Q&A Hero

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.

Q: Which factors would be considered in determining the feasibility of financing a proposed takeover? a. Potential dilution in EPS of the combined firms. b. Impact on overall borrowing costs of the combined firms. c. Possible violation of loan covenants on existing debt of the acquiring company d. Return on total capital of the combined firms e. All of the above.

Q: If the Fed wants to raise the federal funds interest rate, it will ________ securities to ________ the banking system. A) sell; add reserves to B) sell; remove reserves from C) buy; add reserves to D) buy; remove reserves from

Q: If the Fed wants to lower the federal funds interest rate, it will ________ the banking system by ________ securities. A) add reserves to; selling B) add reserves to; buying C) remove reserves from; selling D) remove reserves from; buying

Q: A floating or flexible share exchange ratio is used to a. Protect the value of the transaction for the acquirers shareholders b. Preserve 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 of the transaction for the acquiring firm e. Increase the value of the transaction for the target firm

Q: The Fed can lower the federal funds interest rate by ________ securities, thereby ________ reserves. A) selling; adding B) selling; lowering C) buying; adding D) buying; lowering

Q: What happens to the outstanding shares of the target firm when the acquirer purchases 100% of the targets outstanding stock? a. They are added to the number of shares of Acquirer stock outstanding b. They are cancelled. c. They are converted into preferred stock. d. They are shown as treasury stock on the books of the combined companies. e. They are swapped for debt in the new company.

Q: Acquiring Corp agrees to buy 100% of the outstanding shares of Target Corp in a share for share exchange. How would Acquiring Corp determine how many new share of its stock it would have to issue? a. Multiply the purchase price premium paid for Targets stock by the number of shares of target stock outstanding. b. Multiply the share exchange ratio by the number of Acquirer shares outstanding. c. Add the number of Acquirer and Target shares outstanding d. Multiply the share exchange ratio by the number of Target shares outstanding. e. Divide the share exchange ratio by the purchase price premium

Q: The Federal Reserve can influence the federal funds interest rate by buying securities, which ________ reserves, thereby ________ the federal funds rate. A) adds; raising B) removes; lowering C) adds; lowering D) removes; raising

Q: The share exchange ratio is defined as a. Offer price for the target divided by the acquirers share price b. Offer price for the target divided by the targets share price c. Acquirers share price divided by the targets share price d. Targets share price divided by the offer price e. Acquirers share price divided by the offer price

Q: The Fed can influence the federal funds interest rate by adjusting the level of reserves available to banks. The Fed can A) lower the federal funds interest rate by adding reserves. B) raise the federal funds interest rate by removing reserves. C) remove reserves by selling securities. D) do all of the above. E) do only A and B of the above.

Q: The initial offer price for the target firm is defined as a. The minimum price b. The present value of the minimum price plus some fraction of the present value of net synergy c. The present value of net synergy plus the current market value of the target firm d. The maximum price less the minimum price e. The maximum price less the present value of net synergy

Q: Federal funds are A) usually overnight investments. B) borrowed by banks that have a deficit of reserves. C) lent by banks that have an excess of reserves. D) all of the above. E) only A and B of the above.

Q: Which of the following is generally not considered a source of value to the acquiring firm? a. Duplicate facilities b. Patents c. Land on the balance sheet at below market value d. Warranty claims e. Copyrights

Q: Federal funds A) are short-term funds transferred between financial institutions, usually for a period of one day. B) actually have nothing to do with the federal government. C) provide banks with an immediate infusion of reserves. D) are all of the above. E) are only A and B of the above.

Q: Target is a wholly owned subsidiary of MegaCorp Inc. MegaCorp supplies a number of services to target. Target sells some of its products to other MegaCorp subsidiaries. Target also buys products from other MegaCorp subsidiaries that are used as inputs in producing Targets products. Which of the following adjustments should the acquirer make to Targets financial statements before valuing the firm? a. Deduct the actual cost of services required by Target that are being supplied by the parent without charge from targets cost of sales. b. Deduct the difference between the cost of products purchased from other MegaCorp subsidiaries at below market prices and the actual market prices for such products from Targets cost of sales. c. Deduct the difference between the cost of products purchased from other MegaCorp subsidiaries at above market prices and the actual cost of such products if purchased from other sources from Targets cost of sales d. A and B only. e. None of the above.

Q: If your noncompetitive bid for a Treasury bill is successful, then you will A) certainly pay less than if you had submitted a competitive bid. B) certainly pay more than if you had submitted a competitive bid. C) pay the average of prices offered in other noncompetitive bids. D) pay the same as other successful noncompetitive bidders.

Q: Which of the following is not true about common size financial statements? a. Such statements are used to uncover data irregularities. b. Such statements are constructed by calculating the percentage each line item of the income statement, balance sheet, and cash flow statement is of annual sales. c. Such statements are useful for comparing businesses of different sizes in the same industry at different moments in time. d. Common size statements applied over a number of consecutive periods may be used to determine if the target firm is deferring necessary spending. e. Common size statements may be calculated for both quarterly and annual financial data.

Q: If your competitive bid for a Treasury bill is successful, then you will A) certainly pay less than if you had submitted a noncompetitive bid. B) probably pay more than if you had submitted a noncompetitive bid. C) pay the average of prices offered in other successful competitive bids. D) pay the same as other successful competitive bidders.

Q: Which of the following is not true about generally accepted accounting principles (GAAP)? a. GAAP provide specific guidelines as to how to account for specific events impacting the financial performance of the firm. b. The scrupulous application GAAP accounting rules does ensure consistency in comparing one firms financial performance to another. c. It is customary for definitive agreements of purchase and sale to require that a target company represent that its financial books are kept in accordance with GAAP. d. GAAP guarantees that a firms financial books are accurate. e. Differences between how a firm records actual financial transactions and how they should be recorded based on GAAP may indicate fraud or mismanagement.

Q: Treasury bills do not A) pay interest. B) have a maturity date. C) have a face amount. D) have an active secondary market.

Q: Revenue-related synergy may result from the acquirer being able to sell their products to the target firms customers. True or False

Q: Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about A) 1.5%. B) 2%. C) 3%. D) 6%.

Q: In determining the initial offer price, the acquiring company must decide how much of anticipated synergy it is willing to share with the target firms shareholders. True or False

Q: Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about A) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent.

Q: In calculating the value of net synergy, the costs required to realize the anticipated synergy should be ignored because they are difficult to forecast. True or False

Q: Which of the following statements are true of Treasury bills? A) The market for Treasury bills is extremely deep and liquid. B) Occasionally, investors find that earnings on T-bills do not compensate them for changes in purchasing power due to inflation. C) By volume, most Treasury bills are sold to individuals who submit noncompetitive bids. D) All of the above are true. E) Only A and B of the above are true.

Q: Assume Firm As acquisition of Firm B results in a reduction in the combined firms debt-to-total capital ratio to .25. If the same ratio for the industry is .5, the combined firm may be able to increase its borrowing to the industry average, assuming no extenuating circumstances. However, this should not be viewed as a source of value to the acquiring firm. True or False

Q: Potential sources of value rarely include factors not recorded on a firms balance sheet. True or False

Q: Money market instruments issued by the U.S. Treasury are called A) Treasury bills. B) Treasury notes. C) Treasury bonds. D) Treasury strips.

Q: Which of the following is the largest borrower in the money markets? A) commercial banks B) large corporations C) the U.S. Treasury D) U.S. firms engaged in foreign trade

Q: Trend extrapolation, which entails extending present trends into the future using historical growth rates or multiple regression techniques, is rarely used to forecast cash flow. True or False

Q: When inflation rose in the late 1970s, A) consumers moved money out of money market mutual funds because their returns did not keep pace with inflation. B) banks solidified their advantage over money markets by offering higher deposit rates. C) brokerage houses introduced highly popular money market mutual funds, which drew significant amounts of money out of bank deposits. D) consumers were unable to take advantage of higher rates in money markets because of the requirement of large transaction sizes.

Q: A simple model to project cash flow rarely involves the projection of revenue and the various components of cash flow as a percent of projected revenue. True or False

Q: Finance companies play a unique role in money markets by A) giving consumers indirect access to money markets. B) combining consumers' investments to purchase money market securities on their behalf. C) borrowing in capital markets to finance purchases of money market securities. D) assisting the government in its sales of U.S. Treasury securities.

Q: Financial ratio analysis is the calculation of performance ratios from data in a companys financial statements to identify the firms financial strengths and weaknesses. True or False

Q: Finance companies raise funds in the money market by selling A) commercial paper. B) federal funds. C) negotiable certificates of deposit. D) Eurodollars.

Q: By expressing the targets line-item data as a percentage of sales, it is possible to compare the target company with other companies line item data expressed in terms of costs to highlight significant differences. True or False

Q: The primary function of large diversified brokerage firms in the money market is to A) sell money market securities to the Federal Reserve for its open market operations. B) make a market for money market securities by maintaining an inventory from which to buy or sell. C) buy money market securities from corporations that need liquidity. D) buy T-bills from the U.S. Treasury Department.

Q: Common size financial statements may be constructed by calculating the percentage each line item of the income statement, balance sheet, and cash flow statement is of annual sales for each quarter or year for which historical data are available. True or False

Q: Commercial banks are large holders of ________ and are the major issuer of ________. A) negotiable certificates of deposit; U.S. government securities B) U.S. government securities; negotiable certificates of deposit C) commercial paper; Eurodollars D) Eurodollars; commercial paper

Q: It is rarely useful to review more than one or two years of historical data for the acquiring or target firms. True or False

Q: The Fed is an active participant in money markets mainly because of its responsibility to A) lower borrowing costs to encourage capital investment. B) control the money supply. C) increase the interest income of retirees holding money market instruments. D) assist the Securities and Exchange Commission in regulating the behavior of other money market participants.

Q: Historical cash flow may be adjusted by deducting unusually large increases in reserves or by adding back large decreases in reserves from free cash flow to the firm. True or False

Q: The most influential participant(s) in the U.S. money market A) is the Federal Reserve. B) is the U.S. Treasury Department. C) are the large money center banks. D) are the investment banks that underwrite securities.

Q: Examples of relevant historical relationships that are useful for forecasting cash flows include the relationship between fixed and variable expenses, and the impact on revenue of changes in product prices and unit sales. If these relationships can reasonably be expected to continue through the forecast period, they can be used to project the earnings and cash flows used in the valuation process. However, it is important to ignore cyclical movements in the data. True or False

Q: Which of the following are true statements about participants in the money markets? A) Large banks participate in the money markets by selling large negotiable CDs. B) The U.S. government and corporations borrow in the money markets because cash inflows and outflows are rarely synchronized. C) The Federal Reserve is the single most influential participant in the U.S. money market. D) All of the above are true. E) Only A and B of the above are true.

Q: Competitive dynamics simply refer to the factors within the industry that determine industry profitability and cash flow. True or False

Q: Which of the following statements about the money markets are true? A) Most money market securities do not pay interest. Instead, the investor pays less for the security than it will be worth when it matures. B) Pension funds invest a portion of their assets in the money market to have sufficient liquidity to meet their obligations. C) Unlike most participants in the money market, the U.S. Treasury Department is always a demander of money market funds and never a supplier. D) All of the above are true. E) Only A and B of the above are true.

Q: Which of the following statements about the money markets are true? A) Not all commercial banks deal for their customers in the secondary market. B) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds. C) The single most influential participant in the U.S. money market is the U.S. Treasury Department. D) All of the above are true. E) Only A and B of the above are true.

Q: The accuracy of any valuation is heavily dependent on understanding the historical competitive dynamics of the industry, the historical performance of the company within the industry, and the reliability of the data used in the valuation. True or False

Q: Brokerage firms that offered money market security accounts in the 1970s had a cost advantage over banks in attracting funds because the brokerage firms A) were not subject to deposit reserve requirements. B) were not subject to the deposit interest rate ceilings. C) were not limited in how much they could borrow from depositors. D) had the advantage of all the above. E) had the advantage of only A and B of the above.

Q: Value drivers are factors such as product volume, selling price, and cost of sales that have a significant impact on the value of the firm whenever they are altered. True or False

Q: In situations where asymmetric information problems are not severe, A) the money markets have a distinct cost advantage over banks in providing short-term funds. B) the money markets have a distinct cost advantage over banks in providing long-term funds. C) banks have a distinct cost advantage over the money markets in providing short-term funds. D) the money markets cannot allocate short-term funds as efficiently as banks can.

Q: The appropriate financial structure can be determined from a range of different scenarios created by making small changes in selected value drivers. True or False

Q: The banking industry A) should have an efficiency advantage in gathering information that would eliminate the need for the money markets. B) exists primarily to mediate the asymmetric information problem between saver-lenders and borrower-spenders. C) is subject to more regulations and governmental costs than the money markets. D) all of the above are true. E) only A and B of the above are true.

Q: Financial models are of little value in determining whether the proposed purchase price can be financed by the acquirer. True or False

Q: Money market instruments A) are usually sold in large denominations. B) have low default risk. C) mature in one year or less. D) are characterized by all of the above. E) are characterized by only A and B of the above.

Q: It is unimportant whether the acquirer uses the targets or its own weighted average cost of capital when valuing the target firm. True or False

Q: Money market securities have all the following characteristics except they are not A) short term. B) money. C) low risk. D) very liquid.

Q: The appropriate discount rate for the combined firms is generally the targets cost of capital unless the two firms have similar risk profiles and are based in the same country. True or false

Q: Activity in money markets increased significantly in the late 1970s and early 1980s because of A) rising short-term interest rates. B) regulations that limited what banks could pay for deposits. C) both A and B of the above. D) neither A nor B of the above.

Q: A standalone business is one whose financial statements reflect all the costs of running the business and all of the revenues generated by the business. True or False

Q: What are the arguments for and against central bank intervention during asset-price bubbles?

Q: While it is legitimate for a firm to follow different accounting practices for financial reporting and tax purposes, the relationship between book and tax accounting is likely to remain constant over time, unless there are changes in tax rules or accounting standards. True or False

Q: Describe an asset-price bubble.

Q: Although public companies still are required to file their financial statements with the Securities and Exchange Commission in accordance with GAAP, companies increasingly are using pro forma statements to portray their financial performance in what they argue is a more realistic (and usually more favorable) manner. True or False

Q: Discuss how the monetary policy of the European Central Bank is similar to the U.S. How are they different?

Q: When one company acquires another, year over year historical earnings comparisons for the acquiring firm are unaffected. True or False

Q: What is the argument for the Fed paying interest to banks on required reserves? Are there good arguments for not doing this?

Q: Discuss the role of the Fed as a lender of last resort during the 2007-2009 financial crisis.

Q: Pro forma financial statements rarely deviate from those compiled in accordance with GAAP. True or False

Q: Pro forma financial statements are simply another name for GAAP financial statements. True or False

Q: Describe and discuss Chairman Bernanke's views on inflation targeting and transparency in central banking.

Q: Discrepancies between the way a firm records its financial statements and GAAP accounting standards are common and should be ignored. True or False

Q: Describe what criteria is applied when choosing a policy instrument.

Q: While GAAP does not ensure accuracy, it is helpful to the analyst in that statements that conform to GAAP rules must adhere to certain standards. True or False

Q: Compare the advantages and disadvantages of monetary targeting and inflation targeting.

Q: Financial models can be used to answer the following questions: How much is the target company worth without the effects of synergy? What is the value of expected synergy? What is the maximum price that the acquiring company should pay for the target? True or False

Q: Can the Fed control the money supply? Has it done so? What evidence can you provide to support your answer to each question?