CPFM Mergers and Acquisitions Finance 1 — Questions and Answers
Question 1: In an M&A transaction, which term describes the premium paid over the target company's pre-announcement market price?
- Enterprise value
- Control premium (Correct answer)
- Terminal value
- Minority discount
Correct answer: Control premium
The control premium is the amount above the market price that an acquirer pays to gain controlling interest in the target company.
Question 2: Which type of merger involves two companies in the same industry and at the same stage of production?
- Vertical merger
- Conglomerate merger
- Horizontal merger (Correct answer)
- Reverse merger
Correct answer: Horizontal merger
A horizontal merger combines two companies that are direct competitors at the same level of the supply chain.
Question 3: The due diligence process in M&A is conducted primarily to:
- Market the deal to shareholders
- Identify risks and validate the target's financial information (Correct answer)
- Negotiate employee benefits
- Establish post-merger branding
Correct answer: Identify risks and validate the target's financial information
Due diligence involves a thorough investigation of the target's financials, operations, legal matters, and risks to validate the deal.
Question 4: In a stock-for-stock acquisition, the acquirer pays for the target by:
- Paying cash from reserves
- Issuing new shares of its own stock to target shareholders (Correct answer)
- Assuming the target's debt only
- Converting bonds to equity
Correct answer: Issuing new shares of its own stock to target shareholders
In a stock-for-stock deal, the acquirer exchanges its own newly issued shares for shares of the target company.
Question 5: Which concept represents the additional value created when two companies combine that neither could achieve independently?
- Goodwill amortization
- Synergy (Correct answer)
- Dilution
- Accretion
Correct answer: Synergy
Synergy is the value created through combination — including cost savings, revenue enhancements, and operational improvements — beyond standalone values.
Question 6: A leveraged buyout (LBO) is characterized by the use of:
- Primarily equity financing to acquire a target
- Significant debt financing secured by the target's assets and cash flows (Correct answer)
- Government grants and subsidies
- Convertible preferred stock only
Correct answer: Significant debt financing secured by the target's assets and cash flows
An LBO uses a large proportion of debt, often secured by the target's assets and cash flows, with equity providing a smaller portion.
CPFM Mergers and Acquisitions Finance 1
In an M&A transaction, which term describes the premium paid over the target company's pre-announcement market price?