CH18 TB MERGERS, LBOs, DIVESTITURES, AND BUSINESS FAILURE Flashcards
1
Q
(T/F) A merger occurs when two or more firms are combined to form a completely new corporation.
A
FALSE
2
Q
(T/F) In the broadest sense, activities involving expansion or contraction of a firm’s operations or changes in
its assets or ownership structure are called corporate restructuring.
A
TRUE
3
Q
(T/F) A merger transaction endorsed by a target firm’s management, approved by its stockholders, and
easily consummated is called a friendly merger.
A
TRUE
4
Q
(T/F) Holding companies are corporations that have voting control of one or more other corporations and
the companies they control are referred to as subsidiaries.
A
TRUE
5
Q
(T/F) Subsidiary companies are corporations having no voting control on holding companies.
A
TRUE
6
Q
(T/F) Consolidation involves the combination of two or more firms, and the resulting firm maintains the
identity of one of the firms.
A
FALSE
Merger
7
Q
(T/F) The companies controlled by a holding company are normally referred to as its subsidiaries.
A
TRUE
8
Q
(T/F) A tender offer is a formal offer to purchase a given number of shares of a firm’s stock at a specified
price.
A
TRUE
9
Q
(T/F) Strategic mergers seek to achieve various economies of scale by eliminating redundant functions,
increasing market share, and improving raw material sourcing and finished product distribution.
A
TRUE
10
Q
(T/F) A holding company is a corporation which is controlled by one or more other corporations.
A
FALSE
11
Q
(T/F) Financial mergers involve merging firms in order to achieve various economies of scale by
eliminating redundant functions, increasing market share, and improving raw material sourcing and
finished product distribution.
A
FALSE
Strategic mergers
12
Q
(T/F) A consolidated corporation has voting control of one or more other corporations.
A
FALSE
Holding companies
13
Q
(T/F) A financial merger is a merger transaction undertaken to achieve economies of scale.
A
FALSE
Strategic merger
14
Q
(T/F) A strategic merger is a merger transaction undertaken with the goal of restructuring the acquired
company in order to improve its cash flow and unlock its hidden value.
A
FALSE
Financial merger
15
Q
(T/F) A takeover target’s management will not support a proposed takeover due to a very high tender offer.
A
FALSE
16
Q
(T/F) The overriding goal for merging is the maximization of the owners’ wealth as reflected in the
acquirer’s share price.
A
TRUE
17
Q
(T/F) The synergy of mergers is the economies of scale resulting from the merged firm’s lower overhead.
A
TRUE
18
Q
(T/F) Tax loss carryforward benefits can be used in mergers.
A
TRUE
19
Q
(T/F) 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
TRUE
20
Q
(T/F) An acquisition of a “cash-rich” company immediately increases the acquiring firm’s borrowing power
by decreasing its financial leverage.
A
TRUE
21
Q
(T/F) Firms’ motives to merge include growth or diversification, synergy, fund raising, tax considerations,
and defense against takeover.
A
TRUE
22
Q
(T/F) A firm that wants to expand or extend its operations in existing or new product areas may avoid
many of the risks associated with the design, manufacture, and sale of additional or new product and
remove a potential competitor by acquiring a suitable going concern.
A
TRUE
23
Q
(T/F) A conglomerate merger is a merger combining firms in unrelated businesses.
A
TRUE
24
Q
(T/F) A congeneric merger is a merger combining firms in unrelated businesses.
A
FALSE
Conglomerate
25
(T/F) Greater control over the acquisition of new materials or the distribution of finished goods is an
economic benefit of horizontal merger.
FALSE
26
(T/F) A vertical merger may result in expansion of operations in an existing product line and elimination of
a competitor.
FALSE
## Footnote
Horizontal
27
(T/F) A vertical merger is a merger of two firms in the same line of business.
FALSE
## Footnote
horizontal
28
(T/F) A horizontal merger is a merger in which one firm acquires another firm in the same general industry
but neither in the same line of business nor a supplier or customer.
FALSE
## Footnote
congeneric
29
(T/F) A congeneric merger is a merger in which a firm acquires a supplier or a customer.
FALSE
30
The key benefit of a horizontal merger is its ability to reduce risk by merging firms that have different
seasonal or cyclic patterns of sales and earnings.
FALSE
31
Business combinations are used by firms to externally expand in order to increase ________.
A) provision for doubtful accounts
B) common stock outstanding
C) production capacity
D) financial leverage
C
32
A corporation that has voting control of one or more other corporations is called a ________.
A) holding company
B) congeneric formation
C) subsidiary
D) target firm
A
33
The combination of two or more companies to form a completely new corporation is a ________.
A) congeneric formation
B) consolidation
C) spin-off
D) conglomerate merger
B
34
A combination of companies where the former corporations cease to exist is ________.
A) a congeneric formation
B) a consolidation
C) a merger
D) a holding company
B
35
A combination of two or more companies that results in a firm maintaining the identity of one of the
firms is ________.
A) amalgamation
B) consolidation
C) merger
D) a holding company
C
36
A firm in a merger transaction that attempts to merge or takeover another company is called the
________.
A) target company
B) holding company
C) acquiring company
D) consolidated company
C
37
A firm in a merger transaction that is being pursued as a takeover potential is called the ________.
A) acquiring company
B) target company
C) holding company
D) consolidated company
B
38
A firm undertakes a merger in order to eliminate redundant functions or increase market share. This
is an example of ________.
A) financial merger
B) divestiture
C) spin-off
D) strategic merger
D
39
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
________.
A) financial merger
B) hostile takeover
C) congeneric formation
D) strategic merger
B
40
A friendly merger is a ________.
A) merger in which the acquirer gains control of the target firm by buying sufficient shared through
private placement
B) merger in which the acquirer can attempt to gain control of the target firm by buying sufficient shares
of the target firm in the marketplace
C) merger transaction that is endorsed by the target firm's management, approved by its stockholders,
and easily consummated
D) merger in which the target firm's management acts to deter rather than facilitate the acquisition
C
41
When a firm undertakes a merger to improve its sources and supply of raw materials, this is an
example of a ________.
A) financial merger
B) hostile takeover
C) divestiture
D) strategic merger
D
42
A ________ occurs when the operations of the acquiring and target firms are combined in order to
achieve economies and thereby cause the performance of the merged firm to exceed that of the pre
merged firm.
A) financial merger
B) hostile takeover
C) operating merger
D) strategic merger
D
43
A friendly merger transaction ________.
A) is a transaction in which merger is completed by forceful acquisition of the target's shares from the
secondary market
B) requires a public announcement for its plan of acquisition
C) can be consummated through an exchange of the acquirer's stock and cash
D) can only be completed by purchasing all the outstanding bonds of the target firm
C
44
A financial merger is undertaken to ________.
A) increase profit margin to enhance the retained earnings of the merged firm
B) improve raw material sourcing and finished product distribution
C) increase market share, which is used to maximize shareholder wealth
D) increase cash flows to service the debt incurred to finance the merger
D
45
A merger involving the purchase of a specific product line, rather than the whole company is
________.
A) an operating merger
B) a financial merger
C) a selective lines merger
D) a variation of the strategic merger
D
46
A hostile merger is accomplished through ________.
A) a cash purchase of stock
B) leveraged buyouts
C) a tender offer
D) divestitures
C
47
A(n) ________ is undertaken with the goal of restructuring the acquired company in order to improve
its cash flow and unlock its hidden value.
A) operating merger
B) strategic merger
C) financial merger
D) hostile takeover
C
48
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 ________.
A) friendly takeover; leveraged buyout
B) leveraged buyout; consolidation
C) friendly takeover; consolidation
D) hostile takeover; tender offer
D
49
A major impetus fueling financial mergers during the 1980s was ________.
A) high interest rates
B) high tax rates
C) high cash balances that could be utilized for takeovers
D) ready availability of junk bond financing
D
50
The combination of two or more companies that results in one of the corporations having a voting
control of one or more of the other companies is a ________.
A) congeneric formation
B) consolidation
C) spin-off
D) holding company
D
51
Motive for merging includes ________.
A) increased financial leverage
B) increased common stock outstanding
C) increased provision for doubtful accounts
D) increased liquidity
D
52
Which of the following is a reason for undertaking mergers?
A) increasing dividends
B) profit maximization
C) easy process
D) wealth maximization
D
53
One of the key motives for mergers is ________.
A) reducing the marginal tax rate
B) taking advantage of the other firm's tax loss carryforward
C) to sell the assets of the target company to increase the cash balance
D) increasing additional recaptured depreciation
B
54
The overriding goal for merging is to ________.
