In a purchase of assets, the buyer retains the target’s tax attributes. True or False
Answer:
The Type C reorganization is used when it is essential for the acquirer not to assume
any undisclosed liabilities. True or False
Answer:
For financial reporting purposes, the parent firm should account for the spin-off of a
subsidiary’s stock to its shareholders at book value with no gain or loss recognized,
other than any reduction in value due to impairment. True or False
Answer:
Major motivations for business alliances include risk sharing as well as gaining access
to new markets and skills. True or False
Answer:
While it is legitimate for a firm to follow different accounting practices for financial
reporting and tax purposes, the relationship between book and tax accounting is likely
to remain constant over time, unless there are changes in tax rules or accounting
standards. True or False
Answer:
The forward triangular cash merger is the most common form of taxable transaction.
The target company merges with a U.S. subsidiary of the foreign acquirer with
shareholders of the target firm receiving acquirer shares as well as cash, although cash
is the predominate form of payment. True or False
Answer:
The parent firm generally retains control of the business involved in an equity
carve-out. True or False
Answer:
The joint venture may represent an attractive alternative to a merger or acquisition. True
or False
Answer:
The high premiums paid to LBO target shareholders reflect the tax benefits associated
with the high leverage of such transactions and the improved operating efficiency
following the completion of the buyout resulting from management incentive plans and
the discipline imposed by the need to repay debt. True or False
Answer:
The comparable recent transactions method is usually considered less reliable than the
comparable companies’ valuation method.
True or False
Answer:
The acquirer often is asked for a commitment letterfrom a lender, which commits the
lender to providing financing for the transaction. True or False
Answer:
The cost of equity is the minimum financial return required by investors to invest in
stocks of comparable risk. True or False
Answer:
There is no need for the seller to perform due diligence on its own operations to ensure
that its representations and warranties in the definitive agreement are accurate. True or
False
Answer:
The number of selection criteria should be as extensive as possible to ensure that all
factors relevant to the firm’s decision-making process are considered. True or False
Answer:
LBO investors often use public offerings of the firm’s stock or sell the firm to a strategic
buyer in order to exit the business. True or False
Answer:
Whenever either the acquiring or the target firm’s stock is publicly traded, the
transaction is subject to the substantial reporting requirements of federal securities laws.
True or False
Answer:
Payment in transactions involving non-U.S. firms is most likely to be cash. True or
False
Answer:
Shell corporations rarely have any value. True or False
Answer:
The reduction in the firm’s tax liability due to the tax deductibility of interest is often
referred as a tax shield. True or False
Answer:
Financial buyers often will attempt to determine the highest amount of debt possible
(i.e., the borrowing capacity of the target firm) to maximize their equity contribution in
order to maximize the IRR. True or False
Answer:
A parent firm rarely chooses to divest an undervalued business and return the cash to
shareholders either through a liquidating dividend or share repurchase. True or False
Answer:
A minority discount is the reduction in the value of a minority investor’s investment
because minority owners have little influence in how the firm is managed. True or False
Answer:
In globally integrated markets, it makes little difference whether the ß is calculated by
regressing the target firm’s (or a similar firm’s) historical returns against the returns for
a broadly defined global index, U.S. equity market index, or a broadly defined equity
index in the target’s country. True or False
Answer:
A transaction is usually taxable to the target firm’s shareholders, if the acquirer’s stock is
used to purchase at least 30% of the target firm’s stock or assets. True or False
Answer:
A C corporation is the typical acquisition vehicle used by foreign buyers of U.S.
businesses due to its flexibility. True or False
Answer:
The risk to the bidder associated with bidding strategy of offering target firm
shareholders multiple payment options is that the range of options is likely to
discourage target firm shareholders from participating in the bidder’s tender offer for
their shares. True or False.
Answer:
All investment decisions include clearly identifiable and measurable real options whose
estimated value should be included in the valuation of the opportunity. True or False
Answer:
Equity partnerships commonly are used in purchasersupplier relationships, technology
development, marketing alliances, and in situations in which a larger firm makes an
investment in a smaller firm to ensure its continued financial viability. This is important
because it ensures one partner has dominant control over the partnership. True or False
Answer:
High employee turnover is rarely a problem during the integration of the target firm into
the acquirer. True or False
Answer:
The DCF analysis solves for the present value of the firm, while the LBO analysis
solves for the discount rate or internal rate of return. True or False
Answer:
In general, business alliances are not intended to become permanent arrangements. True
or False
Answer:
A split-up involves the creation of a new class of stock for each of the parent’s operating
subsidiaries, paying current shareholders a dividend of each new class of stock, and
then dissolving the remaining corporate shell. True or False
Answer:
As a general rule, a transaction is taxable to the target company shareholders if they
receive the acquiring firm’s stock and non-taxable if they receive cash. True or False
Answer:
A term loan usually has a maturity of less than one year. True or False
Answer:
Because of hubris, managers of acquiring firms often believe their valuation of a target
firm is superior to the market’s valuation. Consequently, they often end up overpaying
for the firm. True and False
Answer:
The cost of capital formula can be generalized to include hybrid sources of funds
available to firms such as convertible preferred
and debt. True or False
Answer:
Customer attrition following an acquisition is commonly related to uncertainty about
a. On time product delivery
b. Product quality
c. Pricing and payment terms
d. A and B only
e. A, B, and C
Answer:
All of the following are examples of antitakeover provisions commonly found in state
statutes except for
a. Fair price provisions
b. Business combination provisions
c. Cash-out provisions
d. Short-form merger provisions
e. Share control provisions
Answer:
The post-closing integration process consists of all of the following activities except for
a. Integration planning
b. Developing communication plans
c. Creating a new organization
d. Developing staffing plans
e. Identifying the acquisition vehicle
Answer:
Which of the following are steps often found in developing a LBO model?
a. Cash flow projections
b. Determining a firm’s borrowing capacity
c. Determining a financial sponsor’s equity contribution
d. A, B, and C
e. A and C only
Answer:
Which of the following is not true of the acquisition process?
a. It always follows a predictable sequence of steps.
b. It sometimes deviates from the sequence outlined in this chapter.
c. It involves a negotiation phase
d. It involves the development of a business plan
e. None of the above
Answer:
Which of the following is true about a voluntary bust-up?
a. Parent ceases to exist
b. Cash infusion to the parent
c. Parent stock is exchanged for subsidiary stock
d. New shares issued to the public
e. Parent remains in control
Answer:
An equity carve-out differs from a spin-off for all but which one of the following
reasons?
a. Generates a cash infusion into the parent
b. Is undertaken when the unit has very little synergy with the parent
c. The proceeds often are taxable to the parent
d. Continues to be influenced by the parent’s management and board
e. The carve-out’s shareholders may differ from those of the parent’s shareholders
Answer:
The initial offer price for the target firm is defined as
a. The minimum price
b. The present value of the minimum price plus some fraction of the present value of
net synergy
c. The present value of net synergy plus the current market value of the target firm
d. The maximum price less the minimum price
e. The maximum price less the present value of net synergy
Answer:
Earnouts tend to shift risk from the seller to the acquirer in that a higher price is paid
only when the seller or acquired firm has met or exceeded certain performance criteria.
True of False
Answer:
Which of the following examples represents the best application of a firm’s primary
core competence?
a. Honda Motors manufactures cars, motorcycles, lawnmowers, and snow blowers
b. IBM provides both software services and manufactures computer hardware
c. PepsiCo manufactures and distributes soft drinks and manages restaurant chains
d. Microsoft sells operating system software and access to the internet through its MSN
subscription service
e. McDonalds sells hamburgers and pizza.
Answer:
Which of the following is true? A hostile takeover attempt
a. Is generally found to be illegal
b. Is one that is resisted by the target’s management
c. Results in lower returns to the target firm’s shareholders than a friendly attempt
d. Usually successful
e. Supported by the target firm’s board and its management
Answer:
Delay in integrating the acquired business contributes to which of the following?
a. Employee anxiety
b. Customer attrition
c. Employee anxiety
d. Deteriorating employee productivity
e. All of the above
Answer:
Fraudulent conveyance is best described by which of the following situations:
a. A new company spun off by its parent to the parent’s shareholders that enters
bankruptcy is found to have been substantially undercapitalized when created
b. An acquiring company pays too high a price for a target firm
c. A company takes on too much debt
d. A leveraged buyout is taken public when its operating cash flows are increasing
e. None of the above
Answer:
The tax status of the transaction may influence the purchase price by
a. Raising the price demanded by the seller to offset potential tax liabilities
b. Reducing the price demanded by the seller to offset potential tax liabilities
c. Causing the buyer to reduce the purchase price if the transaction is taxable to the
target firm’s shareholders
d. Forcing the seller to agree to defer a portion of the purchase price
e. Forcing the buyer to agree to defer a portion of the purchase price
Answer:
The zero growth model is a special case of what valuation model?
