Question

The potential of a tax loss carryforward has no effect when considering the acquisition of a company.

True or False

If the purchasing firm's price earnings ratio is greater than the acquired firm’s price earnings, the surviving firm will automatically get an increase in earnings per share.

True or False

Selling stockholders generally receive a price below the current market value of their prior stock during a merger.

True or False

An example of a horizontal merger would be

Pepsi and Sears.

McDonald's and Pillsbury.

Pepsi and Frito Lay.

Coca-Cola and Dr Pepper.

Answer 1

1). False - Tax loss carry-forwards of the target can be used by the acquiring company to set off its own losses.

2). True - If the acquiring firm's PE ratio is higher than the target firm's PE ratio then the surviving firm will see an increase in EPS.

3). False - The price of the target firm depends upon its intrinsic value, usually. If the firm is undervalued then it is possible that the purchase price will be higher than the market price of the stock.

4). In a horizontal merger, two companies in the same business (competitors mostly) offering similar products/services merge. Example would be Coca-Cola and Dr.Pepper.