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Non-U.S. buyers intending to make additional acquisitions may prefer a holding
company structure.
True or False
Answer:
An LBO transaction makes sense from the viewpoint of all investors if the present
value (of the cash flows to the firm or enterprise value, discounted at the
weighted-average cost of capital, equals or exceeds the total investment consisting of
debt, common equity, and preferred equity required to buy the outstanding shares of the
target company. True or False
Answer:
The court can ignore the objections of creditors and stockholders if it feels the
reorganization is both fair and feasible. True or False
Answer:
Institutional activism has assumed a larger role in ensuring good corporate governance
practices in recent years. True or False
Answer:
With respect to joint ventures, so-called distribution issues relate to dividend policies
and how
profits and losses are allocated among the owners. True or False
Answer:
Macro value drivers are those factors which directly influence specific activities within
the firm. True or False
Answer:
Unlike a spin-off or carve-out, the parent retains complete ownership of the business for
which it has created a tracking stock. True or False
Answer:
A competitive self-assessment involves an analysis of the firm's absolute strengths and
weaknesses. True or False
Answer:
Shrewd sellers often negotiate a break-up clause in an agreement of purchase and sale
requiring the buyer to pay the seller an amount at least equal to the seller's cost
associated with the transaction. True or False
Answer:
Empirical studies show that exit strategies, which return cash to shareholders, tend to
have a highly unfavorable impact on shareholder wealth creation. True or False
Answer:
Because of the need to satisfy both the demands of stockholders and regulatory
agencies, public companies need to balance the desire to minimize taxes with the goal
of achieving quarterly earnings levels consistent with investor expectations. Failure to
do so frequently results in an immediate loss in the firm's market value. True or False
Answer:
The reasons for selecting a divestiture, carve-out, or spin-off strategy are basically the
same. True or False
Answer:
Under purchase accounting, the difference between the combined firm's shareholders'
equity immediately following closing and the acquiring firm's shareholders' equity
equals the purchase price paid for the target firm.
True or False
Answer:
Key stakeholders in the integration effort generally include employees, customers,
suppliers, communities, and regulators. True or False
Answer:
Management can obtain insight into the firm's probable future cash requirements and in
turn its value by determining its position in its industry's product life cycle. True or
False
Answer:
Increased borrowing by a firm will, other things equal, increase its tax liability. True or
False
Answer:
Triangular mergers are rarely used for tax-free transactions. True or False
Answer:
The number of billing errors as a percent of total invoices is a specific example of a
macro value driver. True or False
Answer:
LBO firms seldom purchase a firm to use as a platform to undertake other leveraged
buyouts in the same industry. True or False
Answer:
By acquiring the target firm through the JV, the corporate investor limits the potential
liability to the extent of their investment in the JV corporation. True or False
Answer:
Since the IRS requires that target shareholders continue to hold a substantial equity
interest in the acquiring company, the tax code defines what constitutes a substantial
equity interest. True or False
Answer:
A debt-for-equity swapoccurs when the distressed firm's shareholders are willing to
surrender a portion of their ownership for debt in the firm. True or False
Answer:
Studies show that control premiums vary widely across countries reflecting the efficacy
of shareholder rights laws and how well such laws are enforced in each country. True or
False
Answer:
When the firm increases its debt in direct proportion to the market value of its equity,
the level of the debt is perfectly correlated with the firm's market value. Consequently,
the risk associated with the tax shield (resulting from interest paid on outstanding debt)
is the same as that associated with the firm. True or False
Answer:
A spin-off is tax free to the shareholders if it is properly structured. In contrast, the cash
proceeds from an outright sale may be taxable to the parent to the extent a gain is
realized. True or False
Answer:
The extent to which compensation plans for the acquiring and acquired firms are
integrated depends on whether the two companies are going to be managed separately
or fully integrated. True or False
Answer:
By expressing the target's line-item data as a percentage of sales, it is possible to
compare the target company with other companies' line item data expressed in terms of
costs to highlight significant differences. True or False
Answer:
Sales within the protection of Chapter 11 reorganization may be accomplished either by
a negotiated private sale to a particular purchaser or through a public auction. True or
False
Answer:
A negative loan covenant is a portion of a loan agreement that specifies the actions the
borrowing firm agrees to take during the term of the loan. True or False
Answer:
Stakeholders only include a firm's shareholders. True or False
Answer:
Projecting as many of the key income, cash flow, and balance sheet components as a
percent of projected revenue helps to ensure the internal consistency of the model. True
or False
Answer:
The purchasing power parity theory states that one currency will appreciate (depreciate)
with respect to another currency according to the expected relative rates of inflation
between the two countries. True or False
Answer:
Secured debt often is referred to as mezzanine financing. True or False
Answer:
If the acquirer is interested in integrating the target business immediately following
closing, the holding structure may be most desirable. True or False
Answer:
Pro forma financial statements are frequently used to show what the acquirer and
target's combined financial statements would look like if they were merged. True or
False
Answer:
The present value of tax savings is irrelevant to the adjusted present value method. True
or False
Answer:
A firm is not bankrupt or in bankruptcy until it files or its creditors file a petition for
reorganization or liquidation with the federal bankruptcy courts. True or False
Answer:
Financial buyers usually plan to hold onto acquired firms longer than strategic buyers.
True or False
Answer:
Benchmarking important functions such as the acquirer's and the target's manufacturing
and IT operations and processes is a useful starting point for determining how to
integrate these activities. True or False
Answer:
