Q&A Hero

Q: As the relative expected return on dollar deposits increases, A) foreigners will want to hold fewer dollar deposits and more foreign deposits. B) Americans will want to hold more dollar deposits and less foreign deposits. C) Americans will want to hold fewer dollar deposits and more foreign deposits. D) Americans and foreigners will be indifferent toward holding dollar deposits or foreign deposits.

Q: A negative loan covenant is a portion of a loan agreement that specifies the actions the borrowing firm agrees to take during the term of the loan. True or False

Q: As the relative expected return on dollar deposits increases, foreigners will want to hold more ________ deposits and less ________ deposits. A) foreign; foreign B) foreign; dollar C) dollar; foreign D) dollar; dollar

Q: Because of their high liquidity, lenders often lend up to 100% of the book value of accounts receivable pledged as collateral in leveraged buyouts. True or False

Q: When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits, there is a ________ demand for dollar deposits and a correspondingly ________ demand for foreign deposits. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

Q: Accounts receivable represent an undesirable form of collateral from the lenders point of view because they are often illiquid. True or False

Q: When Americans and foreigners expect the return on ________ deposits to be high relative to the return on ________ deposits, there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits. A) dollar; dollar B) dollar; foreign C) foreign; dollar D) foreign; foreign

Q: Leveraged buyout firms use the unencumbered assets and operating cash flow of the target firm to finance the transaction. True or False

Q: According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent. A) appreciation; 4 B) appreciation; 2 C) depreciation; 2 D) depreciation; 4

Q: What are the primary differences between a forward and a reverse triangular merger? Why might JDS Uniphase have chosen to merge its K2 Acquisition Inc. subsidiary with SDL in a reverse triangular merger? Explain your answer.

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 ________ of the foreign currency must be ________ percent. A) appreciation; 4 B) appreciation; 2 C) depreciation; 2 D) depreciation; 4

Q: What is the primary risk to realizing the full value of the anticipated tax benefits?

Q: As an analyst, how would you determine the impact of the anticipated tax benefits on the value of the firm?

Q: According to the interest parity condition, if the domestic interest rate is ________ the foreign interest rate, then ________. A) above; there is expected appreciation of the foreign currency B) above; there is expected depreciation of the foreign currency C) below; there is expected appreciation of the foreign currency D) below; the interest parity condition is violated

Q: According to the interest parity condition, the domestic interest rate is equal to the foreign interest rate A) plus the expected appreciation of the domestic currency. B) less the expected appreciation of the domestic currency. C) less the expected depreciation of the domestic currency. D) less the expected depreciation of the domestic currency weighted by the domestic interest rate.

Q: How is the 338 election likely to impact Cablevision Systems earnings per share immediately following closing? Why?

Q: In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the A) interest parity condition. B) purchasing power parity condition. C) exchange rate parity condition. D) foreign asset parity condition.

Q: How did the use of a reverse merger facilitate the transaction?

Q: The condition which states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called A) the purchasing power parity condition. B) the interest parity condition. C) money neutrality. D) the theory of foreign capital mobility.

Q: How might allowing the form of a transaction to override the actual spirit or intent of the deal impact the cost of doing business for the parties involved in the distribution agreement? Be specific.

Q: The expected return on dollar deposits in terms of dollars, RD, is A) always the interest rate on dollar deposits, iD, for any exchange rate. B) the interest rate on dollar deposits, iD, only when Et > . C) the interest rate on dollar deposits, iD, only when Et < . D) the interest rate on dollar deposits, iD, only when Et = .

Q: Do you agree with the argument that the courts should focus on the form or structure of an agreement and not try to interpret the actual intent of the parties to the transaction? Explain your answer.

Q: If the interest rate is 13 percent on euro deposits and 15 percent on dollar deposits, and if the euro is expected to appreciate at a 4 percent rate relative to the dollar, then A) euro deposits have a lower expected return than dollar deposits. B) the expected return on euro deposits in terms of dollars is 9 percent. C) the expected return on dollar deposits in terms of euros is 19 percent. D) both A and B of the above will occur. E) none of the above will occur.

Q: For financial reporting purposes, goodwill resulting from an acquisition a. Must equal the fair market value of the target firms assets b. Immediately impacts the acquirers profits c. Is expensed over 20 years d. Is reviewed annually or whenever there is reason to believe it has lost value and amortized to the extent its value has declined e. Never affects the profits of the acquirer

Q: If the interest rate is 7 percent on euro deposits and 5 percent on dollar deposits, and if the dollar is expected to appreciate at a 4 percent rate, A) euro deposits have a higher expected return than dollar deposits. B) the expected return on euro deposits in terms of dollars is 11 percent. C) the expected return on dollar deposits in terms of euros is 1 percent. D) the expected return on euro deposits in terms of dollars is 3 percent. E) the expected return on dollar deposits equals the expected return on euro deposits.

Q: Purchase accounting requires that a. The excess amount paid for the target firm be recorded as an intangible asset on the books of the acquirer and immediately written off b. Target firm assets must be recorded on the acquirers balance sheet at their fair market value c. The excess of the purchase price of the purchase price of the target firm must be recorded as asset and expensed over a period of 10 years d. Goodwill once established is never written off e. Target firm liabilities are recorded on the balance sheet of the acquirer at their book value

Q: If the interest rate on dollar deposits is 10 percent, and the dollar is expected to appreciate by 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is A) 3 percent. B) 10 percent. C) 13.5 percent. D) 17 percent. E) 24 percent.

Q: Which one of the following statements is true? a. Target firm shareholders may accept cash or acquirer stock in exchange for their shares for the transaction to be considered tax free b. To be tax free, the target firm shareholders must receive acquirer firm shares for all of the target firms shares outstanding c. At least one-half of the assets of the target firm are recorded on the balance sheet of the acquirer at their book rather than market value in a tax free transaction d. If the assets of a firm are written up to fair market value as part of the transaction, the increase in value is considered a taxable gain e. Target firm shareholders are required by law to pay taxes on any writeup of the firms assets to fair market value

Q: If the interest rate on foreign deposits increases, holding everything else constant, A) the expected return on these deposits must also increase. B) the expected return on domestic deposits must decrease. C) the expected return on domestic deposits must increase. D) both A and B of the above. E) both A and C of the above.

Q: Which of the following are required for an acquisition to be considered tax-free? a. Continuity of interest b. A legitimate business purpose other than tax avoidance c. The use of predominately acquirer shares to buy the targets shares d. An all cash acquisition of the target firms shares e. A, B, and C only

Q: Which of the following are non-taxable transactions? a. Statutory stock merger or consolidation b. Stock for stock merger c. Stock for assets merger d. Triangular reverse stock merger e. All of the above

Q: The expected return on dollar deposits in terms of foreign currency is the ________ the interest rate on dollar deposits and the expected appreciation of the dollar. A) product of B) ratio of C) sum of D) difference in

Q: When Franois the Foreigner considers the expected return on dollar deposits in terms of foreign currency, the expected return must be adjusted for A) any expected appreciation or depreciation of the dollar. B) the interest rates on foreign deposits. C) both A and B of the above. D) neither A nor B of the above.

Q: Which of the following are true? a. Taxes are important in any transaction. b. Taxes should never be the overarching reason for the transaction. c. Tax savings accruing to the buyer should simply reinforce the decision to acquire. d. The sale of stock, rather than assets, is generally preferable to the target firm shareholders to avoid double taxation, if the target firm is structured as a C corporation. e. All of the above.

Q: The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign deposits is A) the level of trade and capital flows. B) the expected return on these assets relative to one another. C) the liquidity of these assets relative to one another. D) the riskiness of these assets relative to one another.

Q: Which of the following represent taxable transactions? a. Purchase of assets with cash b. Purchase of stock with cash c. Purchase of stock or assets with cash d. Statutory cash merger or consolidation e. All of the above

Q: If the French demand for American exports rises at the same time that U.S. productivity rises relative to French productivity, then, in the long run, A) the euro should appreciate relative to the dollar. B) the dollar should depreciate relative to the euro. C) the dollar should appreciate relative to the euro. D) it is not clear whether the euro should appreciate or depreciate relative to the dollar.

Q: The tax status of the transaction may influence the purchase price by a. Raising the price demanded by the seller to offset potential tax liabilities b. Reducing the price demanded by the seller to offset potential tax liabilities c. Causing the buyer to reduce the purchase price if the transaction is taxable to the target firms shareholders d. Forcing the seller to agree to defer a portion of the purchase price e. Forcing the buyer to agree to defer a portion of the purchase price

Q: If the inflation rate in the United States is higher than that in Germany and productivity is growing at a slower rate in the United States than it is in Germany, in the long run, A) the euro should appreciate relative to the dollar. B) the euro should depreciate relative to the dollar. C) there should be no change in the euro price of dollars. D) it is not clear what will happen to the euro price of dollars.

Q: Which of the following is not true of a taxable purchase of stock? a. Taxable transactions usually involve the purchase of the targets voting stock with acquirer stock. b. Taxable transactions usually involve the purchase of the targets voting stock, because the purchase of assets automatically will trigger a taxable gain for the target if the fair market value of the acquired assets exceeds the target firms tax basis in the assets. c. All stockholders are affected equally in a taxable purchase of assets. d. The target firm does not pay any taxes on the transaction. e. The effect of the tax liability will vary depending on the individual shareholders tax basis.

Q: Lower tariffs and quotas cause a country's currency to ________ in the ________ run. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long

Q: Which of the following is not true of taxable asset purchases? a. Net operating losses carry over to the acquiring firm b. The acquiring firm may step up its basis in the acquired assets. c. The target firm is subject to recapture of tax credits and excess depreciation d. Target firm shareholders are subject to a potential immediate tax liability e. Target firm net operating losses and tax credits cannot be transferred to the acquiring firm

Q: Higher tariffs and quotas cause a country's currency to ________ in the ________ run. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long

Q: Which of the following is not true of purchase accounting? a. Total purchase price paid for the target firm is reflected on the books of the combined companies b. All liabilities are transferred at the NPV of their future cash payments c. The cost of the acquired entity becomes the new basis for recording the acquirers investment in the assets of the target company. d. Goodwill equals the difference between the purchase price paid for the target firm and the book value of acquired assets. e. Goodwill must be reduced if it is believed to be impaired.

Q: Which of the following is not true of a forward triangular cash merger? a. It is considered by the IRS as a purchase of target assets. b. It is generally followed by a liquidation of the target firm. c. Target shareholders must recognize a gain or loss as if they had sold their shares. d. The targets tax attributes carry over to the buyer. e. Taxes are paid by the target firm on any gain on the sale of its assets and again by shareholders who receive a liquidating dividend.

Q: If the demand for ________ goods decreases relative to ________ goods, the domestic currency will depreciate. A) foreign; domestic B) foreign; foreign C) domestic; domestic D) domestic; foreign

Q: Increased demand for a country's ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate. A) imports; imports B) imports; exports C) exports; imports D) exports; exports

Q: Which of the following is not true of a 338 election ? a. It applies to asset purchases only. b. It applies to stock purchases only. c. It allows a purchase of stock to be treated as an asset purchase for tax purposes. d. The buyer must adopt the 338 election. e. The seller must agree with the adoption of the 338 election.

Q: In the short run, the quantity of dollars supplied (deposits, bonds, equities) is A) fixed with respect to the exchange rate. B) quite volatile and difficult to model in a supply-demand framework. C) typically following the business cycle (procyclical). D) is best represented with a horizontal supply curve.

Q: Which of the following is not considered a tax-free reorganization? a. Type A transactions b. Type B transactions c. Type C Transactions d. Forward triangular merger e. Cash purchase of assets

Q: The theory of purchasing power parity cannot fully explain exchange rate movements because A) all goods are identical even if produced in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries. D) fiscal policy differs across countries.

Q: Which of the following are not true of net operating loss carrybacks and carryforwards? a. Net operating loss carrybacks enable firms to recover previous taxes paid. b. Net operating loss carryforwards enable firms to shelter future taxable income. c. Net operating loss carryforwards may be applied to income up to 5 years into the future.. d. Loss corporations cannot use a net operating loss carry forward unless they remain viable and in essentially the same business for at least 2 years following the closing of the acquisition. e. None of the above

Q: The theory of purchasing power parity cannot fully explain exchange rate movements because A) not all goods are identical in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries. D) both A and C of the above. E) both B and C of the above.

Q: Which of the following is not true about goodwill ? a. Goodwill must be written off over 20 years. b. Goodwill must be checked for impairment at least annually. c. The loss of key customers could impair the value of goodwill. d. Goodwill does not have to be amortized. e. Goodwill is shown as an asset on the balance sheet.

Q: If the 2005 inflation rate in Britain is 6 percent, and the inflation rate in the U.S. is 4 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the British pound in terms of U.S. dollars will A) rise by 10 percent. B) rise by 2 percent. C) fall by 10 percent. D) fall by 2 percent. E) do none of the above.

Q: Which of the following is true about purchase accounting? a. Cash and accounts receivable, reduced for bad debt and returns, are valued at their values on the books of the target before the acquisition.. b. Marketable securities are valued at their realizable value after transactions costs. c. Property, plant and equipment are valued at fair market value. d. Intangible assets are booked at their appraised values. e. All of the above.

