1. Which of the following is defined as a transaction in which two firms combine to form a single firm?
A. merger
B. synergy
C. acquisition
D. assignment
2. Which of the following is defined as the purchase of one firm by another firm?
A. merger
B. synergy
C. acquisition
D. assignment
3. Which of the following is a type of merger in which an entirely new firm is created?
A. composition
B. synergy
C. consolidation
D. assignment
4. Which of the following is a type of merger in which two firms that sell the same products in different market areas are combined?
A. vertical
B. conglomerate
C. product extension
D. market extension
5. Which of the following is a combination of a firm with a supplier or distributor?
A. vertical merger
B. conglomerate merger
C. product extension merger
D. market extension merger
6. Which of the following combines two companies that have no related products or markets?
A. vertical merger
B. conglomerate merger
C. product extension merger
D. market extension merger
7. Which of the following is a combination of firms that sell different, but somewhat related, products?
A. vertical merger
B. conglomerate merger
C. product extension merger
D. market extension merger
8. Which of these terms is defined as the value of the combined firms being greater than the sum of the value of the two firms individually?
A. composition
B. synergy
C. consolidation
D. conglomerate
9. Which of the following is NOT one of the sources of value enhancing synergy in a merger?
A. revenue enhancement
B. cost reduction
C. tax considerations
D. higher cost of capital
10. Which of the following is defined as a merged firm’s ability to generate synergistic cost savings through the joint use of inputs in producing multiple products?
A. economies of scale
B. economies of scope
C. economies of synergy
D. x-efficiencies
11. Which of the following is defined as a merged firm’s advantage over smaller firms if cuts associated with the merger lower the firm’s operating costs of production?
A. economies of scale
B. economies of scope
C. economies of synergy
D. x-efficiencies
12. Which of the following is cost savings usually attributed to superior management skills and other difficult-to-measure managerial factors?
A. economies of scale
B. economies of scope
C. economies of synergy
D. x-efficiencies
13. Which of the following is NOT a tax consideration motive for a merger?
A. tax gains from net operating losses
B. tax gains from used debt capacity
C. tax gains from used equity capacity
D. tax gains from surplus firms
14. Which of these makes the following a true statement? Diversification resulting from a merger can:
A. Make the debt of the merged firm more risky, thus lowering the cost of capital.
B. Make the debt of the merged firm less risky, thus lowering the cost of capital.
C. Make the debt of the merged firm less risky, thus raising the cost of capital.
D. None of these make the statement true.
15. Which of the following is the most extreme type of financial distress for a business?
A. business failure
B. economic failure
C. technical insolvency
D. business extension
16. Which of the following is the type of financial distress in which the return on a firm’s assets is less than the firm’s cost of capital?
A. business failure
B. economic failure
C. technical insolvency
D. business extension
17. Which of the following is the type of financial distress in which a firm’s operating cash flows are not sufficient to pay its liabilities as they come due?
A. business failure
B. economic failure
C. technical insolvency
D. business extension
18. Which of the following is the termination of the firm as a going concern in which assets are sold and any proceeds go to pay off the firm’s creditors?
A. liquidation
B. assignment
C. composition
D. consolidation
19. Which of the following is a voluntary liquidation proceeding that passes the liquidation of the firm’s assets to a third party that is designated as the assignee or trustee?
A. liquidation
B. assignment
C. composition
D. consolidation
20. Which of these is the person who liquidates the firm’s assets through a private sale or public auction and then distributes any proceeds from the sale to the firms’ creditors and stockholders?
A. assignor
B. grantor
C. trustor
D. trustee
21. Which of the following is a formal bankruptcy proceeding which outlines the process to be followed for liquidating a failed firm?
A. Chapter 7
B. Chapter 11
C. Chapter 13
D. Chapter 179
22. Which of the following is a formal bankruptcy proceeding involving the reorganization of the corporation with some provision for repayment to the firm’s creditors?
A. Chapter 7
B. Chapter 11
C. Chapter 13
D. Chapter 179
23. Which of the following involves a firm and its creditors agreeing to a private reorganization outside the formal bankruptcy process?
A. consolidation bankruptcy
B. prepackaged bankruptcy
C. Chapter 13
D. Chapter 7
24. Calculation of Average Costs with Economies of Scope Jan’s Bakery is considering a merger with Tina’s Cookies. Jan’s total operating costs of producing services are $300,000 for a sales volume of $2 million. Tina’s total operating costs of producing services are $75,000 for a sales volume of $600,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.
A. 12.5%
B. 11.54%
C. 14.42%
D. 13.75%
25. Calculation of Average Costs with Economies of Scope Flowers Galore is considering a merger with Balloons N More. Flowers Galore’s total operating costs of producing services are $400,000 for a sales volume of $4 million. Balloons’ total operating costs of producing services are $30,000 for a sales volume of $700,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.
A. 4.29%
B. 9.15%
C. 10.00%
D. 7.14%
26. Calculation of Average Costs with Economies of Scope Building Supplies is considering a merger with Tools and More. Building’s total operating costs of producing services are $4 million for a sales volume of $20 million. Tools’ total operating costs of producing services are $1 million for a sales volume of $5 million. Suppose that synergies in the production process result in a cost of production for the merged firms totaling $4.8 million with total sales remaining unchanged. Calculate the total average cost for the merged firm.
A. 9.6%
B. 40.0%
C. 19.2%
D. 20.0%
27. Calculation of Altman’s Z-Score: Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = .15, X2 = Retained earnings/Total assets = .10, X3 = Earnings before interest and taxes/Total assets = .15, X4 = Market value of equity/Book value of long-term debt = .40, X5 = Sales/Total assets ratio = 0.8. Calculate the Altman’s Z-score for this firm.
A. 9.10
B. 1.60
C. 0.371
D. 1.855
28. Calculation of Altman’s Z-Score: Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = .25, X2 = Retained earnings/Total assets = .30, X3 = Earnings before interest and taxes/Total assets = .35, X4 = Market value of equity/Book value of long-term debt = .50, X5 = Sales/Total assets ratio = 0.9. Calculate the Altman’s Z-score for this firm.
A. 2.30
B. 3.075
C. 9.8
D. 1.96
29. Calculation of Altman’s Z-Score: Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = .30, X2 = Retained earnings/Total assets = .40, X3 = Earnings before interest and taxes/Total assets = .43, X4 = Market value of equity/Book value of long-term debt = .65, X5 = Sales/Total assets ratio = 0.95. Calculate the Altman’s Z-score for this firm.
A. 3.679
B. 2.73
C. 10.23
D. 2.046
30. Calculation of Altman’s Z-Score: Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = .35, X2 = Retained earnings/Total assets = .50, X3 = Earnings before interest and taxes/Total assets = .60, X4 = Market value of equity/Book value of long-term debt = 1.50, X5 = Sales/Total assets ratio = 3.65. Calculate the Altman’s Z-score for this firm.
A. 7.65
B. 1.54
C. 6.60
D. 1.32
31. Calculation of Bankruptcy Probability Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:
PDi = .20 (debt ratio) + .15 (profit margin)
A firm you are thinking of lending to has a debt ratio of 55 percent and a profit margin of 10 percent. Calculate the firm’s expected probability of default, or bankruptcy.
A. 12.5%
B. 10.0%
C. 1.65%
D. 10.25%
32. Calculation of Bankruptcy Probability Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:
PDi = .15 (debt ratio) + .05 (profit margin)
A firm you are thinking of lending to has a debt ratio of 50 percent and a profit margin of 8 percent. Calculate the firm’s expected probability of default, or bankruptcy.
A. 7.90%
B. 11.6%
C. 30.00%
D. 7.80%
33. Calculation of Bankruptcy Probability Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:
PDi = .23 (debt ratio) + .08 (profit margin)
A firm you are thinking of lending to has a debt ratio of 60 percent and a profit margin of 12 percent. Calculate the firm’s expected probability of default, or bankruptcy.
A. 14.76%
B. 22.32%
C. 10.30%
D. 13.25%
34. Calculation of Bankruptcy Probability Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:
PDi = .25 (debt ratio) + .12 (profit margin)
A firm you are thinking of lending to has a debt ratio of 62 percent and a profit margin of 14 percent. Calculate the firm’s expected probability of default, or bankruptcy.
A. 17.18%
B. 2.604%
C. 14.99%
D. 19.09%
35. Calculation of Average Costs with Economies of Scope Dee’s Dry Cleaning is considering a merger with Larry’s Laundry Supply Stores. Dee’s total operating costs of producing services are $600,000 for sales volume of $4 million. Larry’s total operating costs of producing services are $200,000 for a sales volume (JP) of $1 million. Calculate the average cost of production for the Dee’s and Larry’s firms, respectively.
A. 15%, 20%
B. 20%, 15%
C. 16%, 16%
D. 60%, 5%
36. Calculation of Average Costs with Economies of Scope Dee’s Dry Cleaning is considering a merger with Larry’s Laundry Supply Stores. Dee’s total operating costs of producing services are $600,000 for sales volume of $4 million. Larry’s total operating costs of producing services are $200,000 for a sales volume (JP) of $1 million. For a sales volume of $5 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 10%.
A. decrease of $500,000
B. decrease of $300,000
C. decrease of $100,000
D. decrease of $200,000
37. Calculation of Average Costs with Economies of Scope Blinds N Such is considering a merger with Window Supply Stores. Blinds’ total operating costs of producing services are $750,000 for sales volume of $6 million. Window’s total operating costs of producing services are $100,000 for a sales volume (JP) of $1 million. Calculate the average cost of production for the Blinds and Window firms, respectively.
A. 10%, 12.5%
B. 12.5%, 10%
C. 75%, 1.67%
D. 13.93%, 13.93%
38. Calculation of Average Costs with Economies of Scope Blinds N Such is considering a merger with Window Supply Stores. Blinds’ total operating costs of producing services are $750,000 for sales volume of $6 million. Window’s total operating costs of producing services are $100,000 for a sales volume (JP) of $1 million. For a sales volume of $7 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 12%.
A. decrease of $840,000
B. decrease of $10,000
C. decrease of $40,000
D. decrease of $90,000
39. Calculation of Average Costs with Economies of Scope Jewelry Designs is considering a merger with Beads Supply Stores. Jewelry’s total operating costs of producing services are $300,000 for sales volume of $2 million. Beads’ total operating costs of producing services are $125,000 for a sales volume (JP) of $2.25 million. Calculate the average cost of production for the Jewelry and Beads firms, respectively.
A. 15%, 5.56%
B. 5.56%, 15%
C. 15%, 55.56%
D. 13.33%, 6.25%
40. Calculation of Average Costs with Economies of Scope Jewelry Designs is considering a merger with Beads Supply Stores. Jewelry’s total operating costs of producing services are $300,000 for sales volume of $2 million. Beads’ total operating costs of producing services are $125,000 for a sales volume (JP) of $2.25 million. For a sales volume of $4.25 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 8%.
A. decrease of $340,000
B. decrease of $85,000
C. decrease of $40,000
D. decrease of $25,000