A) develop monopoly control over the markets
B) maximize shareholders' wealth as reflected in the acquirer's share price
C) maximize shareholders' profit as reflected in the share price of the target firm
D) maximize dividend payout ratio
B
55
Which of the following is a reason for mergers?
A) to reduce common stock outstanding
B) to gain monopoly control over the markets
C) to decrease the level of provision for doubtful accounts
D) to gain increased managerial skills
D
56
The acquisition of a "cash-rich" company allows the acquiring company ________.
A) to reap greater tax benefits
B) to reduce leverage and to increase borrowing power
C) to develop monopoly control over the markets
D) to achieve economies of scale in some phase of the business
B
57
A ________ results from the combination of firms in the same line of business.
A) congeneric merger
B) conglomerate diversification
C) horizontal merger
D) hostile takeover
C
58
A ________ is when a firm acquires a supplier or a customer.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
D
59
Which of the following is true of a conglomerate merger?
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.
B
60
Which of the following is true of a horizontal merger?
A) The key benefit of this merger stems from the merged firm's increased control over the acquisition of
raw materials or the distribution of finished goods.
B) The key benefit of this form of merger is its ability to reduce risk by merging firms that have different
patterns of sales and earnings.
C) This form of merger results when two firms in the same line of business are merged.
D) This form of merger occurs when a firm acquires a supplier or a customer.
C
61
The combination of a dress manufacturer and a credit bureau is an example of ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
B
62
Greater control over the acquisition of raw materials or the distribution of finished goods is an
economic benefit of a ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
D
63
A ________ may result in the expansion of a firm's operations in an existing product line and
elimination of a competitor.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
C
64
A ________ is achieved by acquiring a company in the same general industry, but neither in the same
line of business nor a supplier or a customer.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
A
65
The ability to use the same sales and distribution channels to reach customers of both businesses is a
benefit of ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
A
66
A merger of a paper manufacturer and a logging company is an example of ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
D
67
The reduction of risk resulting from combining firms with differing seasonal or cyclical patterns of
sales or earnings is a key benefit of ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
B
68
(T/F) LBOs are an example of a financial merger undertaken to create a high-debt private corporation with
improved cash flow and value.
TRUE
69
(T/F) An attractive candidate for acquisition through leveraged buyout must have a good position in its
industry with a solid profit history and reasonable expectation for growth.
TRUE
70
(T/F) An attractive candidate for acquisition through leveraged buyout usually has a relatively high level of
debt and a low level of "bankable" assets.
FALSE
71
(T/F) The sale of a unit of a firm to existing management is often achieved through a leveraged buyout.
TRUE
72
(T/F) In an LBO, 90 percent or more of the purchase price is financed with debt.
TRUE
73
(T/F) 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.
TRUE
74
(T/F) One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively low
level of debt and a high level of liquid assets that could be used as loan collateral.
TRUE
75
(T/F) One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively high
level of debt and a low level of liquid assets.
FALSE
75
(T/F) 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.
TRUE
76
(T/F) Unlike business bankruptcy and business failure, divestiture is often undertaken for positive motives
in a manner that is consistent with the firm's strategic goals.
TRUE
77
(T/F) Like business bankruptcy and business failure, divestiture is most often undertaken to relieve
pressure by creditors such as bondholders and banks due to the firm's relatively high debt levels.
FALSE
78
(T/F) The motive for divestiture is often to get rid of a poorly performing operation in order to generate
cash for expansion of other product lines.
TRUE
79
(T/F) The selling of some of a firm's assets for various strategic motives is called divestiture.
TRUE
80
(T/F) A spin-off is 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.
TRUE
81
(T/F) Methods of divestiture include the sale of a product line to another firm, the sale of a unit to existing
management, spin-offs, and the liquidation of assets.
TRUE
82
(T/F) Recent divestitures seem to suggest that many operating units are worth much more to others than to
the firm itself.
TRUE
83
(T/F) The value of a firm measured as the sum of the values of its operating units if each were sold
separately is known as a firm's part and parcel value.
FALSE
84
(T/F) The value of a firm measured as the sum of the values of its operating units if each were sold
separately is known as a firm's breakup value.
TRUE
85
The use of a large amount of debt to finance the acquisition of other firms is a ________.
A) conglomerate merger
B) leveraged buyout
C) hostile merger
D) congeneric buyout
B
86
The sale of a unit of a firm to existing management is often achieved through ________.
A) a limited partnership
B) a leveraged buyout
C) an employee stock option
D) a cash exchange
B
87
A ________ is a method of structuring a financial merger, whereas a ________ involves the sale of the
firm's assets.
A) leveraged buyout; bankruptcy
B) congeneric buyout; divestiture
C) horizontal merger; leveraged divestiture
D) leveraged buyout; divestiture
D
88
Leveraged buyouts are clear examples of ________.
A) strategic mergers
B) vertical mergers
C) financial mergers
D) congeneric mergers
C
89
The creation of a high-debt, private corporation with improved cash flow and value is the goal in
________.
A) a spin-off
B) a divestiture
C) a conglomerate merger
D) a leveraged buyout
D
90
Which of the following is true of a leveraged buyout?
A) It is a type of a strategic merger.
B) It is used to increase market share, which is used to maximize shareholder wealth.
C) It aims at developing monopoly control over the markets.
D) It involves the use of a large amount of debt to purchase a firm.
D
91
Leveraged buyouts require a target firm ________.
A) to have low level of investments in fixed assets
B) to possess high leverage in its capital structure
C) to maintain relatively high provision for doubtful accounts
D) to have a high level of bankable assets
D
92
An attractive candidate for acquisition through a leveraged buyout should ________.
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
B
93
A leveraged buyout needs to be carried out through ________.
A) a hostile takeover
B) a friendly merger
C) a vertical merger or a hostile takeover
D) a conglomerate merger
B
94
The motive for divestiture includes ________.
A) employee stock option
B) additional debt by the parent company
C) cash generation for expansion
D) additional stock to the parent company
C
95
The selling of some of a firm's assets is called ________.
A) leverage buyout
B) consolidation
C) reverse merger
D) divestiture
D
96
A divestiture that results in an operating unit becoming an independent company is a ________.
A) sale of a line of business
B) strategic merger
C) spin-off of an operating unit
D) leveraged buyout
C
97
A spin-off means ________.
A) a subsidiary being sold to existing management resulting in a new company
B) a subsidiary merging completely with its holding company
C) a subsidiary becoming an independent company
D) a subsidiary being taken over by the federal government due to its incapabilities to survive on its own
C
98
The result of spin-off to the parent company is ________.
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
A
99
One of the main goals of divestiture is ________.
A) expanding operations
B) economies of scale
C) employee stock option
D) raising funds
D
100
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 ________.
A) leveraged buyout
B) employee stock option
C) spin-off
D) strategic takeover
C
101
(T/F) The basic difficulty in applying the capital budgeting approach to an acquisition of a going concern is
the estimation of initial cash flows and certain risk consideration.
FALSE
102
(T/F) A stock swap transaction is an acquisition method in which an acquiring firm exchanges its shares for
shares of the target company according to a predetermined ratio.
TRUE
103
(T/F) The ratio of exchange in market price indicates the market price per share of an acquiring firm paid for
each dollar of market price per share of the target firm.
TRUE
104
(T/F) 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.
TRUE
105
(T/F) The earnings per share of a merged firm are generally above the premerger earnings per share of one
firm and below the premerger earnings per share of the other, after making the necessary adjustment for
the ratio of exchange.
TRUE
106
(T/F) If the P/E paid is greater than the P/E of the acquiring company, on a postmerger basis the target firm's
EPS increases and the acquiring firm's EPS decreases.
TRUE
107
(T/F) A method of acquisition in which the acquiring firm exchanges its shares of stock for shares of the
target company according to a predetermined ratio is called a stock swap transaction.
TRUE
108
(T/F) A method of acquisition in which the acquiring firm exchanges its debt for shares of the target
company according to a predetermined ratio is called a leveraged buyout.
FALSE
109
(T/F) Acquisitions are especially attractive when a target firm's stock price is high, because fewer shares
must be exchanged to acquire the firm.
FALSE
110
(T/F) Acquisitions are especially attractive when an acquiring firm's stock price is high, because fewer
shares must be exchanged to acquire the firm.
TRUE
111
Cash acquisitions of going concerns are best analyzed using ________.
A) an investment opportunity schedule
B) ratio analysis
C) capital budgeting techniques
D) the weighted marginal cost of capital theory
C
112
If the net present value of the target company is ________.
A) lesser than zero, the merger is acceptable
B) greater than zero, the merger is acceptable
C) greater than zero, the merger is rejected
D) equal to zero, the merger is acceptable
B
113
When making a cash acquisition of a going concern, the acquiring corporation should ________.
A) adjust after-tax cash flows generated from new assets
B) recognize different accounting techniques
C) adjust the discount rate for risk differences
D) consider the problems of assimilating the acquired management
C
114
The acquiring firm pays a price that is a premium above the market price of the acquired firm. This
means that the ratio of exchange in market price is ________.
A) less than 1
B) greater than 1
C) 0, because the ratio of exchange results in no increase or decrease of shares
D) equal to 1
B
115
The actual ratio of exchange in a stock-exchange acquisition is the ratio of the ________.
A) amount paid per share of the target company to the per share book value of the acquiring firm
B) book value per share of the target company to the per share market price of the acquiring firm
C) market value per share of the target company to the earnings per share of the acquiring firm
D) amount paid per share of the target company to the per share market price of the acquiring firm
D
116
When the ratio of exchange in a merger is equal to one and both the acquiring and the target
companies have the same premerger earnings per share, the merged firm's earnings per share will
initially ________.
A) decline
B) remain constant
C) increase
D) drop to zero
B
117
When the ratio of exchange in a merger is equal to one and both the acquiring and the target
companies have the same premerger earnings per share, both the acquiring and the target companies
have the same ________.
A) debt ratio
B) book value per share
C) return on equity
D) P/E ratio
D
118
If the P/E paid is greater than the P/E of the acquiring company, the effect on the earnings per share of
the acquired company will be ________.
A) positive
B) neutral
C) negative
D) unrelated
A
119
If the P/E paid for a target company is greater than the P/E of the acquiring company, the effect on the
earnings per share of the acquiring company will be ________.
A) positive
B) neutral
C) negative
D) uncorrelated
C
120
If the P/E paid for a target company is equal to the P/E of the acquiring company, the effect on the
earnings per share of the acquired company will be ________.
A) positive
B) neutral
C) negative
D) uncorrelated
B
121
If the P/E paid for a target company is less than the P/E of the acquiring company, the effect on the
earnings per share of the acquired company will be ________.
A) positive
B) neutral
C) negative
D) uncorrelated
C
122
If the P/E paid for a target company is less than the P/E of the acquiring company, the effect on the
earnings per share of the acquiring company will be ________.
A) positive
B) neutral
C) negative
D) uncorrelated
A
123
The long-run effect on the earnings per share of the merged firm depends largely on ________.
A) the pre-merger P/E ratio
B) the ratio of exchange
C) the synergy of the merged firm
D) the tax considerations
C
124
(T/F) A two-tier offer is a tender offer in which the terms offered are more attractive to those who tender
shares early.
TRUE
125
(T/F) A white knight is a takeover defense in which a firm issues securities that give their holders certain
rights that become effective when a takeover is attempted and that make the target firm less desirable to a
hostile acquirer.
FALSE
126
(T/F) A poison pill is a takeover defense in which a target firm finds an acquirer more to its liking than the
initial hostile acquirer and prompts the two to compete to take over the firm.
FALSE
127
(T/F) ) Greenmail is a takeover defense under which a target firm repurchases a large block of stock at a
premium from one or more shareholders in order to end a hostile takeover attempt by those
shareholders.
TRUE
128
(T/F) Popular takeover defense methods include white knights, poison pills, greenmail, golden parachutes,
and shark repellents.
TRUE
129
(T/F) The owners of a holding company can control significantly larger amounts of assets than they could
acquire through mergers.
TRUE
130
(T/F) Before paying dividends, a subsidiary must pay federal and state taxes on its earnings.
TRUE
131
(T/F) A major disadvantage of holding companies is the increased risk resulting from the leverage effect.
TRUE
132
(T/F) Pyramiding is an arrangement among holding companies wherein one company controls others,
thereby causing an even greater magnification of earnings and losses.
TRUE
133
(T/F) The greater the leverage, the smaller the risk involved.
FALSE
134
(T/F) The U.S. approaches used in hostile takeovers is an effective method of changing corporate control
and used in many areas of the world including China and Japan.
FALSE
## Footnote
non-existent
135
(T/F) The U.S. approaches used in hostile takeovers is practically nonexistent in most other countries
throughout the world including continental Europe and Asia.
