Q&A Hero

Q: Describe the firms strategy to finance the transaction?

Q: Under a fixed exchange rate system, A) an anchor country loses control over its monetary policy. B) a country that ties its currency to that of another country gains control of the other country's monetary policy. C) a country that ties its currency to that of another country loses control over its monetary policy. D) a country that ties its currency to that of another country acquires greater control over its monetary policy.

Q: What is the acquisition vehicle, post-closing organization, form of payment, form of acquisition, and tax strategy described in this case study?

Q: The management team of a privately held firm found a lender who would lend them 90 percent of the purchase price of the firm if they pledged the firms assets as well as their personal assets as collateral for the loan. This purchase would best be described by which of the following terms? a. Merger b. Leveraged buyout c. Joint venture d. Tender offer e. Consolidation

Q: Under the Bretton Woods system, when a nonreserve-currency country was running a balance of payments deficit, A) it gained international reserves. B) it lost international reserves. C) it was necessary for the policymakers to implement a contractionary monetary policy. D) both A and C of the above occurred. E) both B and C of the above occurred.

Q: An investor group acquired all of the publicly traded shares of a firm. Once acquired, such shares would no longer trade publicly. Which of the following terms best describes this situation? a. Merger b. Going private transaction c. Consolidation d. Tender offer e. Joint venture

Q: In September 1992, the Bundesbank attempted to keep the mark from appreciating relative to the British pound, but it failed because participants in the foreign exchange market came to expect the A) appreciation of the mark. B) depreciation of the mark. C) revaluation of the dollar. D) the end of the Exchange Rate Mechanism.

Q: Which of the following tends to be true of LBOs a. LBOs rely heavily on management incentives to improve operating performance b. The premium paid to target firm shareholders often exceeds 40% c. Tax benefits are predictable and are built into the purchase price premium d. The cost of equity is likely to change as the LBO repays debt e. All of the above

Q: When the Bundesbank lowered German mark interest rates in September 1992, A) there was a massive sell-off of German marks, requiring intervention to support the value of the mark. B) there was a massive sell-off of British pounds, requiring intervention to support the value of the pound. C) there was a gradual sell-off of German marks, which avoided the need for intervention to support the value of the mark. D) there was a gradual sell-off of British pounds, which avoided the need for intervention to support the value of the pound.

Q: Which of the following is not typically true of LBOs? a. Managers are generally also owners b. Most employees are given the opportunity to participate in profit sharing plans c. The focus tends to be on improving operational efficiency though cost cutting and improving productivity d. R&D budgets following the creation of the LBO are always increased significantly e. All of the above

Q: Leading up to the foreign exchange crisis of September 1992, the Bank of England wanted to pursue a(n) ________ monetary policy and the German Bundesbank wanted to pursue a(n) ________ monetary policy. A) expansionary, expansionary B) expansionary; contractionary C) contractionary; expansionary D) contractionary; contractionary

Q: LBOs often exhibit very high financial returns during the years following their creation. Which of the following best describes why this might occur? a. LBOs invariably improve the firms operating efficiency b. LBOs tend to increase investment in plant and equipment c. The only LBOs that are taken public are those that have been the most successful d. LBOs experience improved decision making during the post-buyout period e. None of the above

Q: Revaluation of a currency's value occurs when A) a floating exchange rate adjusts upward. B) a floating exchange rate adjusts downward. C) a fixed exchange rate is adjusted upward. D) a fixed exchange rate is adjusted downward.

Q: LBO investors must be very careful not to overpay for a target firm because a. Major competitors tend to become more aggressive when a firm takes on large amounts of debt b. High leverage increases the break-even point of the firm c. Projected cash flows are often subject to significant error limiting the ability of the firm to repay its debt d. A and B only e. A, B, and C

Q: Under a managed float exchange rate regime, policymakers frequently do not want to see their currencies depreciate because it makes ________ goods more expensive for ________ consumers and contributes to inflation. A) foreign; foreign B) foreign; domestic C) domestic; foreign D) domestic; domestic

Q: Fraudulent conveyance is best described by which of the following situations: a. A new company spun off by its parent to the parents shareholders that enters bankruptcy is found to have been substantially undercapitalized when created b. An acquiring company pays too high a price for a target firm c. A company takes on too much debt d. A leveraged buyout is taken public when its operating cash flows are increasing e. None of the above

Q: Policymakers may not want to see their country's currency appreciate because A) this would hurt consumers in their country by making foreign goods more expensive. B) this would hurt domestic businesses by making foreign goods cheaper in their country. C) this would increase inflation in their country. D) this would decrease the wealth of the country.

Q: Which of the following are commonly used sources of funding for leveraged buyouts? a. Secured debt b. Unsecured debt c. Preferred stock d. Seller financing e. All of the above

Q: Depreciation of a currency occurs when A) a floating exchange rate adjusts upward. B) a floating exchange rate adjusts downward. C) a fixed exchange rate is adjusted upward. D) a fixed exchange rate is adjusted downward.

Q: If a country's central bank eventually runs out of international reserves, it cannot keep its currency from ________ and a ________ must occur in which the par exchange value is reset at a ________ level. A) appreciating; revaluation; higher B) depreciating; revaluation; higher C) depreciating; devaluation; lower D) appreciating; devaluation; lower

Q: Which of the following is generally not considered a characteristic of a financial buyer? a. Focus on short-to-intermediate returns b. Concentrate on actions that enhance the ability of target firms ability to generate cash flow to satisfy debt service requirements c. Intend to own the business for very long periods of time d. Manage the business to maximize return to equity investors e. All of the above

Q: If a central bank does not want to see its currency rise in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby weakening its currency. A) expansionary; raise B) contractionary; raise C) expansionary; lower D) contractionary; lower

Q: Which of the following is not true about attractive LBO candidates? a. Most assets tend to be encumbered b. Have low leverage c. Have predictable cash flow d. Have assets that are not critical to the ongoing operation of the firm e. Are in mature, moderately growing industries

Q: Factors that are most likely to contribute to the magnitude of premiums paid to LBO target firm shareholders are a. Tax benefits b. Improved operating efficiency c. Improved decision making d. A, B, and C e. A and C only

Q: If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency. A) expansionary; raise B) contractionary; raise C) expansionary; lower D) contractionary; lower

Q: Premiums paid to LBO firm shareholders average a. 20% b. 70% c. 5% d. Less than typical mergers e. More than typical mergers

Q: If the domestic currency is initially undervalued, that is below par, the central bank must intervene to sell the ________ currency by purchasing ________ assets. A) domestic; foreign B) domestic; domestic C) foreign; foreign D) foreign; domestic

Q: Which of the following characteristics of a firm would limit the firms attractiveness as a potential LBO candidate? a. Substantial tangible assets b. High reinvestment requirements c. High R&D requirements d. B and C e. All of the above

Q: Under a fixed exchange rate regime, if the domestic currency is initially ________, that is ________ par, the central bank must intervene to buy the domestic currency by selling foreign assets. A) overvalued; below B) overvalued; above C) undervalued; below D) undervalued; above

Q: Under a fixed exchange rate regime, if the domestic currency is initially ________, that is ________ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets. A) overvalued; below B) overvalued; above C) undervalued; below D) undervalued; above

Q: Which of the following is not true about junk bonds? a. Junk bonds are either unrated or rated below investment grade by the credit rating agencies b. Typically yield about 1-2 percentage points below yields on U.S. Treasury debt of comparable maturities. c. Junk bonds are commonly used source of permanent financing in LBO transactions d. During recessions, junk bond default rates often exceed 10% e. Junk bond default risk on non-investment grade bonds tends to increase the longer the elapsed time since the original issue date of the bonds

Q: Security provisions and protective covenants are included in loan documents to increase the likelihood that the interest and principal of outstanding loans will be repaid in a timely fashion. Which of the following is not true about security provisions and protective covenants? a. Security features include the assignment of payments due under a specific contract to the lender. b. Negative covenants include limits on the amount of dividends that might be paid c. Limitations on the amount of working capital that the borrower can maintain. d. Periodically, financial statements must be sent to lenders. e. Automatic loan repayment acceleration if the borrower is in default on any loans outstanding

Q: Under a fixed exchange rate regime, when the domestic currency is overvalued, the central bank must ________ the domestic currency to keep the exchange rate fixed; as a result, it ________ international reserves. A) purchase; loses B) sell; loses C) purchase; gains D) sell; gains

Q: Asset based lending is commonly used to finance leveraged buyouts. Which of the following is not true about such financing? a. The borrower generally pledges tangible assets as collateral. b. Lenders look at the target firms assets as their primary protection. c. Bank loans are secured frequently by receivables and inventory. d. Loans maturing in more than one year are often referred to as term loans. e. The target firms most liquid assets generally secure longer-term loans.

Q: Under a fixed exchange rate regime, when the domestic currency is undervalued, the central bank must ________ the domestic currency to keep the exchange rate fixed; as a result, it ________ international reserves. A) purchase; gains B) sell; gains C) purchase; loses D) sell; loses

Q: Which of the following is generally not true about leveraged buyouts? a. Borrowed funds are used to pay for all or most of the purchase price, perhaps as much as 90% b. Tangible assets of the target firm are often used as collateral for loans. c. Bank loans are often secured by the target firms intangible assets d. Secured debt is often referred to as junk bond financing. e. C and D only

Q: Which of the following are true statements about the Bretton Woods system? A) The Bretton Woods system was a flexible exchange rate regime, in which central banks allowed their currencies to float within a wide trading band. B) The U.S. dollar was called a reserve currency because it was used to denominate the securities central banks held as international reserves. C) The Bretton Woods agreement broke down in 1945. D) Only A and B of the above are true.

Q: Private equity investments are normally focused on the manufacturing industry. True or False

Q: Which of the following are true statements about the Bretton Woods system? A) 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. B) To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the IMF would loan deficit countries international reserves contributed by other members. C) The German mark was called a reserve currency because it was used to denominate the securities central banks held as international reserves. D) All of the above are true. E) Only A and B of the above are true.

Q: Most highly leveraged transactions consist of acquisitions of private rather public firms. True or False

Q: In the Bretton Woods system, the anchor currency was the A) euro. B) British pound. C) German mark. D) U.S. dollar.

Q: What kind of exchange rate system did the Bretton Woods agreement establish? A) floating B) managed float C) dirty float D) fixed

Q: LBOs normally involve public companies going private. True or False

Q: LBO exit strategies involving selling to a strategic buyer usually result in the best price as the buyer may be able to generate significant synergies by combining the firm with its existing business. True or False

Q: The Bretton Woods agreement set up the ________, which currently provides long-term loans to assist developing countries to build dams, roads, and other physical capital that contributes to economic development. A) International Monetary Fund B) World Bank C) Central Settlements Bank D) Bank of International Settlements E) European Exchange Rate Mechanism (ERM)

Q: The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties. A) IMF B) World Bank C) Central Settlements Bank D) Bank of International Settlements E) European Exchange Rate Mechanism (ERM)

Q: Management buyouts without a financial equity contributor are relatively rare. True or False

Q: LBOs may be consummated by establishing a new subsidiary that merges with the target. This may be done to avoid any negative impact that the new company might have on existing customer or creditor relationships. True or False

Q: The Bretton Woods system was one in which central banks A) agreed to limit domestic money growth to the average of the seven largest industrial nations. B) agreed not to intervene in the foreign exchange market to maintain a fixed exchange rate regime that had existed prior to World War I. C) agreed to limit domestic money growth to the average of the five largest industrial nations. D) bought and sold their own currencies to keep their exchange rates fixed.

Q: Which of the following statements is correct? A) current account balance = capital account balance B) current account balance = capital account balance + net change in government international reserves C) current account balance + capital account balance = net change in government international reserves D) current account balance + net change in government international reserves = capital account balance

Q: If the LBO is structured as a direct merger in which the seller receives cash for stock, the lender will make the loan to the buyer once the appropriate security agreements are in place and the targets stock has been pledged against the loan. The target then is merged into the acquiring company, which is the surviving corporation. True or False

Q: If the current account balance shows a surplus, and capital account receipts exceed capital account payments, then the net change in government international reserves must be ________, indicating a(n) ________ in U.S. international reserves. A) positive; increase B) negative; increase C) negative; decrease D) positive; decrease

Q: The acquirer often is asked for a commitment letter from a lender, which commits the lender to providing financing for the transaction. True or False

Q: The current account balance plus the capital account balance equals A) the amount of unsterilized exchange market intervention. B) the trade balance. C) the net change in government international reserves. D) both A and C of the above.

Q: Preferred stock often is issued in LBO transactions, because it provides investors a fixed income security, which has a claim that is junior to common stock in the event of liquidation. True or False

Q: Holding other factors constant, which of the following would increase the size of the U.S. current account deficit? A) sales of U.S. farm products in Europe B) visits by European tourists to the United States C) increasing travel by American college students in Europe D) both A and B of the above

Q: Holding other factors constant, which of the following would decrease the size of the U.S. current account deficit? A) an increase in the amount of services purchased from foreigners B) an increase in the amount of goods purchases from foreigners C) an increase in the amount of goods sold to foreigners D) only A and B of the above

Q: An indenture is a contract between the firm that issues the long-term debt securities and the lenders. True or False

Q: A current account ________ indicates that the United States is ________ its claims on foreign wealth. A) deficit; decreasing B) deficit; increasing C) surplus; decreasing D) balance; increasing

Q: Debt issues not secured by specific assets are called debentures. True or False

Q: Bridge financing is usually expected to be replaced within two years after the closing date of the LBO transaction. True or False

Q: A current account ________ indicates that the United States is ________ its claims on foreign wealth. A) surplus; increasing B) surplus; decreasing C) deficit; increasing D) balance; decreasing

Q: Secured debt often is referred to as mezzanine financing. True or False

Q: The difference between merchandise exports and imports is called the A) current account balance. B) capital account balance. C) balance of payments. D) trade balance.

Q: Limitations the lender imposes on the borrower on the amount of dividends that can be paid, the level of salaries and bonuses that may be given to the borrowers employees, the total amount of indebtedness that can be assumed by the borrower, and investments in plant and equipment and acquisitions are called affirmative covenants. True or False

Q: Because sterilized interventions mean offsetting open market operations, A) there is no impact on the monetary base. B) there is no impact on the money supply. C) there is no effect on the exchange rate. D) all of the above occur. E) only A and B of the above occur.

Q: Because sterilized interventions mean offsetting open market operations, there is no impact on the monetary base and the money supply, and therefore a sterilized intervention A) causes the exchange rate to overshoot in the short run. B) causes the exchange rate to undershoot in the short run. C) causes the exchange rate to depreciate in the short run, but has no effect on the exchange rate in the long run. D) has no effect on the exchange rate.

Q: Because term loans are negotiated privately between the borrower and the lender, they are much more expensive than the costs associated with floating a public debt or stock issue. True or False

Q: A Federal Reserve decision to purchase dollars by selling foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply. A) sale; decrease B) purchase; decrease C) sale; increase D) purchase; increase

Q: If the borrower defaults on the loan or otherwise fails to honor the terms of the agreement, the lender can seize and sell the collateral to recover the value of the loan only if the borrower agrees that it is unlikely that the loan will be repaid. True or False

Q: A Federal Reserve decision to sell dollars in order to buy foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply. A) sale; decrease B) purchase; decrease C) sale; increase D) purchase; increase

Q: The promissory note commits the borrower to repay the loan, only if the assets when liquidated fully cover the unpaid balance. True or False

Q: An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to A) a gain in international reserves. B) a decrease in the money supply. C) an appreciation in the domestic currency. D) all of the above. E) only A and B of the above.

Q: The growth in LBO activity is not simply a U.S. phenomenon. Western Europe has seen a veritable explosion in private equity investors taking companies private, reflecting ongoing liberalization in the European Union as well as cheap financing and industry consolidation. True or False

Q: An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to A) a gain in international reserves. B) an increase in the money supply. C) an appreciation in the domestic currency. D) all of the above. E) only A and B of the above.

Q: There is some evidence that the Sarbanes-Oxley Act of 2002 has also been a factor in some firms going private as a result of the onerous reporting requirements of the bill. True or False

Q: A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called A) an unsterilized foreign exchange intervention. B) a sterilized foreign exchange intervention. C) an exchange rate feedback rule. D) a money-neutral foreign exchange intervention.

Q: LBO investors have become much more actively involved in managing target firms in recent years than they have in the past. True or False

Q: A common technique used during the 1990s was to wait for favorable periods in the stock market to sell a portion of the LBOs equity to the public. The proceeds of the issue would be used to repay debt, thereby reducing the LBOs financial risk. True or False

Q: When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base, it is called A) a sterilized foreign exchange intervention. B) an unsterilized foreign exchange intervention. C) an exchange rate feedback rule. D) a money-neutral foreign exchange intervention.