a. Variable growth model
b. Constant growth model
c. Delta growth model
d. Perpetuity valuation model
e. None of the above
Answer:
Which of the following is an example of economies of scope?
a. Declining average fixed costs due to increasing levels of capacity utilization
b. A single computer center supports multiple business units
c. Amortization of capitalized software
d. The divestiture of a product line
e. Shifting production from an underutilized facility to another to achieve a higher
overall operating rate and shutting down the first facility
Answer:
Which of the following is not true of a spin-off?
a. Creates cash infusion for parent
b. Change in equity ownership of the spin-off
c. New legal entity created
d. New shares issued to the public
e. A, B, and D
Answer:
Which of the following represent key components of the acquisition process
a. Business plan
b. Integration plan
c. Search plan
d. Negotiation process
e. All of the above
Answer:
Which of the following represent disadvantages of a holding company structure?
a. Potential for triple taxation
b. Significant number of minority shareholders may create contentious environment
c. Managers may have difficulty in making the best investment decisions
d. A, B, and C
e. A and C only
Answer:
The seller’s insistence that the buyer agree to purchase its stock may encourage the
buyer to
a. offer a lower purchase price because it is assuming all of the target firm’s liabilities
b. offer a higher purchase price because it is assuming all of the target firm’s liabilities
c. offer a lower purchase price because it is receiving all of the target’s tax benefits
d. use its stock rather than cash to purchase the target firm
e. use cash rather than its stock to purchase the target firm
Answer:
Integration planning is included in which of the following activities?
a. Development of a business plan
b. The search process
c. Development of a financing plan
d. Post-closing integration
e. None of the above
Answer:
Key management integration team responsibilities include all of the following except
for
a. Building a master schedule of activities that need to be accomplished
b. Establishing work teams
c. Tracking the daily operation of the firms
d. Monitoring and expediting key decisions
e. Establishing a rigorous communications program
Answer:
The leading causes of business failure include which of the following:
a. Recession
b. Excessive operating expenses
c. Excessive leverage
d. Management inexperience
e. All of the above
Answer:
Which of the following is not typically true of LBOs?
a. Managers are generally also owners
b. Most employees are given the opportunity to participate in profit sharing plans
c. The focus tends to be on improving operational efficiency though cost cutting and
improving productivity
d. R&D budgets following the creation of the LBO are always increased significantly
e. All of the above
Answer:
Which of the following is not true of unrelated diversification?
a. Involves buying firms outside of the company’s primary lines of business
b. Involves shifting from a firm’s core product lines into those which are perceived to
have higher growth potential
c. Generally results in higher returns to shareholders
d. Generally requires that the cash flows of acquired businesses are uncorrelated with
those of the firm’s existing businesses
e. A and D only
Answer:
Which of the following are components of a business strategy?
a. Mission/vision
b. Objectives
c. Internal analysis
d. External analysis
e. All of the above
Answer:
All of the following are true about the challenges of integrating firms with different
corporate cultures except for
a. Cultural issues can run the gamut from dress codes to compensation
b. The acquired firm’s overarching culture is generally rapidly accepted by the target
firm’s employees
c. Small companies are usually highly unstructured and informal
d. There are often differences in culture even between firms in the same industry
e. Integration may be inappropriate if acquirer and acquired firm’s cultures are
extremely different.
Answer:
The control model of corporate governance is applicable under all of the following
conditions except for
a. Capital markets are illiquid
b. Board members are largely insiders
c. Ownership and control overlap
d. Equity ownership is widely dispersed
e. A, B, & D only
Answer:
All of the following are true of a proxy contest except for
a. Are usually successful
b. Are sometimes designed to replace members of the board
c. Are sometimes designed to have certain takeover defenses removed
d. May enable effective control of a firm without owning 51% of the voting stock
e. Are often costly
Answer:
Closing is included in which of the following activities?
a. Development of a business plan
b. Development of an acquisition plan
c. The search process
d. The negotiation process
e. None of the above
Answer:
For a spin-off to be tax-free to the shareholder it must satisfy which of the following:
a. The parent firm must have a controlling interest in the subsidiary before it is spun off.
b. After the spin-off, both the parent and the subsidiary must remain in the same line of
business in which each was involved for at least 5 years before the spin-off.
c. The spin-off cannot have been used as a means of avoiding dividend taxation by
converting ordinary income into capital gains.
d. The parent’s shareholders must maintain significant ownership in both the parent and
the subsidiary following the transactions.
e. All of the above
Answer: