Q&A Hero

Q: When the exchange rate changes from 1.0 euros to the dollar to 1.2 euros to the dollar, the euro has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

Q: A forward triangular merger is the most commonly used form of reorganization for tax-free stock acquisitions in which the form of payment is acquirer stock. It involves three parties: the acquiring firm, the target firm, and a shell subsidiary of the target firm. True or False

Q: When the value of the dollar changes from 0.50 to 0.75, the pound has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

Q: The Type C reorganization is used when it is essential for the acquirer not to assume any undisclosed liabilities. True or False

Q: When the value of the British pound changes from $1.50 to $1.25, the pound has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

Q: A type C reorganization is a stock-for-assets reorganization with the requirement that at least 50% of the FMV of the targets assets, as well as the assumption of certain specified liabilities, are acquired solely in exchange for voting stock. True or False

Q: A spot transaction in the foreign exchange market involves the A) exchange of exports and imports at a specified future date. B) exchange of bank deposits at a specified future date. C) immediate (within two days) exchange of exports and imports. D) immediate (within two days) exchange of bank deposits.

Q: In a type B stock-for-stock reorganization, the acquirer must purchase an amount of voting stock that comprises at least 50% of the voting power of all of the targets voting stock outstanding. True or False

Q: American firms became less competitive compared to foreign firms during the 1980s because A) the quality and productivity of American workers declined. B) foreign firms were younger than American firms and as a result had more modern facilities that made use of the latest technology. C) the U.S. dollar became worth more in terms of foreign currencies. D) the U.S. dollar became worth less in terms of foreign currencies.

Q: The acquirer must be careful that not too large a proportion of the purchase price be composed of cash, because this might not meet the IRSs requirement for continuity of interests of the target shareholders and disqualify the transaction as a Type A reorganization. True or False

Q: Discuss the pros and cons of a subprime market for residential mortgages in the U.S.

Q: Type A reorganizations are generally viewed as the least flexible of the various types of tax-free reorganizations. True or False

Q: What are the benefits and side effects of securitized mortgages?

Q: To qualify for a Type A reorganization, the transaction must be either a merger or a consolidation. True or False

Q: What are mortgage-backed securities, why were they developed, what types of mortgage-backed securities are there, and how do they work?

Q: Why may Fannie Mae and Freddie Mac pose a threat to the health of the financial system?

Q: Triangular mergers are rarely used for tax-free transactions. True or False

Q: Why has the online lending market developed in recent years and what are the advantages and disadvantages of this development?

Q: Since the IRS requires that target shareholders continue to hold a substantial equity interest in the acquiring company, the tax code defines what constitutes a substantial equity interest. True or False

Q: Evaluate the advantages and disadvantages, from both the lender's and borrower's perspectives, of fixed-rate and adjustable-rate mortgages.

Q: Tax-free reorganizations require that substantially all of the consideration received by the targets shareholders be paid in common or preferred stock. True or False

Q: Tax-free reorganizations require that substantially all of the consideration received by the targets shareholders be paid in cash. True or False

Q: How does an amortizing mortgage loan differ from a balloon mortgage loan?

Q: A buyer may divest a significant portion of the acquired company immediately following closing without jeopardizing the tax-free status of the transaction. True or False

Q: What are points? What is their purpose?

Q: Tax-free reorganizations generally require that all or substantially all of the target companys assets or shares be acquired. True or False

Q: Explain the features of mortgage loans that are designed to reduce the likelihood of default.

Q: Nontaxable transactions also are called tax-free reorganizations. True or False

Q: How has the modern mortgage market changed over recent years?

Q: To demonstrate continuity of interests (COI), target shareholders must continue to own a substantial part of the value of the combined target and acquiring firms. True or False

Q: An option ARM mortgage gives the borrower the option to reduce the monthly interest being charged on the mortgage.

Q: The tax-free structure is generally not suitable for the acquisition of a division within a corporation. True or False.

Q: Subprime loans are those made to borrowers who do not qualify for loans at the usual market rate of interest because of a poor credit rating or because the loan is larger than justified by their income.

Q: If the transaction is tax-free, the acquiring company is able to transfer or carry over the targets tax basis to its own financial statements. True or False

Q: A FICO score below 660 is considered good while a score above 720 is likely to cause problems in obtaining a loan.

Q: Acquirers and targets planning to enter into a tax-free transaction seldom seek to get an advance ruling from the IRS to determine its tax-free status. True or False

Q: Fannie Mae and Freddie Mac together either own or insure the risk on nearly one-fourth of America's residential mortgages.

Q: Transactions may be partially taxable if the target shareholders receive some nonequity consideration, such as cash or debt, in addition to the acquirers stock. True or False

Q: Mortgage-backed securities are marketable securities collateralized by a pool of mortgages.

Q: In a tax-free reorganization, the buyer is never required to get shareholder approval. True or False

Q: Mortgage-backed securities have declined in popularity in recent years as institutional investors have sought higher returns in other markets.

Q: In a reverse triangular merger, the acquirer retains the targets tax attributes. True or False

Q: A problem that initially hindered the marketability of mortgages in a secondary market was that they were not standardized.

Q: In a statutory merger, the buyer retains the targets tax attributes. True or False

Q: Many institutions that make mortgage loans do not want to hold large portfolios of long-term securities, because it would subject them to unacceptably high interest-rate risk.

Q: In a purchase of assets, the buyer retains the targets tax attributes. True or False

Q: Nearly half the funds for mortgage lending comes from mortgage pools and trusts.

Q: As a result of a 338 election, the IRS treats the purchase of target shares as a taxable purchase of assets which can be stepped up to fair market value. Only the buyer has to agree to the 338 election. True or False

Q: An advantage of a graduated-payment mortgage is that borrowers will qualify for a larger loan than if they requested a conventional mortgage.

Q: With the purchase of target stock, the acquirer retains the targets tax attributes, but there is no step up in the basis of the acquired assets unless the acquirer adopts a 338 election. True or False

Q: Mortgage interest rates loosely track interest rates on three-month Treasury bills.

Q: If the acquirer invokes a 338 election no taxes will have to be paid on any gains on assets written up to their fair market value. True or False

Q: Adjustable-rate mortgages generally have lower initial interest rates than fixed-rate mortgages.

Q: The IRS treats the reverse triangular cash merger as a purchase of target shares, with the target firm, including its assets, liabilities, and tax attributes, ceasing to exist. True or False

Q: One important advantage to a borrower who qualifies for an FHA or VA loan is the very low interest rate on the mortgage.

Q: In a forward triangular merger, the target firms tax attributes in the form of any tax loss carry forwards or carrybacks or investment tax credits carry over to the acquirer because the target ceases to exist. True or False

Q: Tax benefits that result from an acquisition should always be considered as among the most important justification for paying a very high premium for the target firm. True or False

Q: During the early years of a mortgage loan, the lender applies most of the payment to the principal on the loan.

Q: Private mortgage insurance is a policy that guarantees to make up any discrepancy between the value of the property and the loan amount, should a default occur.

Q: Tax free reorganizations generally require that all or substantially all of the target companys assets or shares be acquired in order to ensure that the acquiring firm has a continuing ownership interest in the combined firms. True or False

Q: Closing for a mortgage loan refers to the moment the loan is paid off.

Q: As a general rule, a transaction is taxable to the target company shareholders if they receive the acquiring firms stock and non-taxable if they receive cash. True or False

Q: A point on a mortgage loan refers to one monthly payment of principal and interest.

Q: Purchase accounting affects only the cash flow of the combined firms but not the reported net income. True or False

Q: Discount points (or simply points) are interest payments made at the beginning of a loan.

Q: Under purchase price accounting, the excess of the purchase price paid over the book value of equity of the target firm is assigned only to the tangible assets up to their fair market value or to goodwill. True or False

Q: Down payments are designed to reduce the likelihood of default on mortgage loans.

Q: Under purchase accounting, the difference between the combined firms shareholders equity immediately following closing and the acquiring firms shareholders equity equals the purchase price paid for the target firm. True or False

Q: From 2000 to 2005, housing prices increased, on average, by over 40%. This runup in prices was caused by A) speculators. B) an increase in subprime loans, which increased demand for new and existing houses. C) both A and B. D) None of the above are correct.

Q: The IRS generally views forward triangular cash mergers as a purchase of target stock followed by a liquidation of the target for which target shareholders will recognize a taxable gain or loss as if they had sold their shares. True or False

Q: According to Section 338 of the U.S. tax code, a purchaser of 80% or more of the assets of the target may elect to treat the acquisition as if it were an acquisition of the targets assets for tax purposes. True or False

Q: Between 2000 and 2005, home prices increased an average of ________ per year. A) 2% B) 4% C) 8% D) 12%

Q: What factors are used in determining a person's FICO score? A) past payment history B) outstanding debt C) length of credit history D) all of the above

Q: In a taxable purchase of target stock with cash, the target firm does not restate (i.e., revalue) its assets and liabilities for tax purposes to reflect the amount that the acquirer paid for the shares of common stock. Rather, the tax basis (i.e., their value on the targets financial statements) of assets and liabilities of the target before the acquisition carries over to the acquirer after the acquisition. True or False

Q: 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. True or False

Q: Which of the following terms are found in mortgage loan contracts to protect the lender from financial loss? A) collateral B) down payment C) private mortgage insurance D) all of the above

Q: Empirical studies generally show that the tax shelter resulting from the ability of the acquiring firm to increase the value of acquired assets to their FMV is a highly important motivating factor for a takeover. True or False

Q: The percentage of the total loan paid back immediately when a mortgage loan is obtained, which lowers the annual interest rate on the debt, is called A) discount points. B) loan terms. C) collateral. D) down payment.

Q: In a cash purchase of assets. the targets shareholders could be taxed twice, once when the firm pays taxes on any gains and a second time when the proceeds from the sale are paid to the shareholders either as a dividend or distribution following liquidation of the corporation. True or False

Q: A loan for borrowers who do not qualify for loans at the usual market rate of interest because of a poor credit rating or because the loan is larger than justified by their income is A) a subprime mortgage. B) a securitized mortgage. C) an insured mortgage. D) a graduated-payment mortgage.