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Q:
Which of the following are important ways in which mortgage markets differ from the stock and bond markets?
A) The usual borrowers in the capital markets are government entities and businesses, whereas the usual borrowers in the mortgage markets are individuals.
B) Most mortgages are secured by real estate, whereas the majority of capital market borrowing is unsecured.
C) Because mortgages are made for different amounts and different maturities, developing a secondary market has been more difficult.
D) All of the above are important differences.
E) Only A and B of the above are important differences.
Q:
Explain how differing assumptions about market growth, potential synergies, and the size of the potential liability related to product recalls affected the bidding?
Q:
Why would a crisis in the subprime mortgage market lead to declining prices in the U.S. equity markets?
Q:
What evidence is given that J&J may not have taken Boston Scientific as a serious bidder?
Q:
What are the advantages and disadvantages of exchange traded funds (ETFs) fro trading stocks?
Q:
What might J&J have done differently to avoid igniting a bidding war?
Q:
What are the objectives of the Securities and Exchange Commission?
Q:
What are American Depository Receipts (ADRs)?
Q:
What were the key differences between J&Js and Boston Scientifics bidding strategy? Be specific.
Q:
Using the Gordon growth model, explain why the 2001 terrorist attacks and the Enron financial scandal caused stock prices to decline.
Q:
A floating or flexible share exchange ratio is used primarily to
a. Protect the value of the transaction for the acquirers shareholders
b. Protect the value of the transaction for the targets shareholders
c. Minimize the number of new acquirer shares that must be issued
d. Increase the value for the acquiring firm
e. Increase the value for the target firm
Q:
What is the role of the required return on equity investments in stock valuation models?
Q:
Form of payment can involve which of the following:
a. Cash
b. Stock
c. Cash and stock
d. Rights, royalties and fees
e. All of the above
Q:
What are the advantages and disadvantages of Electronic Communications Networks (ECNs) for trading stocks?
Q:
A holding company may be used as a post-closing organizational structure for all but which of the following reasons?
a. A portion of the purchase price for the target firm included an earn-out
b. The target firm has a substantial amount of unknown liabilities
c. The acquired firms culture is very different from that of the acquiring firm
d. Profits from operations are not taxable
e. The transaction involves a cross border transaction
Q:
The sellers insistence that the buyer agree to purchase its stock may encourage the buyer to
a. offer a lower purchase price because it is assuming all of the target firms liabilities
b. offer a higher purchase price because it is assuming all of the target firms liabilities
c. offer a lower purchase price because it is receiving all of the targets tax benefits
d. use its stock rather than cash to purchase the target firm
e. use cash rather than its stock to purchase the target firm
Q:
What is the role of specialists on a stock exchange?
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 lower 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:
How do over-the-counter markets differ from organized exchanges?
Q:
How do common stocks differ from preferred stocks?
Q:
The form of acquisition refers to which of the following:
a. Tax status of the transaction
b. Acquisition vehicle
c. What is being acquired, i.e., stock or assets
d. Form of payment
e. How the transaction will be displayed for financial reporting purposes
Q:
How do corporate stocks differ from bonds?
Q:
Which of the represent disadvantages of a cash purchase of target stock?
a. Buyer responsible for known and unknown liabilities.
b. Buyer may avoid need to obtain consents to assignments on contracts.
c. NOLs and tax credits pass to the buyer.
d. No state sales transfer, or use taxes have to be paid.
e. Enables circumvention of targets board in the event a hostile takeover is initiated.
Q:
A lower than average PE may mean that the market expects earnings to rise in the future.
Q:
Which of the following is true of collar arrangements?
a. A fixed or constant share exchange ratio is one in which the number of acquirer shares exchanged for each target share is unchanged between the signing of the agreement of purchase and sale and closing.
b. Collar agreements provide for certain changes in the exchange ratio contingent on the level of the acquirers share price around the effective date of the merger.
c. A fixed exchange collar agreement may involve a fixed exchange ratio as long as the acquirers share price remains within a narrow range, calculated as of the effective date of merger.
d. A fixed payment collar agreement guarantees that the target firm shareholder receives a certain dollar value in terms of acquirer stock as long as the acquirers stock remains within a narrow range, and a fixed exchange ratio if the acquirers average stock price is outside the bounds around the effective date of the merger.
e. All of the above.
Q:
The Wall Street Journal reports on 23 different indexes in its "Markets Lineup" column.
Q:
About 95% of orders to buy or sell on the NYSE are executed using SuperDOT.
