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Q:
Explain graphically the speculative attacks that occurred against the British pound in 1992, the Mexican peso in 1994, the Thai baht in 1997, the Brazilian real in 1999, and the Argentine peso in 2002.
Q:
Conventional capital budgeting procedures are of little use in valuing an LBO. True or False
Q:
Explain graphically how a country must intervene in the foreign exchange market under a fixed exchange rate regime if its currency is undervalued.
Q:
An LBO can be valued from the perspective of common equity investors only or all those who supply funds, including common and preferred investors and lenders. True or False
Q:
What was the European Monetary System? How did its exchange rate mechanism work?
Q:
What are the advantages and disadvantages of using enterprise cash flow in valuing CK? In what might EBITDA been a superior (inferior) measure of cash flow for valuing CK?
Q:
Briefly explain what it means to be a "reserve-currency" country. What are the advantages? Can you think of any disadvantages?
Q:
Describe how PI financed the purchase price. Speculate as why each source of financing was selected? How did CK pay for feels incurred in closing the transaction?
Q:
How does a fixed exchange rate regime differ from a system of floating exchange rates?
Q:
How does a sterilized foreign exchange intervention differ from an unsterilized one in terms of its effects on the exchange rate, international reserves, and the monetary base?
Q:
What criteria did Pacific Investors (PI) use to select California Kool (CK) as a target for an LBO? Why were these criteria employed?
Q:
By the end of 2010, China had accumulated more than $2 trillion of international reserves.
Q:
The new company, Chrysler Holdings, is a limited liability company. Why do you think CCM chose this legal structure over a more conventional corporate structure?
Q:
A managed float regime is when countries intervene in foreign exchange markets in an attempt to influence their exchange rates by buying and selling foreign assets.
Q:
Which of the leading explanations of why deals sometimes fail to meet expectations best explains why the combination of Daimler and Chrysler failed? Explain your answer.
Q:
A sterilized intervention leaves the money supply changed and has a direct way of affecting interest rates or the expected future exchange rate.
Q:
Cerberus and Daimler will own 80.1% and 19.9% of Chrysler Holdings LLC, respectively. Why do you think the two parties agreed to this distribution of ownership?
Q:
Cite examples of economies of scale and scope?
Q:
An unsterilized intervention in which domestic currency is purchased by selling foreign assets leads to a rise in international reserves, a decrease in the money supply, and an appreciation of the domestic currency.
Q:
What are the risks to this deals eventual success? Be specific.
Q:
When it acts as a lender of last resort, the IMF may increase the likelihood that financial institutions take excessive risks and thus increase moral hazard.
Q:
What were the motivations for this deal from Cerberus perspective? From Daimlers perspective?
Q:
If a country's central bank eventually runs out of international reserves, it cannot keep its currency from depreciating and a devaluation must occur.
Q:
Why did banks lower their lending standards in financing LBOs in 2006 and early 2007? How did the lax standards contribute to their inability to sell the loans to investors? How did the inability to sell the loans once made curtail their future lending?
Q:
The Bretton Woods system was a fixed exchange rate regime in which central banks bought and sold their own currencies to keep their exchange rates fixed.
Q:
Based on the information given it the case, determine the amount of the price reduction Home Depot accepted for HD Supply and the amount of cash the three buyout firms put into the transaction?
Q:
In a fixed exchange rate system, a country whose currency is undervalued will lose international reserves.
Q:
Why does Cox Enterprises believe that the investment needed for growing its cable business is best done through a private company structure?
Q:
An anchor currency provides the base for a floating exchange rate system.
Q:
Why did the board feel that it was appropriate to set up special committee of independent board directors?
Q:
In contrast to other countries' currencies, the Japanese yen and yen-denominated assets are the major component of international reserves held by countries.
Q:
Why was the equity contribution of the buyout firms as a percentage of the total capital requirements so much higher than amounts contributed during the 1980s?
Q:
Why would it take five very large financial institutions to finance the transactions?
Q:
A central bank's international reserves are its holdings of assets denominated in foreign currencies.
Q:
Why would the buyout firms want Qwest to continue to provide such services as billing and information technology support? How might such services be priced?
