SU6: Corp. Restr. and Intl Finance

Question 1

consolidation

Answer 1

similar to a merger, but a new entity is formed and neither of the merging entities survives.

Question 2

horizontal merger

Answer 2

occurs when two firms in the same line of business combine.

Question 3

vertical merger

Answer 3

combines a firm with one of its suppliers or customers.

Question 4

conglomerate merger

Answer 4

involves two unrelated firms in different industries.

Question 5

tender offer

Answer 5

a general invitation by an individual or a corporation to all shareholders of another corporation to tender their shares for a specified price.

Question 6

Greenmail

Answer 6

If management and the board are opposed to the tender offer, the potential acquirer is offered the opportunity to sell his or her already acquired shares back to the corporation at an amount substantially above market value (i.e., paying greenmail).

Question 7

Fair Price Provisions

Answer 7

Warrants are issued to shareholders that permit purchase of stock at a small percentage (often half) of market price in the event of a takeover attempt.

Question 8

Leveraged Recapitalization

Answer 8

Leveraged recapitalization, or restructuring, occurs when a company obtains a substantial amount of new debt and uses the funds to pay a cash dividend

Question 9

LBO

Answer 9

leveraged buyout is a financing technique by which a company is purchased using very little equity. The cash-offer price is financed with large amounts of debt. An LBO is often used when a company is sold to management or some other group of employees, but it is also used in hostile takeovers.

Question 10

Flip-over rights

Answer 10

The charter of a target corporation may provide for its shareholders to acquire in exchange for their stock (in the target) a relatively greater interest (e.g., twice the shares of stock of equivalent value) in an acquiring entity.

Question 11

Flip-in rights

Answer 11

Acquisition of more than a specified ownership interest (e.g., 25%) in the target corporation permits shareholders, except for the acquirer, to purchase additional shares at a reduced price.

Question 12

Tracking stock

Answer 12

stock issued in a division or segment of a parent entity. This provides investors with the opportunity to invest in only a portion of the entity. However, they have no claims on the assets of the division or segment. Rather, the parent entity maintains control over the division or segment.
Tax benefits may arise from a combination.

Question 13

split-up

Answer 13

an entity splits into two or more entities. Shares in the original entity are exchanged for shares in the new entities.

Question 14

spin-off

Answer 14

the creation of a new separate entity from another entity, with the new entity’s shares distributed on a pro rata basis to existing shareholders of the parent entity.

Question 15

equity carve-out

Answer 15

the sale of a portion of the firm through a public offering. It provides a way to quickly raise capital and bring in new management while still maintaining control.

Question 16

Fixed Exchange Rate

Answer 16

In a fixed exchange rate system, the value of a country’s currency in relation to another country’s currency is either fixed or allowed to fluctuate only within a very narrow range. Pros - predictable, cons - govt can manipulate

Question 17

Freely Floating Exchange Rate

Answer 17

government steps aside and allows exchange rates to be determined entirely by the market forces of supply and demand. Pros - less manipulation. Cons - a country is vulnerable to economic conditions in other countries

Question 18

Managed Exhange Rate

Answer 18

the government allows market forces to determine exchange rates until they move too far in one direction or another. The government will then intervene to maintain the currency within the broad range considered appropriate

Question 19

Pegged Exchange Rate System

Answer 19

government fixes the rate of exchange for its currency with respect to another country’s currency (or to a “basket” of several currencies)

Question 20

Spot rate

Answer 20

the exchange rate as of right now

Question 21

Forward rate

Answer 21

the exchange rate as of a future period

Question 22

Forward premium

Answer 22

when the forward rate is greater than the spot rate

Question 23

Forward discount

Answer 23

when the forward rate is less than the spot rate

Question 24

Calculation of Forward Premium/Discount

Answer 24

[(Forward Rate - Spot Rate)/Spot rate] x (Days in year / days in forward period)

Question 25

Cross rate

Answer 25

domestic currency per usd/foreign currency per usd

Question 26

Factors affecting exchange rates

Answer 26

Trade: inflation, income, govt intervention
Financial: relative int, ease of capital

Question 27

ADR

Answer 27

American Depository Receipts - ownership rights in foreign corporations. Allows Americans to participate i foreign stock markets.

Question 28

Forfaiting

Answer 28

Forfaiting is a form of factoring that involves the sale by exporters of large, medium- to long-term receivables to buyers (forfaiters) who are willing and able to bear the costs and risks of credit and collections.

Question 29

Sight Draft or Bill of Exchange

Answer 29

exporter uses a sight draft to obtain payment from an importer. The exporter holds title to the shipped goods until the importer has received the shipment and paid for it. The sight draft and shipping documents are sent to the importer’s bank, which remits payment to the exporter.

Question 30

Open Account Sale

Answer 30

A sale on open-account is risky because the exporter merely ships the goods to the importer, who signs an invoice acknowledging receipt. Thus, the exporter is not assured of payment if the importer defaults. Such an arrangement is most likely if the parties have previously transacted business.

Question 31

An exporter delivers goods to a retailer for sale to the public. If the exporter is paid only after sale to third parties, the arrangement is a(n)

Answer 31

Consignment

Question 32

An attempt to replace management in which a group of shareholders try to solicit votes is a

Answer 32

Proxy Fight

Question 33

If spot rate is greater than forward rate, then the currency is quoted at a…

Answer 33

discount

Question 34

The three generally acknowledged theories regarding currency exchange rates suggest all of the following about high-inflation currencies

Answer 34

The usually trade at large forward discounts
Their economies will have high interest rates
They will weaken over time

Question 35

An overvalued foreign currency exchange rate represents a <> on exports and a <> on imports

Answer 35

tax, subsidy

Question 36

Cross-border factoring involves

Answer 36

Using a network of factors in other countries.

Question 37

Assuming exchange rates are allowed to fluctuate freely list one factor that would cause a nations currency to appreciate in the foreign exchange market.

Answer 37

A slower rate of growth in income which causes imports to lag behind exports.

Question 38

If the growth of a country’s national income is more rapid than other countries’ national income, its currency is likely to <>

Answer 38

Depreciate

Question 39

The synergy of a business combination can be determined by

Answer 39

Using the risk adjusted discount rate to discount the incremental cash flows of the newly-formed entity.

Question 40

Trade Acceptance

Answer 40

is a time draft accepted by a trader of goods or a merchant. It is accepted only by the drawee and is not countersigned by the drawee’s bank. It is a negotiable instrument similar to a banker’s acceptance except it is drawn on and accepted by a buyer and not a bank

Question 41

Time Draft

Answer 41

a form of payment that is guaranteed by an issuing bank but is not payable in full until a specified amount of time after it is received and accepted.

Question 42

Sight Draft or Bill of Exchange

Answer 42

A sight draft is a type of bill of exchange, in which the exporter holds the title to the transported goods until the importer receives and pays for them. … Unlike a time draft, which allows for a short-term delay in payment after the importer receives the goods, a sight draft is payable immediately

Question 43

The purchasing-power parity exchange rate

Answer 43

Holds constant the relative price levels in two countries when measured in a common currency.

Question 44

What is the effect on prices of U.S. imports and exports when the dollar depreciates

Answer 44

Import prices will increase and export prices will decrease.

Question 45

The economic effects of a change in foreign exchange rates on a relatively self-contained and integrated operation within a foreign country relate to the net investment by the reporting enterprise in that operation. Consequently, translation adjustments that arise from the consolidation of that operation

Answer 45

Do not directly affect cash flows and should not be reflected in income.

Question 46

If consumers in Japan decide they would like to increase their purchases of consumer products made in the United States, in foreign currency markets there will be a tendency for the demand for <> to <>

Answer 46

dollars, increase

Question 47

If the U.S. dollar declines in value relative to the currencies of many of the U.S. trading partners. then

Answer 47

US Exports will tend to increase.

Question 48

Decline in the value of a domestic currency <> prices of domestic goods and will tend to <> <>ports

Answer 48

reduces, increase exports

Question 49

Decline in the value of a domestic currency results in <> priced foreign goods and <>ports will tend to <>

Answer 49

higher, imports decrease

Question 50

Describe a merger

Answer 50

The surviving company is one of the two combining companies

Question 51

Describe a divestiture

Answer 51

A large U.S. company recently set up a new corporation based on the assets from one of its divisions. The stock of the new corporation was titled to the stockholders of the original firm.

Question 52

List the effects of inflation on a countrys currency

Answer 52

The currency of a country with a falling inflation rate retains more purchasing power. Demand for a currenty with increasing purchasing power will increase.

Question 53

T/F - a Merger involves the absorption of one firm by another

Answer 53

T

Question 54

T/F - a Merger involves approval by shareholders of each firm

Answer 54

T