Q&A Hero

Q: Which proposal for insuring that sufficient funds will be available to provide Social Security benefits to future retirees does the AARP find least objectionable? A) Raise the maximum income cap on which workers and employers are taxed. B) Provide more generous annual cost of living increases. C) Privatize Social Security. D) Lower immigration restrictions to increase the number of workers paying into the Social Security system.

Q: Developed economies seem to exhibit significant differences in the cost of equity due to the relatively high integration of their capital markets in the global capital market. True or False

Q: Which of the following is not a proposal for insuring that sufficient funds will be available to provide Social Security benefits to future retirees? A) Raise the maximum income cap on which workers and employers are taxed. B) Provide more generous annual cost of living increases. C) Raise the minimum age for receiving benefits. D) Reduce the amount of future benefits.

Q: In general, the appropriate marginal tax rate used in calculating cash flows and the discount rate should be that applicable to the country in which the cash flows are produced. True or False

Q: Which of the following statements regarding the funding of Social Security is false? A) In 2004, workers contributed 6.2% of their wages up to a maximum of $87,900. B) Employers contribute an amount equal to the workers' contributions. C) Interest, dividend, rent, and royalty income are also taxed to provide supplemental funds for Social Security. D) Contributions exceeding the amounts paid to current Social Security recipients are invested in Treasury bonds to build up a Social Security trust fund.

Q: 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

Q: The Social Security system is an example of a public pension plan that is ________. A) underfunded B) fully funded C) overfunded D) none of the above

Q: The interest rate parity theory relates forward or future spot exchange rates to differences in interest rates between two countries adjusted by the spot rate. True or False

Q: Social Security is a A) fully funded pension plan. B) federally insured private pension plan. C) government sponsored private pension plan. D) "pay-as-you-go" system.

Q: For developed countries, such as Western Europe, the interest rate parity theory provides a useful framework for estimating forward currency exchange rates (i.e., future spot exchange rates). True or False

Q: A company's pension plan promises employees a specific amount of income when they retire. However, the plan does not have the assets to meet these future obligations to employees. This plan represents a defined-________ plan that is ________. A) benefit; underfunded B) benefit; overfunded C) contribution; underfunded D) contribution; overfunded

Q: Interest rates and expected inflation in one country compared to another country seldom affect exchange rates between the two countries. True or False

Q: Which of the following has not contributed to the growth of pension plans? A) privatization of Social Security B) urbanization C) retirement at earlier ages D) increases in life expectancy

Q: Nominal or real cash flows should give different net present values if the expected rate of inflation used to convert future cash flows to real terms is the same inflation rate used to estimate the real discount rate. True or False

Q: The fastest growing financial intermediary is ________. A) commercial banks B) pension plans C) life insurance companies D) mutual funds

Q: M&A practitioners utilize nominal cash flows except in circumstances of high rates of inflation, when real cash flows are preferable. True or False

Q: Clauses in life insurance policies that eliminate death benefits if the insured person commits suicide are an example of a ________. A) restrictive provision B) restrictive covenant C) anti-fraud exclusion D) risk-based deductible

Q: The basic differences between within-country and cross-border valuation methods is that the latter involves converting cash flows from one currency into another and adjusting the discount rate for risks not generally found when the acquirer and target firms are within the same country. True or False

Q: The fact that insurance companies charge young males higher automobile insurance premiums than young females is an example of A) risk-based premiums. B) an attempt to minimize adverse selection. C) coinsurance. D) all of the above. E) only A and B of the above.

Q: The methodology for valuing cross-border transactions using discounted cash flow analysis is substantially different from that employed when both the acquiring and target firms are within the same country. True of False

Q: If automobile insurance companies were prevented from charging risk-based premiums, but could selectively screen potential policyholders, the likely effect would be to A) increase the number of young men obtaining insurance coverage relative to young women. B) decrease the number of young women obtaining insurance coverage relative to young men. C) decrease the number of young men obtaining insurance coverage relative to young women. D) do both A and B of the above.

Q: In emerging countries where financial statements may be haphazard and gaining access to the information necessary to adequately assess risk is limited, it may be impossible to perform an adequate due diligence. Under these circumstances, acquirers may protect themselves by including a put option in the agreement of purchase and sale. Such an option would enable the buyer to require the seller to repurchase shares from the buyer at a predetermined price under certain circumstances. True or False

Q: Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices? A) collection of information and screening of potential policyholders B) risk-based premiums C) deductibles and coinsurance D) all of the above E) only A and B of the above

Q: The decision to buy political risk insurance depends on the size of the investment and the perceived level of political and economic risk. True or False

Q: Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices? A) collection of information and screening of potential policyholders B) risk-based premiums C) cancellation of insurance D) all of the above

Q: Unanticipated changes in exchange rates rarely influence the competitiveness of products produced in the local market for export to the global marketplace. True or False

Q: Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices? A) gender-neutral premiums B) flat-rate premiums C) restrictive provisions D) all of the above E) only A and B of the above

Q: A sometimes overlooked challenge is the failure of the legal system in an emerging country to honor contracts. True or False

Q: Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices? A) requiring collateral for policies B) risk-based premiums C) compensating balances D) all of the above E) only A and B of the above

Q: It is easy to differentiate between political and economic risks, since they are generally unrelated. True or False

Q: Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices? A) risk-assessment screening B) risk-based premiums C) restrictive provisions D) all of the above E) only A and B of the above

Q: In choosing how to manage an acquisition in a new country, a manager with an in-depth knowledge of the acquirers priorities, decision-making processes, and operations is appropriate, especially when the acquirer expects to make very large new investments. True or False

Q: Which of the following is not a feature of the Terrorism Risk Insurance Act of 2002? A) Losses that exceed $100 billion are not covered. B) The law does not apply to acts of international terrorism when losses are less than $5 million. C) Government pays 50 percent of losses in excess of $100 billion. D) Government pays 90 percent of the losses.

Q: Language barriers, different customs, working conditions, work ethics, and legal structures create a new set of challenges in integrating cross-border transactions. True or False

Q: The federal regulatory agency responsible for regulating the activities of life insurance companies is A) the Federal Deposit Insurance Corporation. B) the Federal Reserve. C) the Federal Life Insurance Board. D) none of the above; there is no such federal regulatory agency.

Q: The Euroequity market reflects equity issues by a foreign firm tapping a larger investor base than the firms home equity market. True or False

Q: The largest share of life insurance companies' assets are ________. A) corporate stock B) corporate bonds C) government securities D) cash reserves

Q: The American Depository Receipt (ADR) market evolved as a means of enabling foreign firms to raise funds in the U.S. equity markets. True or False

Q: Relative to life insurance companies, property and casualty insurance companies hold A) more liquid assets. B) more long-term government bonds. C) more commercial mortgages. D) fewer municipal bonds.

Q: Bonds of a non-U.S. issuer registered with the SEC for sale in the U.S. public bond markets are called Yankee bonds. True or False

Q: Of the following financial intermediaries, which holds the least liquid assets? A) property and casualty insurance companies B) life insurance companies C) money market mutual funds D) commercial banks

Q: As in the U.S., any representations and warranties in an acquisition agreement are intended to cause the seller to disclose significant information. However, because of local custom, they are often more extensive in foreign countries than in the U.S. True or False

Q: Which of the following is true of life insurance companies? A) They primarily hold long-term assets that are not particularly liquid. B) They primarily hold short-term liquid assets. C) Payouts to policyholders are relatively predictable. D) Both A and C of the above are true.

Q: Employees receive far greater legal protection in many developed foreign countries than they do in the U.S. True or False

Q: Which of the following types of life insurance provides no savings element? A) term B) whole C) universal D) none of the above

Q: Product liability claims are generally more frequent and judgments are larger outside the U.S. True or False

Q: A term life insurance policy provides A) insurance benefits only. B) savings benefits only. C) both insurance and savings benefits. D) none of the above.

Q: Despite accounting practices varying widely from country to country, the seller should not be required to confirm that their financial statements have been prepared in accordance with generally accepted accounting principles if to do so would endanger the deal. True or False

Q: Which of the following do not help people during their retirement? A) term life insurance B) annuity C) whole life insurance D) universal life insurance

Q: If the acquisition is structured as an asset purchase because the target is only a division of a foreign company or because the seller agrees to sell assets, the U.S. buyer of the assets must decide whether to acquire them directly or to use a new or existing foreign company to do so. The choice will affect future U.S. and non-U.S. tax consequences. True or False

Q: International transactions tend to be highly challenging, as they typically involve multiple tax and legal jurisdictions. True or False

Q: (I) A majority of life insurance companies are organized as mutual companies. (II) State governments have the major responsibility for regulating insurance companies. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.

Q: ________ companies get a tax advantage; most new insurance companies organize as ________ companies. A) Mutual insurance; mutual insurance B) Mutual insurance; stock C) Stock; stock D) Stock; mutual insurance

Q: Mergers are legal in all countries. True or False

Q: Insurance companies employ underwriters A) as an alternative to higher deductibles. B) to control the risky behavior of their policyholders. C) to control the risk incurred on their behalf by agents. D) to encourage the loyalty of exclusive agents. E) to maintain the independence of independent agents.

Q: With tax avoidance and fraud common in many countries, the buyer may find that some assets will transfer encumbered by tax liens. True or False

Q: Which is not a management practice for reducing the problems of adverse selection and moral hazard in insurance? A) deductibles B) restrictive provisions C) coinsurance D) reinsurance

Q: In cross-border M&As, acquirer shares often are less attractive to potential targets because of the absence of a liquid market for resale or because the acquirer is not widely recognized by the target firms shareholders. True or False

Q: Insurance management tools that give policyholders incentives to avoid accidents insured against include ________. A) deductibles B) risk-based premiums C) coinsurance D) all of the above

Q: Payment in transactions involving non-U.S. firms is most likely to be cash. True or False

Q: To prevent the moral hazard problem, health and life insurance companies may write policies A) that increase benefits dramatically once the policyholder is discovered to have contracted an illness so that the patient can recover sooner. B) containing provisions which either reduce or eliminate benefits to persons who contract prespecified illnesses. C) boosting the amount the companies will pay health providers in the event that claims are submitted by policyholders. D) with only A and B of the above provisions.

Q: In civil law countries (which include Western Europe, South America, Japan, and Korea), the acquisition will generally be in the form of a share company or limited liability company. True or False

Q: To prevent the moral hazard problem, health and life insurance companies may write policies A) for which premiums increase dramatically once the policyholder is discovered to have contracted an illness. B) containing provisions which either reduce or eliminate benefits to persons who contract prespecified illnesses. C) limiting the amount the companies will pay in the event that claims are submitted by policyholders. D) with all of the above provisions. E) with only A and B of the above provisions.

Q: In common law countries (e.g., U.K., Canada, Australia, India, Pakistan, Hong Kong, Singapore, and other former British colonies), the acquisition vehicle will be a corporation-like structure. True or False

Q: In the case of an insurance policy, ________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff; ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most. A) moral hazard; insurance market discrimination B) moral hazard; insurance segregation C) moral hazard; adverse selection D) adverse selection; moral hazard

Q: Acquiring businesses outside the U.S. involves additional obstacles atypical of domestic acquisitions. True or False

Q: 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

Q: Some automobile owners will drive faster knowing that they are covered by health and automobile insurance. This behavior creates the problem of ________. A) fraudulent claims B) moral hazard C) adverse selection D) pecuniary purchases

Q: To qualify as a U.S. corporation for tax purposes, the foreign firm must own at least 80% of the stock of the domestic subsidiary. True or False

Q: In the case of an insurance policy, ________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff. A) moral hazard B) opportunism C) adverse selection D) shirking

Q: A tax- free reorganization or merger is one in which target shareholders receive acquirer stock in exchange for substantially all of the targets assets or shares. The target firm merges with a U.S. subsidiary of the foreign acquirer in a statutory merger under state laws.

Q: To prevent adverse selection, health and life insurance companies may do all the following except A) charge higher premiums to people with certain preexisting health conditions. B) require potential policyholders to submit medical records. C) refuse to sell policies to people with certain pre-existing health conditions. D) charge the same premiums to all policyholders.

Q: While a foreign buyer may acquire shares or assets directly, share acquisitions are generally the simplest form of acquisition. True or False

Q: When those most likely to produce the outcome insured against are the ones who purchase insurance, insurance companies are said to face the problem of ________. A) fraudulent claims B) moral hazard C) adverse selection D) pecuniary purchases

Q: Target shareholders most often receive shares rather than cash in cross-border transactions. True or False

Q: The problem of ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most. A) asymmetric information B) moral hazard C) adverse selection D) fraudulent behavior

Q: The certainty equivalent for risk-averse people who buy insurance is the A) maximum loss they may sustain. B) expected loss they may sustain. C) insurance premium they pay. D) profit the insurance company earns.

Q: There is no limitation on non-U.S. persons or entities acting as shareholders in U.S. corporations, except for certain regulated industries. True or False

Q: A C corporation is the typical acquisition vehicle used by foreign buyers of U.S. businesses due to its flexibility. True or False

Q: The earliest form of insurance was ________ insurance. A) life B) health C) automobile D) property and casualty