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Q:
The acquisition vehicle is the legal structure used to acquire the target. True or False
Q:
The risk on an agency bond is
A) high.
B) zero.
C) moderate.
D) low.
Q:
STRIPS (Separate Trading of Registered Interest and Principal Securities) are also called
A) interest-based securities.
B) zero-coupon securities.
C) leveraged securities.
D) covenant securities.
Q:
Deal structuring is fundamentally about satisfying as many of the primary objectives of the parties involved and deciding how risk will be shared. True or False
Q:
Bonds
A) are securities that represent a debt owed by the issuer to the investor.
B) obligate the issuer to pay a specified amount at a given date, generally without periodic interest payments.
C) both A and B of the above.
D) none of the above.
Q:
Studies of restricted stock sales since 1990 indicate a median liquidity discount of about 20 percent with several showing a decline to 13 percent after 1997 following the holding period change under Rule 144 from two years to one. True or False
Q:
Capital market trading occurs in
A) the primary market.
B) the secondary market.
C) both A and B of the above.
D) none of the above.
Q:
Shell corporations may be attractive for investors interested in capitalizing on the intangible value associated with the existing corporate shell. This could include name recognition; licenses, patents, and other forms of intellectual properties; and underutilized assets such as warehouse space and fully depreciated equipment with some economic life remaining. True or False
Q:
Corporations may enter the capital markets because
A) they do not have sufficient capital to fund their investment opportunities.
B) they want to preserve their capital to protect against expected needs.
C) it is required by the Securities and Exchange Commission (SEC).
D) none of the above.
Q:
Private investment in public entities (PIPES) is a commonly used method of financing reverse mergers. True or False
Q:
When an old bond's market value is above its par value, the bond is selling at a ________. This occurs because the old bond's coupon rate is ________ the coupon rates of new bonds with similar risk.
A) premium; below
B) premium; above
C) discount; below
D) discount; above
Q:
Shell corporations rarely have any value. True or False
Q:
The current yield on a $5,000, 8 percent coupon bond selling for $4,000 is
A) 5%.
B) 8%.
C) 10%.
D) 20%.
E) none of the above.
Q:
It is generally easier to sell a minority interest than a majority interest in a business without loss of the value of the original investment. True or False
Q:
The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is
A) 5%.
B) 10%.
C) 12%.
D) 15%.
Q:
An investor in a small company generally has little difficulty in selling their shares because of the high demand for small businesses. True or False
Q:
The current yield is a less accurate approximation of the yield to maturity the ________ the time to maturity of the bond and the ________ the price is from/to the par value.
A) shorter; closer
B) shorter; farther
C) longer; closer
D) longer; farther
Q:
A control premium is the additional premium a buyer is willing to pay for the right to direct the activities of a firm. True or False
Q:
Which of the following are true for the current yield?
A) The current yield is defined as the yearly coupon payment divided by the price of the security.
B) The current yield and the yield to maturity always move together.
C) The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond.
D) All of the above are true.
E) Only A and B of the above are true.
Q:
If the discount rate is assumed to be 8% and the current cash flow is $1.5 million and is expected to remain at that level in perpetuity, the implied valuation is $18.75 million. True or False
Q:
The nearer a bond's price is to its par value and the longer the maturity of the bond, the more closely the ________ approximates the ________.
A) current yield; yield to maturity
B) current yield; coupon rate
C) yield to maturity; current yield
D) yield to maturity; coupon rate
Q:
If the cash flows of the firm are not expected to grow or are expected to grow at a constant rate indefinitely, the discount rate used by practitioners often is referred to as the capitalization rate. True or False
Q:
Which of the following are true for the current yield?
A) The current yield is defined as the yearly coupon payment divided by the price of the security.
B) The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond.
C) The current yield is always a poor approximation for the yield to maturity.
D) All of the above are true.
E) Only A and B of the above are true.
Q:
The fair value concept is applied when no strong market exists for a business or it is not possible to identify the value of substantially similar firms. True or False
Q:
Corporate bonds are less risky if they are ________ bonds and municipal bonds are less risky if they are ________ bonds.
A) secured; revenue
B) secured; general obligation
C) unsecured; revenue
D) unsecured; general obligation
Q:
EBITDA has become an increasingly popular measure of value for privately held firms in recent years. True or False
Q:
In its simplest form, a credit default swap provides
A) insurance against default in the principle and interest payments of a credit instrument.
B) an alternative method for bond issuers to pay principle and interest payments via a swap.
C) bond investors with a method to swap interest payments for principle payments during a "credit event."
D) the government with a guarantee that certain bond issues will not run into credit problems.
Q:
A sudden improvement in operating profits in the year in which the business is being offered for sale may suggest that both revenue and expenses had been overstated during the historical period.
True or False
Q:
Financial guarantees
A) are insurance policies to back bond issues.
B) are purchased by financially weaker security issuers.
C) lower the risk of the bonds covered by the guarantee.
D) do all of the above.
E) do only A and B of the above.
Q:
It is rare that the owner or a family member is either an investor in or an owner of a vendor supplying products or services to the family owned firm. True or False
Q:
A secured bond is backed by
A) the general creditworthiness of the borrower.
B) an insurance company's financial guarantee.
C) the expected future earnings of the borrower.
D) specific collateral.
Q:
Owners of private businesses attempting to minimize taxes may overstate their contribution to the firm by giving themselves or family members unusually low salaries, bonuses, and benefits. True or False
Q:
Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called
A) junk bonds.
B) callable bonds.
C) convertible bonds.
D) debentures.
Q:
Small firms may lack product, industry, and geographic diversification, which add to their specific business risk. True or False
Q:
(I) Callable bonds usually have a higher yield than comparable noncallable bonds.
(II) Convertible bonds are attractive to bondholders and sell for a higher price than comparable nonconvertible bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Private companies are generally not subject to the same level of rigorous controls and reporting systems as are public companies. True or False
Q:
A requirement in the bond indenture that the firm pay off a portion of the bond issue each year is called
A) a sinking fund.
B) a call provision.
C) a restrictive covenant.
D) a shelf registration.
Q:
Despite the lack of public exchanges for privately held firms, Wall Street analysts have ample incentive to analyze such firms in search of emerging companies. True or False
Q:
Call provisions will be exercised when interest rates ________ and bond values ________.
A) rise; rise
B) fall; rise
C) rise; fall
D) fall; fall
Q:
Because of the need to satisfy both the demands of stockholders and regulatory agencies, public companies need to balance the desire to minimize taxes with the goal of achieving quarterly earnings levels consistent with investor expectations. Failure to do so frequently results in an immediate loss in the firms market value. True or False
Q:
(I) Restrictive covenants often limit the amount of dividends that firms can pay the stockholders.
(II) Most corporate indentures include a call provision, which states that the issuer has the right to force the holder to sell the bond back.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
A family owned firms board faces the sometimes daunting challenge of achieving the proper balance between monitoring and collaboration to minimize the emotionality and overlapping roles that often characterize such firms. True or False
Q:
Restrictive covenants can
A) limit the amount of dividends the firm can pay.
B) limit the ability of the firm to issue additional debt.
C) restrict the ability of the firm to enter into a merger agreement.
D) do all of the above.
E) do only A and B of the above.
Q:
The control model of corporate governance may be more applicable where ownership tends to be highly diverse and the right to control the business is separate from ownership. True or False
Q:
Typically, the interest rate on corporate bonds will be ________ the more restrictions are placed on management through restrictive covenants, because ________.
A) higher; corporate earnings will be limited by the restrictions
B) higher; the bonds will be considered safer by bondholders
C) lower; the bonds will be considered safer by buyers
D) lower; corporate earnings will be higher with more restrictions in place
Q:
Policies that limit the discretion of managers as a way of protecting bondholders' interests are called
A) restrictive covenants.
B) debentures.
C) sinking funds.
D) bond indentures.
Q:
In many countries, family owned firms have been successful because of their shared interests and because investors place a higher value on short-term performance than on the long-term health of the business. True or False
Q:
The bond contract that states the lender's rights and privileges and the borrower's obligations is called the
A) bond syndicate.
B) restrictive covenant.
C) bond covenant.
D) bond indenture.
Q:
The market model of corporate governance is readily applicable to privately held, family owned firms. True or False
Q:
Succession issues tend to be easier for small family owned firms than for large publicly traded firms. True or False
Q:
(I) Most corporate bonds have a face value of $1,000, pay interest semiannually, and can be redeemed anytime the issuer wishes.
(II) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
(I) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation.
(II) General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Firms that are family owned but not managed by family members are often well managed, as family shareholders with large equity stakes carefully monitor those charged with managing the business. True or False
Q:
Which of the following statements about Treasury inflation-indexed bonds is not true?
A) The principal amount used to compute the interest payment varies with the consumer price index.
B) The interest payment rises when inflation occurs.
C) The interest rate rises when inflation occurs.
D) At maturity, the securities pay the greater of face value or inflation-adjusted principal.
Q:
Family owned businesses account for about 89% of all businesses in the U.S. True or False
Q:
(I) Because interest rates on Treasury bills are more volatile than rates on long-term securities, the return on short-term Treasury securities is usually above that on longer-term Treasury securities.
(II) A Treasury STRIP separates the periodic interest payments from the final principal repayment.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
The M&A market for employer firms tends to be concentrated among smaller firms, as firms in the United States with 99 or fewer employees account for 98% of all firms with employees. True or False
Q:
In many family owned firms, family influence is exercised by family members holding senior management positions, seats on the board of directors, and through holding super-voting stock (i.e., stock with multiple voting rights). True or False
Q:
(I) In most years, the rate of return on short-term Treasury bills is below that on the 20-year Treasury bond.
(II) Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
All family owned businesses are small. True or False
Q:
Most of the time, the interest rate on Treasury notes and bonds is ________ that on money market securities because of ________ risk.
A) above; interest-rate
B) above; default
C) below; interest-rate
D) below; default
Q:
Very few closely held businesses are family owned. True or False
Q:
To sell an old bond when interest rates have ________, the holder will have to ________ the price of the bond until the yield to the buyer is the same as the market rate.
A) risen; lower
B) risen; raise
C) fallen; lower
D) risen; inflate
Q:
Privately owned businesses are often referred to as closely held since they are usually characterized by a small group of shareholders controlling operating and managerial policies of the firm. True or False
Q:
(I) To sell an old bond when interest rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate.
(II) The risk that the value of a bond will fall when market interest rates rise is called interest-rate risk.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
A private corporation is a firm whose securities are not registered with state or federal authorities. True or False
Q:
The security with the longest maturity is a Treasury
A) note.
B) bond.
C) acceptance.
D) bill.
Q:
Restricted stock is often issued to employees of privately held firms as a significant portion of their total
compensation. Such stock is similar to other types of common stock except that its sale on the open market is prohibited for a period of time. True or False
Q:
The prices of Treasury notes, bonds, and bills are quoted
A) as a percentage of the coupon rate.
B) as a percentage of the previous day's closing value.
C) as a percentage of $100 face value.
D) as a multiple of the annual interest paid.
Q:
The term capitalization refers to the conversion of a future income stream into a present value, and it is a
term often used by business appraisers when future income or cash flows are not expected to grow or to grow at a constant rate. True or False
Q:
Treasury bonds are subject to ________ risk but are free of ________ risk.
A) default; interest-rate
B) default; underwriting
C) interest-rate; default
D) interest-rate; underwriting
Q:
Valuation of privately held businesses may involve substantial adjustment of the discount or capitalization
rate. True or False
Q:
(I) The coupon rate is the rate of interest that the issuer of the bond must pay.
(II) The coupon rate on old bonds fluctuates with market interest rates so they will remain attractive to investors.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Fair value is by necessity more subjective than the concept of fair market value, because it represents the
dollar value of a business based upon an appraisal of the tangible and intangible assets of the business. True or False
Q:
(I) The coupon rate is the rate of interest that the issuer of the bond must pay.
(II) The coupon rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Intangible assets such as customer lists, intellectual property, licenses, distributorships agreements, leases,
regulatory approvals, and employment contracts may offer significant sources of value. True or False
Q:
The ________ rate is the rate of interest that the issuer must pay.
A) market
B) coupon
C) discount
D) funds
Q:
Before selling a business, an owner may increase advertising expenses in order to inflate profits.
True or False
Q:
In adjusting base year income, an appraiser must be aware of the implications of various accounting
methods for value. During periods of inflation, businesses frequently use the last-in, first out method to
value inventories. This approach results a reduction in the cost of sales and an increase in gross profits and taxable income. True or False
Q:
The ________ value of a bond is the amount that the issuer must pay at maturity.
A) market
B) present
C) discounted
D) face