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Banking
Q:
Discuss the pros and cons of a reverse merger versus an initial public offering for taking a company public.
Q:
Explain why money market interest rates move so closely together over time.
Q:
Explain why the money markets are referred to as wholesale markets.
Q:
Who were Panda Ethanol, Grove Street Investors, Grove Panda, and Cirracor? What were their roles in the case study? Be specific.
Q:
A corporate shell may have value because
a. It may enable the owner to avoid the costs of going public
b. The name is widely recognized
c. It could own the rights to various forms of intellectual property
d. All of the above
e. None of the above
Q:
Explain how the Federal Reserve can influence the federal funds interest rate.
Q:
A business owner may overstate revenue and understate actual expenses when
a. The business is about to be sold
b. They are being audited by the IRS
c. They are trying to minimize tax liabilities
d. All of the above
e. None of the above
Q:
Explain why banks, which would seem to have a comparative advantage in gathering information, have not eliminated the need for the money markets.
Q:
A business owner may overstate revenue by
a. Failing to deduct from revenue products returned by customers
b. Billing customers for products not ordered
c. Booking the entire value of a multiyear contract in the current year
d. Counting interest income as revenue
e. All of the above
Q:
Not all commercial banks deal in the secondary money market for their customers.
Q:
The most important element(s) in selecting a business valuation professional include which of the following: (Select only one)
a. Overall experience
b. Demonstrated ability in the industry in which the firm to valued competes
c. Degree of specialization
d. Number of professional degrees
e. A and B only
Q:
The Treasury accepts noncompetitive bids in ascending order of yield until the accepted bids reach the offering amount.
Q:
Revenue Ruling 59-60 describes the general factors that the IRS and tax courts consider relevant in valuing private businesses. Of the following valuation methods, which do the IRS and tax courts view as the most important?
a. Discounted cash flow
b. Comparable company methods
c. Tangible book value
d. Replacement cost method
e. All of the above
Q:
Commercial paper has been used in various forms since the 1930s.
Q:
All of the following represent common sources of value in appraising private or publicly owned businesses except for
a. Intellectual property
b. Customer lists
c. Licenses
d. Contingent liabilities
e. Employment contracts
Q:
In general, money market instruments are low-risk, high-yield securities.
Q:
The size of the asset-backed commercial paper market nearly doubled between 2004 and 2007 to about $1 trillion.
Q:
The discount rate may be estimated using all but the one of the following:
a. The capital asset pricing model
b. The share exchange ratio
c. The cost of capital
d. Return on total assets
e. Price-to-earnings ratio
Q:
Interest rates on banker's acceptances are low because the risk of default is very low.
Q:
Fair market value is
a. The cash or cash equivalent value that a willing buyer would pay or seller would accept for a business
b. The cash or cash equivalent value that a willing buyer would pay or seller would accept for a business, assuming each had access to all necessary information
c. The cash or cash equivalent value that a willing buyer would pay or seller would accept for a business, assuming each had access to all necessary information and that neither party is under duress.
d. The discounted value of free cash flow to the firm
e. The discounted value of free cash flow to equity investors.
Q:
All of the following are often true of privately held firms except for
a. Financial data is often inaccurate and out of date
b. Internal controls are ineffective
c. Have limited access to capital markets and product distribution channels
d. Are more easily valued than public companies
e. Have limited ability to influence customers, suppliers, unions, and regulators
Q:
A banker's acceptance is an order to pay a specified amount of money to the bearer on a given date. Banker's acceptances have been used since the twelfth century.
Q:
Leveraged employee stock ownership plans are frequently used by owners of private businesses to
a. Hide assets
b. Motivate employees
c. Sell the firm to the employees
d. B and C
e. A, B, and C
Q:
Commercial paper securities are unsecured promissory notes, issued by corporations, that mature in no more than 270 days.
Q:
Corporate shells have value because they enable the buyer to
a. Avoid the cost of going public
b. Exploit intangible value such as brand name
c. A and D only
d. Provide limited liability
e. A, B, and D only
Q:
The Fed can influence the federal funds rate by adjusting the level of reserves in the banking system.
Q:
Which of the following is not true of liquidity or marketability risk or discount?
a. It is measurable.
b. It is believed to have declined in recent years
c. The magnitude of the discount or risk is inversely related to the size of the investors equity ownership in the business.
d. The magnitude of the discount or risk is directly related to the size of the investors equity ownership in the business.
e. It is important to adjust the discount rate for liquidity risk.
Q:
The main purpose of federal funds is to provide banks with an immediate infusion of reserves should they be short.
Q:
All of the following are true of reverse mergers except for.
a. May be used to take a private firm public
b. May represent an effective alternative to an IPO
c. Commonly use private equity placements for financing
d. Requires 2 years of audited financial statements to take a private firm public
e. A and B
Q:
The T-bill is not an investment to be used for anything but temporary storage of excess funds because it barely keeps up with inflation.
Q:
The market for U.S. Treasury bills is a shallow market because so few individual investors buy T-bills.
Q:
In valuing private businesses, the U.S. tax courts have historically supported the use of which valuation method for purposes of estate valuation?
a. Discounted cash flow
b. Comparable company method
c. Tangible book value method
d. A combination of a and c
e. All of the above
Q:
Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds.
Q:
Which of the following are often true about the challenges of valuing private firms?
a. There is a lack of analyses generated by sources outside of the company.
b. Financial reporting systems are often inadequate.
c. Management depth and experience is often limited.
d. Reported earnings are often understated to minimize taxes.
e. All of the above.
Q:
Increasing market liquidity will reduce the value of control; an increasing value of control will reduce market liquidity and contribute to increasing liquidity discounts. True or False
Q:
Banks are unusual participants in the money market because they buy, but do not sell, money market instruments.
Q:
The U.S. Treasury Department is the single largest borrower in the U.S. money market.
Q:
Studies show that control premiums vary widely across countries reflecting the efficacy of shareholder rights laws and how well such laws are enforced in each country. True or False
Q:
A pure control premium is the value the acquirer believes can be created by replacing the target firms incompetent management, by changing the strategic direction of the target, by gaining a foothold in a market not currently served, or by achieving unrelated diversification. True or False
Q:
The U.S. Treasury Department is the single most influential participant in the U.S. money market.
Q:
A minority discount is the reduction in the value of a minority investors investment because minority owners have little influence in how the firm is managed. True or False
Q:
Money markets are referred to as retail markets because small individual investors are the primary buyers of money market securities.
Q:
There is widespread agreement over the magnitude of the liquidity discount. True or False
Q:
The term money market is actually a misnomer, because liquid securities are traded in these markets rather than money.
Q:
What was the composition of the purchase price? Why was this composition selected according to this case study?
Q:
Money market securities include Treasury bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, banker's acceptances, and Eurodollars.
Q:
Money market securities are short-term instruments with an original maturity of less than one year.
Q:
How was the initial offer price determined according to this case study? Do you find the logic underlying the initial offer price compelling? Explain your answer.
Q:
Asset-backed commercial paper differs from conventional commercial paper in that
A) it is backed (secured) by some bundle of assets.
B) its maturity usually extends well beyond 1 year.
C) both A and B of the above.
D) neither A nor B of the above.
Q:
Ford anticipates substantial synergies from acquiring Volvo. What are these potential synergies? As a consultant hired to value Volvo, what additional information would you need to estimate the value of potential synergy from each of these areas?
Q:
What is the purpose of the common-size financial statements developed for Volvo (see Table 8-8 in the textbook)? What insights does this table provide about the historical trend in Volvos historical performance? Based on past performance, how realistic do you think the projections are for 2000-2004?
Q:
The advantage of mutual funds is that they
A) require no cash up front.
B) give investors with relatively small amounts of cash to invest access to large-denomination securities.
C) always yield the highest returns.
D) both A and B of the above.
Q:
The estimated equity value for the Times Mirror Corporation on the day the merger was announced was about $2.8 billion. Moreover, as shown in the offer price evaluation table, the equity value estimated using discounted cash flow analysis is given has $2.4 billion. Why is the minimum offer price shown as $2.8 billion rather than the lower $2.4 billion figure? How is the maximum offer price determined in the Offer Price Evaluation Table? How much of the estimated synergy value generated by combining the two businesses is being transferred to the Times Mirror shareholders? Why?
Q:
In a direct placement
A) the issuer bypasses the dealer and sells indirectly to the end investor.
B) the dealer sells directly to the end investor.
C) the issuer bypasses the dealer and sells directly to the end investor.
D) none of the above.
Q:
Despite the merger having closed in mid-2000, the full effects of synergy are not expected until 2002. Why? What factors could account for the delay?
Q:
The main role of investment companies in the money market is to
A) trade on behalf of commercial accounts.
B) mediate the symmetric information problem between server-lender and borrower-spenders.
C) both A and B of the above.
D) neither A nor B of the above.
Q:
Using the Merger Evaluation table given in the case, determine the estimated equity values of Tribune, Times Mirror and the combined firms. Why is long-term debt deducted from the total present value estimates in order to obtain equity value?
Q:
Two important characteristics of any financial market are flexibility and
A) risk.
B) innovation.
C) tolerance.
D) capital.
Q:
In your judgment, did it make good strategic sense to combine the Tribune and Times Mirror corporations? Why? / Why not?
Q:
Money market transactions
A) do not take place in any one particular location or building.
B) are usually arranged purchases and sales between participants over the phone by traders and completed electronically.
C) are both A and B of the above.
D) are none the the above.
Q:
Given the terms of the agreement, Wrigley shareholders would own what percent of the combined companies? Explain your answer
Q:
Which of the following statements about money market securities are true?
A) The interest rates on all money market instruments move very closely together over time.
B) The secondary market for Treasury bills is extensive and well developed.
C) There is no well-developed secondary market for commercial paper.
D) All of the above are true.
E) Only A and B of the above are true.
Q:
Speculate as to the potential sources of synergy associated with the deal. Based on this speculation what additional information would you want to know in order to determine the potential value of this synergy?
Q:
Eurodollars
A) are time deposits with fixed maturities and are, therefore, somewhat illiquid.
B) may offer the borrower a lower interest rate than can be received in the domestic market.
C) are limited to London banks.
D) are all of the above.
E) are only A and B of the above.
Q:
A merger which is expected to produce synergy
a. Should be rejected because the synergy will dilute the combined firms earnings per share
b. Should be rejected because the first years cash flow is negative
c. Has a negative NPV
d. Should be pursued because it creates value
e. Reduces target firm revenues
Q:
Banker's acceptances
A) can be bought and sold until they mature.
B) are issued only by large money center banks.
C) carry low interest rates because of the very low default risk.
D) are all of the above.
E) are only A and B of the above.
Q:
Which of the following are examples of cost-related synergy?
a. Spreading fixed costs over increased output levels
b. Eliminating duplicate jobs
c. Discounts from suppliers due to bulk purchases
d. Paying termination expenses
e. A, B, and C only
Q:
A banker's acceptance is
A) used to finance goods that have not yet been transferred from the seller to the buyer.
B) an order to pay a specified amount of money to the bearer on a given date.
C) a relatively new money market security that arose in the 1960s as international trade expanded.
D) all of the above.
E) only A and B of the above.
Q:
Does the Times Mirror-Tribune Corporation merger create value? If so, how much? What percentage of this value goes to Times Mirror shareholders and what percentage to Tribune shareholders? Why?
Q:
Real Value Autos acquired Automotive Industries in a transaction that produced an NPV of $3.7 million.
This NPV represents
a. Synergy
b. Book value
c. Investment value
d. Diversification
e. None of the above
Q:
Unlike most money market securities, commercial paper
A) is not generally traded in a secondary market.
B) usually has a term to maturity that is longer than a year.
C) is not popular with most money market investors because of the high default risk.
D) all of the above.
E) only A and B of the above.
Q:
The share exchange ratio is impacted by all of the following except for
a. The current share price of the target firm
b. The current share price of the acquirer
c. The offer price for the target firm
d. The number of shares outstanding for the target firm
e. A and D
Q:
Commercial paper securities
A) are issued only by the largest and most creditworthy corporations, as they are unsecured.
B) carry an interest rate that varies according to the firm's level of risk.
C) never have a term to maturity that exceeds 270 days.
D) all of the above.
E) only A and B of the above.
Q:
Post merger earnings per share are affected by all of the following factors, except for
a. Acquiring firms outstanding shares
b. Price offered for the target company
c. Number of target firms outstanding shares
d. Current price of the acquiring companys stock
e. Current price of the target firms stock
Q:
Negotiable certificates of deposit
A) are bearer instruments because their holders earn the interest and principal at maturity.
B) typically have a maturity of one to four months.
C) are usually denominated at $100,000.
D) are all of the above.
E) are only A and B of the above.
Q:
A negotiable certificate of deposit
A) is a term security because it has a specified maturity date.
B) is a bearer instrument, meaning whoever holds the certificate at maturity receives the principal and interest.
C) can be bought and sold until maturity.
D) all of the above.
E) only A and B of the above.
Q:
Selecting the appropriate financing structure for the combined firms requires consideration of which of the
following:
a. The impact on the combined firms EPS
b. Potential violation of loan covenants
c. The extent to which the primary needs of both the buyers and sellers shareholders are satisfied.
d. A and B only
e. A, B, and C
Q:
Repos are
A) usually low-risk loans.
B) usually collateralized with Treasury securities.
C) low interest rate loans.
D) all of the above.
E) only A and B of the above.
Q:
Realizing synergy often requires spending money. Which of the following are examples of such
expenditures?
a. Employee recruitment and training expenses
b. Severance expenses
c. Investment in equipment to improve employee productivity
d. Redesigning workflow
e. All of the above
Q:
Government securities dealers frequently engage in repos to
A) manage liquidity.
B) take advantage of anticipated changes in interest rates.
C) lend or borrow for a day or two with what is essentially a collateralized loan.
D) do all of the above.
E) do only A and B of the above.