Q: In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a rise in the country's relative productivity causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate

Q: Which of the following is not true about purchase accounting? a. For financial reporting purposes, all M&As must be recorded using the purchase method of accounting. b. Under the purchase method of accounting, the excess of the purchase price over the targets net asset value is treated as goodwill on the combined firms balance sheet. c. Goodwill may be amortized up to 40 years. d. If the fair value of the targets net assets later falls below its carrying value, the acquirer must record a loss equal to the difference. e. None of the above

Q: The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in A) the trade balances of the two countries. B) the current account balances of the two countries. C) fiscal policies of the two countries. D) the price levels of the two countries.

Q: Which of the following is not true about mergers and acquisitions and taxes? a. Tax considerations and strategies are likely to have an important impact on how a deal is structured by affecting the amount, timing, and composition of the price offered to a target firm. b. Tax factors are likely to affect how the combined firms are organized following closing, as the tax ramifications of a corporate structure are quite different from those of a limited liability company or partnership. c. Potential tax savings are often the primary motivation for an acquisition or merger. d. Transactions may be either partly or entirely taxable to the target firms shareholders or tax-free. b. None of the above

Q: The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A) theory of purchasing power parity B) law of one price C) theory of money neutrality D) quantity theory of money

Q: The sale of assets by a target firm will result in a taxable gain if the fair market value is less than the book value? True or False

Q: The theory of purchasing power parity is a theory of how exchange rates are determined in A) the long run. B) the short run. C) both A and B of the above. D) none of the above.

Q: For tax purposes, goodwill created after July 1993 may be amortized up to 15 years and is tax deductible. Goodwill booked before July 1993 is also tax deductible. True or False

Q: The starting point for understanding how exchange rates are determined is a simple idea called ________, which states that if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it. A) Gresham's law B) the law of one price C) purchasing power parity D) arbitrage

Q: Goodwill no longer has to be amortized over its projected life, but it must be written off if it is deemed to have been impaired. Impairment reviews are to be taken annually or whenever the firm has experienced an event which materially affects the value of its assets. True or False

Q: When the exchange rate for the euro changes from $1.20 to $1.00, then, holding everything else constant, the euro has A) appreciated and German cars sold in the United States become more expensive. B) appreciated and German cars sold in the United States become less expensive. C) depreciated and American wheat sold in Germany becomes more expensive. D) depreciated and American wheat sold in Germany becomes less expensive.

Q: So-called Morris Trust transactions tax code rules restrict how certain types of corporate deals can be structured to avoid taxes. True or False

Q: When the exchange rate for the euro changes from $1.00 to $1.20, then, holding everything else constant, the euro has A) appreciated and German cars sold in the United States become more expensive. B) appreciated and German cars sold in the United States become less expensive. C) depreciated and American wheat sold in Germany becomes more expensive. D) depreciated and American wheat sold in Germany becomes less expensive.

Q: Subchapter S Corporation shareholders, and LLC members, are taxed at their personal tax rates. True or False

Q: If the dollar appreciates relative to the Swiss franc, A) Swiss chocolate will become more expensive in the United States. B) American computers will become less expensive in Switzerland. C) Swiss chocolate will become cheaper in the United States. D) both A and B of the above will happen.

Q: Although NOLs represent a potential source of value, their use must be monitored carefully to realize the full value resulting from the potential for deferring income taxes. True or False

Q: If the dollar depreciates relative to the Swiss franc, A) Swiss chocolate will become more expensive in the United States. B) American computers will become less expensive in Switzerland. C) Swiss chocolate will become cheaper in the United States. D) both A and B of the above will happen.

Q: If the dollar appreciates from 0.8 euros per dollar to 1.2 euros per dollar, the euro depreciates from ________ dollars to ________ dollars per euro. A) 1.25; 0.83 B) 0.83; 1.25 C) 0.67; 1.50 D) 1.50; 0.67

Q: To qualify for a 1031 exchange, the property must be an investment property or one that is used in a trade or business (e.g., a warehouse, store, or commercial office building). True or False

Q: A section of the U.S. tax code known as 1031 forbids investors to make a like kind exchange of investment properties. True or False

Q: If the dollar ________ from 1.2 euros per dollar to 0.8 euros per dollar, the euro ________ from 0.83 dollars to 1.25 dollars per euro. A) appreciates; appreciates B) appreciates; depreciates C) depreciates; depreciates D) depreciates; appreciates

Q: The disadvantages of the forward triangular merger may include the requirement of the buyer to get shareholder approval. True or False

Q: When the exchange rate changes from 1.0 euros to the dollar to 0.8 euros to the dollar, the euro has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

Q: Asset sales by the target firm just prior to the transaction may threaten the tax-free status of the deal. Moreover, tax-free deals are disallowed within ten-years of a spin-off. True or False