The market model of corporate governance is readily applicable to privately held,
family owned firms. True or False
Answer:
Joint venture and alliance agreements often limit how and to whom parties to the
agreements can transfer their interests. True or False
Answer:
Firms adopting a focus strategy tend to concentrate their efforts by selling a few
products to a single market and compete primarily on price. True or False
Answer:
Collar agreements are employed in all cash purchases of the target’s stock to preserve
the value of the purchase price for acquirer shareholders. True or False
Answer:
As a result of a 338 election, the IRS treats the purchase of target shares as a taxable
purchase of assets which can be stepped up to fair market value. Only the buyer has to
agree to the 338 election. True or False
Answer:
Whatever the analyst chooses to do with respect to the selection of a tax rate, it is
critical to use the marginal rate in calculating after-tax operating income in perpetuity.
Otherwise, the implicit assumption is that taxes can be deferred indefinitely. True or
False
Answer:
The threat of hostile takeovers is a factor in encouraging a firm to implement good
governance practices.
True or False
Answer:
Fair value is by necessity more subjective than the concept of fair market value,
because it represents the dollar value of a business based upon an appraisal of the
tangible and intangible assets of the business. True or False
Answer:
An LBO deal makes sense to common equity investors if the present value of free cash
flow to equity exceeds the value of the equity investment in the deal. True or False
Answer:
The acquirer must be careful that not too large a proportion of the purchase price be
composed of cash, because this might not meet the IRS’s requirement for continuity of
interests of the target shareholders and disqualify the transaction as a Type A
reorganization. True or False
Answer:
In determining the initial offer price, the acquiring company must decide how much of
anticipated synergy it is willing to share with the target firm’s shareholders. True or
False
Answer:
Under a C corporate structure, ownership can be easily transferred, which facilitates
raising money. True or False
Answer:
A split-up involves carving out a portion of the equity of each of the parent’s operating
subsidiaries and selling the shares to the public. True or False
Answer:
For a return to be considered risk-free over some future time period it must be free of
default risk and there must not be any uncertainty about the reinvestment rate (i.e., the
rate of return that can be earned at the end of the investor’s holding period).
True or False
Answer:
Tax free reorganizations generally require that all or substantially all of the target
company’s assets or shares be acquired in order to ensure that the acquiring firm has a
continuing ownership interest in the combined firms. True or False
Answer:
Non-compliance with environmental laws, product liabilities, pending lawsuits, poor
product quality, patents, poorly written or missing customer contracts, and high
employee turnover are all considered destroyers of value. True or False
Answer:
The adjusted present value method implies that the firm should optimally use 100%
debt financing to take maximum advantage of the tax shield created by the tax
deductibility of interest. True or False
Answer:
The letter of intent often specifies the type of information to be exchanged as well as
the scope and duration of the potential buyer’s due diligence. True or False
Answer:
An acquiring firm may attempt to limit the options of the target’s senior management by
making a formal acquisition proposal, usually involving a public announcement, to the
board of the directors of the target. True or False
Answer:
The financing plan may be affected by the discovery during due diligence of assets that
can be sold to pay off debt accumulated to finance the transaction. True or False
Answer:
Financial buyers usually hold onto their investments for at least 15-20 years. True or
False
Answer:
The comparable companies’ method is widely used in so-called “fairness opinion”
letters. True or False
Answer:
If the borrower defaults on the loan or otherwise fails to honor the terms of the
agreement, the lender can seize and sell the collateral to recover the value of the loan
only if the borrower agrees that it is unlikely that the loan will be repaid. True or False
Answer:
An increase in the target firm’s reserves for doubtful accounts increases taxable income,
while a decrease reduces the firm’s taxable income. True or False
Answer:
Firms that are family owned but not managed by family members are often well
managed, as family shareholders with large equity stakes carefully monitor those
charged with managing the business. True or False
Answer:
The weights used to calculate the weighted average cost of capital for a firm with
common equity and debt only represent the book
value of equity and debt. True or False
Answer:
The basic differences between within-country and cross-border valuation methods is
that the latter involves converting cash flows from one currency into another and
adjusting the discount rate for risks not generally found when the acquirer and target
firms are within the same country. True or False
Answer:
Most empirical studies support the conclusion that unrelated diversification benefits a
firm’s shareholders. True or False
Answer:
The accuracy of any valuation is heavily dependent on understanding the historical
competitive dynamics of the industry, the historical performance of the company within
the industry, and the reliability of the data used in the valuation. True or False
Answer:
Buyers and sellers generally view purchase price adjustments as a form of insurance
against any erosion or accretion in assets, such as plant and equipment. True or False.
Answer:
The capital asset pricing model is commonly used to estimate the cost of equity. True or
False
Answer: