Question

Anti-trust legislation keeps firms from merging to create monopoly power. However, if a firm grows organically to attain monopoly power, it cannot be broken apart. True or False?

The acquirer’s due diligence and evaluation of the target firm are two entirely separate processes. True or False?

Free cash flows are cash flows that are available to all of the firm’s investors and are therefore used to value the firm as a whole (both debt and equity claims). True or False?

Answer 1

Q1) Anti-trust legislation keeps firms from merging to create monopoly power. However, if a firm grows organically to attain monopoly power, it cannot be broken apart. True or False?

Ans: True - this law was passed in the United States so that companies belonging to the same industry should not merge to gather in order to prevent competition amongst themselves. If they merge it will create a monopoly which can lead to no negotiation power with the end user. On the other hand, if a company can grow to a large size organically over the years it will be strong fundamentally and can withstand any competition in the market

Q2) The acquirer’s due diligence and evaluation of the target firm are two entirely separate processes. True or False?

Ans: False - due diligence and evaluation are both same. This basically evaluates the target companies claims of what is to be sold.

Free cash flows are cash flows that are available to all of the firm’s investors and are therefore used to value the firm as a whole (both debt and equity claims). True or False?

Ans: True, free cash flow is very important to the investors as it shows how much cash the company can generate after paying for operations and capital expenditure and can be used for dividends for the shareholders and share buybacks