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Cash flow lenders view the borrower's future cash flow generation capability as the
primary means of recovering a loan, while largely ignoring the assets of the LBO target.
True or False
Answer:
Stock purchases involve the exchange of the target's stock for acquirer stock only. True
or False.
Answer:
Poison pills represent a new class of securities issued by a company to its shareholders,
which have no value unless an investor acquires a specific percentage of the firm's
voting stock. True or False
Answer:
Benchmarking important functions such as the acquirer's and the target's manufacturing
and information technology operations and processes is a useful starting point for
determining how to integrate these activities. True or False
Answer:
A standalone business is one whose financial statements reflect all the costs of running
the business and all of the revenues generated by the business. True or False
Answer:
The major advantages of using a triangular structure are limitations of the voting rights
of acquiring shareholders and that the acquirer gains control of the target through a
subsidiary without being directly responsible for the target's known and unknown
liabilities. True or False
Answer:
The evolution of the growth of a product can be characterized in four stages:
embryonic, growth, maturity, and decline. This description is called a business
attractiveness matrix. True or False
Answer:
The relationship between the overall market and a specific firm's beta may change
significantly if a large sector of stocks that make up the overall index increase or
decrease substantially. True or False
Answer:
Buyers routinely perform due diligence on sellers, but sellers rarely perform due
diligence on buying firms. True or False
Answer:
An earnout agreementis a financial contract whereby a portion of the purchase price of
a company is to be paid to the buyer in the future contingent on the realization of a
previously agreed upon future earnings level or some other performance measure. True
or False
Answer:
Consolidation occurs when two or more companies join to form a new company. True
or False
Answer:
To qualify as a U.S. corporation for tax purposes, the foreign firm must own at least
80% of the stock of the domestic subsidiary. True or False
Answer:
The acquisition vehicle is the legal structure used to acquire the target. True or False
Answer:
In limited liability companies, owners must also be active participants. True or False
Answer:
A cross-marketing relationship is one in which one party to the agreement agrees to sell
to its customers the products or services of another firm. True or False
Answer:
Poison pills represent a new class of stock issued by a company to its shareholders,
usually as a dividend. True or False
Answer:
Micro value drivers are those factors affecting specific functions within the firm. True
or False
Answer:
Merging compensation systems can be one of the most challenging activities of the
integration process. True or False
Answer:
Business alliances generally do not exhibit a higher success rate than mergers and
acquisitions. True or False
Answer:
The actual price paid for a target firm is unaffected by the buyer's due diligence. True or
False
Answer:
Borrowers often seek revolving lines of credit that they can draw upon on a daily basis
to run their business. True or False
Answer:
In order to normalize the historical data of the target firm, it may be necessary to
subtract large increases in
reserves and add back large decreases in reserves from cash flow. True or False
Answer:
Small firms may lack product, industry, and geographic diversification, which add to
their specific business risk. True or False
Answer:
Intuition suggests that the length of the high-growth period when applying the variable
growth model should be shorter the greater the current growth rate of the firm's cash
flow. True or False
Answer:
In terms of important deal structuring issues, scope outlines how broadly the alliance
will be applied in pursuing its purpose. True or False
Answer:
Tax-free reorganizations require that substantially all of the consideration received by
the target's shareholders be paid in cash. True or False
Answer:
The constant growth model may be used to estimate the risk premium component of the
cost of equity as an alternative to relying on historical information as is done in the
capital asset pricing model. True or False
Answer:
A heavily concentrated market is one in which a single or a few firms control a
disproportionately large share of the total market. True or False
Answer:
Letters of intent are usually legally binding on the potential buyer but rarely on the
target firm. True or False
Answer:
It is crucial to focus on the highest leverage issues in implementing post-merger
integration. True of False
Answer:
For firms whose market value is less than $50 million, the adjustment to the CAPM in
estimating the cost of equity can be as large as 2 percentage points. True or False
Answer:
