Corporate Restructuring Test Questions
Course Introduction
Corporate Restructuring explores the strategies, tools, and techniques organizations use to adapt to changing business environments and enhance long-term value. The course examines key restructuring activities such as mergers and acquisitions, divestitures, leveraged buyouts, spin-offs, debt restructuring, and financial distress management. Emphasis is placed on understanding the legal, financial, and operational considerations involved in the restructuring process, as well as the roles of various stakeholders. Through case studies and real-world examples, students develop the analytical skills necessary to assess restructuring opportunities and risks, design effective restructuring plans, and implement them successfully in dynamic corporate settings.
Recommended Textbook
Mergers Acquisitions and Other Restructuring Activities 7th Edition by Donald DePamphilis
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Page 2
Chapter 1: Introduction to Mergers, acquisitions, and Other
Restructuring
Activities
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Sample Questions
Q1) Why could Gores Technology do in a matter of weeks what the behemoth toy company,Mattel,could not do?
Answer: Gores was in the business of turning around companies.They knew what to do and appreciated the need for speed.Gores also exhibited the ability that eluded Mattel to make quick decisions.Mattel may have been slow to make the needed changes because that could have been seen by investors as an admission by Mattel's management that they had made a mistake in buying The Learning Company.
Q2) When investment bankers are paid by a firm's board to evaluate a proposed takeover bid,their opinions are given in a so-called "fairness letter."
A)True
B)False
Answer: True
Q3) Large investment banks invariably provide higher quality service and advice than smaller,so-called boutique investment banks.
A)True
B)False
Answer: False
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Chapter 2: The Regulatory Environment
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Sample Questions
Q1) How might the proliferation of Internet usage in the twenty-first century change your answer to question 1?
Answer: Many financial institutions offer online banking today.In some instances,such services are free.Consequently,the array of alternatives to Intuit has grown to the point where competition would be fierce if the firm tried to raise prices sharply or did not provide the services users demanded.
Q2) Foreign competitors are not relevant to antitrust regulators when trying to determine if a merger of two domestic firms would create excessive pricing power.
A)True
B)False
Answer: False
Q3) A heavily concentrated market is one in which a single or a few firms control a disproportionately large share of the total market.
A)True
B)False
Answer: True
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Chapter 3: The Corporate Takeover Market: Common
Takeover Tactics, anti-Takeover Defenses, and Corporate Governance
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Q1) Should state laws be used to protect companies from hostile takeovers?
Answer: The empirical evidence suggests that target shareholders benefit greatly from a hostile takeover,while the acquirer's shareholders' may experience modest negative abnormal returns.Some critics of M&A's argue that the gains to the target shareholders are more than offset by the damage to other constituent groups including employees,communities,customers,and suppliers.
Q2) Kraft appeared to take action immediately following Cadbury's spin-off of Schweppes making Cadbury a pure candy company.Why do you believe that Kraft chose not to buy Cadbury and later divest such noncore businesses as Schweppes?
Answer: Kraft would have had to pay a larger purchase price for the combined Cadbury and Schweppes businesses.It would also have required a longer and more involved due diligence.Finally,the price that they might have been able to receive for Schweppes might have been below its intrinsic value because bidders would have known that Kraft considered Schweppes a noncore asset and would have bid accordingly.
Q3) Litigation is a tactic that is used only by acquiring firms.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Planning,developing Business,and Acquisition
Plans: Phases 1 and 2 of the Acquisition Process
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Sample Questions
Q1) Stakeholders include which of the following groups?
A) Shareholders
B) Customers
C) Lenders
D) Suppliers
E) All of the above
Q2) Who are Adobe's and Omniture's customers and what are their needs?
Q3) Planning in advance of a merger or an acquisition necessarily slows down decision making.
A)True
B)False
Q4) Who are Dell's primary customers? Current and potential competitors? Suppliers? How would you assess Dell's bargaining power with respect to its customers and suppliers? What are Dell's strengths/weaknesses versus it current competitors?
Q5) Potential competitors include firms (both domestic and foreign)in the current market,those in related markets,current customers,and current suppliers.
A)True
B)False
Q6) Comment on the likely success of each of this intended transformation?
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Chapter 5: Implementation: Search Through Closing:
Phases 3 to 10 of the
Acquisition Process
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Q1) What integration challenges do you believe these two banks will encounter as they attempt to consolidate operations?
Q2) An excessively long list of screening criteria used to develop a list of potential acquisition targets can severely limit the number of potential candidates.
A)True
B)False
Q3) In your opinion,are earnouts more appropriate for firms in certain types of industries than for others? If so,give examples.Explain your answer.
Q4) The screening process represents a refinement of the search process and commonly utilizes which of the following as selection criteria
A) Market share, product line, and profitability
B) Product line, profitability, and growth rate
C) Profitability, leverage, and growth rate
D) Degree of leverage, market share, and growth rate
E) All of the above
Q5) Do you believe the cross option and unusual fee structure in this transaction were in the best interests of the Wachovia shareholders? Explain your answer.
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Chapter 6: Postclosing Integration: Mergers, acquisitions, and Business Alliances
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Sample Questions
Q1) Explain the logic behind combining the two companies.Be specific.
Q2) Why did Citibank and Travelers resort to a co-CEO arrangement? What are the advantages and disadvantages of such an arrangement?
Q3) In what sense is the initial divergence in Travelers' operational orientation and Citigroup's marketing and planning orientation an excellent justification for the merger? Explain your answer.
Q4) Following an acquisition,long-term contracts with suppliers can generally be broken without redress.
A)True
B)False
Q5) Plant consolidation rarely requires the adoption of a common set of systems and standards for all manufacturing activities.
A)True
B)False
Q6) High employee turnover is rarely a problem during the integration of the target firm into the acquirer.
A)True
B)False
Page 8
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Chapter 7: Merger and Acquisition Cash Flow Valuation
Basics
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Sample Questions
Q1) The market risk or equity premium refers to the additional rate of return in excess of the weighted average cost of capital that investors require to purchase a firm's equity.
A)True
B)False
Q2) Free cash flow to the firm is also called enterprise cash flow.
A)True
B)False
Q3) Which one of the following factors is not considered in calculating the firm's cost of equity?
A) risk free rate of return
B) beta
C) interest rate on corporate debt
D) expected return on equities
E) difference between expected return on stocks and the risk free rate of return
Q4) The discounted cash flow method for valuing a firm adjusts for differences in the magnitude and timing of cash flows and for risk.
A)True
B)False
Q5) Did @Home overpay for Excite?
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Chapter 8: Relative,asset-Oriented,and Real Option
Valuation Basics
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Q1) Valuations of target firms based on the comparable companies and recent transactions methods must be adjusted to reflect control premiums.
A)True
B)False
Q2) Liquidation or breakup value is the projected price of the firm's assets sold separately in liquidating or breaking up the firm.
A)True
B)False
Q3) Relative valuation methods are often described as market-based,as they reflect the amounts investors are willing to pay for each dollar of earnings,cash flow,sales,or book value at a moment in time.
A)True
B)False
Q4) Like the recent transactions method,comparable company valuation estimates do not require the addition of a purchase price premium.
A)True
B)False
Q5) What method of accounting would Merrill use to show its investment in BlackRock?
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Chapter 9: Applying Financial Models to Value, structure, and Negotiate Mergers and Acquisitions
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Q1) Value drivers are factors such as product volume,selling price,and cost of sales that have a significant impact on the value of the firm whenever they are altered.
A)True
B)False
Q2) Why was market share in the confectionery business an important factor in Mars' decision to acquire Wrigley?
Q3) Competitive dynamics simply refer to the factors within the industry that determine industry profitability and cash flow.
A)True
B)False
Q4) In your judgment,did it make good strategic sense to combine the Tribune and Times Mirror corporations? Why? / Why not?
Q5) The share exchange ratio indicates the number of acquirer shares to be exchanged for each share of target stock based on the target firm's current share price.
A)True
B)False
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Chapter 10: Analysis and Valuation of Privately Held Companies
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Sample Questions
Q1) In valuing private businesses,the U.S.tax courts have historically supported the use of which valuation method for purposes of estate valuation?
A) Discounted cash flow
B) Comparable company method
C) Tangible book value method
D) A combination of a and c
E) All of the above
Q2) Succession issues tend to be easier for small family owned firms than for large publicly traded firms.
A)True
B)False
Q3) Restricted stock is often issued to employees of privately held firms as a significant portion of their total compensation.Such stock is similar to other types of common stock except that its sale on the open market is prohibited for a period of time.
A)True
B)False
Q4) What were the primary reasons Cantel wants to acquire Crosstex? Be specific.
Page 12
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Chapter 11: Structuring the Deal: Payment and Legal
Considerations
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Q1) Whether cash is the predominant form of payment will depend on a variety of factors.These include the acquirer's current leverage,potential near-term earnings per share dilution of issuing new shares,the seller's preference for cash or acquirer stock,and the extent to which the acquirer wishes to maintain control over the combined firms.
A)True
B)False
Q2) Is this transaction likely to be non-taxable,wholly taxable,or partially taxable to Vivendi? Explain your answer.
Q3) Sellers who are structured as C corporations generally prefer to sell assets for cash than acquirer stock because of more favorable tax treatment. A)True
B)False
Q4) ESOP structures are rarely used vehicles for transferring the owner's interest in the business to the employees in small,privately owned firms.
A)True
B)False
Q5) From a legal standpoint,identify the acquirer and the target firms?
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Chapter 12: Structuring the Deal: Tax and Accounting
Considerations
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Q1) Under purchase price accounting,the excess of the purchase price paid over the book value of equity of the target firm is assigned only to the tangible assets up to their fair market value or to goodwill.
A)True
B)False
Q2) Tax benefits that result from an acquisition should always be considered as among the most important justification for paying a very high premium for the target firm.
A)True B)False
Q3) Asset sales by the target firm just prior to the transaction may threaten the tax-free status of the deal.Moreover,tax-free deals are disallowed within ten-years of a spin-off. A)True
B)False
Q4) The IRS treats the reverse triangular cash merger as a purchase of target shares,with the target firm,including its assets,liabilities,and tax attributes,ceasing to exist.
A)True B)False
14
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Chapter 13: Financing the Deal: Private Equity, hedge Funds, and
Other Sources of
Funds
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Q1) Why are payment-in-kind securities (e.g.,debt or preferred stock)particularly well suited for financing LBOs? Under what circumstances might they be most attractive to lenders or investors?
Q2) Which of the following are commonly used sources of funding for leveraged buyouts?
A) Secured debt
B) Unsecured debt
C) Preferred stock
D) Seller financing
E) All of the above
Q3) A negative loan covenant is a portion of a loan agreement that specifies the actions the borrowing firm agrees to take during the term of the loan.
A)True
B)False
Q4) Describe the firm's strategy to finance the transaction?
Q5) How might bondholders and preferred stockholders have been hurt in the RJR Nabisco leveraged buyout?
Q6) Cite examples of economies of scale and scope?
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Q7) Why might the RJR Nabisco board have accepted the KKR bid over the Johnson bid?
Chapter 14: Highly Leveraged Transactions: Lbo Valuation and Modeling Basics
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Sample Questions
Q1) Comment on the fairness of this transaction to the various stakeholders involved.How would you apportion the responsibility for the eventual bankruptcy of Tribune among Sam Zell and his advisors,the Tribune board,and the largely unforeseen collapse of the credit markets in late 2008? Be specific.
Q2) The tax benefits of higher leverage may be partially or entirely offset by the higher probability of default associated with an increase in leverage. A)True B)False
Q3) Describe how PI financed the purchase price.Speculate as why each source of financing was selected? How did CK pay for feels incurred in closing the transaction?
Q4) Is this transaction taxable or non-taxable to Tribune's public shareholders? To its post-transaction shareholders? Explain your answer.
Q5) Why was the equity contribution of the buyout firms as a percentage of the total capital requirements so much higher than amounts contributed during the 1980s?
Q6) Do you believe that MGM is an attractive LBO candidate? Why? Why not?
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Chapter 15: Business Alliances: Joint Ventures, partnerships, strategic Alliances, and Licensing
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Q1) Top management of the parents of a business alliance should not involve themselves aggressively and publicly,as this may tend to stifle alliance management's risk taking and creativity.
A)True
B)False
Q2) Describe the advantages of the supply agreement to Garmin compared to outright acquisition of Tele Atlas?
Q3) The formation of a successful alliance requires that a series of issues be resolved before signing an alliance agreement.
A)True
B)False
Q4) Foreign companies having a minority ownership position in international business alliances rarely have control over the alliance even though they may possess much of the expertise required to manage the alliance.
A)True
B)False
Q5) Do you believe that Conoco gained an effective say in Lukoil's operations following its investment? Explain your answer.
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Chapter 16: Alternative Exit and Restructuring Strategies:
Divestitures,
spin-Offs, carve-Outs, split-Ups, and Split-Offs
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Q1) Equity carve-outs have some of the characteristics of both divestitures and spin-offs.
A)True
B)False
Q2) Like divestitures or equity carve-outs,the spin-off generally results in an infusion of cash to the parent company.
A)True
B)False
Q3) Describe the motivation for UPS to undertake this type of transaction.
Q4) A spin-off is a transaction involving a separate legal entity whose shares are sold to the parent firm's shareholders.
A)True
B)False
Q5) What risks did Hughes face in moving completely away from its core defense business and into a high-technology commercial business? In your judgment,did Hughes move too quickly or too slowly? Explain your answer.
Q6) What other alternatives could USX have pursued to increase shareholder value? Why do you believe they pursued the breakup strategy rather than some of the alternatives?
Page 18
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Chapter 17: Alternative Exit and Restructuring Strategies:
Bankruptcy Reorganization and Liquidation
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Q1) Comment on the fairness of the bankruptcy process to shareholders,lenders,employees,communities,government,etc.Be specific.
Q2) Prior to the Bankruptcy Abuse Protection and Consumer Protection Act of 2005 (BAPCPA),commercial enterprises used Chapter 11 Reorganization to continue operating a business and to repay creditors through a court-approved plan of reorganization.
A)True
B)False
Q3) For capital markets to function smoothly,disputes involving the legal rights of all participants (both debtors and creditors)need to be resolved quickly and equitably by the courts.
A)True
B)False
Q4) Prepackaged bankruptcies are less common today than in years past. A)True
B)False
Q5) What alternative restructuring strategies do you believe may have been considered for GM? Of these,do you believe that the 363 sale in bankruptcy represented the best course of action? Explain your answers.
Page 19
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Chapter 18: Cross-Border Mergers and Acquisitions: Analysis
and Valuation
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Q1) Developed economies seem to exhibit significant differences in the cost of equity due to the relatively high integration of their capital markets in the global capital market.
A)True
B)False
Q2) International transactions tend to be highly challenging,as they typically involve multiple tax and legal jurisdictions.
A)True
B)False
Q3) Do you believe that countries should permit foreign ownership of vital scarce natural resources? Explain your answer.
Q4) For an acquirer evaluating a target firm in another country,the target's cash flows can be expressed in which of the following ways?
A) Expressed in the home country's currency
B) Local country's currency
C) In real terms
D) A & B only
E) A, B, and C
Q5) Why would rising commodity prices spark industry consolidation?
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