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Banking
Q:
Merging compensation systems can be one of the most challenging activities of the integration process. True or False
Q:
American businesses get more funds from direct financing than from indirect financing.
Q:
The Global Legal Settlement includes what key element?
A) It directly reduces conflicts of interest.
B) It provides incentives for investment banks to not exploit conflicts of interest.
C) It has measures to improve the quality for information in financial markets.
D) All of the above.
Q:
Decentralized management control usually facilitates the integration of a newly acquired business. True or False
Q:
Which of the following provisions of legislation to deal with conflicts of interest does not increase the flow of information in financial markets?
A) requiring a firm's chief officers to certify its financial statements and other disclosures
B) requiring investment banks to make their analysts' recommendations public
C) requiring disclosure of off-balance-sheet transactions
D) increasing resources available to the Securities and Exchange Commission to supervise financial markets
Q:
Customers of newly acquired firms are usually slow to switch to other suppliers even if product quality deteriorates due to inertia. True or False
Q:
The Global Legal Settlement of 2002 dealt with conflicts of interest in
A) accounting firms.
B) investment banks.
C) credit-rating agencies.
D) all of the above.
Q:
Pre-closing integration planning is likely to be easier in friendly than in hostile transactions. True or False
Q:
The Sarbanes-Oxley Act of 2002 dealt with conflicts of interest in
A) investment banks.
B) accounting firms.
C) credit-rating agencies.
D) all of the above.
Q:
A merger agreement should specify how the seller should be reimbursed for products shipped or services provided by the seller before closing but not paid for by the customer until after closing. True or False
Q:
Since firms issuing new securities pay to have these securities rated, the credit-rating agencies have incentive to ________ to attract more business.
A) give favorable ratings
B) give impartial ratings
C) lower the fees they charge
D) practice spinning
Q:
It is crucial to focus on the highest leverage issues in implementing post-merger integration. True of False
Q:
Sharing common goals, standards, services, and space can be a highly effective and practical way to integrate disparate corporate cultures. True or False
Q:
During the 2007-2009 financial crisis, housing prices began to fall and subprime mortgages began to default. Which of the following statements is true about the rating of subprime mortgage products?
A) The rating agencies were way ahead of the market, giving many of the subprime products junk ratings from the start.
B) Rating agencies were not involved. Subprime mortgages could not be structured, by law.
C) Many AAA-rated subprime products had to be downgraded over and over again until they reached junk status.
D) None of the above are true.
Q:
When two companies with very different cultures merge, the new firm inevitably adopts one of the two cultures that existed prior to the merger. True or False
Q:
The conflict of interest in credit-rating agencies arises because ________ pay to have securities rated and, as a result, the agencies' ratings may be biased ________.
A) security issuers; downward
B) security issuers; upward
C) investors; downward
D) regulators; upward
Q:
Benchmarking important functions such as the acquirers and the targets manufacturing and information technology operations and processes is a useful starting point for determining how to integrate these activities. True or False
Q:
The extent to which compensation plans for the acquiring and acquired firms are integrated depends on whether the two companies are going to be managed separately or fully integrated. True or False
Q:
The potential conflict of interest when a single accounting firm provides both auditing and consulting services is that the firm can
A) charge higher fees to its audit clients and lower fees for its consulting services so it can expand its consulting business.
B) charge higher fees to its consulting clients and lower fees for its audit services so it can expand its auditing business.
C) provide unjustifiably favorable audit reviews for firms that are large clients for its consulting services.
D) pressure its clients into paying high fees for both auditing and consulting services.
Q:
Conflicts of interest in the Arthur Andersen accounting firm intensified when ________ became the firm's largest source of profits and large clients pressured ________ office managers to give favorable audits.
A) consulting; regional
B) consulting; national
C) auditing; regional
D) auditing; national
Q:
Highly decentralized organizational structures generally expedite the integration effort more so than highly centralized structures. True or False
Q:
Auditors attempt to reduce information asymmetry between a firm's managers and its
A) customers.
B) owners.
C) employees.
D) competitors.
Q:
In building a new organization for the combined firms, it is important to start with a clean sheet of paper and ignore the organizational structures that existed prior to the merger or acquisition.
True or False
Q:
Investment banks serve two client groups,
A) home buyers and mortgage lenders.
B) people saving for retirement and pension funds.
C) issuers of securities and investors in those securities.
D) mutual funds and investors with relatively small amounts to invest.
Q:
Following an acquisition, long-term contracts with suppliers can generally be broken without redress. True or False
Q:
Investment banks are guilty of conflict of interest when they
A) pressure their analysts to produce research favorable to their client firms.
B) permit executives of client firms to alter analysts' research on their firms.
C) prohibit analysts from making negative or controversial comments about client firms.
D) all of the above.
Q:
A newly merged company will often experience at least a 5-10% loss of current customers during the integration effort. True or False
Q:
Spinning is the practice of
A) investment banks allowing executives of potential client companies to buy underpriced initial public offerings of other companies' securities.
B) investment bank analysts providing misleading information about a company to encourage more investors to purchase the company's securities.
C) accounting firms encouraging its audit clients to also purchase its management advisory services.
D) credit rating agencies providing higher ratings on a company's securities in order to develop a long-term relationship with the company.
Q:
Key stakeholders in the integration effort generally include employees, customers, suppliers, communities, and regulators. True or False
Q:
It is generally more important to respond to current issues as they arise in your communication plans even if it results in the appearance of a somewhat inconsistent theme throughout communications made to stakeholders. True or False
Q:
If potential revenues from underwriting greatly exceed brokerage commissions, there is ________ incentive for investment bank analysts to report ________ information about firms issuing securities.
A) stronger; unbiased
B) stronger; favorable
C) weaker; unbiased
D) weaker; favorable
Q:
An acquiring firm that focuses heavily on integrating a target firm, which represents a sizeable portion of its total operations, frequently sees deterioration in its own current operating performance. True or False
Q:
A conflict of interest between providing impartial research about companies issuing securities and selling those same securities arises in
A) investment banking.
B) commercial banking.
C) accounting firms.
D) mutual funds.
Q:
The management integration teams primary responsibilities should be to focus on achieving long-term profit goals, monitoring actual performance to the goals of the integration plan, and on cost management. True or False
Q:
A conflict of interest occurs when
A) a financial firm sells a service to its customers for a price that exceeds the cost of producing the service.
B) lenders prefer higher interest rates and borrowers prefer lower interest rates.
C) riskier borrowers are the ones who are more likely to apply for loans.
D) people expected to provide reliable information to the public have incentives not to do so.
Q:
An advantage of providing multiple financial services within one financial institution is that it
A) lowers information costs.
B) develops broader long-term relationships with customers.
C) both A and B of the above.
D) none of the above.
Q:
The management integration teams primary responsibilities should be monitoring the daily operations of the work-teams assigned to complete specific tasks during the integration.
True or False
Q:
In hostile takeovers, the employees that are on the post-merger integration team should come from the acquiring firm because of concerns that the target firms employees cannot be trusted.
True or False
Q:
Conflicts of interest pose a problem because they
A) lower the quality of information.
B) increase problems of asymmetric information.
C) make the financial system less efficient.
D) do all of the above.
Q:
Which combination of activities within a single financial institution is least likely to lead to conflicts of interest?
A) auditing and management advisory services
B) commercial banking and investment banking
C) assessment of credit quality and consulting
D) consumer lending and business lending
Q:
Employee health care or disability claims tend to escalate just before a transaction closes, thereby adding to the total cost of the transaction. Who will pay such claims should be determined in the agreement of purchase and sale. True or False
Q:
So-called contract related transition issues often involve how the new employees will be paid and what benefits they should receive. True or False
Q:
A financial institution can achieve cost savings in its credit card operations if it increases the number of cardholders. This is an example of economies of
A) scope.
B) scale.
C) complexity.
D) information.
Q:
A financial institution can achieve cost savings by engaging in multiple activities. These are called economies of
A) scope.
B) scale.
C) complexity.
D) information.
Q:
Co-locating employees from the acquiring and target firms is rarely a good idea early in the integration period because of the inevitable mistrust that will arise. True or False
Q:
Economies of scope refer to cost savings that arise when the
A) size of financial transactions increase.
B) size of financial transactions decrease.
C) number of different activities undertaken increases.
D) number of different activities undertaken decreases.
Q:
Developing staffing plans involves identifying staffing requirements and developing a compensation strategy, among other things. True or False
Q:
Net worth
A) is the difference between current assets and current liabilities.
B) is the difference between assets and liabilities.
C) is total assets divided by total liabilities.
D) is total assets plus total liabilities.
Q:
Communication plans should be developed for all stakeholder groups except for suppliers, because they generally have a lower priority in the integration process. True or False
Q:
Divulging the true intentions of the acquiring firm to the target firms employees should be deferred until it can be determined that such employees can be trusted. True or False
Q:
A bank
A) has the ability to profit from the information it produces.
B) avoids the free-rider problem by primarily making private loans rather than by purchasing securities that are traded in the open market.
C) becomes an expert in determining good firms from bad firms.
D) all of the above.
Q:
Revenue growth is often sacrificed in an effort to engage in aggressive cost cutting during the integration period. True or False
Q:
Bad firms
A) do not have an incentive to make themselves look good.
B) will slant the information they are required to transmit to the public.
C) both A and B of the above.
D) neither A nor B of the above.
Q:
The free-rider problem
A) occurs when people who do not pay for information take advantage of the information other people have to pay for.
B) suggests that the private sale of information will only be a partial solution to the lemons problem.
C) prevents the private market from producing enough information to eliminate all the asymmetric information that leads to adverse selection.
D) all of the above.
Q:
Focus on customers is generally considered a factor critical to the ultimate success or failure of the merger or acquisition. True or False
Q:
Adverse selection
A) is a problem created by asymmetrical information after the transaction.
B) can be solved by eliminating asymmetrical information.
C) occurs when people who do not pay for information take advantage of the information other people have to pay for.
D) all of the above.
Q:
Differences in the way the management of the acquiring and target firms make decisions, the pace of decision-making, and perceived values are common examples of cultural differences between the two firms. True or False
Q:
Employees of both the target and acquiring firms are likely to resist change following a takeover. True or False
Q:
Liquidity services are services that
A) make it easier for customers to conduct transactions.
B) conducts transactions for the customer.
C) increase transaction costs.
D) all of the above.
Q:
Employees or so-called human capital are often the most valuable asset of the target firm. True or False
Q:
Economies of scale
A) in the financial markets does not explain why financial intermediaries developed and have become such an important part of our financial structure.
B) can be used to an advantage by reducing transaction cost.
C) both A and B of the above.
D) neither A nor B of the above.
Q:
High employee defection during the integration period is an excellent way to realize cost savings?
True or False
Q:
Governments in developing countries sometimes adopt policies that retard the efficient operation of their financial systems. These actions include policies that
A) prevent lenders from foreclosing on borrowers with political clout.
B) nationalize banks and direct credit to politically favored borrowers.
C) make it costly to collect payments and collateral from defaulting debtors.
D) do all of the above.
E) do only A and B of the above.
Q:
High employee turnover is rarely a problem during the integration of the target firm into the acquirer. True or False
Q:
Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that
A) borrowers may find loopholes that make the covenants ineffective.
B) they are costly to monitor and enforce.
C) too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate others' monitoring and enforcement efforts.
D) all of the above.
E) only A and B of the above.
Q:
Rapid integration helps to realize the planned synergies and may contribute to a higher present value for the merger or acquisition. True or False
Q:
Which of the following are accurate statements concerning the role that restrictive covenants play in reducing moral hazard in financial markets?
A) Covenants reduce moral hazard by restricting borrowers' undesirable behavior.
B) Covenants require that borrowers keep collateral in good condition.
C) Covenants require periodic accounting statements and income reports.
D) All of the above.
E) Only A and B of the above.
Q:
Integration is among the most important factors contributing to the success or failure of mergers and acquisitions. True or False
Q:
A debt contract that specifies that the company can only use the funds to finance certain activities
A) is a private loan.
B) contains a restrictive covenant.
C) increases the problem of adverse selection.
D) all of the above.
E) only A and B of the above.
Q:
The integration process if done effectively can help to mitigate the potential loss of employees. True or False
Q:
Buyers generally want to complete due diligence on the seller as quickly as possible. True or False
Q:
A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of
A) a restrictive covenant.
B) a collusive agreement between mortgage lenders and insurance companies.
C) both A and B of the above.
D) neither A nor B of the above.
Q:
A debt contract is more likely to be incentive compatible if
A) the company must follow standard accounting principles.
B) the funds are provided by a venture capital firm.
C) owners of the firm have more of their own money in the business.
D) all of the above.
E) only B and C.
Q:
Loan covenants are promises made by the borrower that certain acts will be performed and others will be avoided. True or False
Q:
Earnouts are generally very poor ways to create trust and often represent major impediments to the integration process. True or False
Q:
A debt contract is said to be incentive compatible if
A) the borrower's net worth reduces the probability of moral hazard.
B) restrictive covenants limit the type of activities that can be undertaken by the borrower.
C) both A and B of the above occur.
D) neither A nor B of the above occur.
Q:
Equity contracts account for a small fraction of external funds raised by American businesses because
A) costly state verification makes the equity contract less desirable than the debt contract.
B) there is greater scope for moral hazard problems under equity contracts, as compared to debt contracts.
C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt.
D) all of the above.
E) both A and B of the above.
Q:
The purchase price may be fixed at the time of closing, subject to future adjustment, or it may be contingent on future performance of the target business. True or False
Q:
The closing often involves getting all the necessary third-party consents and regulatory and shareholder approvals. True or False
Q:
Debt contracts
A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals.
B) have an advantage over equity contracts in that they have a lower cost of state verification.
C) are used much more frequently to raise capital than equity contracts.
D) all of the above.
E) only A and B of the above.