Deck 32: Corporate Restructuring

Question 1

The largest gainers from LBO transactions have typically been

A)junk bond holders.
B)raiders.
C)selling stockholders.
D)investment banking firms.

Answer 1

selling stockholders.

Question 2

The following are examples of LBOs EXCEPT:

A)BC Partners and PetSmart.
B)Blackstone and Team Health Holdings.
C)Fiat and Ferrari.
D)All of these options are LBOs.

Answer 2

Fiat and Ferrari.

Question 3

The following are advantages of spin-offs:
I.They widen investor choice by allowing them to invest in just one part of the business.
II.They can improve incentives for managers.
III.By spinning off businesses with "poor fit," parent firms can concentrate on their core businesses.
IV.They relieve investors of the worry that funds will be siphoned off from one business to support unprofitable capital investments in another.

A)I and II only
B)I, II, and III only
C)I, II, III, and IV
D)III and IV only

Answer 3

I, II, III, and IV

Question 4

In carve-out transactions:

A)shares of the new company are given to the shareholders of the parent company.
B)shares of the new company are sold in a public offering.
C)shares of the new company are bought by borrowing or issuing junk bonds.
D)None of these options are correct.

Question 5

Leveraged restructurings are designed to force mature, successful, but overweight firms to

A)reduce cash.
B)reduce operating costs.
C)use assets more efficiently.
D)all of these options are correct.

Question 6

The gains from LBOs typically derive from

A)tax savings because of high debt servicing.
B)loss in the value to bondholders.
C)improved performance because of incentives to managers and employees.
D)All of these options are correct.

Question 7

Junk bonds are bonds that

A)have ratings above investment grade.
B)have ratings below investment grade.
C)are used only for leveraged buyouts.
D)are used only for management buyouts.

Question 8

In the case of the RJR Nabisco LBO, the gain in market value for RJR stockholders was several times more than the

A)estimated value of additional interest tax shields generated by the LBO.
B)estimated losses to RJR bondholders as a result of drastic decline in bond ratings.
C)estimated value of additional interest tax shields generated by the LBO and the estimated losses to RJR bondholders as a result of drastic decline in bond ratings.
D)The gain in market value was never determined.

Question 9

Leveraged buyouts (LBOs)almost always involve which of the following?
I.a large part of the purchase price is financed by debt;
II.most of the issued debt is below investment grade (i.e., junk);
III.the firm goes private and its shares are no longer traded on the open market

A)I only
B)II only
C)I and II only
D)I, II, and III

Question 10

Spin-offs are not taxed if the shareholders of the parent company are given at least

A)90 percent of the shares in the new company.
B)80 percent of the shares in the new company.
C)70 percent of the shares in the new company.
D)60 percent of the shares in the new company.

Question 11

The main characteristic(s)of LBOs is (are)

A)high debt.
B)private ownership.
C)management incentives.
D)All of these options are correct.

Question 12

In 1991 RJR:

A)reverted to being a public company.
B)went bankrupt because of the high debt burden.
C)carved-out the stake held by KKR.
D)all of these options are correct.

Question 13

A spin-off is a(n)
I.new company;
II.independent company;
III.company formed by detaching part of a parent firm's assets and operations;

A)I only
B)II only
C)I and II only
D)I, II, and III

Question 14

In a spin-off:

A)shares of the new company are given to shareholders of the parent company.
B)shares of the new company are sold as a public offering.
C)shares of the new company are bought by borrowing or issuing junk bonds.
D)a private equity firm sells the assets of a portion of an acquired company.

Question 15

The following are examples of spin-offs except:

A)Motorola and Motorola Mobility.
B)eBay and PayPal.
C)Altria and Kraft Foods.
D)Apollo Management and ADT.

Question 16

The largest and best documented LBO of the 1980s was

A)KKR acquiring RJR Nabisco.
B)Thompson Co. acquiring Southland (7-11).
C)KKR acquiring Beatrice.
D)None of these options are correct.

Question 17

If a firm's management leads a leveraged buyout transaction, then the transaction is called a(n)

A)IPO.
B)MBO.
C)MACRS.
D)SEO.

Question 18

The main characteristic(s)of leveraged restructurings is (are)

A)high debt.
B)high debt and management incentives.
C)high debt and private ownership.
D)high debt, management incentives, and private ownership.

Question 19

The following are examples of LBOs EXCEPT:

A)KKR and RJR Nabisco.
B)Motorola and Motorola Mobility.
C)JAB and Keurig Green Mountain.
D)Carlyle Group and Veritas.

Question 20

Which of the following are methods by which a company's structure can be modified?

A)LBOs and privatizations
B)Privatizations
C)LBOs and spin-offs and carve-outs
D)LBOs, privatizations, spin-offs and carve-outs, and bankruptcies

Question 21

Which of the following statements regarding spin-offs and carve-outs is not true?

A)Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company.
B)Spin-offs are not taxed if the shareholders of the parent company are given at least 80 percent of the shares in the new company.
C)Gains or losses from carve-outs are taxed at the corporate tax rate.
D)In carve-outs, the parent company retains majority control.

Question 22

Private-equity partnerships can cash out of companies in the partnership's portfolio in the following ways:
I.an IPO of portfolio companies;
II.a trade sale to another firm;
III.a carve-out of portfolio companies;

A)I only.
B)II only.
C)I and II only.
D)III only.

Question 23

A conglomerate discount refers to which circumstance?

A)The market value of the whole conglomerate is greater than the sum of the value of the parts.
B)The market value of the whole conglomerate is less than the sum of the value of the parts.
C)The book value of the whole conglomerate is greater than the sum of the value of the parts.
D)The book value of the whole conglomerate is less than the sum of the value of the parts.

Question 24

The simplest way to divest an asset is to

A)spin it off.
B)carve it out.
C)sell it.
D)All of these methods are equally complex.

Question 25

A conglomerate is a firm that

A)invests in one industry only.
B)diversifies across several unrelated businesses.
C)integrates vertically.
D)is usually formed by combining private-equity partnerships.

Question 26

The following are examples of privatization EXCEPT:

A)Postbank.
B)AT&T.
C)West Japan Railway Company.
D)Air India.

Question 27

The following statements are true of private-equity partnership agreements:
I.The partnership agreement has a limited term, typically 10 years or less.
II.The general partners get a management fee plus carried interest in 20% of any profits earned by the partnership.
III.The limited partners get paid off first, but they get only 80% of any further returns.
IV.The general partners can reinvest the limited partners' money.

A)I and II only
B)I, II, and III only
C)I, II, III, and IV
D)II and III only

Question 28

The following are important motives for privatization EXCEPT:

A)revenue for the government.
B)increased efficiency.
C)share ownership.
D)economies of scale.

Question 29

Private-equity investment funds are organized as

A)C-corporations.
B)sole proprietorships.
C)partnerships.
D)nonprofit corporations.

Question 30

The following are advantages of private-equity partnerships:
I.Carried interest gives the general partners potential for high profits.
II.Carried interest, because it is a call option, gives the general partners incentives to take risks.
III.There is no separation of ownership and control as general partners can intervene in the fund's portfolio companies any time performance lags or strategy needs change.
IV.There is no free cash flow problem as cash from the first round must be distributed to investors and not reinvested.

A)I, II, and IV only
B)I and II only
C)I and IV only
D)I, II, III, and IV

Question 31

Which of the following statements is (are)true of limited partnerships?

A)Limited partners enjoy limited liability but do not participate in management.
B)Generally, limited partners put up most of the money.
C)Generally, limited partners are institutional investors.
D)All of these statements are true of limited partnerships.

Question 32

The Chrysler bankruptcy and reorganization into New Chrysler resulted in which of the following events?

A)Termination of dealer and warranty obligations
B)LBO
C)Chapter 7 liquidation
D)Reverse priority

Question 33

Asset sales:
I.are perceived as good news for investors of the selling firm;
II.generally result in the assets being employed more productively after the sale;
III.transfer business units to companies that can manage them more efficiently;

A)I only
B)I and II only
C)II and III only
D)I, II, and III

Question 34

Asset sales are common in

A)manufacturing.
B)banking.
C)services.
D)None of these options are correct.

Question 35

The following are private equity funds:

A)Blackstone.
B)Cerberus Capital Management.
C)KKR.
D)All of these options are private equity funds.

Question 36

A privatization is a

A)sale of a government-owned company to private investors.
B)sale of private companies to the government.
C)sale of a publicly traded company to private investors.
D)sale, by a private equity fund's limited partners, of their partnership stakes.

Question 37

The following are examples of carve-outs except:

A)RWE and Innogy.
B)3Com and Palm.
C)Altria and Philip Morris International.
D)All of these options are examples of carve-outs.

Question 38

Most privatizations resemble

A)spin-offs.
B)carve-outs.
C)LBOs.
D)both spin-offs and carve-outs.

Question 39

Two in-court options for dealing with firms in financial distress are

A)merger and acquisition.
B)liquidation and reorganization.
C)leasing and LBO.
D)issuance of stocks or bonds.

Question 40

The following are characteristics of a public conglomerate:
I.It is designed to operate various divisions for the long run.
II.It has an internal capital market wherein each division competes for funds.
III.A hierarchy of corporate staff evaluates divisions' plans and performance.
IV.Divisional managers' compensation depends mostly on earnings of their respective divisions.

A)I and II only
B)I, II, and III
C)II, III, and IV only
D)I, II, III, and IV

Question 41

There are two common types of bankruptcy procedures in the United States, which are set out in Chapter 7 and Chapter 11 of the 1978 Bankruptcy Reform Act.

Question 42

A spin-off is a new, independent company created by selling some of a parent company's assets to new investors.

Question 43

LBOs are typically financed with junk bonds.

Question 44

Leveraged buyouts are the same as acquisitions.

Question 45

Private-equity partnerships are designed to run portfolio companies indefinitely.

Question 46

Which class of creditor suffered the most during the Chrysler reorganization?

A)Dealer and warranty obligations
B)Trade creditors
C)Pension liabilities
D)Secured creditors

Question 47

Indirect costs of bankruptcy are borne principally by

A)bondholders.
B)stockholders.
C)managers.
D)the government.

Question 48

A major beneficiary of privatization is the government that receives the revenues from the sale.

Question 49

What is a leveraged buyout?

Question 50

The Securities and Exchange Commission (SEC)usually plays an important role in the reorganization of large, public companies by ensuring that all relevant and material information is disclosed to creditors before they vote on the proposed reorganization plan.

Question 51

LBOs often occur because managers are not maximizing shareholder value.

Question 52

Spin-offs are not taxed as long as shareholders of the parent company are given at least 80 percent of the shares in the new company.

Question 53

Private-equity ownership relies less on internal capital markets than conglomerates do.

Question 54

A "privatization" is the same type of transaction as taking a company private in an LBO.

Question 55

Suppose that a bankrupt firm, while in the process of developing a reorganization plan, is allowed to buy goods on credit and borrow money to finance needed working capital. Such an arrangement is called

A)debtor-in-possession financing.
B)prepack bankruptcy.
C)workout by creditors.
D)appointment of receiver.

Question 56

A privatization is a sale of a government-owned company to private investors.

Question 57

Carve-outs are identical to spin-offs.

Question 58

Which of the following is not a motive for privatization?

A)Increased efficiency
B)Share ownership
C)Expansion of government
D)Revenue for the government

Question 59

In a private-equity partnership arrangement, the general partners put up most of the money but receive a management fee and get a carried interest in the fund's profits.

Question 60

Private-equity partnerships avoid the free cash flow problem that often troubles conglomerates.

Question 61

Briefly explain the difference between leveraged buyouts and leveraged restructurings.

Question 62

Briefly describe the role of the Securities and Exchange Commission (SEC)in bankruptcy reorganizations.

Question 63

Briefly explain why private equity has an advantage, versus publicly owned firms, in creating value.

Question 64

What are some of the benefits of privatization?

Question 65

What is a spin-off?

Question 66

Briefly explain the difference between a spin-off and a carve-out.

Question 67

Briefly describe the main features of the Bankruptcy Reform Act of 1978.

Question 68

Briefly explain what is meant by privatization.

Question 69

Describe the main differences between private-equity partnerships and public conglomerates.

Question 70

Explain how private-equity partnerships are organized.