1 A hybrid security is a security that is neither debt nor equity.2 A derivative security is a form of debt or equity financing that has characteristics of both debt and equity.3 A financial lease is a form of hybrid security.4 An operating lease is a non-cancellable lease.5 The lessee is normally required to maintain the leased assets in an operating lease.6 In a lease-versus-purchase decision, the lessee sells the asset to the lessor and then leases it back.7 Leasing allows the lessee to 'depreciate' land.8 Convertible securities provide the holder with an option to convert them into ordinary shares.9 Convertible preference shares have a higher stated dividend than straight preference shares because of the uncertainty caused by the conversion feature.10 A convertible bond issue provides the issuer with the opportunity to alter the firm's capital structure.11 A convertible security that can be forced into conversion is called an overhanging issue.12The market premium on a convertible security is the difference between the price of a convertible security and a straight security.13A European option can be exercised at any time.14.A put option gives the holder the right to force the issuer to buy the specified security at a predetermined price.15Options only have value if they are held to their expiration (maturity) date.16.A put option is 'in-the-money' when the strike price is less than the market price of the underlying security. 17.A put option is 'out-of-the-money' when the strike price is less than the market price of the underlying security.18.Call and put options are a source of financing for the firm.19A 'pre-emptive right' allows investment in a company by new shareholders.20A warrant is a type of call option.

1. The combination of two or more companies to form a completely new corporation is a: A. holding companyB.ConsolidationC.mergerD.congeneric formation.2. The firm in a merger transaction that attempts to merge or takeover another company is called the: A. acquiring company.B.holding company.C.target company.D.conglomerate.3.The firm in a merger transaction that is being pursued as a takeover potential is called the: A.target company.B.acquiring company.C.holding company.D.conglomerate.4.____________ results from the combination of firms in the same line of business. A.Horizontal growthB.Congeneric growthC.Vertical growthD.Conglomerate diversification5.______ results when a firm acquires a supplier or a customer. A.Congeneric growthB.Vertical growthC.Conglomerate diversificationD.Horizontal growth6.Most firms seeking merger partners will hire the services of: A.an investment broker.B.a commercial banker.C.a private contractor.D.an investment banker.7.Greater control over the acquisition of raw materials or the distribution of finished goods is an economic benefit of:A.conglomerate merger.B.congeneric merger.C. vertical merger.D. horizontal merger.8.Typically, reasons for undertaking mergers are: A.strategic or financial.B.in conflict with wealth maximisation.C.only strategic.D.only financial.9.______ is achieved by acquiring a company in the same general industry, but neither in the same line of business nor a supplier or a customer.A.Conglomerate mergerB.Vertical mergerC.Horizontal mergerD.Congeneric merger10.One of the key motives for combinations is the tax benefit of _________. A.increasing additional recaptured depreciation. C.using capital gains B.taking advantage of the other firm's tax loss carryforward. D.reducing the marginal tax rate.11.A merger of a paper manufacturer and a logging company is an example of: A.vertical merger. B.congeneric merger C.conglomerate merger D.horizontal merger12.The primary reason a financial merger is undertaken is to increase: A.operating efficiency; which is used to increase cash flows. B.cash flows; which are used to service the debt typically incurred to finance the merger transaction. C.market share; which is used to maximise shareholder wealth. D.cash flows; which are used to increase dividends to shareholders.13.The selling of some of a firm's assets is called: A.vertical segmentation.B.business failure.C.reverse merger.D.divestiture.14.A divestiture that results in an operating unit becoming an independent company is a: A.sale of a line of business.B.spin-off of an operating unit. C.sale of a unit to existing management.D.leveraged buyout. 15.Leveraged buyouts are clear examples of: A. vertical mergers.B. congeneric mergers.C. financial mergers.D. strategic mergers.16.Acquisitions of going concerns are best analysed using: A.an investment opportunity schedule. B. ratio analysis C.capital budgeting techniques. D.the weighted marginal cost of capital theory.17.When the ratio of exchange in a merger is equal to one, and both the acquiring and the target companies have the same pre-merger earnings per share, both the acquiring and the target companies have the same:A.return on equity.B.book value per share.C. P/E ratio.D.debt ratio.18.The overriding goal for merging is to: A. increase cash flows. B. maximise shareholder wealth as reflected in the share price of the target firm C. maximise operating efficiency. D. maximise shareholder wealth as reflected in the acquirer's share price.19.In defending against a hostile takeover, the strategy that involves the target firm creating securities that give their holders certain rights that become effective when a takeover is attempted is called the ____________ strategy. A.greenmailB.shark repellentC.golden parachuteD.poison pill20.In defending against hostile takeover attempts, a company will include provisions in the employment contracts of key executives that provide them with sizeable compensation if the firm is taken over. This is called the ________ strategy. A.poison pillB.golden parachuteC.shark repellentD.white knight

1.Merger occurs when two or more firms are combined to form a completely new corporation.2.Firms' motives to merge include growth or diversification, synergy, fundraising, tax considerations and defence against takeover.3.Greater control over the acquisition of new materials or the distribution of finished goods is an economic benefit of horizontal merger.4.Consolidation involves the combination of two or more firms, and the resulting firm maintains the identity of one of the firms.5.Vertical merger is a merger of two firms in the same line of business.6.A congeneric merger is a merger in which a firm acquires a supplier or a customer.7.Strategic mergers seek to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and finished product distribution.8.Financial merger is a merger transaction undertaken to achieve economies of scale.9.The synergy of mergers is the economies of scale resulting from the merged firms' lower overhead.10.The tax loss carryforward benefits can be used in mergers but cannot be used in the formation of holding companies.11.The motive for divestiture is often to get rid of a product line in order to generate cash for expansion of other product lines.12.The selling of some of a firm's assets for various strategic motives is called divestiture.13.The sale of a unit of a firm to existing management is often achieved through a leveraged buyout.14.A share swap transaction is an acquisition method in which the acquiring firm exchanges its shares for shares of the target company according to a predetermined ratio.15.Ratio of exchange in market price indicates the market price per share of the acquiring firm paid for each dollar of market price per share of the target firm.16.The earnings per share of the merged firm are generally above the pre-merger earnings per share of one firm and below the pre-merger earnings per share of the other, after making the necessary adjustment for the ratio of exchange.17.A major disadvantage of holding companies is the increased risk resulting from the leverage effect.18.The poison pill is a takeover defence in which the target firm finds an acquirer more to its liking than the initial hostile acquirer, and prompts the two to compete to take over the firm.19.Greenmail is a takeover defence under which the target firm repurchases a large block of shares at a premium from one or more shareholders in order to end a hostile takeover attempt by those shareholders.20.Acquisitions are attractive when the acquiring firm's share price is high because more shares need to be exchanged to acquire another firm.