ACCA Advanced Financial Management 3

Question 1

When valuing a target company using the P/E ratio method, the most appropriate P/E ratio to apply to the target's earnings is typically:

Accepted Answer

The acquiring company's P/E ratio or a relevant industry P/E ratio reflecting post-merger prospects

Answer

The acquirer's or industry P/E ratio reflects the earnings quality and growth prospects expected after the acquisition, making it more relevant than the target's standalone ratio.

Question 2

In a merger or acquisition, 'synergy' is best defined as:

Accepted Answer

The additional value created by combining two entities that exceeds the sum of their individual standalone values

Answer

Synergy means the combined entity is worth more than the two firms would be worth separately, and can arise from revenue enhancements, cost savings, or financial benefits.

Question 3

Which of the following is a recognised defensive tactic used by a target company's board to resist a hostile takeover bid?

Accepted Answer

Inviting a preferred acquirer (white knight) to make a competing bid

Answer

Inviting a white knight — a preferred bidder — to make a rival offer is a legitimate defensive tactic that gives shareholders an alternative, usually at a higher price.

Question 4

In a leveraged buyout (LBO), the acquisition of the target company is primarily funded by:

Accepted Answer

High levels of debt, typically secured against the assets and future cash flows of the target

Answer

LBOs use substantial debt — often 60–90% of the purchase price — secured on the target's assets, with debt repaid from the target's operating cash flows post-acquisition.

Question 5

The 'bootstrap effect' in mergers refers to:

Accepted Answer

An apparent increase in EPS that results from combining firms with different P/E ratios, without any real value creation

Answer

When a high-P/E acquirer buys a low-P/E target, the combined EPS rises arithmetically even with no synergies — this optical improvement is the bootstrap or P/E illusion.

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA Advanced Financial Management 3