Question 1

Pyramiding is an arrangement among holding companies wherein one company controls others, thereby causing an even greater magnification of earnings and losses.

Accepted Answer

A) True 
 B)False

Question 2

A(n) ________ is an arrangement whereby an insolvent firm's creditors receive full payment, although not immediately.

Accepted Answer

A)  composition 
B)  creditor control agreement 
C)  extension 
D)  liquidation

Question 3

The creation of a high-debt, private corporation with improved cash flow and value is the goal in ________.

Accepted Answer

A)  a spin-off 
B)  a divestiture 
C)  a conglomerate merger 
D)  a leveraged buyout

Question 4

Subsidiary companies are corporations having no voting control on holding companies.

Accepted Answer

A) True 
 B)False

Question 5

The combination of a dress manufacturer and a credit bureau is an example of ________.

Accepted Answer

A)  congeneric merger 
B)  conglomerate merger 
C)  horizontal merger 
D)  vertical merger

Question 6

The actual ratio of exchange in a stock-exchange acquisition is the ratio of the amount paid per share of the target company to the per-share market price of the acquiring firm.

Accepted Answer

A) True 
 B)False

Question 7

One of the key attributes that makes a firm a good candidate for an LBO is that it has stable and predictable cash flows that are adequate to meet interest and principal payments on the debt.

Accepted Answer

A) True 
 B)False

Question 8

A firm's current structure is as follows:  *Secured by fixed assets.
Suggest a recapitalized capital structure that would reduce the debt/equity ratio (several solutions are feasible). Calculate the d/e ratio for the pre-reorganization capital structure and the post-reorganization capital structure.

Accepted Answer

The answer of A firm's current structure is as follows:...

Question 9

An involuntary petition for reorganization may be filed against a firm if ________.

Accepted Answer

A)  the firm has past-due debts of $5,000 or more 
B)  the firm's solvency ratio is greater than 20% 
C)  the firm's current ratio is 2:1 
D)  the book value of the firm's assets is less than the stated liabilities

Question 10

An attempt to gain control of a target firm by buying sufficient shares of it in the marketplace is known as a ________ and is typically accomplished through a ________.

Accepted Answer

A)  friendly takeover; leveraged buyout 
B)  leveraged buyout; consolidation 
C)  friendly takeover; consolidation 
D)  hostile takeover; tender offer

Question 11

An attractive candidate for acquisition through a leveraged buyout should ________.

Accepted Answer

A)  possess a relatively high leverage 
B)  have a solid profit history 
C)  have a high level of provision for doubtful accounts 
D)  have a low level of investment in fixed assets

Question 12

Which of the following is true of a conglomerate merger?

Accepted Answer

A)  It occurs when a firm acquires a supplier or a customer. 
B)  It involves the combination of firms in unrelated businesses. 
C)  It is achieved by acquiring a firm that is in the same general industry but neither in the same line of business nor a supplier or customer. 
D)  It results in the expansion of a firm's operations in a given product line and at the same time eliminates a competitor.

Question 13

A creditor in possession in a Chapter 12 bankruptcy proceeding is responsible for valuing a firm both in terms of its liquidation value and as a going concern.

Accepted Answer

A) True 
 B)False

Question 14

One of the key attributes that makes a firm a good candidate for an LBO is that it has a solid position in the industry with reasonable expectations for future growth.

Accepted Answer

A) True 
 B)False

Question 15

In defending against hostile takeover attempts, a company will include provisions in the employment contracts of key executives that provide them with sizable compensation if the firm is taken over. This is called the ________ strategy.

Accepted Answer

A)  shark repellent 
B)  silver parachute 
C)  greenmail 
D)  golden parachute

Question 16

The result of spin-off to the parent company is ________.

Accepted Answer

A)  additional stock to the parent through stock dividend 
B)  additional cash from the sale 
C)  additional debt by the parent through issue of bonds 
D)  no additional cash to the subsidiary

Question 17

Primary motives for merging include growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and defense against takeovers.

Accepted Answer

A) True 
 B)False

Question 18

A merger transaction is not supported by the target firm's management, forcing the acquiring company to try to gain control of the firm by buying shares in the marketplace. This is an example of ________.

Accepted Answer

A)  financial merger 
B)  hostile takeover 
C)  congeneric formation 
D)  strategic merger

Question 19

In an LBO, 90 percent or more of the purchase price is financed with debt.

Accepted Answer

A) True 
 B)False

Question 20

A form of divestiture in which an operating unit becomes an independent company by issuing shares in it on a pro rata basis to the parent company's shareholders is called ________.

Accepted Answer

A)  leveraged buyout 
B)  employee stock option 
C)  spin-off 
D)  strategic takeover

Exam 18: Mergers, Lbos, Divestitures, and Business Failure

Pyramiding is an arrangement among holding companies wherein one company controls others, thereby causing an even greater magnification of earnings and losses.

A(n) ________ is an arrangement whereby an insolvent firm's creditors receive full payment, although not immediately.

The creation of a high-debt, private corporation with improved cash flow and value is the goal in ________.

Subsidiary companies are corporations having no voting control on holding companies.

The combination of a dress manufacturer and a credit bureau is an example of ________.

The actual ratio of exchange in a stock-exchange acquisition is the ratio of the amount paid per share of the target company to the per-share market price of the acquiring firm.

One of the key attributes that makes a firm a good candidate for an LBO is that it has stable and predictable cash flows that are adequate to meet interest and principal payments on the debt.

A firm's current structure is as follows: *Secured by fixed assets. Suggest a recapitalized capital structure that would reduce the debt/equity ratio (several solutions are feasible). Calculate the d/e ratio for the pre-reorganization capital structure and the post-reorganization capital structure.

An involuntary petition for reorganization may be filed against a firm if ________.

An attempt to gain control of a target firm by buying sufficient shares of it in the marketplace is known as a and is typically accomplished through a .

An attractive candidate for acquisition through a leveraged buyout should ________.

Which of the following is true of a conglomerate merger?

A creditor in possession in a Chapter 12 bankruptcy proceeding is responsible for valuing a firm both in terms of its liquidation value and as a going concern.

One of the key attributes that makes a firm a good candidate for an LBO is that it has a solid position in the industry with reasonable expectations for future growth.

In defending against hostile takeover attempts, a company will include provisions in the employment contracts of key executives that provide them with sizable compensation if the firm is taken over. This is called the ________ strategy.

The result of spin-off to the parent company is ________.

Primary motives for merging include growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and defense against takeovers.

A merger transaction is not supported by the target firm's management, forcing the acquiring company to try to gain control of the firm by buying shares in the marketplace. This is an example of ________.

In an LBO, 90 percent or more of the purchase price is financed with debt.

A form of divestiture in which an operating unit becomes an independent company by issuing shares in it on a pro rata basis to the parent company's shareholders is called ________.