Q:
The current account balance plus the capital account balance equals the net change in government international reserves.
Q:
Why did the buyout firms want a 50-year contract to be the exclusive provider of publishing services to Qwest Communications?
Q:
The difference between merchandise exports and imports is called the current account balance.
Q:
An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to a gain in international reserves.
Q:
Why was QwestDex considered an attractive LBO candidate? Do you think it has significant growth potential? Explain the following statement: A business with high growth potential may not be a good candidate for an LBO.
Q:
Seigniorage is
A) when a country abandons its currency altogether and adopts that of another country.
B) when a country loses the revenue that it received by issuing money.
C) when the par exchange rate is reset at a lower level.
D) when the domestic currency is backed 100% by a foreign currency.
Q:
Describe the potential benefits and costs of LBOs to shareholders, employers, lenders, customers, and communities in which the firm undergoing the buyout may have operations. Do you believe that on average LBOs provide a net benefit or cost to society? Explain your answer.
Q:
A dirty float is
A) when the value of a currency is pegged relative to the value of one other currency.
B) when the value of a currency is allowed to fluctuate against all other currencies.
C) when countries intervene in foreign exchange markets in an attempt to influence their exchange rates by buying and selling foreign assets.
D) when the value of a currency is pegged relative to an anchor currency.
Q:
How might bondholders and preferred stockholders have been hurt in the RJR Nabisco leveraged buyout?
Q:
The official reserve transactions balance is referred to as
A) the capital account.
B) the current account.
C) the trade balance.
D) the net change in government international reserves.
Q:
Why might the RJR Nabisco board have accepted the KKR bid over the Johnson bid?
Q:
What is the bookkeeping system for recording all receipts and payments that have a direct bearing on the movement of funds between a nation and foreign countries?
A) current account
B) capital account
C) balance of payments
D) trade balance
Q:
What were the RJR Nabisco boards fiduciary responsibilities to the shareholders? How well did they satisfy these responsibilities? What could/should they have done differently?
Q:
What shows international transactions that involve currently produced goods and services?
A) current account
B) balance of payments
C) trade balance
D) capital account
Q:
In your opinion, was the buyout proposal presented by Ross Johnsons management group in the best interests of the shareholders? Why? / Why not?
Q:
________ is when the domestic currency is backed 100% by a foreign currency and in which the note-issuing authority establishes a fixed exchange rate to this foreign currency and stands ready to exchange domestic currency for the foreign currency at this rate whenever the public requests it.
A) dollarization
B) currency board
C) devaluation
D) revaluation
Q:
What do you believe were the major factors persuading the MGM board to accept the Revised Sony bid? In
your judgment, do these factors make sense? Explain your answer.
Q:
When a reserve currency country runs a balance of payments deficit and a nonreserve currency country buys the reserve currency to finance the reserve country's deficits, the monetary base in the nonreserve country ________ and the monetary base in the reserve country ________.
A) increases; decreases
B) increases; does not change
C) decreases; does not change
D) decreases; increases
Q:
How did Time Warners entry into the bidding affect pace of the negotiations and the relative bargaining power of MGM, Time Warner, and the Sony consortium?
Q:
Because other countries hold dollars as international reserves, a U.S. official reserve transactions deficit can be financed by
A) an increase in U.S. international reserves.
B) an increase in foreign holdings of dollars.
C) a decrease in foreign holdings of dollars.
D) only A and B of the above.
Q:
The official reserve transactions balance
A) equals the current account balance plus the items in the capital account.
B) tells us the net amount of international reserves that must move between central banks in order to finance international transactions.
C) has an important impact on the money supply.
D) is all of the above.
Q:
In what way do you believe that Sonys objectives might differ from those of the private equity investors making up the remainder of the consortium? How might such differences affect the management of MGM? Identify possible short-term and long-term effects.
Q:
A balance of payments ________ is associated with a ________ of international reserves.
A) surplus; loss
B) surplus; gain
C) deficit; gain
D) balance; loss
Q:
Do you believe that MGM is an attractive LBO candidate? Why? Why not?
Q:
Having pledged not to engage in aggressive cost cutting, how do you think HCA and its financial sponsor group planned on paying off the loans?
Q:
A balance of payments ________ is associated with a ________ of international reserves.
A) deficit; loss
B) deficit; gain
C) surplus; loss
D) balance; gain
Q:
Does a hospital or hospital system represent a good or bad LBO candidate? Explain your answer.
Q:
Many believe that the statistical discrepancy is primarily the result of
A) large hidden capital flows into the United States.
B) large hidden capital flows out of the United States.
C) measurement errors due to exchange rate calculations.
D) none of the above.
Q:
Explain how the way in which the LBO is financed affects the way it is operated and the timing of when equity investors choose to exit the business. Be specific.
Q:
Given the size of the statistical discrepancy needed to balance the balance of payments account, one can infer that
A) hidden capital flows into the U.S. are inconsequential.
B) items in the balance of payments are measured quite accurately.
C) many international transactions go unrecorded.
D) all of the above occur.
Q:
Why are payment-in-kind securities (e.g., debt or preferred stock) particularly well suited for financing LBOs? Under what circumstances might they be most attractive to lenders or investors?
Q:
Which of the following appears in the capital account part of the balance of payments?
A) a gift to an American from his English aunt
B) a purchase by the Honda corporation of a U.S. Treasury bill
C) a purchase by the Bank of England of a U.S. Treasury bill
D) income earned by the Honda corporation on its automobile plant in Ohio
Q:
In what ways is this transaction similar to and different from those that were common in the 1980s? Be specific.
Q:
The capital account describes the flow of capital between the United States and other countries. Capital inflows are
A) American purchases of foreign assets.
B) foreign purchases of American assets.
C) both A and B of the above.
D) neither A nor B of the above.
Q:
An argument that supports the view that the world needs an international lender of last resort such as the IMF is that
A) central banks in emerging-market countries lack credibility as inflation fighters.
B) an international lender of last resort creates a safety net that protects bank depositors.
C) the IMF is slow to lend, which ultimately reduces the amount that must be borrowed.
D) the IMF imposes requirements that borrowing countries must enact microeconomic policies to reform their financial systems.
Q:
Under what circumstances would SunGard refinance the existing $500 million in outstanding senior debt after the merger? Be specific.
Q:
The most effective way to deal with currency crises is to
A) impose controls on capital inflows.
B) impose controls on capital outflows.
C) impose controls on both capital inflows and outflows.
D) improve bank regulation and supervision.
Q:
SunGard is a software company with relatively few tangible assets. Yet, the ratio of debt to equity of almost 5 to 1. Why do you think lenders would be willing to engage in such a highly leveraged transaction for a firm of this type?
Q:
(I) Controls on capital outflows may increase capital flight by weakening confidence in the government. (II) Controls on capital outflows are an inadequate substitute for financial reform to deal with currency crises.
A) (I) is true; (II) false.
B) (I) is false; (II) true.
C) Both are true.
D) Both are false.
Q:
Comment on the fairness of this transaction to the various stakeholders involved. How would you apportion the responsibility for the eventual bankruptcy of Tribune among Sam Zell and his advisors, the Tribune board, and the largely unforeseen collapse of the credit markets in late 2008? Be specific.
Q:
A disadvantage of dollarization is that it
A) prevents a central bank from creating inflation.
B) avoids the possibility of a speculative attack on the domestic currency.
C) does not allow a country to pursue its own independent monetary policy.
D) is a strong commitment to exchange rate stability.
Q:
Is this transaction taxable or non-taxable to Tribunes public shareholders? To its post-transaction shareholders? Explain your answer.
Q:
Under dollarization, a country
A) backs its currency 100 percent with foreign reserves.
B) earns seigniorage because it no longer bears the cost of issuing its own currency.
C) abandons its own currency and adopts the money of another country.
D) must worry about a speculative attack on its currency.
Q:
Is this transaction best characterized as a merger, acquisition, leveraged buyout, or spin-off? Explain your answer.
Q:
The euro is unlikely to seriously challenge the dollar as a reserve currency as long as
A) the European Union's share of world GDP remains significantly smaller than that of the United States.
B) the European Union's share of world exports remains significantly smaller than that of the United States.
C) Europe neglects to integrate its financial markets.
D) the European Union is unable to function as a cohesive political entity.