The weighted average cost of capital (WACC) is the broadest measure of the firm’s cost
of funds and represents the return that a firm must earn to induce investors to buy its
common stock. True or False
Answer:
In contacting large, publicly traded firms, it is usually preferable to make initial contact
through an intermediary and at the highest level of the company possible. True or False
Answer:
Whenever an investor acquires 5% or more of public company, it must disclose its
intentions, the identities of all investors, their occupation, sources of financing, and the
purpose of the acquisition. True or False
Answer:
Because of their high liquidity, lenders often lend up to 100% of the book value of
accounts receivable pledged as collateral in leveraged buyouts. True or False
Answer:
Limitations the lender imposes on the borrower on the amount of dividends that can be
paid, the level of salaries and bonuses that may be given to the borrower’s employees,
the total amount of indebtedness that can be assumed by the borrower, and investments
in plant and equipment and acquisitions are called affirmative covenants. True or False
Answer:
The acquisition plan provides the detail needed to implement effectively the firm’s
business strategy, True or False
Answer:
An acquisition is the purchase of an entire company or a controlling interest in a
company. True or False
Answer:
States are not allowed to pass any laws that impose restrictions on interstate commerce
or that conflict in any way with federal laws regulating interstate commerce. True or
False
Answer:
The purchase price for a target firm may be fixed at the time of closing, subject to
future adjustment, or be contingent on future performance. True or False
Answer:
Bonds of a non-U.S. issuer registered with the SEC for sale in the U.S. public bond
markets are called “Yankee” bonds. True or False
Answer:
Post-merger returns to shareholders often do not meet expectations. However, this is
also true of such alternatives to M&As as joint ventures, alliances, and new product
introductions. True or False
Answer:
Private firms must file quarterly earnings reports with the Securities and Exchange
Commission.
True or False
Answer:
The total value of the firm according to the adjusted present value method is the present
value of the firm’s free cash flows to equity investors plus the present value of future
tax savings discounted at the firm’s unlevered cost of equity. True or False
Answer:
While a foreign buyer may acquire shares or assets directly, share acquisitions are
generally the simplest form of acquisition. True or False
Answer:
Sellers who are structured as C corporations generally prefer to sell assets for cash than
acquirer stock because of more favorable tax treatment. True or False
Answer:
When estimating liquidation value, analysts often make a simplifying assumption that
the assets can be sold in an orderly fashion, which is defined as a reasonable amount of
time to solicit bids from qualified buyers. True or False
Answer:
Empirical studies show that company size (measured by assets), case duration
(measured in days), and the number of parties involved in the proceedings (measured in
terms of the numbers of professional firms working) explain most of the case-to-case
variation in professional fees. True or False
Answer:
The shareholder interests theory suggests that shareholders gain when management
resists takeover attempts. True or False
Answer:
Investors in highly leveraged transactions who are primarily focused on relatively
short-to-intermediate term financial returns are often called financial buyers. True or
False
Answer:
In the presence of taxes, firms are often less leveraged than they should be, given the
potentially large tax benefits associated with debt. Firms can increase market value by
increasing leverage to the point at which the additional contribution of the tax shield to
the firm’s market value begins to decline. True or False
Answer:
Firms adopting a focus strategy compete primarily based on their superior
understanding of how to satisfy their customers needs better than the competition. True
or False
Answer:
By replacing the target’s board members, proxy fights may be an effective means of
gaining control without owning 51% of the target’s voting stock. True or False
Answer:
In a balance sheet adjustment, the buyer increases the total purchase price by an amount
equal to the decrease in net working capital or shareholders’ equity of the target
company. True or False
Answer:
The justification for the adjusted present value method reflects the theoretical notion
that firm value should is affected by the way in which it is financed. True or False
Answer:
A statutory merger is a combination of two corporations in which only one corporation
survives and the merged corporation goes out of existence. True or False
Answer:
The success rate among business alliances is usually much higher than for mergers and
acquisitions. True or False
Answer:
Due to absence of historical data in many emerging economies, the equity risk premium
often is estimated using the prospective method implied in the constant growth
valuation model. True or False
Answer:
Pro forma financial statements are simply another name for GAAP financial statements.
True or False
Answer:
A conglomerate merger is one in which a firm acquires other firms, which are highly
related to its current core business. True or False
Answer:
The target firm’s bylaws may provide significant hurdles for an acquiring firm. True or
False
Answer: