Answer Choices:
a. True
b. False
Answer:
a. True
Question: Which of the following statements is most CORRECT? The primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization plan. The basic doctrine of fairness states that all debt holders must be treated equally. Since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the “public interest” is not a relevant concern. While the firm is in bankruptcy, the existing management is always allowed to remain in control of the firm, though the court monitors its actions closely. To a large extent, the decision to dissolve a firm through liquidation or to keep it alive through reorganization depends upon the value of the firm if it is rehabilitated versus its value if its assets are sold off individually.
Answer:
Options:
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Hostile takeovers are most likely to occur when a firm’s stock is selling below its intrinsic value as a result of poor management.
b. The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.
c. The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers.
d. In general, it is more in bondholders’ interests than stockholders’ interests for a firm to shift its investment focus away from safe, stable investments and into risky investments, especially those that primarily involve research and development.
e. Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm’s stock to sell at a price below its intrinsic value.
Answer:
a
Question: Borrowing funds on terms that would require immediate repayment of all loans if the firm is acquired, selling off at bargain prices the assets that originally made the firm a desirable target, and granting huge “golden parachutes” that open if the firm is acquired are 3 procedures used to defend against hostile takeovers. These strategies are known as “poison pills.” True False
Answer:
Options:
Question: Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?
Answer Choices:
a. Decrease the use of restrictive covenants in bond agreements.
b. Take actions that reduce the possibility of a hostile takeover.
c. Elect a board of directors that allows managers greater freedom of action.
d. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.
e. Eliminate a requirement that members of the board of directors have a substantial investment in the firm’s stock.
Answer:
d
Question: In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.
Answer:
Options:
Question: Since a manager’s central goal is to maximize the firm’s stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.
Answer:
Options:
Question: Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?
Answer Choices:
a. Pay managers large cash salaries and give them no stock options.
b. Change the corporation’s formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.
c. Beef up the restrictive covenants in the firm’s debt agreements.
d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm’s stock.
e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.
Answer:
b
Question: Which of the following statements is CORRECT?
Answer Choices:
a. One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability.
b. Using restrictive covenants in debt agreements is an effective way to reduce conflicts between stockholders and managers.
c. Managers generally welcome hostile takeovers since the “raider” generally offers a price for the stock that is higher than the price before the takeover action started.
d. The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers.
e. Most business in the U.S. is conducted by corporations, and corporations’ popularity results primarily from their favorable tax treatment.
Answer:
d
Question: SafeCo Company and Risco Inc are identical in size and capital structure. However, the riskiness of their assets and cash flows are somewhat different, resulting in SafeCo having a WACC of 10% and Risco a WACC of 12%. SafeCo is considering Project X, which has an IRR of 10.5% and is of the same risk as a typical SafeCo project. Risco is considering Project Y, which has an IRR of 11.5% and is of the same risk as a typical Risco project. Now assume that the two companies merge and form a new company, SafeCo/Risco Inc. Moreover, the new company’s market risk is an average of the pre-merger companies’ market risks, and the new merger has no impact on either the cash flows or the risks of Projects X and Y. Which of the following statements is CORRECT?
Answer Choices:
a. If evaluated using the correct post-merger WACC, Project X would have a negative NPV.
b. After the merger, SafeCo/Risco would have a corporate WACC of 11%. Therefore, it should reject Project X but accept Project Y.
c. After the merger, SafeCo/Risco would have a corporate WACC of 11%. Therefore, it should reject Project X and Project Y.
d. SafeCo/Risco’s WACC, as a result of the merger, would be 10%.
e. After the merger, SafeCo/Risco should select Project Y but reject Project X. If the firm does this, its corporate WACC will fall to 10.5%.
Answer:
Options:
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Corporations face few regulations and more favorable tax treatment than do proprietorships and partnerships.
b. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers.
c. Bond covenants are an effective way to resolve conflicts between shareholders and managers.
d. Because of their simplified organization, it is easier for proprietors and partnerships to raise large amounts of outside capital than it is for corporations.
e. One advantage to forming a corporation is that the owners of the firm have limited liability.
Answer:
e
Question: Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.
Answer:
Options:
Question: Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope. True False
Answer:
Options:
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Well-designed bond covenants are useful for reducing potential conflicts between stockholders and managers.
b. The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail.
c. Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm’s stock to sell at a price below its intrinsic value.
d. Takeovers are most likely to be attempted if the target firm’s stock price is above its intrinsic value.
e. The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.
Answer:
b
Question: Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?
Answer Choices:
a. Congress passes a law that severely restricts hostile takeovers.
b. A firm’s compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock.
c. The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period.
d. The company’s outside auditing firm is given a lucrative year-by-year consulting contract with the company.
e. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.
Answer:
e
Question: Leveraged buyouts (LBOs) occur when a firm’s managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money. True False
Answer:
Options:
Question: The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm’s shareholders at the target’s cost of equity reflecting any changes to its capital structure as a result of the merger.
Answer:
Options:
Question: A spin-off is a type of divestiture in which the assets of a division are sold to another firm. True False
Answer:
Options:
Question: The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.
Answer:
Options: