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Chapter 19

Terms in this set (37)

56. According to the literature on bank mergers these mergers are often motivated by:
A) Their profit potential
B) Expected reduction in the risk of fluctuations in cash flow and earnings
C) Expected tax benefits
D) All of the above.
E) None of the above.
Answer: D
57. According to the research literature, the principal beneficiaries of most bank mergers appear to be:
A) The stockholders of the bank acquired
58. According to the research literature, the lackadaisical profit performance surrounding a merger may be explained by the following:
A) Managerial hubris
B) The sizeable merger premium that acquirers have to pay to shareholders of the acquired firms
C) Accounting irregularities when reporting earnings of the combined entity
D) All of the above
E) A and B only
Answer: E
59. The ratio of the acquired bank's current stock price per share plus the additional amount paid by the acquirer for each share of the acquired bank's stock divided by the acquired bank's current stock price is the:
B) Merger premium
60. The danger faced by the stockholders of an acquiring firm in a merger if an excessive number of new shares are issued relative to the value of their old shares is known as:
C) Dilution of ownership
61. The federal law that requires each U.S. merging bank to notify its principal federal regulatory agency and request approval before a merger can take place is the:
A) Bank Merger Act
62. A merger may increase the bank's expected future earnings or reduce its level of risk exposure by:
A) Improved operating efficiency.
B) Improved earnings per share.
C) Geographic or product diversification.
D) All of the above.
E) A and B, only.
Answer: D
63. The Herfindahl-Hirschman Index is a measure of:
A) Market concentration.
64. There are three banks in East Panhandle. First National Bank currently has 40 percent of the deposits, while Second State Bank currently has 30 percent, as does New State Bank and Trust. What is the Herfindahl-Hirschman Index for East Panhandle?
C) 3400.
65. There are three banks in East Panhandle. First State Bank currently has 25 percent of the deposits, while Second State Bank currently has 40 percent. What is the Herfindahl-Hirschman Index for East Panhandle (compute the share of Third State Bank first)?
C) 3450.
66. There are three banks in East Panhandle. First State Bank currently has 25 percent of the deposits, while Second State Bank currently has 40 percent. Compute the share of the Third State Bank in the market and use the Department of Justice Guidelines to identify this market as:
D) Concentrated
67. There are three banks in East Panhandle. First State Bank currently has 25 percent of the deposits, while Second State Bank currently has 40 percent. Compute the share of the Third State Bank in the market. Suppose First State and Third State propose to merge in order to compete with Second State Bank. According to the Department of Justice Guidelines, would this merger be allowed?
C) No
68. First National Bank's stock is currently selling at $40 per share and the bank recently reported earnings per share of $4.50 for its 200,000 shares. Second National Bank has 150,000 shares outstanding, with a current market price of $30 per share. Second National just reported its earnings per share of $5. If First National acquires Second National in a stock purchase, with the two banks agreeing to exchange stock at the current market prices, and post-merger earnings are expected to be $1,800,000, what will the post-merger EPS be?
B) $5.76
69. Recent research on interstate bank mergers suggests that:
C) Faster growth ensued
70. Suppose Bank A's stock price is $75 and Bank B's stock price is $25. Bank A is planning on purchasing Bank B and plans on paying Bank B shareholders a bonus of $10 per share. What is the merger premium that Bank B shareholders will receive?
D) 140 percent
71. Suppose Bank A's stock price is $75 and Bank B's stock price is $25. Bank A is planning on purchasing Bank B and plans on paying Bank B shareholders a bonus of $10 per share. If Bank B has 100,000 shares outstanding, how many shares of Bank A will the shareholders of Bank B receive?
C) 46,667 shares
72. The most important goal of any merger should be to:
A) Increase the market value of the surviving firm
73. Which of the following are reasons that bank mergers do not work?
A) Ill-prepared management
B) A mismatch of corporate cultures
C) Excessive prices paid by the acquirer for the acquired bank
D) A failure to take into account customers' feelings and concerns
E) All of the above are reasons bank mergers do not work
Answer: E
74. Andover Bank is thinking about purchasing Berkley Bank. The current market value of Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently, Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has 50,000 shares outstanding and earnings per share of $5. What is the market premium that Andover is paying on Berkley's shares?
C) 133 percent
75. Andover Bank is thinking about purchasing Berkley Bank. The current market value of Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently, Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has 50,000 shares outstanding and earnings per share of $5. What is the exchange ratio for this transaction?
D) 4:11
76. Andover Bank is thinking about purchasing Berkley Bank. The current market value of Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently, Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has 50,000 shares outstanding and earnings per share of $5. What should the total number of shares outstanding be in the new bank?
A) 118,182 shares
77. Andover Bank is thinking about purchasing Berkley Bank. The current market value of Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently, Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has 50,000 shares outstanding and earnings per share of $5. Suppose that the earnings of the new bank are $1,600,000 and the combined bank will have 118,182 shares outstanding. What will the earnings per share of the new bank be?
B) $13.54 per share
78. Andover Bank is thinking about purchasing Berkley Bank. The current market value of Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently, Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has 50,000 shares outstanding and earnings per share of $5. Suppose the earnings of the combined bank do not increase over the total earnings of the two banks before the merger. In addition assume that the new bank will have 118,182 shares outstanding. What will the earnings per share of the new bank be?
D) $12.27 per share
79. Suppose there are four banks in a local community. Each of these banks has 25 percent of the deposits in this community. What is the Herfindahl-Hirschman Index (HHI) for this community?
C) 2500
80. Suppose there are four banks in a local community. Each of these banks has 25 percent of the deposits in this community. This market is:
D) Concentrated
81. Suppose there are four banks in a local community. Each of these banks has 25 percent of the deposits in this community. Calculate the change in the Herfindahl-Hirschman Index (HHI) if two of these banks merge.
E) 1250
82. In the United States, most bank mergers have occurred in the following geographic region of the country:
A) Southeastern U.S.
83. Research indicates economies of scale (cost savings) for financial institution mergers which are:
A) Small
87. There are 10 banks in a particular market area all with a market share of 10%. What is the Hirfindahl-Hirschmann Index for this market area?
C) 1000
88. There are 10 banks in a particular market area all with a market share of 10%. Two of the banks plan to merge. What would the Hirfindahl-Hirschmann Index be after the merger?
B) 1200
89. There are 10 banks in a particular market area, all with a market share of 10%. Two of the banks plan to merger and the Hirfindahl-Hirschmann Index moves from 1000 to 1200. Would the Justice Department likely bring suit against the merger?
B) No
90. What caused there to be a wave of mergers in Europe?
D) Formation of the European Union
91. The First State Bank of Wyoming wants to acquire the First State Bank of Oklahoma. The management of the bank feels that this geographic diversification will increase earnings as new markets will be exploited and new services are offered to all of their bank customers. Which motive for a merger does this most likely reflect?
A) Profit Potential
92. The First State Bank of Wyoming wants to acquire the Second National Bank of South Carolina. They want to do this because management feels that South Carolina faces very different economic conditions than does Wyoming and that this acquisition will reduce variability in earnings in the future. What motive for a merger does this most likely reflect?
B) Risk Reduction
93. The First National Bank of Edmond wants to acquire the First State Bank of Oklahoma City. Management believes that this merger will enhance their reputation in the labor market because the new firm will be twice as big as what they are managing now. In addition, the First National Bank of Edmond has promised to pay $10,000,000 in compensation to the top managers of the First State Bank of Oklahoma City and help them cover any resulting tax liability. What motive for a merger does this most likely reflect?
E) Maximizing Management Welfare
94. The First National Bank of Edmond had decided to purchase The First National Bank of Plano in Texas. The bank is interested in this purchase because The First National Bank of Plano is in financial distress and the First National Bank of Edmond thinks this is a cheap way to get a start in the large Texas market. The FDIC supports this acquisition because they won't have to make any insurance payouts. What motive for a merger does this most likely reflect?
C) Rescue of Failing Institution
95. The State Bank of Stillwater has had record profits this year. They are interested in purchasing the National Bank of Durant because they have had losses this year. The State Bank of Stillwater feels that they can turn around the National Bank of Durant and in the meantime they can enjoy a reduced tax burden after this acquisition. What motive for a merger does this most likely reflect?
D) Tax and Market Positioning
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