Question

1. Which of the following is not true about mergers and acquisitions and taxes?

1. Tax considerations and strategies are likely to have an important impact on how a deal is structured by affecting the amount, timing, and composition of the price offered to a target firm.
2. Tax factors are likely to affect how the combined firms are organized following closing, as the tax ramifications of a corporate structure are quite different from those of a limited liability company or partnership.

c.         Potential tax savings are often the primary motivation for an acquisition or merger.

d.         Transactions may be either partly or entirely taxable to the target firm’s shareholders or tax-free.

g.None of the above

1. Which of the following is not true about purchase accounting?

1. For financial reporting purposes, all M&As must be recorded using the purchase method of accounting.
2. Under the purchase method of accounting, the excess of the purchase price over the target’s net asset value is treated as goodwill on the combined firm’s balance sheet.
3. Goodwill may be amortized up to 40 years.
4. If the fair value of the target’s net assets later falls below its carrying value, the acquirer must record a loss equal to the difference.
5. None of the above

1. Which of the following is true about purchase accounting?

a.         Cash and accounts receivable, reduced for bad debt and returns, are valued at their values on

                        the books of the target before the acquisition..

b.         Marketable securities are valued at their realizable value after transactions costs.

c.         Property, plant and equipment are valued at fair market value.

d.         Intangible assets are booked at their appraised values.

5.        All of the above.

Answer 1

1]

(a) is true. Tax considerations are important for deal structuring.

(b) is true. Taxation of a corporate structure is quite different from other business structures.

(c) is not true. Potential tax savings are not the primary motivation for M&A. Rather, synergies are the primary motivation. Tax savings may be an additional or secondary motivation, or a part of the expected synergies.

(d) is true. Transactions may be taxable, party taxable or tax-free depending on jurisdiction and facts of the case.