Business Valuation Exam Preparation Guide
Course Introduction
Business Valuation is a comprehensive course designed to introduce students to the principles, methods, and practical applications of valuing businesses and business interests. Through a combination of theory and real-world case studies, students will learn about key valuation approaches such as discounted cash flow, market comparables, and asset-based methods. The course covers the analysis of financial statements, identification of value drivers, assessment of risk, and the impact of market and industry trends on valuation outcomes. By the end of the course, students will be equipped to evaluate company worth for purposes such as mergers and acquisitions, investment analysis, financial reporting, and strategic planning.
Recommended Textbook Mergers Acquisitions and Corporate Restructurings 6th Edition by Patrick A. Gaughan
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16 Chapters
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Chapter 1: Introduction
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Q1) In risk arbitrage the following is true:
A)Investors may expect the bidder's stock price to fall
B)Investors may expect the target's stock price to rise
C)Both a and b
D)Neither a and b
Answer: C
Q2) One of the advantages of an asset acquisition is that it may not be necessary to solicit approval from its own shareholders.
A)True
B)False Answer: True
Q3) In a freeze-out:
A)Minority shareholders cannot hold up a merger
B)Certain members of management are prevented from entering company facilities
C)Targets are prevented from receiving a takeover premium
D)None of the above
Answer: A
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Chapter 2: History of Mergers
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Q1) Which of the following factors contributed to the end of the fifth merger wave?
A)Stock market downturn
B)Economic slowdown
C)Antitrust enforcement
D)None of the above
E)a, b, and c
F)Both a and b
Answer: F
Q2) The United Technologies takeover of Otis Elevator is an example of a failed merger.
A)True
B)False
Answer: False
Q3) Roll-ups were not common in the 1990s but became more popular in the 2000s.
A)True
B)False
Answer: False
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Chapter 3: Legal Framework
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Q1) The Celler Kefauver Act required bidders and targets to file with the Justice Department and Federal Trade Commission in advance of completing a merger or acquisition.
A)True
B)False Answer: False
Q2) In the United States target shareholders must have at least what time period to consider the original bids in cases when there is a competing tender offer?
A)10 days
B)5 days
C)2 days
D)One month
Answer: A
Q3) In Japan tender offers must be kept open for at least 20 calendar days but not more than 60.
A)True
B)False
Answer: True
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Chapter 4: Merger Strategy
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Q1) Doukas and Travlos found that, unlike many domestic acquisitions, acquirers enjoyed positive (although not statistically significant)) returns when they acquired targets in countries in which they did not previously have operations.
A)True
B)False
Q2) Cybo-Ottone and Murgia found positive abnormal returns for European bank merger announcements.
A)True
B)False
Q3) Markides and Oyon found positive announcement effects for acquisitions by U.S.firms of:
A)Continental European targets
B)British or Canadian target firms
C)South and Central American firms
D)Asian companies
Q4) Schipper and Thompson found positive stock market announcement effects from diversification acquisition programs in the 1960s.
A)True
B)False
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Chapter 5: Antitakeover Measures
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Q1) Masulis, Wang, and Xie found that the greater the divergence between insider voting rights and cash flow rights, the more likely shareholder wealth will increase.
A)True
B)False
Q2) Which of the following are usually considered preventative antitakeover measures?
A)Greenmail
B)Poison pills
C)Tender offers
D)All of the above
Q3) Flip-in provisions allow holders of rights to acquire stock in the target, as opposed to flip-over rights, which allow holders to acquire stock in the acquirer.
A)True
B)False
Q4) Research has shown that shareholders in companies that become white knights experience increased shareholder wealth.
A)True
B)False
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Chapter 6: Takeover Tactics
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Q1) Two-tiered tender offers are sometimes referred to as front -end-loaded tender offers.
A)True
B)False
Q2) Bange and Mazzeo found that target companies whose CEO and chairman were the same person were more likely to be recipients of bypass offers.
A)True
B)False
Q3) Assume that Company A makes a $40-per-share offer for Company B, which now trades at $30 per share.Also assume that the deal is expected to close in 90 days.If the deal closes, then the risk arbitrager's return would be:
A)20%
B)30%
C)35%
D)50%
Q4) In a bear hug the bidder makes an overture directly to the target company's shareholders.
A)True B)False
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Chapter 7: Hedge Funds As Activist Investors
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Q1) Research, such as the work of Huang, found that companies which had activists in their shareholder base tended to receive higher takeover premiums when they are sold.
A)True
B)False
Q2) Research, such as the work of Clifford, has established that when activists establish share position in target shareholder wealth declines.
A)True
B)False
Q3) Which of the following may be a valid criticism of activist hedge funds?
A)May cause target firms to be too short-term oriented
B)Tend to reduce target financial performance
C)Often fail to yield positive returns for investors
D)All of the above
E)None of the above
Q4) Which of the following is not an example of an activist hedge funds?
A)Carl Icahn Enterprises
B)Relational Investors
C)Goldman Sachs
D)Jana
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Chapter 8: Going-Private Transactions and Leveraged Buyouts
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Q1) In the United States two-tiered tender offers are not that common any more.
A)True
B)False
Q2) A study by Travlos and Cornett shows a statistically significant negative correlation between abnormal returns to shareholders and the P/E ratio of the rm relative to the industry
A)True
B)False
Q3) Research shows that audit fees constitute what percent of total costs of being public?
A)25% to 35%
B)Approximately 90%
C)50% to 60%
D)Roughly one third
Q4) Harris, Siegel, and Wright found productivity improvements for European companies that underwent an MBO.
A)True
B)False
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Chapter 9: The Private Equity Market
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Q1) Officer et al.found that target companies received higher takeover premiums in club deals.
A)True
B)False
Q2) Phalippou and Gottschalg analyzed the same return data as Kaplan and Schoar but found that private equity returns trailed the S&P 500 when unexited deals were taken into account.
A)True
B)False
Q3) Kaplan and Schoar found which of the following with respect to private equity firms?
A)Growth in the industry
B)Decline in the industry
C)Persistence in returns
D)All of the above
E)None of the above
Q4) Glode and Green theorize that the findings of Kaplan and Schoar may be due to insufficient disclosure by private equity firms.
A)True
B)False
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Chapter 10: The Junk Bond and the Leveraged Loan Market and
Stapled Financing
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Q1) The fallout from the S&L crisis caused the market supply of high-yield bonds to sharply rise.
A)True
B)False
Q2) Junk bond-financed takeovers were mainly concentrated in specific industries that were deregulated.
A)True
B)False
Q3) Which of the following factors contributed to the collapse of the junk bond market?
A)Default of integrated resources
B)Bankruptcy of Drexel Burnham Lambert
C)LTV bankruptcy
D)All of the above
Q4) Ma, Rao, and Peterson showed that the junk bond market was so resilient in the mid-1980s that the bankruptcy of LTV had little impact of bond default probabilities.
A)True
B)False
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Chapter 11: Corporate Restructuring
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Q1) Which of the following are examples of pension-related employee benefit plans?
A)Defined benefit
B)Defined contribution
C)Profit sharing
D)All of the above
Q2) In a spin-off the entity being separated from the parent company often is assigned specific debt attributable to it as part of the sale process.
A)True
B)False
Q3) Kaplan and Weishbach found that diversifying deals were which of the following with respect to the likelihood of subsequent divestiture?
A)Four times more likely to be divested
B)Equally likely
C)Two times less likely
D)None of the above
Q4) Many studies covering a quarter of a century document the positive shareholder wealth effects of sell-offs.
A)True
B)False
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Chapter 12: Restructuring in Bankruptcy
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Q1) A prepackaged bankruptcy may also provide tax benefits because net operating losses are treated differently in a workout than in a bankruptcy
A)True
B)False
Q2) George and Hwang found that firms with high distress costs had:
A)Lower leverage
B)Lower probabilities of default
C)None of the above
D)Both a and b
Q3) Dun & Bradstreet showed that which of the following are causes of business failure?
A)Economic factors e.g., industry weakness, insufficient profits)
B)Financial factors e.g., heavy operating expenses, insufficient capital)
C)Neglect e.g., poor work habits, business conflicts)
D)Fraud
E)All of the above
Q4) Larger companies tend to do better in Chapter 11 bankruptcy than smaller ones.
A)True
B)False
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Chapter 13: Corporate Governance
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Q1) Core, Holthausen, and Larker's research found:
A)An inverse relationship between CEO compensation and the percentage of outside directors on the board
B)An inverse relationship between CEO compensation and the size of the board
C)None of the above
D)Both a and b
Q2) When challenged, which is not common, courts have found golden parachute agreements to be an illegal giveaway of shareholder wealth.
A)True
B)False
Q3) The European Union has enacted its own version of the Sarbanes-Oxley Act.It is called:
A)European Accounting Regulatory Mandate
B)8th Company Directive
C)European Commission Accounting Regulatory Reform Law
D)None of the above
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Chapter 14: Joint Ventures and Strategic Alliances
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Q1) McConnell and Nantell study showed that shareholders in companies entering into joint ventures enjoyed announcement period returns of -4%.
A)True
B)False
Q2) Chan, Kensinger, Keown, and Martin found positive abnormal returns from strategic alliances.
A)True
B)False
Q3) Woolridge and Snow's research on strategic investment decisions derived results that contradict those of McConnell and Nattell.
A)True
B)False
Q4) One of the reasons why companies enter into strategic alliances is to:
A)Jointly benefit from specific knowledge resources of one of the partners
B)Gain from a situation where a smaller partner possesses specific knowledge and expertise
C)Totally avoid antitrust conflicts
D)Both a and b
E)Both a and c
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Chapter 15: Valuation
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Q1) Which of the following are desirable characteristics of targets?
A)Rapidly growing cash flows and earnings
B)Low P/E ratios
C)Market value less than book value
D)All of the above
True or False
Q2) Continuing value and exit value mean the same thing.
A)True
B)False
Q3) For many years the concentrated holdings by large block holders made hostile takeovers in Europe more difficult to complete.
A)True
B)False
Q4) In thin markets float shares are not as plentiful.
A)True
B)False
Q5) Business valuation is as much of an art as it is a science.
A)True
B)False
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Chapter 16: Tax Issues in Mergers & Acquisitions
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Q1) In the United States and under the purchase method, the acquiring company is entitled to income of the acquired company only from the date of purchase.
A)True
B)False
Q2) In a Type B reorganization in the United States, cash may constitute no more than 20% of the consideration paid for the target's shares.
A)True
B)False
Q3) Research by Auerbach and Reishus found that:
A)Firms that merge more frequently do not borrow more than firms that have exhibited a less tendency to merge
B)Firms that merge more frequently increasingly use stock as a function on the number of deals they do
C)Private equity firms use less debt when they complete deals
D)All of the above
E)Both a and b True or False
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