Deal Structuring

Question 1

M & A require understanding of accounting (2)

Answer 1

• need to see behind the number

- different financial statements depend on method used

Question 2

Main methods for accounting (4)

Answer 2

• cost method
• equity method
• purchase/ consolidation accounting
• outdated: pooling of interest accounting

Question 3

Cost method (5)

Answer 3

• 0-20%
• non influence investment
• investment as an asset on balance sheet
• apply the lower of cost or current market value
• gains or losses of the sales on these securities are only shown in income statement when realize

Question 4

Equity method (4)

Answer 4

• 20-50%
• influence but not control
• investment are shown on acquiring balance sheet on cost plus share of target net income less any dividend received when purchases
• owned share of target net income recognized on acquirer income statement as earned

Question 5

Purchase accounting (5)

Answer 5

• > 50%
• controlling stake
• one company is buyer
• identify liabilities and assets
• target revenue and expenses are included

Question 6

Purchase price goes to (3)

Answer 6

• goodwill
• intangible assets
• tangible deductible assets are written off

Question 7

Should you care about numbers like EPS (2)

Answer 7

• No: economic values will be the same

- Yes: analysis and market are not rational, influence from deal structure, covenant on debt

Question 8

Earning management (6)

Answer 8

• EPS enhancement
• tax management
• credit enhancement
• amortization and write off: harms EPS and save tax
• allocation of purchase price
• price maximization

Question 9

goodwill minimization (3)

Answer 9

• lower tax
• increase depreciation
• good cashflow, bad on earnings

Question 10

deal structuring involves accounting consideration of (4)

Answer 10

• legal
• tax
• form of payment and financing
• incorporate subsidiaries as a conduit for transaction

Question 11

Non-taxable (1)

Answer 11

• tax are deferred from the shareholders until they dispose of their stocks

Question 12

Statutory mergers (1)

Answer 12

• target exchange stocks for acquired company stocks

Question 13

Non-taxable reorganization (2)

Answer 13

• acquiring firm: NOL carryover, tax credit carryover, carryover asset basis
• target firm: deferred gain for shareholders

Question 14

Taxable acquisition (2)

Answer 14

• acquiring firm: step up asset basis, loss NOlL and tax credit
• target firm: immediate gains recognition by target SH, depreciation recapture of income

Question 15

Empirical studies of tax (3)

Answer 15

• tax factor significants in under 10% merger
• tax effect not main motivation
• role of tax in going private transaction

Question 16

Analysis of possible tax gain from acquisition (3)

Answer 16

• increase leverage
• basis increase acquired assets
• NOL carry forward

Question 17

Form of payment (1)

Answer 17

• cash or stocks

Question 18

Fixed exchange ratio (1)

Answer 18

• 0.85 regardless of stock price at closing

Question 19

Collared exchange ratio (1)

Answer 19

• depending on stock price at closing (min/max, fixed on range, unrestrictive)

Question 20

Financing (5)

Answer 20

• cash reserves
• acquisition financing
• debt and collateral debenture
• credit failure
• issues stocks

Question 21

Arithmetic and geometric means (2)

Answer 21

• measure actual return earned on stock or portfolio

- measure of expected market return

Question 22

Real option technique (4)

Answer 22

• sensitivity
• binomial tree
• black schole formula
• monte carlos simulation