The disadvantages of exporting include high transportation costs, exchange rate
fluctuations, and possible tariffs placed on imports into the local country. True or False
Answer:
Takeover attempts are likely to increase when the market value of a firm’s assets is
more than their replacement value. True or False
Answer:
Employee stock ownership plans cannot be legally used to acquire companies. True or
False
Answer:
Studies show that rival firms’ share prices will rise in response to the announced
acquisition of a competitor, regardless of whether the proposed acquisition is ultimately
successful or unsuccessful. True or False
Answer:
Sharing common goals, standards, services, and space can be a highly effective and
practical way to integrate disparate corporate cultures. True or False
Answer:
Assume a firm has a market value of less than $50 million and a of 1.75. Also, assume
the risk-free rates of return and equity premium are 5.0 and 5.5 percent, respectively.
The firm’s cost of equity using the CAPM method adjusted for firm size is 23.8%. True
or False
Answer:
In the U.S., the Sherman Act makes illegal all contracts, combinations and conspiracies,
which “unreasonably” restrain trade. The Act applies to all transactions and businesses
engaging in both interstate and intrastate trade. True or False
Answer:
Taxes are an important consideration in almost any transaction, and they are often the
primary motivation for an acquisition.
True or False
Answer:
Free cash flow to the firm is calculated before debt and taxes. True or False
Answer:
Antitrust authorities may approve a proposed takeover even if the resulting combination
will substantially increase market concentration if the target from would go bankrupt if
the takeover does not occur. True or False
Answer:
In a spin-off, the proportional ownership of shares in the new legal subsidiary is the
same as the stockholders’ proportional ownership of shares in the parent firm. True or
False
Answer:
Some state anti-takeover laws contain so-called “fair price provisions” requiring that all
target shareholders of a successful tender offer receive the same price as those who
actually tendered their shares. True or False
Answer:
In common law countries (e.g., U.K., Canada, Australia, India, Pakistan, Hong Kong,
Singapore, and other former British colonies), the acquisition vehicle will be a
corporation-like structure. True or False
Answer:
Although the proposition that the value of the firm should be independent of the way in
which it is financed may make sense for a firm whose debt-to-capital ratio is relatively
stable and similar to the industry’s, it is highly problematic when it is applied to highly
leveraged transactions. True or False
Answer:
Strategic alliances often make use of written contracts rather than more formal legal
structures such as a corporation. True or False
Answer:
Methodologies employed to value private firms are substantially different from those
employed to value public firms. True or False
Answer:
If a transaction involves a cash purchase of target stock, the target company’s tax cost or
basis in the acquired stock or assets is increased or ‘stepped up” automatically to their
fair market value (FMV), which is equal to the purchase price paid by the acquirer.
True or False
Answer:
Divestitures always result in the parent receiving stock or debt from the buyer. True or
False
Answer:
The size of the target firm is the best predictor of the likelihood of being taken over by
another firm.
True or False
Answer:
In an earnout agreement, the acquirer must directly control the operations of the target
firm to ensure the target firm adheres to the terms of the agreement. True or False.
Answer:
The extent to which the sales forces of the two firms are combined depends on their
relative size, the nature of their products and markets, and their geographic location.
True or False
Answer:
The appropriate deal structure is that which satisfies, without regard to risk, as many of
the primary objectives of the parties involved as necessary to reach overall agreement.
True or False
Answer:
Financial models can be used to answer the following questions: How much is the
target company worth without the effects of synergy? What is the value of expected
synergy? What is the maximum price that the acquiring company should pay for the
target? True or False
Answer:
The replacement cost approach to valuation of a target firm ignores value created by
operating the assets in combination as a going concern. True or False
Answer:
To determine the total value of the firm using the adjusted present value method, add
the present value of the firm’s cash flows to equity, interest tax savings, and terminal
value discounted at the firm’s unlevered cost of equity and subtract the present value of
the expected cost of financial distress. True or False
Answer:
There is no substitute for performing a complete due diligence on the target firm. True
or False
Answer:
Since real options provide flexibility that can greatly change the value of a project, it
should be considered in capital budgeting methodology. True or False
Answer:
Divisions of larger companies are generally poor candidates for successful leveraged
buyouts. True or False
Answer:
Assume Firm A’s acquisition of Firm B results in a reduction in the combined firms’
debt-to-total capital ratio to .25. If the same ratio for the industry is .5, the combined
firm may be able to increase its borrowing to the industry average, assuming no
extenuating circumstances. However, this should not be viewed as a source of value to
the acquiring firm. True or False
Answer:
The decision to sell or to retain the business depends on a comparison of the pre-tax
value of the business to the parent with the after-tax proceeds from the sale of the
business. True or False
Answer:
A corporate structure is the preferred post-closing organization when an earn-out is
involved in acquiring the target firm. True or False
Answer: