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Q:
The PE ratio approach to valuing stock is especially useful for valuing
A) privately held firms.
B) firms that don't pay dividends.
C) both A and B of the above.
D) neither A nor B of the above.
Q:
Whether cash is the predominant form of payment will depend on a variety of factors. These include the acquirers current leverage, potential near-term earnings per share dilution of issuing new shares, the sellers preference for cash or acquirer stock, and the extent to which the acquirer wishes to maintain control over the combined firms. True or False
Q:
Sellers who are structured as C corporations generally prefer to sell assets for cash than acquirer stock because of more favorable tax treatment. True or False
Q:
Which of the following is true regarding the Gordon growth model?
A) Dividends are assumed to grow at a constant rate forever.
B) The dividend growth rate is assumed to be greater than the required return on equity.
C) Both A and B of the above.
D) Neither A nor B of the above.
Q:
A partnership or JV structure may be appropriate acquisition vehicle if the risk associated with the target firm is
believed to be high. True or False
Q:
Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price of Auto Zone stock if the retailer's earnings per share is projected to be $1.85?
A) $21.85
B) $37
C) $10.81
D) $9.25
Q:
A financial buyer may use a holding company structure because they expect to sell the firm within a relatively short time period. True or False
Q:
Holding other things constant, a stock's value will be highest if the investor's required return on investments in equity is
A) 20%.
B) 15%.
C) 10%.
D) 5%.
Q:
When the target is a foreign firm, it is often appropriate to operate it separately from the rest of the acquirers operations because of the potential disruption from significant cultural differences. True or False
Q:
Holding other things constant, a stock's value will be highest if its most recent dividend is
A) $2.00.
B) $5.00.
C) $0.50.
D) $1.00.
Q:
Holding other things constant, a stock's value will be highest if its dividend growth rate is
A) 15%.
B) 10%.
C) 5%.
D) 2%.
Q:
In an earnout agreement, the acquirer must directly control the operations of the target firm to ensure the target firm adheres to the terms of the agreement. True or False.
Q:
According to the Gordon growth model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 15 percent?
A) $20
B) $11
C) $22
D) $7.33
E) $4.40
Q:
A corporate structure is the preferred post-closing organization when an earn-out is involved in acquiring the target firm. True or False
Q:
Decision-making in JVs and partnerships is likely to be faster than in a corporate structure. Consequently, JVs and partnerships are more commonly used if speed is desired during the post-closing integration. True or False
Q:
According to the Gordon growth model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 11 percent?
A) $110
B) $100
C) $11
D) $10
E) $5.24
Q:
If the acquirer is interested in integrating the target business immediately following closing, the holding structure may be most desirable. True or False
Q:
Which of the following is not an element of the Gordon growth model of stock valuation?
A) the stock's most recent dividend paid
B) the expected constant growth rate of dividends
C) the required return on investments in equity
D) the stock's expected future price
Q:
Non-U.S. buyers intending to make additional acquisitions may prefer a holding company structure.
True or False
Q:
In the generalized dividend valuation model, a stock's value depends only on
A) its future dividend payments and its future price.
B) its future dividend payments and the required return on equity.
C) its future price and the required return on investments on equity.
D) its future dividend payments.
Q:
ESOP structures are rarely used vehicles for transferring the owners interest in the business to the employees in small, privately owned firms. True or False
Q:
In the one-period valuation model, a stock's value falls if the ________ rises.
A) dividend
B) expected future price
C) required return on equity
D) current price
Q:
By acquiring the target firm through the JV, the corporate investor limits the potential liability to the extent of their investment in the JV corporation. True or False
Q:
In the one-period valuation model, a stock's value will be higher
A) the higher its expected future price is.
B) the lower its dividend is.
C) the higher the required return on investments in equity is.
D) all of the above.
Q:
The reverse triangular merger involves the acquisition subsidiary being merged with the target and subsidiary surviving. True or False
Q:
A stock currently sells for $30 per share and pays $1.00 per year in dividends. What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires a 12 percent return on equity investments?
A) $38
B) $33.50
C) $34.50
D) $33.93
Q:
A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15 percent return on equity investments?
A) $30.24
B) $26.30
C) $26.09
D) $27.74
Q:
The forward triangular merger involves the acquisition subsidiary being merged with the target and the target surviving. True or False
Q:
A basic principle of finance is that the value of any investment is
A) the present value of all future net cash flows generated by the investment.
B) the undiscounted sum of all future net cash flows generated by the investment.
C) unrelated to the future net cash flows generated by the investment.
D) unrelated to the degree of risk associated with the future net cash flows generated by the investment.
Q:
A holding company is an example of either an acquisition vehicle or post-closing organization. True or False
Q:
Which of the following statements is false regarding Electronic Communications Networks (ECNs)?
A) Archipelago and Instinet are two examples of ECNs.
B) Competition from ECNs has forced NASDAQ to cut its fees.
C) Traders benefit from lower trading costs and faster service.
D) ECNs allow institutional investors, but not individuals, to trade after hours.
Q:
A post-closing organization must always be a C corporation. True or False
Q:
Which of the following is not an advantage of Electronic Communications Networks (ECNs)?
A) All unfilled orders are available for review by ECN traders.
B) Transactions costs are lower for ECN trades.
C) Trades are made and confirmed faster.
D) ECNs work well for thinly traded stocks.
Q:
The acquisition vehicle refers to the legal structure created to acquire the target company. True or False
Q:
Decisions made in one area of a deal structure rarely affect other areas of the overall deal structure.
True or False
Q:
Which of the following statements about trading operations in an organized exchange is correct?
A) Floor traders all deal in a wide variety of stocks.
B) In most trades, specialists match buy and sell orders.
C) In most trades, specialists buy for or sell from their own inventories.
D) The SuperDOT system is used to expedite large trades of over 100,000 shares.
Q:
Staged transactions may be used to structure an earn-out, to enable the target to complete the development of a technology or process, to await regulatory approval, to eliminate the need to obtain shareholder approval, and to minimize cultural conflicts with the target. True or False
Q:
The most active stock exchange in the world is the
A) Nikkei Stock Exchange.
B) London Stock Exchange.
C) Shanghai Stock Exchange.
D) New York Stock Exchange.
Q:
Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers "make a market" by
A) buying stocks for inventory when investors want to sell.
B) selling stocks from inventory when investors want to buy.
C) doing both of the above.
D) doing neither of the above.
Q:
Statutory mergers are governed by the statutory provisions of the state in which the surviving entity is chartered. True or False
Q:
In a statutory merger, only assets and liabilities shown on the target firms balance sheet automatically transfer to the acquiring firm. True or False
Q:
To list on the NYSE, a firm must
A) have earnings of at least $10 million per year.
B) have at least $500 million in outstanding debt.
C) have a total of $100 million in market value.
D) meet all of the above requirements.
E) meet A and C of the above requirements.
Q:
(I) The largest of the organized stock exchanges in the United States is the New York Stock Exchange.
(II) To be listed on the NYSE, a firm must have a minimum of $100 million in market value or $10 million in revenues.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Sellers may find a sale of assets attractive because they are able to maintain their corporate existence and therefore ownership of tangible assets not acquired by the buyer and intangible assets such as licenses, franchises, and patents. True or False
Q:
The riskiest capital market security is
A) preferred stock.
B) common stock.
C) corporate bonds.
D) Treasury bonds.
Q:
Stock purchases involve the exchange of the targets stock for cash, debt, stock of the acquiring company, or some combination. True or False
Q:
(I) Firms issue common stock in far greater amounts than preferred stock.
(II) In a given year, the total volume of stock issued is much less than the volume of bonds issued.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Asset purchases require the acquiring company to buy all or a portion of the target companys assets and to assume at least some of the targets liabilities in exchange for cash or stock. True or False
Q:
(I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders.
(II) Bondholders hold a claim on assets that has priority over the claims of preferred stockholders.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Rights to intellectual property, royalties from licenses and employment agreements are often used to close the gap on price between what the seller wants and what the buyer is willing to pay because the income generated is tax free to the recipient. True or False
Q:
Earn-outs tend to shift risk from the seller to the buyer in that a higher price is paid only when the seller has met or exceeded certain performance criteria. True or False
Q:
(I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders, but after that of bondholders.
(II) Firms issue preferred stock in far greater amounts than common stock.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Because they can be potentially so lucrative to sellers, earn-outs are sometimes used to close the gap between what the seller wants and what the buyer might be willing to pay. True or False
Q:
Preferred stockholders hold a claim on assets that has priority over the claims of
A) both common stockholders and bondholders.
B) neither common stockholders nor bondholders.
C) common stockholders, but after that of bondholders.
D) bondholders, but after that of common stockholders.
Q:
In a balance sheet adjustment, the buyer increases the total purchase price by an amount equal to the decrease in net working capital or shareholders equity of the target company. True or False
Q:
(I) A share of common stock in a firm represents an ownership interest in that firm.
(II) A share of preferred stock is as much like a bond as it is like common stock.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Registered bonds have now been largely replaced by bearer bonds, which do not have coupons.
Q:
When buyers and sellers cannot reach agreement on price, other mechanisms can be used to close the gap. These include balance sheet adjustments, earn-outs, rights to intellectual property, and licensing fees. True or False
Q:
Most corporate bonds have a face value of $1,000, are sold at a discount, and can only be redeemed at the maturity date.
Q:
The acquired company should be fully integrated into the acquiring company if an earn-out is used to consummate the transaction. True or False
Q:
Most municipal bonds are revenue bonds rather than general obligation bonds.
Q:
A holding company structure is the preferred post-closing organization if the acquiring firm is interested in integrating the target firm immediately following acquisition. True or False
Q:
Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation.
Q:
The acquirer may reduce the total cost of an acquisition by deferring some portion of the purchase price. True or False
Q:
Most of the time, the interest rate on Treasury notes is below that on money market securities because of their low default risk.
Q:
The assumption of seller liabilities by the buyer in a merger may induce the seller to demand a higher selling price. True or False
Q:
The form of payment does not affect whether a transaction is taxable to the sellers shareholders. True or False
Q:
To sell an old bond when rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate.
Q:
Governments never issue stock because they cannot sell ownership claims.
Q:
If the form of acquisition is a statutory merger, the seller retains all known, unknown or contingent liabilities.
True or False
Q:
Capital market securities are less liquid and have longer maturities than money market securities.
Q:
Form of payment may consist of something other than cash, stock, or debt such as tangible and intangible assets.
True or False
Q:
The appropriate deal structure is that which satisfies, without regard to risk, as many of the primary objectives of the parties involved as necessary to reach overall agreement. True or False
Q:
The primary issuers of capital market securities are local governments and corporations.
Q:
By the time the subprime financial crisis hit in force, Fannie and Freddie had ________ subprime and Alt-A assets on their books.
A) over $1 trillion of
B) very few
C) been prohibited from holding
D) none of the above
Q:
Form of payment refers only to the acquirers common stock used to make up the purchase price paid to target shareholders. True or False
Q:
A change in the current yield ________ signals a change in the same direction of the yield to maturity.
A) never
B) rarely
C) always
D) often
Q:
Employee stock ownership plans cannot be legally used to acquire companies. True or False
Q:
The first step in finding the value of a bond is to
A) discount back the cash flows using an interest rate that represents the yield available on other bonds of like risk and maturity.
B) identify the cash flows the holder of the bond will receive.
C) contact the holder of the bond.
D) none of the above.
Q:
Such legal structures as holding company, joint venture, and limited liability corporations are suitable only for acquisition vehicles but not post closing organizations. True or False