Chapter 1

Question 1

When two entities competing in the same industry combine, it is called a horizontal business combination.

Answer 1

True

Question 2

Horizontal business combinations are likely to occur when management is attempting to dominate a geographic segment of the market.

Answer 2

False

Question 3

One way that a horizontal business combination can increase sales for an entity is to expand into new product markets.

Answer 3

True

Question 4

A vertical business combination generally involves companies attempting to improve the efficiency of operations by purchasing suppliers of inputs or purchasers of outputs.

Answer 4

True

Question 5

When a retail clothing store purchases a competitor in city, a vertical combination has occurred.

Answer 5

False

Question 6

A vertical combination is one where the entities have a potential buyer-seller relationship.

Answer 6

True

Question 7

A business combination in which a supplier of raw materials is acquired is a conglomerate combination.

Answer 7

False

Question 8

A conglomerate combination is often undertaken to help increase income stability due to diversifying the asset base of an entity.

Answer 8

True

Question 9

Conglomerate combinations are easy for the government to challenge in court.

Answer 9

True

Question 10

If negotiation between management groups leads to a mutually agreeable business combination, the process is called a friendly takeover.

Answer 10

True

Question 11

An offer by an acquirer to buy the stock of another company is commonly called a tender offer.

Answer 11

True

Question 12

A tender offer that is opposed by the acquiree management is called a hostile bid.

Answer 12

True

Question 13

Greenmail exists when a company is encouraged to buy a potential acquiree.

Answer 13

False

Question 14

A poison pill is the term used to describe the issuance of a special kind of convertible preferred stock to deter the acquisition of the company.

Answer 14

False

Question 15

The sale of the crown jewels defensive maneuver involves the sale of more assets than does the scorched earth defense.

Answer 15

False

Question 16

The fatman defensive maneuver involved the acquisition of assets by the potential acquiree.

Answer 16

True

Question 17

Golden parachutes give a bonus to all employees if the company is acquired.

Answer 17

False

Question 18

The packman defensive maneuver is where a potential acquire attempts to purchase the acquirer.

Answer 18

True

Question 19

A business combination occurs when one entity gains control over the net assets of another entity.

Answer 19

True

Question 20

The only way to attain control over the net assets of another entity is to purchase the net assets.

Answer 20

False

Question 21

In an acquisition where the acquirer pays cash for the acquiree assets, the book value of the acquirer increases.

Answer 21

False

Question 22

In an acquisition of assets for assets, the ownership structure of the acquiree does not change.

Answer 22

True

Question 23

In an acquisition of assets for assets, the ownership structure of the acquirer changes.

Answer 23

False

Question 24

There is an increase in the total capitalization of an acquirer when the acquirer issues stock for acquiree assets.

Answer 24

True

Question 25

In an exchange of stock (acquirer) for assets (acquiree), the ownership structure of the acquiree does not change.

Answer 25

True

Question 26

In an exchange of stock (acquirer) for assets (acquiree), the acquiree stockholders become acquirer stockholders.

Answer 26

False

Question 27

Control over the acquiree assets is directly achieved in an asset for asset exchange but indirectly achieved in an asset (acquirer) for stock (acquiree) exchange.

Answer 27

True

Question 28

A business combination that occurs where only one of the original entities in existence after the combinations called a statutory consolidation.

Answer 28

False

Question 29

The acquiree entity is liquidated in a statutory merger.

Answer 29

True

Question 30

For a business combination to qualify as a statutory consolidation, a new corporation must be formed.

Answer 30

True

Question 31

In a statutory consolidation form of business combination, the Retained Earnings account of the newly formed corporation has a balance of zero immediately after the combination.

Answer 31

False

Question 32

After completing a business combination in the form of a statutory merger or statutory consolidation, there is only one legal entity in existence.

Answer 32

True

Question 33

In a business combination accomplished as a stock acquisition normally two companies exist after the combination.

Answer 33

True

Question 34

A business combination accomplished as a stock acquisition must be accomplished with a stock for stock exchange.

Answer 34

False

Question 35

A stock acquisition is the only form of business combination that might require the preparation of consolidated financial statements.

Answer 35

True

Question 36

The substance of statutory mergers, statutory consolidations, and stock acquisitions is the same if income tax considerations are ignored.

Answer 36

True

Question 37

There are no uncertainties when two companies agree on a business combination.

Answer 37

False

Question 38

When the acquisition price of an acquiree is contingent on acquiree future earnings, the acquisition price may change?

Answer 38

True

Question 39

When the acquisition price of an acquiree is contingent on the market value of the acquirer stock, the acquisition price may change?

Answer 39

False

Question 40

For business combinations to qualify as reorganizations (for tax purposes), the acquiree Stockholders must receive voting common stock of the acquired.

Answer 40

False

Question 41

There are different required levels of stock ownership in the acquiree for the three different types of reorganizations for tax purposes.

Answer 41

True

Question 42

One important benefit in a business combination is any net operating loss carry forward that might exist and be available to the acquirer.

Answer 42

False