Mergers, Acquisitions & Corporate Restructuring Flashcards
7 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
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What is the primary purpose of due diligence in a merger or acquisition?
Answer: To assess risks and verify the target's financial, legal, and operational information
Due diligence involves thoroughly investigating the target company to identify risks, liabilities, and verify all disclosed information before completing the transaction.
When an acquirer pays more than the fair market value of a target's identifiable net assets, the excess amount is recorded on the consolidated balance sheet as:
Answer: Goodwill
Goodwill represents the excess of the purchase price over the fair value of all identifiable net assets acquired, reflecting intangibles such as brand reputation, customer relationships, and expected synergies.
Which M&A valuation approach determines a target's value by benchmarking its financial multiples against those of similar publicly traded firms?
Answer: Comparable Company Analysis (CCA)
Comparable Company Analysis uses market-derived multiples such as EV/EBITDA or P/E from peer companies in the same industry to estimate the target's fair value.
A leveraged buyout (LBO) is primarily financed by:
Answer: Borrowed funds secured by the target's assets and cash flows
In an LBO, the acquirer uses a high proportion of debt—typically secured by the target's own assets and future cash flows—to fund the purchase, minimizing the equity contribution required.
Operational synergies in an M&A transaction most commonly refer to:
Answer: Cost savings and revenue enhancements generated by combining operations
Operational synergies arise when the combined entity achieves greater efficiency or revenue than the two standalone firms through economies of scale, eliminated redundancies, or cross-selling opportunities.
A 'poison pill' shareholder rights plan is primarily designed to:
Answer: Make a hostile takeover prohibitively expensive by allowing existing shareholders to buy new shares at a steep discount
A poison pill triggers when a single investor acquires a threshold stake, allowing other shareholders to buy additional shares at a discount and thereby massively diluting the hostile acquirer's position.
The 'acquisition premium' paid in an M&A transaction is best defined as:
Answer: The percentage by which the offer price exceeds the target's pre-announcement market price
The acquisition premium is the amount above the target's pre-deal market value that the acquirer pays, typically ranging from 20–40% for public company acquisitions, reflecting expected synergies and control value.