A buyer may divest a significant portion of the acquired company immediately
following closing without jeopardizing the tax-free status of the transaction. True or
False
Answer:
During periods of high inflation, the market value of assets is often less than their book
value. This often creates an attractive M&A opportunity. True or False
Answer:
Golden parachutes are employee severance arrangements, which are triggered
whenever a change incontrol takes place. They are generally held by a large number of
employees at all levels of management throughout the firm. True or False
Answer:
A post-closing organization must always be a C corporation. True or False
Answer:
Tax benefits that result from an acquisition should always be considered as among the
most important justification for paying a very high premium for the target firm. True or
False
Answer:
Collar agreements provide for certain changes in the exchange ratio contingent on the
level of the acquirer’s share price around the effective date of the merger. True or False
Answer:
A horizontal merger occurs between two companies within the same industry. True or
False
Answer:
Whenever the target firm’s projected cash flows are in local currency, the risk free rate
is the local country’s government bond rate. True or False
Answer:
Developed economies seem to exhibit significant differences in the cost of equity due to
the relatively high integration of their capital markets in the global capital market. True
or False
Answer:
The form of payment does not affect whether a transaction is taxable to the seller’s
shareholders. True or False
Answer:
Examples of management preferences used in an acquisition plan include their
preference for an asset or stock purchase or openness to partial rather than full
ownership of the target firm. True or False
Answer:
Split-ups and spin-offs generally are taxable to shareholders. True or False
Answer:
Mergers and acquisitions are subject to federal regulation only. True or False
Answer:
Staged transactions may be used to structure an earn-out, to enable the target to
complete the development of a technology or process, to await regulatory approval, to
eliminate the need to obtain shareholder approval, and to minimize cultural conflicts
with the target. True or False
Answer:
If the P/E ratio for the comparable firm is equal to 10 and the after-tax earnings of the
target firm are $2 million, the market value of the target firm would be $5 million. True
or False
Answer:
Divulging the true intentions of the acquiring firm to the target firm’s employees should
be deferred until it can be determined that such employees can be trusted. True or False
Answer:
Offering sellers consulting contracts to defer a portion of the purchase price is illegal in
most states. True or False
Answer:
Common exit strategies for LBOs include sale to a strategic buyer, an IPO, a leveraged
recapitalization, or a sale to another buyout firm. True or False
Answer:
In a tax-free reorganization, the buyer is never required to get shareholder approval.
True or False
Answer:
For financial reporting purposes, a distribution of tracking stock splits the parent firm’s
equity structure into separate classes of stock without a legal split-up of the firm. True
or False
Answer:
In calculating the weighted average cost of capital, the weights should be estimated
using the market value of the target firm’s debt and equity. True or False
Answer:
Without adjusting for the cost of financial distress, the adjusted present value method
implies that the value of the firm could be increased by continuously taking on more
debt. True or False
Answer:
In determining the liquidation value of inventories, it is not necessary to look at their
composition. True or False
Answer:
Decisions made in one area of a deal structure rarely affect other areas of the overall
deal structure.
True or False
Answer:
Net synergy may be estimated as the difference between the sum of the present values
of the target and acquiring firms, including the effects of synergy, and the value of the
target firm including the effects of synergy. True or False
Answer:
If the transaction is tax-free, the acquiring company is able to transfer or carry over the
target’s tax basis to its own financial statements. True or False
Answer:
Tracking stocks may create internal operating conflicts among the parent’s business
units in terms of how the consolidated firm’s cash is allocated among its business units.
True or False
Answer:
Common size financial statements may be constructed by calculating the percentage
each line item of the income statement, balance sheet, and cash flow statement is of
annual sales for each quarter or year for which historical data are available. True or
False
Answer:
The interest rate paritytheory relates forward or future spot exchange rates to
differences in interest rates between two countries adjusted by the spot rate. True or
False
Answer:
Investment bankers offer strategic and tactical advice and acquisition opportunities,
screen potential buyers and sellers, make initial contact with a seller or buyer, and
provide negotiation support for their clients.
True or False
Answer:
A corporate mission statement should be defined as broadly as possible since it seeks to
describe the corporation’s reason for being, and it should not exclude the firm from
pursuing any significant opportunities. True or False
Answer:
The constant growth model is most applicable to firms in mature markets. True or False
Answer:
When a parent creates a tracking stock for a subsidiary, it is giving up all control of that
subsidiary. True or False
Answer:
If the LBO is structured as a direct merger in which the seller receives cash for stock,
the lender will make the loan to the buyer once the appropriate security agreements are
in place and the target’s stock has been pledged against the loan. The target then is
merged into the acquiring company, which is the surviving corporation. True or False
Answer:
Interest payments are tax deductible to firms in the U.S. True or False
Answer:
The speed with which two firms are merged is an important factor determining the
long-term success of the merger. True or False
Answer:
Nominal or real cash flows should give different net present values if the expected rate
of inflation used to convert future cash flows to real terms is the same inflation rate
used to estimate the real discount rate. True or False
Answer:
Market segmentation involves identifying customers with common characteristics and
needs. True or False
Answer:
Decentralized management control usually facilitates the integration of a newly
acquired business. True or False
Answer: