Q&A Hero

Q: LBO firms seldom purchase a firm to use as a platform to undertake other leveraged buyouts in the same industry. True or False

Q: With the start of the subprime financial crisis in August 2007, the dollar began an accelerated decline in value, falling by 9% against the euro. At that point, the financial crisis appeared to be a U.S. problem. However, by mid-2008, the crisis spread to Europe. Discuss the reaction of the dollar to actions taken by European central banks in late 2008 to deal with the widening financial crisis.

Q: What are some of the long-run determinants of the exchange rate?

Q: The LBO that is initiated by the target firms incumbent management is called a management buyout. True or False

Q: Discuss the relationship between changes in domestic real and nominal interest rates and exchange rates.

Q: When a public company is subject to an LBO, it is said to be going private, because more than 50% of the equity of the firm has been purchased by a small group of investors and is no longer publicly traded. True or False

Q: Explain graphically how a change in the foreign interest rate will affect exchange rates.

Q: LBOs can be of an entire company or divisions of a company. True or False

Q: Explain the theory of purchasing power parity.

Q: Borrowers often prefer term loans because they do not have to be concerned that these loans will have to be renewed. True or False

Q: Explain graphically how a change in the domestic price level will affect exchange rates, holding everything else constant.

Q: An affirmative covenant is a portion of a loan agreement that specifies the actions the borrowing firm cannot take during the term of the loan. True or False

Q: The loan agreement stipulates the terms and conditions under which the lender will loan the firm funds. True or False

Q: Explain the logic underlying the law of one price and the theory of purchasing power parity.

Q: A term loan usually has a maturity of less than one year. True or False

Q: There are two kinds of exchange rate transactions.

Q: Depreciation of a currency makes it easier for domestic manufacturers to sell their goods abroad and makes foreign goods less competitive in domestic markets.

Q: Borrowers often seek revolving lines of credit that they can draw upon on a daily basis to run their business. True or False

Q: A fall in the expected future exchange rate shifts the expected return schedule for domestic deposits to the right and causes the domestic currency to depreciate.

Q: Financial buyers usually plan to hold onto acquired firms longer than strategic buyers. True or False

Q: According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected appreciation of the foreign currency must be 2 percent.

Q: Divisions of larger companies are generally poor candidates for successful leveraged buyouts. True or False

Q: As the relative expected return on dollar deposits increases, Americans will want to hold fewer dollar deposits and more foreign deposits.

Q: Common exit strategies for LBOs include sale to a strategic buyer, an IPO, a leveraged recapitalization, or a sale to another buyout firm. True or False

Q: Increased demand for a country's exports causes its currency to depreciate.

Q: Firms with redundant assets and predictable cash flow are often good candidates for leveraged buyouts. True or False

Q: In the short run, the quantity of dollars supplied is relatively fixed, and is best represented with a vertical supply curve.

Q: Junk bonds are always high risk. True or False

Q: Under-performing operating units of large companies are often excellent candidates for LBOs. True or False

Q: An increase in tariffs and quotas on imports causes a country's currency to appreciate.

Q: If the exchange rate between the dollar and the Swiss franc changes from 1.8 to 1.5 francs per dollar, the franc depreciates and the dollar appreciates.

Q: The risk associated with overpaying is magnified for leveraged buyout transactions. True or False

Q: If the dollar appreciates relative to the Swiss franc, Swiss chocolate will become cheaper in the United States.

Q: To avoid being subject to fraudulent conveyance laws, a properly structured LBO should have a balance sheet that clearly indicates solvency at the time of closing. True or False

Q: If the dollar depreciates relative to the British pound, British sweaters will become more expensive in the United States.

Q: Fraudulent conveyance laws are intended to prevent shareholders, secured creditors, and others from benefiting at the expense of unsecured creditors. True or False

Q: The theory of purchasing power parity cannot fully explain exchange rate movements because fiscal policy differs across countries.

Q: 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

Q: When the exchange rate for the euro changes from $0.90 to $0.85, then holding everything else constant, the euro has depreciated and American wheat sold in Germany becomes more expensive.

Q: Cash flow lenders view the borrowers future cash flow generation capability as the primary means of recovering a loan, while largely ignoring the assets of the LBO target. True or False

Q: When the value of the dollar changes from 0.50 pounds to 0.75 pounds, the pound has appreciated and the dollar has depreciated.

Q: Asset based lenders will usually lend up to 100% if the book value of the LBO targets receivables. True or False

Q: A single asset is often used to collateralize loans from different lenders in LBO transactions. True or False

Q: The foreign exchange market is organized as an over-the-counter market in which deposits denominated in foreign currencies are bought and sold.

Q: The loan agreement stipulates the terms and conditions under which the lender will loan the borrower funds. True or False

Q: With the start of the subprime financial crisis in August 2007, the dollar ________ in value against the euro as the Fed lowered interest rates. By December of 2008, with the financial crisis spreading throughout Europe, foreign central banks cut their interest rates, leading to a ________ in the value of the dollar relative to the euro. A) rose; further increase B) rose; decline C) declined; rise D) declined; further decline

Q: Asset based lending does not require the borrower to pledge assets as collateral underlying the loans. True or False

Q: The more modern asset market approach to exchange rate determination A) emphasizes the role of import and export demand. B) emphasizes stocks of assets. C) emphasizes both of the above. D) emphasizes neither of the above.

Q: Quotas A) are restrictions placed on the quality of foreign goods that can be imported. B) are fees placed on imported goods. C) are restrictions placed on the quantity of foreign goods that can be exported. D) are none of the above.

Q: LBO investors will often use the target firms cash in excess of normal working capital requirements to finance the transaction. True or False

Q: In the long run, ________ affect the exchange rate. A) relative price levels B) tariffs and quotas C) productivity D) all of the above.

Q: LBO investors often use public offerings of the firms stock or sell the firm to a strategic buyer in order to exit the business. True or False

Q: The purchasing power parity theory A) has significant predictive power in the short run. B) is the starting point for understanding how exchange rates are determined. C) does not take into account that many goods and services are not traded across borders. D) is none of the above.

Q: LBO investors seldom sell assets to repay debt used to acquire the firm. True or False

Q: The foreign exchange market A) is organized as an over-the-counter market in which several hundred dealers stand ready to buy and sell deposits denominated in foreign currencies. B) is very competitive. C) functions no differently from a centralized market. D) all of the above.

Q: LBO capital structures are often very complex, consisting of bank debt, subordinated unsecured debt, preferred stock, and common equity. True or False

Q: Forward exchange rates A) involve the immediate exchange of bank deposits. B) involve the exchange of bank deposits at some specified future date. C) involve the immediate exchange of imports and exports. D) none of the above.

Q: Investors in LBOs are frequently referred to as financial buyers, because they are primarily focused on relatively short-to-intermediate-term financial returns. True or False

Q: Evidence from the United States during the period 1973-2010 indicates the correspondence between nominal interest rates and exchange rate movements is A) much closer than that between real interest rates and exchange rate movements. B) not nearly as close as that between government spending and exchange rate movements. C) not nearly as close as that between government deficits and exchange rate movements. D) not nearly as close as that between real interest rates and exchange rate movements.

Q: Financial buyers usually hold onto their investments for at least 15-20 years. True or False

Q: The weakness of the dollar in the late 1970s and the strength of the dollar in the early 1980s can be explained by movements in A) real interest rates, but not nominal interest rates. B) nominal interest rates, but not real interest rates. C) relative price levels, but not real interest rates. D) none of the above.

Q: A leveraged buyout initiated by a firms management is called a management buyout. True or False

Q: When the domestic nominal interest rate rises because of an increase in expected inflation, the expected appreciation of the dollar declines, ________ shifts out more than ________, and the exchange rate declines. A) RF; RD B) RF; RF C) RD; RD D) RD; RF

Q: When a public company is subject to a leveraged buyout, it is said to be going private. True or False

Q: Which of the following causes an appreciation of the domestic currency? A) A lower domestic interest rate due to a lower expected inflation rate. B) A decline in the domestic real interest rate. C) An increase in the domestic money supply. D) All of the above.

Q: Investors in highly leveraged transactions who are primarily focused on relatively short-to-intermediate term financial returns are often called financial buyers. True or False

Q: Which of the following causes a depreciation of the domestic currency? A) A lower domestic interest rate due to a lower expected inflation rate. B) A decline in the domestic real interest rate. C) A decrease in the domestic money supply. D) All of the above.

Q: The high premiums paid to LBO target shareholders reflect the tax benefits associated with the high leverage of such transactions and the improved operating efficiency following the completion of the buyout resulting from management incentive plans and the discipline imposed by the need to repay debt. True or False

Q: A decrease in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left

Q: Premiums paid to LBO target firm shareholders often exceed 40%. True or False

Q: An increase in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left

Q: High growth firms with high reinvestment requirements often make attractive LBO targets. True or False

Q: A fall in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left

Q: Typical LBO targets are in mature industries such as manufacturing, retailing, textiles, food processing, apparel, and soft drinks. True or False

Q: A rise in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left

Q: According to fraudulent conveyance laws, if a new company is found by the court to have been inadequately capitalized to remain viable, the lender could be stripped of its secured position in the assets of the company or its claims on the assets could be made subordinate to those of the general creditors. True or False

Q: A decrease in the foreign interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left

Q: Junk bonds are high-yield bonds either rated by the credit-rating agencies as below investment grade or not rated at all. True or False

Q: An increase in the foreign interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left

Q: Loan agreements commonly have cross-default provisions allowing a lender to collect its loan immediately if the borrower is in default on a loan to another lender. True or False