TRUE
136
A formal proposal to purchase a given number of shares of a firm's stock at a specified price is a
________.
A) golden parachute
B) call option
C) put option
D) tender offer
D
137
Most firms seeking merger partners will hire the services of a(n) ________.
A) commercial banker
B) investment broker
C) private contractor
D) investment banker
D
138
In defending against a hostile takeover, the strategy that involves the target firm finding a more
suitable acquirer and prompting it to compete with the initial hostile acquirer to take over the firm is
called the ________ strategy.
A) poison pill
B) white knight
C) golden parachute
D) greenmail
B
139
In defending against a hostile takeover, the strategy that involves the target firm creating securities
that give their holders certain rights that become effective when a takeover is attempted is called the
________ strategy.
A) shark repellent
B) greenmail
C) poison pill
D) golden parachute
C
140
In defending against a hostile takeover, the strategy that involves the firm repurchasing through
negotiation a large block of stock at a premium from one or more shareholders in order to end those
shareholders' hostile takeover attempt is known as the ________ strategy.
A) poison pill
B) greenmail
C) golden parachute
D) shark repellent
B
141
In defending against a hostile takeover, the strategy involving the payment of a large, debt-financed,
cash dividend is the ________ strategy.
A) shark repellent
B) golden parachute
C) leveraged recapitalization
D) dividend restructuring
C
142
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.
A) shark repellent
B) silver parachute
C) greenmail
D) golden parachute
D
143
In defending against hostile takeover attempts, a company will approve anti-takeover amendments to
the corporate charter that constrain the firm's ability to transfer managerial control of the firm as a result
of a merger. This is called the ________ strategy.
A) golden parachute
B) greenmail
C) poison pill
D) shark repellent
D
144
The "stakeholders" in targeted takeover companies include the ________.
A) federal reserve bank
B) media
C) employees
D) state government
C
145
The primary advantage of a holding company, that permits the firm to control a large amount of
assets with a relatively small dollar investment is known as ________.
A) the leverage effect
B) tax effects
C) administrative effect
D) risk protection
A
146
Disadvantages of holding companies include ________.
A) high dollar investment
B) acquisition of significantly lesser amount of assets
C) legal responsibility for subsidiaries
D) double taxation
D
147
Which of the following is true of a tender offer?
A) It is another form of put option.
B) The management of the target company has the exclusive right to accept the offer.
C) The target firm may take defensive tactics to ward off the offer.
D) It facilitates negotiations for an acquisition.
C
148
A key consideration in the holding company decision is ________.
A) the risk-return tradeoff due to the leverage effect
B) the greater "distance" between top level and operating management
C) the risk of the domino effect if one company in the holding company fails
D) the risk from the separate "companies" in the holding company being classed as one company
A
149
The advantages of holding companies include ________.
A) reduced federal corporate taxes due to the holding company status
B) decreased risk resulting from the leverage effect
C) possible state tax benefits realized by each subsidiary in its state of incorporation
D) low cost of administration
C
150
Which of the following represents an advantage for holding companies?
A) They are easy to analyze for investment purposes.
B) They are facilitated with reduced federal corporate taxes due to the holding company status.
C) They are exempted from double taxation.
D) They permit a firm to control a large amount of assets with relatively small dollar investment.
D
151
Which of the following represents a disadvantage for holding companies?
A) relatively high dollar investment associated with it
B) increased risk resulting from the leverage effect
C) control of lesser amounts of assets than they could acquire through mergers
D) failure of one of the companies results in the failure of the entire holding company
B
152
(T/F) Technical insolvency occurs when a firm's liabilities exceed the book value of its assets.
FALSE
153
(T/F) Bankruptcy is business failure that occurs when a firm's liabilities exceed the fair market value of its
assets.
TRUE
154
(T/F) The various causes of business failure are mismanagement, poor economic conditions, and corporate
maturity.
TRUE
155
Which of the following increases the chances of business failures?
A) current ratio of 2:1
B) decreasing days' sales outstanding
C) solvency ratio of greater than 20%
D) corporate maturity
D
156
(T/F) The various causes that increase the chances of business failures are current ratio of 1.33, solvency ratio
of greater than 20%, and rapid decrease in days' sales outstanding.
FALSE
157
Which of the following increases the chances of business failures?
A) increasing provision for doubtful accounts
B) current ratio of 2:1
C) liabilities that exceed market value of assets
D) book value of assets that exceed liabilities
C
158
(T/F) In a voluntary settlement, composition is an arrangement in which the creditor committee replaces the
firm's operating management and operates the firm until all claims have been settled.
FALSE
159
________ is an arrangement initiated by a debtor firm to negotiate with the creditors about a plan for
sustaining or liquidating the firm.
A) Golden parachute
B) Greenmail
C) A filing of Chapter Seven of the Bankruptcy Reform Act of 1978
D) A voluntary settlement
D
160
A(n) ________ is an arrangement whereby an insolvent firm's creditors receive full payment, although
not immediately.
A) composition
B) creditor control agreement
C) extension
D) liquidation
C
161
A(n) ________ is a pro rata cash settlement of creditor claims.
A) composition
B) creditor control agreement
C) extension
D) liquidation
A
162
A(n) ________ replaces the existing operating management of an insolvent firm with a selected
creditor committee.
A) composition
B) creditor control
C) extension
D) liquidation
B
163
In a voluntary settlement, each creditor will be paid 20 cents on a dollar in 120 days. The remaining 80
cents on a dollar will be paid within an additional 60 days. This is an example of ________.
A) a composition
B) a combination of a composition and extension
C) an extension
D) a liquidation
C
164
In a voluntary settlement, each creditor will be paid only 45 cents on a dollar immediately. This is an
example of ________.
A) a composition
B) a combination of a composition and extension
C) an extension
D) a liquidation
A
165
In a voluntary settlement, one group of creditors having claims of $1,000,000 will be immediately paid
95 cents on a dollar. The remainder of the creditors will postpone payment an additional 60 days. This is
an example of ________.
A) a composition
B) a combination of a composition and extension
C) an extension
D) a liquidation
B
166
In ________, an assignment may be made by the creditors of an insolvent firm to a third party who
then has the power to liquidate the firm's assets.
A) a voluntary private liquidation
B) a greenmail
C) an involuntary liquidation under Chapter Seven of the Bankruptcy Reform Act of 1978
D) a voluntary liquidation under Chapter Seven of the Bankruptcy Reform Act of 1978
A
167
(T/F) Chapter 7 of the Bankruptcy Reform Act of 1978 outlines the procedures for reorganizing a failed (or
failing) firm, whether its petition is filed voluntarily or involuntarily.
FALSE
168
(T/F) Under recapitalization, debts are generally exchanged for equity or the maturities of existing debts are
extended.
TRUE
169
(T/F) One of the responsibilities of a debtor in possession (DIP) is the liquidation of a bankrupt firm's assets.
FALSE
170
(T/F) A debtor in possession in a Chapter 11 bankruptcy proceeding is responsible for valuing the bankrupt
firm both in terms of its liquidation value and as a going concern.
TRUE
171
(T/F) 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.
FALSE
172
(T/F) In a Chapter 7 liquidation bankruptcy proceeding, the order of priority of satisfying claims is secured
creditors, unsecured creditors, and then equity holders.
TRUE
173
A reorganization plan ________.
A) seeks to build a high debt-equity ratio
B) generally exchanges equity for debt
C) must increase the fixed charges for a firm
D) must maintain the priorities of the contractual claims of all parties
D
174
An involuntary petition for reorganization may be filed against a firm if ________.
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
A
175
The responsibilities of a debtor in possession include ________.
A) repurchase of equity from open market
B) change in operational activities
C) change in management
D) recommending a recapitalization plan
D
176
An important aspect of a firm's reorganization plan is the recapitalization of the firm's capital
structure. The goal of restructuring a firm's debt includes ________.
A) decreasing the times interest earned ratio
B) paying off existing debts
C) exchanging equity for debts
D) reducing the fixed-payment obligations
D
177
The priority of claims established by Chapter 7 of the Bankruptcy Reform Act of 1978 gives priority to
________.
A) unpaid employee benefit plan contributions over unsecured customer deposits
B) common stockholders over taxes
C) taxes over expenses of administering the bankruptcy
D) preferred stockholders over claims of secured creditors
A
178
The priority of claims established by Chapter 7 of the Bankruptcy Reform Act of 1978 gives priority to
claims of ________.
A) unsecured creditors over claims of secured creditors
B) preferred stockholders over claims of unsecured creditors
C) wages payable over claims of unsecured creditors
D) farmers in grain storage over expenses of administering the bankruptcy
C
