The weighted average cost of capital consists only of debt and equity. True or False
Answer:
The comparable companies’ method and recent transactions methods of valuation are
conceptually similar. True or False
Answer:
A tender offer is a proposal made directly to the target firm’s board as the first step
leading to a friendly takeover. True or False
Answer:
The integration process if done effectively can help to mitigate the potential loss of
employees. True or False
Answer:
Acquirers and targets planning to enter into a tax-free transaction seldom seek to get an
advance ruling from the IRS to determine its tax-free status. True or False
Answer:
Public announcements of a proposed takeover are often designed to put pressure on the
board of the target firm. True or False
Answer:
LBO investors have become much more actively involved in managing target firms in
recent years than they have in the past. True or False
Answer:
A corporate legal structure is seldom used in implementing business alliances, because
it may be subject to double taxation and significant set up costs. True or False
Answer:
The after-tax cost of borrowed funds to the firm is estimated by multiplying the pretax
interest rate, i, by (1 t), where t is the
marginal tax rate for the firm. True or False
Answer:
The share exchange ratio is defined as offer price divided by the target firm’s current
share price. True or False
Answer:
The experience curve is most important in analyzing industries with low fixed costs.
True or False
Answer:
If the market leader in an industry has a $300 million market value and a 30% market
share, the market is valuing each percentage point of market share at $10 million. If a
target company in the same industry has a 20% market share, the market value of the
target company is $200 million. True or False
Answer:
Most takeover attempts may be characterized as hostile bids. True or False
Answer:
Although the parent retains control, the shareholder base of the subsidiary that has
undergone an equity carve-out is unlikely to be different than that of the parent as a
result of the public sale of equity. True or False
Answer:
An option to abandon an investment (i.e., divest or liquidate) will often increase the
NPV because of its effect on reducing risk. By exiting the business, the acquirer may be
able to recover a portion of its original investment and truncate projected negative cash
flows associated with the acquisition. True or False
Answer:
Investment decisions, including M&As, often contain certain “embedded options” such
as the ability to accelerate growth by adding to the initial investment (i.e., expand), to
delay the timing of the initial investment (i.e., delay), or to walk away from the project
(i.e., abandon). True or False
Answer:
Excess capacity in many industries often drives M&A activity as firms strive to achieve
greater economies of scale and scope, as well as pricing power with customers and
suppliers. True or False
Answer:
The control model of corporate governance may be more applicable where ownership
tends to be highly diverse and the right to control the business is separate from
ownership. True or False
Answer:
Financial risk refers to the buyer’s willingness and ability to leverage a transaction as
well as the willingness of shareholders to accept near-term earnings per share dilution.
True or False
Answer:
Taxable transactions usually involve the purchase of the target’s voting stock, because
the purchase of assets automatically will trigger a taxable gain for the target if the fair
market value of the acquired assets exceeds the target firm’s tax basis in the assets.
True or False
Answer:
Privately owned businesses are often referred to as “closely held” since they are usually
characterized by a small group of shareholders controlling operating and managerial
policies of the firm. True or False
Answer:
Statutory mergers are governed by the statutory provisions of the state in which the
surviving entity is chartered. True or False
Answer:
Efforts to insist on a detailed written agreement or contractual relationship may be
viewed as offensive in some cultures. True or False
Answer:
A simple model to project cash flow rarely involves the projection of revenue and the
various components of cash flow as a percent of projected revenue. True or False
Answer:
About 40% of all proposed M&A transactions are disallowed by the U.S. antitrust
regulators, because they are believed to be anti-competitive. True or False
Answer:
Junk bonds have invariably proved to be a reliable source of low-cost financing in LBO
transactions during the last 30 years. True or False
Answer:
A forward triangular merger is the most commonly used form of reorganization for
tax-free stock acquisitions in which the form of payment is acquirer stock. It involves
three parties: the acquiring firm, the target firm, and a shell subsidiary of the target firm.
True or False
Answer:
There are no state statutes affecting proposed takeovers. True or False
Answer:
A pure control premium is the value the acquirer believes can be created by replacing
the target firm’s incompetent management, by changing the strategic direction of the
target, by gaining a foothold in a market not currently served, or by achieving unrelated
diversification. True or False
Answer:
In addition, stock-based incentive programs to attract and retain key managers can be
implemented for each operation with its own tracking stock. True or False
Answer: