Reading 35: Mergers and Acquisitions - LOS c ～ Q1-5

答案和详解如下：

1.In general, in order for earnings per share bootstrapping to occur, which of the following is most accurate?

A)   The P/E ratio of the target must be greater than that for the acquirer.

B)   The net income of the acquirer must be greater than that for the target.

C)   The net income of the target must be greater than that for the acquirer.

D)   The price-to-earnings (P/E) ratio of the acquirer must be greater than that for the target.

The correct answer was D)

In order for earnings per share bootstrapping to occur, the P/E ratio of the acquirer must be greater than that for the target.

2.Which of the following statements regarding bootstrapping and its effect on earnings per share (EPS) is TRUE? Bootstrapping:

A)   increases current EPS and increases future EPS.

B)   increases current EPS and decreases future EPS.

C)   decreases current EPS and decreases future EPS.

D)   decreases current EPS and increases future EPS.

The correct answer was B)

Bootstrapping increases current EPS at the expense of lower growth prospects and lower future EPS.

3.Use the following data to calculate the EPS of the combined firm following the merger. Topeka Industries has EPS of $4.00, a market price of $90 per share, and 500,000 shares outstanding. Omaha Company has EPS of $2.00, a market price of $25, and 500,000 shares outstanding. If Topeka acquires Omaha in an all-stock transaction, what is the EPS of the combined company?

A)   $4.70.

B)   $1.30.

C)   $3.00.

D)   $3.57.

The correct answer was A)

The total value of Omaha is $25 x 500,000 = $12,500,000. Topeka will need to issue 12,500,000 / 90 = 138,889 new shares to acquire Omaha. The combined firm will have total earnings of ($4 x 500,000) + ($2 x 500,000) = $3,000,000. The combined firm will have EPS = $3,000,000 / (138,889 + 500,000) = $4.70. Note that the pre-merger P/E ratio for Topeka was 90 / 4 = 22.5, vs. 25 / 2 = 12.5 for Omaha.

4.When Firm A acquires Firm B, and, even though there are no real economic gains resulting from the merger, Firm A’s earnings per share increase, this is called:

A)   compression.

B)   bootstrapping.

C)   synergies.

D)   leveraging.

The correct answer was B)

When a firm acquires another firm and its earnings per share increase, even though there are no economic gains from the merger, this is called earnings per share bootstrapping.

5.When bootstrapping, the acquiring firm:

A)   increases current earnings per share (EPS) and increases the total number of shares outstanding.

B)   decreases current earnings per share (EPS) and decreases the total number of shares outstanding.

C)   increases current earnings per share (EPS) and decreases the total number of shares outstanding.

D)   decreases current earnings per share (EPS) and increases the total number of shares outstanding.

The correct answer was C)

The technique of bootstrapping decreases the total shares outstanding of the combined firm (relative to the two separate entities) while the earnings of the two firms is added together, thus increasing EPS for the acquiring firm.