Chapter 1: Revision

1. A leveraged buyout involves the purchase of a company financed primarily by debt. True or
False

2. A merger is a combination of two firms in which only one firm’s identity survives. True or
False

3. In a consolidation, two or more firms combine to form a new company. True or False

4. A horizontal merger occurs between firms at different stages of the value chain. True or False

5. The primary advantage of a holding company is the potential leverage that can be achieved
by gaining effective control of other companies’ assets at a lower overall cost than would be
required if the firm were to acquire 100% of the target’s outstanding shares. True or False

6. Joint ventures are usually more profitable than mergers or acquisitions. True or False

7. A fairness opinion is a certification provided by a third party that guarantees that the price
paid for a specific company is fair. True or False

8. Arbitrageurs buy the stock and make a profit on the difference between the bid price and the
target’s current stock price if the deal is consummated. True or False

9. Empirical studies show that the share price of a target firm rarely rises in advance of the
announcement of a takeover attempt. True or False

10. Perceived synergy is rarely a motivation for M&A. True or False

11. Empirical studies show that unrelated diversification is an excellent way to increase
shareholder value. True or False

12. Tax considerations such as acquiring net operating loss carry forwards and investment tax
credits are often excellent reasons to justify an acquisition. True of False

13. Market power is a motive for M&A in which the acquirer is seeking to gain market share in
order to get more control over its ability to set prices. True or False

14. M&A’s rarely pay off for target firm shareholders. True or False

15. Studies suggest that most M&As fail to meet expectations. True or False
 Chapter 3 Revision

1. Successful corporate governance systems rely on aligning managerial incentives with those of
shareholders and on making financial statements “transparent” to the investors. True and
False

2. Boards of directors play a pivotal role in ensuring good corporate governance systems by
monitoring the day-to-day activities of management. True or False

3. We can be highly confident that a firm’s financial statements are accurate, if they were
compiled in accordance with generally accepted accounting principles. True or False

4. The threat of hostile takeovers is an important factor in promoting good governance practices.
True or False

5. Institutional activism has proven to be largely ineffective in promoting good government

practices. True or False

6. A friendly takeover is often pursued because it offers the potential of a lower overall purchase
price, but it increases the likelihood that post-closing integration will be difficult. True or
False

7. Float represents the amount of stock of a firm that can be purchased most easily by a potential
bidder. Float tends to be largest for those firms that are performing above investor
expectations. True or False

8. To initiate the proxy process, the bidder may attempt to call a special stockholders’ meeting
or may introduce a proposal to replace the target’s board at a regularly scheduled
shareholders’ meeting. True or False

9. A tender offer involving cash for stock is called an exchange offer. True or False

10. A casual pass is a commonly used takeover defense. True or False

11. Under a classified or staggered board system only a relatively small portion of the total board
of directors is up for re-election in any given year. True or False

12. In some states, shareholders may take action to add to the number of seats on the board, to
remove specific board members, or to elect new members without a special meeting. All that
is required is the written consent of shareholders. This is called consent solicitation. True or
False

13. It is illegal for a potential target firm to change its state of incorporation. True or False

14. Greenmail is relatively uncommon today because of changes in the tax law. True or False

15. ESOPs are rarely used as takeover defenses. True or False

 Chapter 4 Self Study Test

1. An internal analysis of firm’s strengths and weaknesses is most informative if they are
compared to the firm’s primary competitors. True or False

2. Generic business strategies most often fall into one of the following three categories: cost
leadership, differentiation, and focus/niche. True or False

3. While commonly used as business objectives, financial returns and cash flow are really a
result of managing those factors which drive financial returns and cash flow such as
productivity and market share. True or False

4. Well thought-out plans require little updating. True or False

5. The desire for control is often the most important determinant of which implementation
strategy is selected. True or False

6. Market share is a common non-financial objective in business plans. True or False

7. Acquisition plan objectives should be quantifiable and supportive of business plan

8. objectives. True or False

9. Understanding the assumptions underlying a business plan is relatively unimportant. True or

False

10. Market share is usually a relatively unimportant determinant of a firm’s ability to achieve a
cost leadership position in an industry. True or False

11. Corporate diversification always involves a firm moving into a new market or product line
that is unrelated to the firm’s current products or markets. True or False

12. The experience curve postulates that as the cumulative historical volume of a firm’s output
increases, costs per unit of output increase geometrically. True or False

13. Distribution channels refer to how a business chooses to distribute its products. True or False

14. A firm’s market share relative to another firm’s may be a useful measure of its overall
operating efficiency compared to competitors. True or False

15. Market segmentation involves identifying customers with common needs and characteristics.
True or False

16. An acquisition plan is a key element of any firm’s business plan. True or False.
 Chapter 5 Self Study Test

1. Initiating the search process involves the development of as many selection criteria as
possible to identify as many potential targets as possible. True or False

2. It is always necessary to approach potential target firms through intermediaries. True or

False

3. The internet should never be used to find information about target firms because information
obtained in that manner is usually inaccurate. True or False

4. It is generally easier to find information on small privately held firms than large public
companies. True or False

5. Fees paid to brokers and finders are non-negotiable because they are fixed by law. True or
False

6. Market share is often an important criterion used in the screening process. True or False

7. Confidentiality agreements generally bind only the potential buyer. True or False

8. Letters of intent (LOI) always commit the buyer to paying the offer price stated in the LOI.
True or False

9. Purchase price is determined during the negotiation phase of the acquisition process. True or
False True

10. During the deal structuring process, it is crucial to satisfy all of the seller’s needs in order to
complete the transactions. True or False

11. The potential buyer is the only party to the transaction that performs due diligence. True or
False

12. “Reps and warranties” made by both the buyer and seller in the agreement of sale and
purchases make it possible to limit the amount time and resources devoted to performing due
diligence. True or False

13. Banks often provide interim or temporary financing to pay all or a portion of the purchase
price until permanent financing can be arranged. True or False

14. “Road shows” are a relatively unimportant part of process of obtaining financing for the
transaction. True or False

15. Post-closing integration is a relatively unimportant part of the acquisition process. True or
False
 Chapter 6 Self Study Test

1. Rapid integration increases the likelihood of the merger achieving its goals by enabling the
realization of planned synergies sooner and by minimizing employee and customer attrition.
True or False

2. Customer attrition often escalates immediately following an acquisition. True or False

3. The bulk of integration planning should wait until just before closing because of the huge
demands of negotiating. True or False

4. Agreements of purchase and sale rarely indicate how target firm employees will be paid and
how their benefit claims will be processed immediately following closing. True or False

5. “Buyer reps and warranties provide the buyer with recourse to the seller if any of their claims
or promises are untrue. True or False

6. Sellers are often inclined to warrant the accuracy of their sales and profit projections. True or
False

7. Post closing integration organizations are difficult to assemble during a hostile takeover.
True or False

8. The post merger integration organization should consist of a management integration team
and a series of work teams, each of which focuses on implementing a specific portion of the
integration plan. True or False

9. Communication during the early stages of the integration process should be kept to a
minimum due to the potential for litigation if what is communicated is not likely to be
entirely implemented. True or False

10. Empirical studies show that a newly merged company can expect to lose on average at least 5
to 10% of its existing customers because of the merger. True or False

11. Given the benefits of rapid integration, it is usually preferable to impose the acquirer’s
organizational structure on the target firm. True or False

12. It is best to staff positions in the new organization following a merger with employees of the
acquiring firm to ensure their loyalty. True or False

13. Performing additional due diligence after closing is redundant and expensive since the
acquirer had an opportunity to perform due diligence prior to closing. True or False

14. Encouraging an atmosphere of shared goals is a common way of integrating disparate

corporate cultures. True or False

15. Integrating alliances relies more on teamwork than on top-down direction. True or False
 Chapter 7 Study Test

1. The capital asset pricing model relates the return required by shareholders to the risk free rate
of return, the risk premium on stocks, and to the firm’s diversifiable risk. True or False

2. The weights associated with the cost of equity and debt, in calculating the firm’s weighted
average cost of capital, reflect the firm’s target capital structure. True or False

3. A beta reflecting the effects of both the increased volatility of earnings and the tax-shelter
effect of leverage is called an unlevered beta. True or False

4. Enterprise cash flow is the cash flow available for common and preferred stockholders, as
well as lenders. True or False

5. Equity cash flow is the cash flow remaining for paying dividends to common equity
investors, buying back stock, or reinvesting in the firm after satisfying all of the firm’s
obligations. True or False

6. In applying discounted cash flow methods, enterprise cash flow is discounted by the firm’s
cost of equity. True or False

7. An important advantage of discounted cash flow methods is that they are relatively
insensitive to changes in estimates of the sustainable growth rate and discount rate. True or
False

8. The zero growth model is a special case of the constant growth valuation model. True or
False

9. The variable growth model consists of a high growth and a no growth period. True or False

10. It is possible for the sustainable growth rate for a firm’s cash flow to exceed the overall
market growth rate indefinitely. True or False

11. The market value of a firm’s equity can be estimated by subtracting the book value of the
firm’s current debt from the present value of the firm’s enterprise cash flow. True or False

12. Cash in excess of the firm’s operating requirements should be added to the value of the firm’s
equity in calculating the total value of the firm. True or False

13. If the terminal value accounts for a large percentage (75% or more) of the total PV, the
conventional 5-year projection of future cash flows should be extended to at least 10 years.
True or False

14. In calculating the present value of a firm’s equity cash flows, the cash flows are discounted
by the firm’s cost of equity. True or False
15. In calculating the value of a firm, it is unnecessary to consider the value of a firm’s non-
operating assets and liabilities. True or False

Chapter 8 Study Test

1. Relative valuation is often described as market-based, as it reflects the amounts investors are
willing to pay for each dollar of earnings, cash flow, sales, or book value. True or False

2. The comparable companies’ method of valuation is widely used in “fairness opinion” letters.
True or False

3. In practice, it is relatively easy to find companies that are substantially similar to the target in
terms of markets served, product offering, degree of leverage, and size. True or False

4. Relative valuation methods can be manipulated easily, because the methods do not require a
clear statement of assumptions with respect to risk, growth, or the timing or magnitude of
cash flows. True or False

5. Comparable companies’ methods already reflect an acquisition premium. True or False

6. Comparable recent transactions do not require the addition of an acquisition premium. True
or False

7. An important limitation of the comparable industry method is the presumption that industry
multiples are actually comparable and that analysts’ projections are unbiased. True or False

8. PEG ratios are applied to adjust similar firms with different earnings or cash flow growth
rates. True or False

9. Liquidation value generally provides an estimate of the minimum value of the firm. True or
False

10. The comparable recent transactions method of valuation is often considered the most accurate
of the various methods available. True or False

11. Empirical evidence suggests that forecasts of earnings and other value indicators are better
predictors of firm value than value indicators based on historical data. True or False

12. Micro value drivers are those that directly influence specific functions within the firm. True
or False

13. The going concern value of a company may be defined as the firm’s value in excess of the
sum of the value of its parts. True or False

14. Real options refer to management’s ability to adopt and later revise corporate investment
decisions. True or False
15. Traditional DCF valuation methods adequately account for the value of real options. True or
False

Chapter 13 Study Test

1. A financial buyer is interested in acquiring a firm for purposes of integrating the business into
another firm to enhance the overall strategic value of the combined firms. True or False

2. Private equity, hedge funds, and venture capital funds, so-called financial sponsors, play a
pivotal role in the financing a wide range of investments globally. True or False

3. If the borrower defaults on the loan, the lender can seize and sell the collateral to recover the
value of the loan. True or False

4. Under asset based lending, the borrower pledges certain assets as collateral. True or False

5. Accounts receivable and inventory are common examples of a target firm’s assets used as
collateral in securing asset based loans. True or False

6. An example of a negative covenant is one in which the firm’s ability to pay dividends without
the lender’s permission is limited. True or False

7. Using target assets as collateral is the only way in which lenders are willing to finance a
leveraged buyout. True or False

8. Junk bonds are typically high yield bonds either rated by the credit rating agencies as below
investment grade or not rated at all. They are necessarily high risk bonds. True or False

9. Junk bonds frequently exhibit an increasing default rate the longer they are outstanding. True
or False

10. Payment in kind preferred stock or debt is a type of equity or debt in which dividends and
interest are paid in the form of more preferred stock or debt. True or False

11. The key to a successful LBO is not to overpay for the acquisition. True or False

12. Divisions of large companies rarely make good candidates for LBOs. True or False

13. Private equity, hedge, and venture capital funds take money from large institutions such as
pension funds and endowments, borrow additional cash, and buy private and public
companies. True or False

14. Successful LBOs often rely heavily on management incentives to improve operating
performance. True or False

15. While private equity firms accept funds from limited partners such as institutional investors,
the bulk of the equity funds comes from the general partner. True or False