CHAPTER 1
INTRODUCTION TO BUSINESS COMBINATIONS
SUMMARY OF ITEMS BY TOPIC
Conceptual Computational
Multiple Multiple
True- Choice Choice Short
False Answer
Problems
Economic Motivation for 1-11 64-73 133-138
Business Combinations
History of Business 12-20 74-82 139-142
Combinations
Legal Restrictions on 21-27 83-87 143-149
Business Combinations
Takeovers 28-36 88-94
Control 37-38 95-96 150-151
Exchanges 39-45 97-104 152-153
Forms of Business 46-53 105-109 154
Combinations
Substance versus Form 54 116-123 128-130
Contingent Consideration 55-57 110 124-127 131-132 155
Taxes and Business 58-63 111-115 156-157
Combinations
, True-False Statements
1. Internal expansion often takes longer than external expansion.
2. Internal expansion is less risky than external expansion.
3. Internal expansion is often slow because the entity must build new production facilities to
support new products or expanding sales.
4. The increase in the size of an entity resulting from a business combination would result in
a lower cost of capital.
5. External combinations may result in economies of scale.
6. External expansion does not increase the total supply of products in the market place.
7. Internal expansion does not increase the total supply of products in the market place.
8. In a business combination, the investee takes control of the net assets of the investor.
9. All business combinations result in one entity taking control of the net assets of another
entity.
10. An acquisition of net assets result in one entity taking control of the net assets of another
entity while the acquisition of stock does not result in taking control of the net assets of
another entity.
,11. The capital budgeting techniques used to determine whether to acquire another entity are
similar to the techniques used to evaluate purchases of equipment.
12. When two entities competing in the same industry combine, it is called a horizontal
business combination.
13. Horizontal business combinations are likely to occur when management is attempting to
dominate a geographic segment of the market.
14. One way that a horizontal business combination can increase sales for an entity is to
expand into new product markets.
15. A vertical business combination generally involves companies attempting to improve the
efficiency of operations by purchasing suppliers of inputs or purchasers of outputs.
16. When a retail clothing store purchases a competitor in another city, a vertical
combination has occurred.
17. A vertical combination is one where the entities have a potential buyer-seller relationship.
18. A business combination in which a supplier of raw materials is acquired is a
conglomerate combination.
19. A conglomerate combination is often undertaken to help increase income stability due to
diversifying the asset base of an entity.
20. Conglomerate combinations are easy for the government to challenge in court.
, 21. The purpose of the Sherman Act of 1890 was to make illegal any action that would
hinder free competition.
22. The Sherman Act requires the government to prove that trade has been restrained before
it can be used to break up a company.
23. The Sherman Act can prevent a business combination from occurring.
24. The Clayton Act can prevent a business combination from occurring.
25. The government does not have to be notified when a business combination is anticipated.
26. The U.S. government opposes all business combinations because they are viewed as a
threat to competition.
27. The Federal Trade Commission assesses the impact of a proposed business combination
on industry concentration.
28. If negotiation between management groups leads to a mutually agreeable business
combination, the process is called a friendly takeover.
29. An offer by an acquirer to buy the stock of another company is commonly called a tender
offer.
30. A tender offer that is opposed by the acquiree management is called a hostile bid.
31. Greenmail exists when a company is encouraged to buy a potential acquiree.
INTRODUCTION TO BUSINESS COMBINATIONS
SUMMARY OF ITEMS BY TOPIC
Conceptual Computational
Multiple Multiple
True- Choice Choice Short
False Answer
Problems
Economic Motivation for 1-11 64-73 133-138
Business Combinations
History of Business 12-20 74-82 139-142
Combinations
Legal Restrictions on 21-27 83-87 143-149
Business Combinations
Takeovers 28-36 88-94
Control 37-38 95-96 150-151
Exchanges 39-45 97-104 152-153
Forms of Business 46-53 105-109 154
Combinations
Substance versus Form 54 116-123 128-130
Contingent Consideration 55-57 110 124-127 131-132 155
Taxes and Business 58-63 111-115 156-157
Combinations
, True-False Statements
1. Internal expansion often takes longer than external expansion.
2. Internal expansion is less risky than external expansion.
3. Internal expansion is often slow because the entity must build new production facilities to
support new products or expanding sales.
4. The increase in the size of an entity resulting from a business combination would result in
a lower cost of capital.
5. External combinations may result in economies of scale.
6. External expansion does not increase the total supply of products in the market place.
7. Internal expansion does not increase the total supply of products in the market place.
8. In a business combination, the investee takes control of the net assets of the investor.
9. All business combinations result in one entity taking control of the net assets of another
entity.
10. An acquisition of net assets result in one entity taking control of the net assets of another
entity while the acquisition of stock does not result in taking control of the net assets of
another entity.
,11. The capital budgeting techniques used to determine whether to acquire another entity are
similar to the techniques used to evaluate purchases of equipment.
12. When two entities competing in the same industry combine, it is called a horizontal
business combination.
13. Horizontal business combinations are likely to occur when management is attempting to
dominate a geographic segment of the market.
14. One way that a horizontal business combination can increase sales for an entity is to
expand into new product markets.
15. A vertical business combination generally involves companies attempting to improve the
efficiency of operations by purchasing suppliers of inputs or purchasers of outputs.
16. When a retail clothing store purchases a competitor in another city, a vertical
combination has occurred.
17. A vertical combination is one where the entities have a potential buyer-seller relationship.
18. A business combination in which a supplier of raw materials is acquired is a
conglomerate combination.
19. A conglomerate combination is often undertaken to help increase income stability due to
diversifying the asset base of an entity.
20. Conglomerate combinations are easy for the government to challenge in court.
, 21. The purpose of the Sherman Act of 1890 was to make illegal any action that would
hinder free competition.
22. The Sherman Act requires the government to prove that trade has been restrained before
it can be used to break up a company.
23. The Sherman Act can prevent a business combination from occurring.
24. The Clayton Act can prevent a business combination from occurring.
25. The government does not have to be notified when a business combination is anticipated.
26. The U.S. government opposes all business combinations because they are viewed as a
threat to competition.
27. The Federal Trade Commission assesses the impact of a proposed business combination
on industry concentration.
28. If negotiation between management groups leads to a mutually agreeable business
combination, the process is called a friendly takeover.
29. An offer by an acquirer to buy the stock of another company is commonly called a tender
offer.
30. A tender offer that is opposed by the acquiree management is called a hostile bid.
31. Greenmail exists when a company is encouraged to buy a potential acquiree.