Q:
Which of the following is not true of mergers?
a. Liabilities and assets transfer automatically
b. May be subject to transfer taxes.
c. No minority shareholders remain.
d. May be time consuming due to need for shareholder approvals.
e. May have to pay dissenting shareholders appraised value of stock
Q:
Which of the following are disadvantages of an asset purchase?
a. Asset write-up
b. May require consents to assignment of contracts
c. Potential for double-taxation of buyer
d. May be subject to sales, use, and transfer taxes
e. B and D
Q:
A stock's market value will be higher the higher the investor's required rate of return is, all else being equal.
Q:
The Gordon growth model assumes that a stock's dividend grows at a constant rate forever.
Q:
Which of the following is a disadvantage of balance sheet adjustments?
a. Protects buyer from eroding values of receivable before closing
b. Audit expense
c. Protects seller from increasing values of receivables before closing
d. Protects from decreasing values of inventories before closing
e. Protects seller from increasing values of inventories before closing
Q:
Which of the following are commonly used to close the gap between what the seller wants and what the buyer is willing to pay?
a. Consulting contracts offered to the seller
b. Earn-outs
c. Employment contracts offered to the seller
d. Giving seller rights to license a valuable technology or process
e. All of the above.
Q:
A stock's market value will be higher the higher its expected dividend stream is, all else being equal.
Q:
Which of the following is not a characteristic of a joint venture corporation?
a. Profits and losses can be divided between the partners disproportionately to their ownership shares.
b. New investors can become part of the JV corporation without having to dissolve the original JV corporate structure.
c. The JV corporation can be used to acquire other firms.
d. Investors liability is limited to the extent of their investment.
e. The JV corporation may be subject to double taxation.
Q:
About half of new equity issues are preferred stock.
Q:
In a statutory merger,
a. Only known assets and liabilities are automatically transferred to the buyer.
b. Only known and unknown assets are transferred to the buyer.
c. All known and unknown assets and liabilities are automatically transferred to the buyer except for those the seller agrees to retain.
d. The total consideration received by the targets shareholders is automatically taxable.
e. None of the above.
Q:
The Securities and Exchange Commission requires firms to submit various documents to increase the flow of information to investors but does not verify the accuracy of that information.
Q:
Which of the following may be used as acquisition vehicles?
a. Partnership
b. Limited liability corporation
c. Corporate shell
d. ESOP
e. All of the above
Q:
The Dow Jones Industrial Average is the broadest and best indicator of the stock market's day-to-day performance.
Q:
The Enron financial scandal increased uncertainty about the quality of accounting information and as a result, increased required return on investment in stocks.
Q:
Which of the following should be considered important components of the deal structuring process?
a. Legal structure of the acquiring and selling entities
b. Post closing organization
c. Tax status of the transaction
d. What is being purchased, i.e., stock or assets
e. All of the above
Q:
Common stock is the riskiest corporate security, followed by preferred stock and then bonds.
Q:
If an acquirer buys most of the operating assets of a target firm, the target generally is forced to
liquidate its remaining assets and pay the after-tax proceeds to its shareholders. True or False
Q:
All stocks pay dividends, as that is the only way an investor can profit from holding stock.
Q:
Stock purchases involve the exchange of the targets stock for acquirer stock only. True or False.
Q:
Electronic Communications Networks apply technology to make organized exchanges more efficient and speedy.
Q:
Both the acquirer and target boards of directors have a fiduciary responsibility to demand that the merger terms be renegotiated if the value of the offer made by the bidder changes materially relative to the value of the targets stock or if their has been any other material change in the targets operations. True or False
Q:
In over-the-counter markets, dealers increase the liquidity of thinly traded securities.
Q:
A fixed exchange collar agreement may involve a fixed exchange ratio as long as the acquirers share price remains within a narrow range, calculated as of the effective date of the signing of the agreement of purchase and sale. True or False
Q:
More stock trading in the U.S. occurs in over-the-counter markets rather than on organized exchanges.
Q:
Collar agreements provide for certain changes in the exchange ratio contingent on the level of the acquirers share price around the effective date of the merger. True or False
Q:
The subprime financial crisis led to one of the worst bear markets in the last 50 years. Stock prices likely fell due to
A) an increase in required returns on equity investments.
B) a decline in growth prospects for U.S. companies.
C) Both A and B are likely reasons.
D) None of the above are correct.
Q:
Offering sellers consulting contracts to defer a portion of the purchase price is illegal in most states. True or False
Q:
A ________ PE may indicate that the market feels the firm's earnings are very ________ risk and is therefore willing to pay a ________ for them.
A) high; low; premium
B) high; high; discount
C) low; low; discount
D) high; high; premium
Q:
Earnouts tend to shift risk from the seller to the acquirer in that a higher price is paid only when the seller or acquired firm has met or exceeded certain performance criteria. True of False
Q:
A high price earnings ratio (PE) gives what interpretation?
A) The market expects earnings to fall in the future.
B) The market feels the firm's earnings are very high risk and are willing to pay a premium for them.
C) The market expects the earnings to rise in the future.
D) The firm is not paying a dividend.
Q:
The value of an earnout payment is never subject to a cap so as not to discourage the seller from working diligently to exceed the payment threshold. True or False
Q:
What is the primary disadvantage of an ETF?
A) ETFs tend to have lower management fees than comparable index mutual bonds.
B) ETFs usually have no minimum investment amount.
C) Investors have to pay a broker commission each time they buy or sell shares.
D) None of the above are disadvantages of an ETF.
Q:
An earnout agreement is a financial contract whereby a portion of the purchase price of a company is to be paid to the buyer in the future contingent on the realization of a previously agreed upon future earnings level or some other performance measure. True or False
Q:
Exchange traded funds (ETFs) have which of the following features?
A) They are listed and traded as individual stocks on a stock exchange.
B) They are indexed rather than actively managed.
C) Their value is based on the underlying net asset value of the stocks held in the index basket.
D) All of the above.
Q:
Buyers and sellers generally view purchase price adjustments as a form of insurance against any erosion or accretion in assets, such as plant and equipment. True or False.
Q:
In 2010, the NYSE traded ________ shares on an average trading day.
A) 4 billion
B) 7 billion
C) 10 billion
D) 12 billion
Q:
Balance sheet adjustments most often are used in purchases of stock when the elapsed time between the agreement on price and the actual closing date is short. True or False
Q:
A share of common stock in a firm represents an ownership interest in that firm and allows stockholders to
A) vote.
B) receive dividends.
C) receive interest payments.
D) only A and B of the above.
Q:
The multiple option bidding strategy introduces a certain level of uncertainty in determining the amount of cash the acquirer will have to ultimately pay out to target firm shareholders, since the number choosing the all cash or cash and stock option is not known prior to the completion of the tender offer. True or False
Q:
Which of the following is not an objective of the Securities and Exchange Commission?
A) maintain integrity of the securities markets
B) advise investors about which particular stocks are good buys
C) require firms to provide specific information to investors
D) regulate major participants in securities markets
Q:
The risk to the bidder associated with bidding strategy of offering target firm shareholders multiple payment options is that the range of options is likely to discourage target firm shareholders from participating in the bidders tender offer for their shares. True or False.
Q:
The 2001 terrorist attacks and the Enron financial scandal caused anticipated dividend growth to ________, investors' required return on equity to ________, and stock prices to ________.
A) decrease; increase; decrease
B) decrease; increase; increase
C) increase; decrease; decrease
D) increase; decrease; increase
Q:
Bidders may use a combination of cash and non-cash forms of payment as part of their bidding strategies to broaden the appeal to target shareholders. True or False
Q:
Stock values computed by valuation models may differ from actual market prices because it is difficult to
A) estimate future dividend growth rates.
B) estimate the risk of a stock.
C) forecast a stock's future dividends.
D) all of the above are true.
Q:
The use of convertible preferred stock as a form of payment provides some downside protection to sellers in the form of continuing dividends, while providing upside potential if the acquirers common stock price increases above the conversion point. True or False
Q:
The main cause of fluctuations in stock prices is changes in
A) tax laws.
B) errors in technical stock analysis.
C) daily trading volume in stock markets.
D) information available to investors.
E) total household wealth in the economy.
Q:
Using stock as a form of payment is generally less complicated than using cash from the buyers point of view. True or False
Q:
(I) The market price of a security at a given time is the highest value any investor puts on the security. (II) Superior information about a security increases its value by reducing its risk.
A) (I) is true, (II) is false.
B) (I) is false, (II) is true.
C) Both are true.
D) Both are false.
Q:
A bidder may choose to use cash rather than to issue voting shares if the voting control of its dominant shareholder is threatened as a result of the issuance of voting stock to acquire the target firm. True or False
Q:
A weakness of the PE approach to valuing stock is that it is
A) difficult to estimate the constant growth rate of a firm's dividends.
B) difficult to estimate the required return on equity.
C) difficult to predict how much a firm will pay in dividends.
D) based on industry averages rather than firm-specific factors.
Q:
The sellers preference for stock or cash will reflect their desire for liquidity, the attractiveness of the acquirers shares, and whether the seller is organized as a joint venture corporation. True or False
Q:
The PE ratio approach to valuing stock is especially useful for valuing
A) publicly held corporations.
B) firms that regularly pay dividends.
C) both A and B of the above.
D) neither A nor B of the above.
Q:
Acquirer stock is a rarely used form of payment in large transactions. True or False