CPFM Mergers and Acquisitions Finance 2 — Questions and Answers
Question 1: In M&A valuation, a precedent transactions analysis establishes value by examining:
- The target's discounted cash flows only
- Multiples paid in similar historical M&A deals (Correct answer)
- The target's book value of assets
- Current stock market indices
Correct answer: Multiples paid in similar historical M&A deals
Precedent transactions analysis uses valuation multiples from past comparable M&A deals to estimate a fair acquisition price.
Question 2: Which M&A defense strategy involves the target company acquiring the acquirer's business or a significant stake in it?
- White knight
- Poison pill
- Pac-Man defense (Correct answer)
- Crown jewel defense
Correct answer: Pac-Man defense
The Pac-Man defense occurs when the target turns the tables and attempts to acquire the hostile bidder.
Question 3: An accretive acquisition means the deal will:
- Decrease the acquirer's earnings per share
- Increase the acquirer's earnings per share (Correct answer)
- Have no impact on earnings
- Reduce the acquirer's revenue
Correct answer: Increase the acquirer's earnings per share
An accretive deal increases the acquirer's EPS because the target's earnings contribution exceeds the dilution from new shares or financing costs.
Question 4: Which financial metric is used in M&A to measure a target's ability to service acquisition debt?
- Price-to-book ratio
- EBITDA (Correct answer)
- Dividends per share
- Net tangible assets
Correct answer: EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is the key proxy for cash flow available to service acquisition debt.
Question 5: In purchase price allocation following an acquisition, any excess of purchase price over the fair value of net identifiable assets is recorded as:
- Deferred revenue
- Goodwill (Correct answer)
- Minority interest
- Treasury stock
Correct answer: Goodwill
Under ASC 805, goodwill is recognized as the excess of the acquisition price over the fair value of the identifiable net assets acquired.
Question 6: A 'hostile takeover' differs from a 'friendly acquisition' primarily because:
- It involves paying a higher price
- The target's board opposes the acquisition (Correct answer)
- It is financed entirely with equity
- It only involves private companies
Correct answer: The target's board opposes the acquisition
A hostile takeover proceeds without the approval or recommendation of the target company's board of directors.
CPFM Mergers and Acquisitions Finance 2
In M&A valuation, a precedent transactions analysis establishes value by examining: