Question #1 of 13 Question ID: 1481910

The first step in evaluation of an announced corporate transaction is:

A) preliminary valuation.
B) the gathering of data.
C) initial evaluation.

Explanation

The first step in evaluation of an announced corporate transaction is initial evaluation.

Within this step, analysts seek to answer four questions: what, why, when, and is it
material.

(Module 18.1, LOS 18.b)

Question #2 of 13 Question ID: 1481907

Kavi Biswas, CFA, makes the following statements:

Statement 1: Empirical studies suggest that corporate transactions taken during

stronger economic times tend to create more value.

Statement 2: Corporate transactions tend to be cyclical, increasing in prevalence

during economic expansions and decreasing during contractions.

Which statement is correct?

A) Statement 1 only.
B) Statement 2 only.
C) Neither statement is correct.

Explanation

Statement 1 is incorrect. Empirical studies suggest that corporate transactions taken

during weaker economic times tend to create more value.

(Module 18.1, LOS 18.a)

Simon Gracier follows Company P. On December 31, 20x2, Company P made an offer to
acquire 100% of Company S's outstanding shares for a purchase price of €175 million—€122
million is financed by senior unsecured debentures with a yield of 6.5%, and the remaining is
in stock based on the €52 per share current market price of Company P. Pre-acquisition
financial statements are presented in Financial Statements (€ thousands) for the Year
Ended December 31, 20X2 .

Financial Statements (€ thousands) for the Year Ended December 31, 20X2

Balance Sheet

Company P Company S

Working capital €25,098 €3,692

Fixed assets €1,807,088 €265,800

Total assets €1,832,186 €269,492

Debt €24,460 €9,262

Equity €1,807,726 €260,230

€1,832,186 €269,492

Income Statement

Company P Company S

Sales €225,886 €33,225

COGS €166,026 €19,603

Gross profit €59,860 €13,622

SG&A €24,845 €3,987

Depreciation €8,442 €2,269

Interest expense €1,223 €741

Income from continuing operations €25,350 €6,625

Gracier is concerned about the impact of the acquisition on Company P's WACC.

Peer Comparable Company Analysis for Company S (€ '000s) shows data about Company
S's peers.

Peer Comparable Company Analysis for Company S (€ '000s)

ompany Enterprise Value Revenues EV/Rev

 Alpha 1,312 298 4.40

Beta 569 115 4.95

Gamma 1,994 391 5.10

Zeta 812 167 4.86

Question #3 - 6 of 13 Question ID: 1501607

Using data in Financial Statements (€ thousands) for the Year Ended December 31,
20X2 , Company P's consolidated-debt-to-EBITDA ratio after acquisition will most likely:

A) increase.
B) decrease.
C) remain the same.

Explanation

Company P's EBITDA = gross profit – SG&A = 35,015

Company S's EBITDA = 9,635

Consolidated EBITDA = 35,015 + 9,635 = 44,650

Company P's debt (after new issue) = 24,460 + 122,000 = 146,460

Consolidated debt = 146,640 + 9,262 = 155,722

Debt/EBITDA (Company P) = 24,460 / 35,015 = 0.70

Debt/EBITDA (consolidated) = 155,722 / 44,650 = 3.49.

(Module 18.2, LOS 18.d)

Question #4 - 6 of 13 Question ID: 1501608

Which of the following statements about Company P's WACC is most accurate?

Weights of debt and equity are calculated using most recent book values, and
A)
include any financing raised or additional equity issued.
B) The cost of debt will depend on the historical cost of debt of Company P only.
Several factors influence the cost of debt: profitability, volatility of EBITDA,
C)
leverage, collateral, and so on.
Explanation

Several factors influence cost of debt: profitability (EBITDA to sales, or EBIT to sales),
volatility of revenues or EBITDA, leverage (debt to EBITDA), collateral (asset specificity,
liquidity, existence of an active market), and prevailing interest rates. Weights of debt and
equity are calculated using market values, and include any financing raised or additional
equity issued.

(Module 18.2, LOS 18.d)

Question #5 - 6 of 13 Question ID: 1501609

Which of the following is the best estimate of the value of equity of Company S, using the
comparable company analysis?

A) €160,415,000.
B) €151,153,000.
C) €171,876,000.

Explanation

Average EV/sales = (4.40 + 4.95 + 5.10 + 4.86) / 4 = 4.83

Company S's EV = 4.83 × 33,225,000 = 160,476,750

Company S's equity = EV – debt = 160,476,750 – 9,262,000 = 151,153,000.

(Module 18.3, LOS 18.e)

Question #6 - 6 of 13 Question ID: 1501610

Assuming that Company P and Company S instead agree to enter into a joint venture, which
of the following statements is most accurate?

Company P and Company S would cease to exist, and a new company would
A)
instead be formed.
Company P would report the investment using the acquisition method, while
B)
Company S would report under the equity method.
C) Both companies would report the investment using the equity method.
Explanation

The accounting for a joint venture is similar to that of equity investments. The two
partners in the joint venture will report their stake in the venture using the equity method,
reporting their share of income from the venture in their respective income statements.
Any capital raised by the two partners will be accounted for in their own financial
statements.

(Module 18.3, LOS 18.e)

Question #7 of 13 Question ID: 1481919

An analyst is writing a report on the impact of an announced divestment by Ziglair, Inc. The
transaction calls for sale of Ziglair's foreign subsidiary. She makes the following two
statements in the report:

Statement 1: One approach is to use a multiple such as EV-to-EBITDA ratio or EV-

to-sales ratio to value the various segments of a business and then
compare the sum of the values to the conglomerate EV to
determine the reasonableness of the transaction.

Statement 2: Unlike sales, spinoffs do not generate sale proceeds; hence, they
are easier to model.

Which statement is correct?

A) Both statements are correct.

B) Statement 1 only.
C) Statement 2 only.

Explanation

Both statements are correct.

(Module 18.3, LOS 18.f)

Question #8 of 13 Question ID: 1481906

Which corporate transaction is most likely in response to compliance with regulatory

requirements?
A) Restructuring.
B) Investment.
C) Divestment.

Explanation

Motivations for divestment actions include liquidity needs, fetching an attractive price, and
compliance with regulatory requirements.

(Module 18.1, LOS 18.a)

Question #9 of 13 Question ID: 1481908

Peter Small, CFA, makes the following statements:

Statement 1: In an opportunistic restructuring, a business changes its balance

sheet composition, cuts costs, or alters its business model to
improve the return on capital.

Statement 2: Moderate- to large-sized business units sought by several potential

acquirers might be expected to be spun off as opposed to sold.

Which statement is correct?

A) Neither statement is correct.

B) Statement 2 only.
C) Statement 1 only.

Explanation

Statement 2 is incorrect. Moderate- to large-sized business units sought by several

potential acquirers might be expected to fetch a high sale price; therefore, they are more
likely to be sold than spun off.

(Module 18.1, LOS 18.a)

Question #10 of 13 Question ID: 1576064

Petra Zimuth, CFA, is analyzing an announced acquisition. Under the terms, Apollo, Inc., is to
be taken over by Bastille, Inc., at a price of $65 per share. Last week, Apollo stock was
trading at a price of $48 and increased to $55 in anticipation of the announcement. The offer
premium is closest to:

A) 35%.
B) 18%.
C) 44%.

Explanation

Deal price (DP) = $65. Unaffected price (UP) = $48. Premium = (DP – UP) / UP = 17 / 48 =
35.4%.

(Module 18.2, LOS 18.c)

Question #11 of 13 Question ID: 1481911

Which of the following is least likely an advantage of comparable company analysis?

The approach does not assume that the market’s valuation of the comparable
A)
companies is fair.
Estimates of value are derived directly from the market rather than
B)
assumptions and estimates about the future.
C) Data for comparable companies is easy to access.

Explanation

One disadvantage of comparable company analysis is that it implicitly assumes that the
market's valuation of the comparable companies is fair.

(Module 18.2, LOS 18.c)

Question #12 of 13 Question ID: 1481909

Which of the following statements about materiality is least accurate?

Cost restructuring may be evaluated as estimated savings as a percentage of

A)
sales.
B) Materiality is evaluated based on transaction size and fit.
 The divestment of an unrelated business for a company that had previously
C)
been diversifying into such businesses is immaterial.

Explanation

The divestment of an unrelated business for a company that had previously been
diversifying into such businesses is material because it may be an indication of a change in
strategy, or that the strategy is not working.

(Module 18.1, LOS 18.b)

Question #13 of 13 Question ID: 1481912

Which of the following is least likely a disadvantage of comparable transaction analysis

(CTA)?

A) Historical transactions may have occurred under different conditions.

Estimates of value are derived directly from recent prices for actual deals
B)
completed in the marketplace.
The CTA approach implicitly assumes that the M&A market valued past
C)
transactions appropriately.

Explanation

Comparable transaction analysis uses market prices of actual transactions; this is an

advantage, not a disadvantage (compared to DCF analysis, which is based on several
estimated inputs).

(Module 18.2, LOS 18.c)