Using the cost of capital method to value LBOs requires adjusting the firms unlevered
beta in each period using the firm’s projected debt-to-equity ratio for that period. True
or False
Answer:
The empirical evidence supports the presumption that bigger is always better when it
comes to acquisitions.
True or False
Answer:
The discounted cash flow method for valuing a firm adjusts for differences in the
magnitude and timing of cash flows and for risk.
True or False
Answer:
The closing often involves getting all the necessary third-party consents and regulatory
and shareholder approvals. True or False
Answer:
Confidentiality agreements are rarely required when target and acquiring firms
exchange information. True or False
Answer:
Employees receive far greater legal protection in many developed foreign countries
than they do in the U.S. True or False
Answer:
In a spin-off, some shareholders receive proportionately more shares than others. True
or False
Answer:
While GAAP does not ensure accuracy, it is helpful to the analyst in that statements that
conform to GAAP rules must adhere to certain standards. True or False
Answer:
LBO exit strategies involving selling to a strategic buyer usually result in the best price
as the buyer may be able to generate significant synergies by combining the firm with
its existing business. True or False
Answer:
Because the limited liability company offers its owners the significant advantage of
greater flexibility in allocating profits and losses and because the LLC is not subject to
the many restrictions of the S-Corporation, the popularity of the S-corporation has
increased. True or False
Answer:
Viewing preferred dividends as paid in perpetuity, the cost of preferred stock can be
calculated as dividends per share of preferred
stock divided by the market value of the preferred stock. True or False
Answer:
Management buyouts without a financial equity contributor are relatively rare. True or
False
Answer:
Both public and private firms are subject to non-diversifiable risk. True or False
Answer:
When a public company is subject to a leveraged buyout, it is said to be “going private.”
True or False
Answer:
It is rare that the owner or a family member is either an investor in or an owner of a
vendor supplying products or services to the family owned firm. True or False
Answer:
The sale of assets by a target firm will result in a taxable gain if the fair market value is
less than the book value? True or False
Answer:
Strong sales growth and low entry barriers characterize the embryonic and growth
stages of a product’s life cycle.
True or False
Answer:
The takeover premium is the dollar or percentage amount the purchase price proposed
for a target firm exceeds the acquiring firm’s share price. True or False
Answer:
M&As represent by far the most profitable means of entering foreign markets. True or
False
Answer:
Nontaxable transactions also are called tax-free reorganizations. True or False
Answer:
The primary purpose of the buyer adjusting the seller earnings is to provide an accurate
estimate of the current year’s operating income or cash flow in the base year. True or
False
Answer:
Typical LBO targets are in mature industries such as manufacturing, retailing, textiles,
food processing, apparel, and soft drinks. True or False
Answer:
Concern about their fiduciary responsibility and about stockholder lawsuits puts
pressure on the target’s board to accept the offer. True or False
Answer:
In a statutory merger, the buyer retains the target’s tax attributes. True or False
Answer:
The expected cost of and probability of occurring of financial distress are easily
forecasted. True or False
Answer:
Project-oriented JVs often are viewed unfavorably by regulators. True or False
Answer:
If the target firm’s ratio of bad debt reserves as a percent of projected revenue is
increasing, the analyst can be confident that the firm is boosting revenue by not
reserving enough to cover probable future losses.
True or False
Answer:
The PEG ratio can be helpful in evaluating the potential market values of a number of
different firms in the same industry in selecting which may be the most attractive
acquisition target. True or False
Answer:
A tax- free reorganization or merger is one in which target shareholders receive acquirer
stock in exchange for substantially all of the target’s assets or shares. The target firm
merges with a U.S. subsidiary of the foreign acquirer in a statutory merger under state
laws.
Answer:
When the target firm is an operating division of a larger firm, it is common for the
parent to provide services to the target at below market prices. In calculating the target’s
standalone value, it is necessary to subtract the difference between the market price of
these services and actual cost paid to the parent from the target firm’s net income. True
or False
Answer:
Globally integrated capital markets provide foreigners with unfettered access to local
capital markets and local residents to foreign capital markets. True or False
Answer:
LBO capital structures are often very complex, consisting of bank debt, subordinated
unsecured debt, preferred stock, and common equity. True or False
Answer:
Accounting considerations rarely affect the decision to buy another business rather than
to build the business internally. True or False
Answer:
The U.S. antitrust regulators are likely to be most concerned about vertical mergers.
True or False
Answer:
Credit ratings provided by Moody’s and Standard & Poor’s are highly reliable indicators
of a firm’s degree of financial distress. True or False
Answer:
In determining the initial offer price, the acquirer must decide how much of the
anticipated synergy to share with the target firm’s shareholders. True or False
Answer:
If the debt-to-equity ratio is expected to fluctuate substantially during the forecast
period, applying conventional capital budgeting techniques that discount future cash
flows with a constant weighted average cost of capital (CC) is appropriate. True or
False
Answer:
The accumulation of a target firm’s stock by arbitrageurs makes purchases of blocks of
stock by the bidder easier. True or False
Answer:
The principal limitation to the comparable companies’ valuation approach is the
difficulty in finding companies that are truly comparable to the target firm. True or
False
Answer:
Owners of private businesses attempting to minimize taxes may overstate their
contribution to the firm by giving themselves or family members unusually low
salaries, bonuses, and benefits. True or False
Answer: