Entrepreneurial Finance Practice Exam
Course Introduction
Entrepreneurial Finance explores the unique financial challenges and opportunities faced by startups and growing ventures. The course covers essential topics such as funding sources, valuation, capital structure, risk management, and financial planning tailored to entrepreneurial environments. Students will learn how to assess funding needs, evaluate and negotiate with investors including venture capitalists and angel investors, and make critical decisions regarding resource allocation to maximize growth and sustainability. Through case studies and practical exercises, the course prepares students to navigate the financial complexities of launching and scaling a successful business.
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) Buyers often prefer "friendly" takeovers to hostile ones because of all of the following except for:
A) Can often be consummated at a lower price
B) Avoid an auction environment
C) Facilitate post-merger integration
D) A shareholder vote is seldom required
E) The target firm's management recommends approval of the takeover to its shareholders
Answer: D
Q2) A vertical merger is one in which the merger participants are usually competitors.
A)True
B)False
Answer: False
Q3) Deregulated industries often experience an upsurge in M&A activity shortly after regulations are removed.
A)True
B)False
Answer: True
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Chapter 2: The Regulatory Environment
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Sample Questions
Q1) This is the first time that a foreign regulatory body has prevented a deal involving U.S.firms only from occurring.What do you think are the long-term implications,if any,of this precedent?
Answer: Concerns about not receiving regulatory approval may discourage firms from engaging in cross-border transactions involving firms with European operations.Consequently,the potential benefits of improved efficiencies resulting from such mergers may not be realized.
Q2) The Sarbanes-Oxley bill is intended to achieve which of the following:
A) Auditor independence
B) Corporate responsibility
C) Improved financial disclosure
D) Increased penalties for fraudulent behavior
E) All of the above
Answer: E
Q3) The requirements to be listed on most major public exchanges far exceed the auditor independence requirements of the Sarbanes-Oxley Act.
A)True
B)False
Answer: True
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Page 4
Chapter 3: The Corporate Takeover Market: Common
Takeover Tactics, anti-Takeover Defenses, and Corporate Governance
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126 Flashcards
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Sample Questions
Q1) Which firm is the acquirer and which is the target firm?
Answer: The acquirer is Kraft and the target is Cadbury
Q2) Which is true of the following? A white knight
A) Is a group of dissident shareholders which side with the bidding firm
B) Is a group of the target firm's current shareholders which side with management
C) Is a third party that is willing to acquire the target firm at the same price as the bidder but usually removes the target's management
D) Is a firm which is viewed by management as a more appropriate suitor than the bidder
E) Is a firm that is willing to acquire only a large block of stock in the target firm
Answer: D
Q3) Litigation is a tactic that is used only by acquiring firms.
A)True
B)False
Answer: False
Q4) Why do you believe Reynolds' management rejected Alcoa's initial bid as inadequate?
Answer: Reynolds' was trying to gain time to solicit additional bids.
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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) Determining how to compete requires a firm's management to consider which of the following factors?
A) Factors critical to successfully competing in its targeted markets
B) An external market analysis
C) An evaluation of what criteria customers use to make buying decisions
D) Availability of product substitutes
E) All of the above
Q2) Strong sales growth and low entry barriers characterize the embryonic and growth stages of a product's life cycle.
A)True
B)False
Q3) Which of the following are ways to implement a firm's business strategy?
A) Merge or acquisition
B) Joint venture
C) Going it alone
D) Asset swap
E) All of the above
Q4) Describe the key factors both external and internal to the firm that you believe are driving this strategy.
Chapter 5: Implementation: Search Through Closing:
Phases 3 to 10 of the Acquisition Process
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106 Verified Questions
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Sample Questions
Q1) How might the amount and composition of the purchase price affect Cingular's,SBC's,and BellSouth's cost of capital?
Q2) Closing is included in which of the following activities?
A) Development of a business plan
B) Development of an acquisition plan
C) The search process
D) The negotiation process
E) None of the above
Q3) What was the role of "strategic controls" in implementing the K2 business plan?
Q4) Should Reliable Appliances have been able to anticipate this problem from its due diligence of Quality-Built? Explain how this might have been accomplished.
Q5) What alternatives to acquisition could Mattel have considered? Discuss the pros and cons of each alternative?
Q6) 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
Page 7
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Chapter 6: Postclosing Integration: Mergers, acquisitions, and Business Alliances
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Sample Questions
Q1) Focus on customers is generally considered a factor critical to the ultimate success or failure of the merger or acquisition.
A)True
B)False
Q2) Why did Cisco have a "no layoff" policy? How did this contribute to maintaining or increasing the value of the companies it acquired?
Q3) When news about the integration is bad,it is critical never to share it with employees.
A)True
B)False
Q4) Integration of a new business into an existing one rarely affects current operations of either business.
A)True B)False
Q5) Describe the management challenges you think may face Citigroup's management team due to the increasing global complexity of Citigroup?
Q6) What are the major cultural differences between Daimler and Chrysler?
Q7) Explain the logic behind combining the two companies.Be specific.
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Chapter 7: Merger and Acquisition Cash Flow Valuation
Basics
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Sample Questions
Q1) The cost of equity can also be viewed as an opportunity cost.
A)True
B)False
Q2) All of the following are true about the marginal tax rate for the firm except for
A) The marginal tax rate in the U.S. is usually about 40%.
B) The effective tax rate is usually less than the marginal tax rate.
C) Once tax credits have been used and the ability to further defer taxes exhausted, the effective rate can exceed the marginal rate at some point in the future.
D) It is critical to use the effective tax rate in calculating after-tax operating income in perpetuity.
E) It is critical to use the marginal rate in calculating after-tax operating income in perpetuity.
Q3) If free cash flow to the firm is expected to remain at $10 million indefinitely and the firm's cost of equity is .10,the present value of the firm is $100 million.
A)True
B)False
Q4) Did @Home overpay for Excite?
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Chapter 8: Relative,asset-Oriented,and Real Option
Valuation Basics
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Sample Questions
Q1) To what extent might the use of stock by Google have influenced the amount they were willing to pay for YouTube? How might the use of "overvalued" shares impact future appreciation of Google stock?
Q2) What are the key valuation assumptions implicit in the valuation method discussed in this case study?
Q3) The so-called PEG ratio is calculated by dividing the firm's price-to-earning ratio by the expected growth rate in the firm's share price.
A)True
B)False
Q4) Which of the following represent options available to managers in making investment decisions?
A) Delay initial investment
B) Accelerate cumulative investment
C) Abandon the investment at a later date
D) A & B only
E) A, B, & C
Q5) Why do you believe Merrill was willing to limit its influence in the combined firms?
Page 10
Q6) 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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Sample Questions
Q1) By expressing the target's line-item data as a percentage of sales,it is possible to compare the target company with other companies' line item data expressed in terms of costs to highlight significant differences.
A)True
B)False
Q2) Net synergy may be estimated as the difference between the sum of the present values of the target and acquiring firms,including the effects of synergy,and the value of the target firm including the effects of synergy.
A)True
B)False
Q3) The effects of synergy resulting from combining the acquirer and target firms do not affect the acquirer's ability to finance the transaction.
A)True
B)False
Q4) Given the terms of the agreement,Wrigley shareholders would own what percent of the combined companies? Explain your answer
Q5) It what way did the acquisition of Wrigley's represent a strategic blow to Cadbury?
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Chapter 10: Analysis and Valuation of Privately Held Companies
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Sample Questions
Q1) In many family owned firms,family influence is exercised by family members holding senior management positions,seats on the board of directors,and through holding super-voting stock (i.e.,stock with multiple voting rights).
A)True
B)False
Q2) What other alternatives could Nick have pursued? Discuss the advantages and disadvantages of each.
Q3) EBITDA has become an increasingly popular measure of value for privately held firms in recent years.
A)True
B)False
Q4) There is widespread agreement over the magnitude of the liquidity discount.
A)True
B)False
Q5) The availability and reliability of data for public companies tends to be much greater than for small private firms.
A)True
B)False
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Q6) What were the primary reasons Cantel wants to acquire Crosstex? Be specific.
Chapter 11: Structuring the Deal: Payment and Legal
Considerations
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Sample Questions
Q1) A financial buyer may use a holding company structure because they expect to sell the firm within a relatively short time period.
A)True
B)False
Q2) How valid are the reasons for the proposed merger?
Q3) What is the form of payment? Why was it used?
Q4) The same outcome could have been achieved if a single buyer had reached agreement with other banks to acquire selected pieces of ABN before completing the transaction.The pieces could then have been sold at the closing.Why might the use of the consortium been a superior alternative?
Q5) Decision-making in JVs and partnerships is likely to be faster than in a corporate structure.Consequently,JVs and partnerships are more commonly used if speed is desired during the post-closing integration.
A)True
B)False
Q6) How did Chevron use the form of payment as a potential takeover strategy?
Q7) What is the form of payment or total consideration? Why do you think this form of payment may have been selected by the parties involved?
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Chapter 12: Structuring the Deal: Tax and Accounting Considerations
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Sample Questions
Q1) How might the use of stock,as an acquisition "currency," have contributed to the sustained decline in JDS Uniphase's stock through mid-2001? In your judgment what is the likely impact of the glut of JDS Uniphase shares in the market on the future appreciation of the firm's share price? Explain your answer.
Q2) Which of the following is not true of a taxable purchase of stock?
A) Taxable transactions usually involve the purchase of the target's voting stock with acquirer stock.
B) Taxable transactions usually involve the purchase of the target's voting stock, because the purchase of assets automatically will trigger a taxable gain for the target if the fair market value of the acquired assets exceeds the target firm's tax basis in the assets.
C) All stockholders are affected equally in a taxable purchase of assets.
D) The target firm does not pay any taxes on the transaction.
E) The effect of the tax liability will vary depending on the individual shareholder's tax basis.
Q3) What are some of the challenges the two companies are likely to face while integrating the businesses?
Q4) Did the AirTouch board make the right decision? Why or why not?
Q5) What is the form of payment? Why was it used?
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Chapter 13: Financing the Deal: Private Equity,
Funds, and
Other Sources of
Funds
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Q1) Which of the following is not true about junk bonds?
A) Junk bonds are either unrated or rated below investment grade by the credit rating agencies
B) Typically yield about 1-2 percentage points below yields on U.S. Treasury debt of comparable maturities.
C) Junk bonds are commonly used source of "permanent" financing in LBO transactions
D) During recessions, junk bond default rates often exceed 10%
E) Junk bond default risk on non-investment grade bonds tends to increase the longer the elapsed time since the original issue date of the bonds
Q2) Cash flow lenders view the borrower's future cash flow generation capability as the primary means of recovering a loan,while largely ignoring the assets of the LBO target.
A)True
B)False
Q3) An indenture is a contract between the firm that issues the long-term debt securities and the lenders.
A)True
B)False
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Page 15
Chapter 14: Highly Leveraged Transactions: Lbo Valuation and Modeling Basics
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Sample Questions
Q1) Why would the buyout firms want Qwest to continue to provide such services as billing and information technology support? How might such services be priced?
Q2) To determine the total value of the firm using the adjusted present value method,add the present value of the firm's cash flows to equity,interest tax savings,and terminal value discounted at the firm's unlevered cost of equity and subtract the present value of the expected cost of financial distress.
A)True
B)False
Q3) The present value of tax savings is irrelevant to the adjusted present value method. A)True B)False
Q4) Explain how the way in which the LBO is financed affects the way it is operated and the timing of when equity investors choose to exit the business.Be specific.
Q5) Why did the buyout firms want a 50-year contract to be the exclusive provider of publishing services to Qwest Communications?
Q6) Why might the RJR Nabisco board have accepted the KKR bid over the Johnson bid?
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Chapter 15: Business Alliances: Joint Ventures, partnerships, strategic Alliances, and Licensing
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Q1) What other motives may General Motors have had in making this investment?
Q2) Business alliances generally do not exhibit a higher success rate than mergers and acquisitions.
A)True
B)False
Q3) Give examples of how the partners' objectives differ.
Q4) How do you believe the ownership distribution for MillersCoors was determined?
Q5) Do you believe that Conoco gained an effective say in Lukoil's operations following its investment? Explain your answer.
Q6) Unlike other legal forms,the C corporate structure has an indefinite life as it does not have to be dissolved as a result of the death of the owners or if one of the owners wishes to liquidate their ownership position.
A)True
B)False
Q7) What is the purpose of the 2-year lockup period during which neither partner can sell its stock? How might the lock-up period impact the value of each firm's holdings?
Q9) In what way do these alliances represent a convergence of "bricks and clicks?" Page 17
Q8) Why do you believe Conoco's stock fell immediately following the announcement?
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Page 18
Chapter 16: Alternative Exit and Restructuring Strategies:
Divestitures, spin-Offs, carve-Outs, split-Ups, and Split-Offs
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Q1) In general,a voluntary bust-up or liquidation has the advantage over mergers of deferring the recognition of a gain by the stockholders of the selling company until they eventually sell the stock.
A)True
B)False
Q2) Explain why Sara Lee may have chosen to spin-off rather than to divest HanesBrands Inc.? Be specific.
Q3) 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.
Q4) For financial reporting purposes,a distribution of tracking stock splits the parent firm's equity structure into separate classes of stock without a legal split-up of the firm.
A)True
B)False
Q5) Management may sell assets to fund diversification opportunities?
A)True
B)False
Q6) How might a spin-off create shareholder value for Kraft Foods shareholders?
Page 19
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Chapter 17: Alternative Exit and Restructuring Strategies:
Bankruptcy Reorganization and Liquidation
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Q1) 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
Q2) A debt extension occurs when creditors agree to lengthen the period during which the debtor firm can repay its debt.
A)True
B)False
Q3) The court must approve any plan accepted by the debtor's shareholders and creditors.True of False
A)True
B)False
Q4) In the absence of a voluntary settlement out of court,the debtor firm may seek protection from its creditors by initiating bankruptcy or may be forced into bankruptcy by its creditors.
A)True
B)False
Page 20
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Chapter 18: Cross-Border Mergers and Acquisitions: Analysis
and Valuation
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Q1) Which of the following represent common components of the global capital asset pricing model when applied to valuing firms in emerging countries?
A) Risk free rate of return
B) Specific country's risk premium
C) Firm size risk premium
D) Emerging country firm's global beta
E) All of the above
Q2) The methodology for valuing cross-border transactions using discounted cash flow analysis is substantially different from that employed when both the acquiring and target firms are within the same country.True of False
A)True
B)False
Q3) Employees receive far greater legal protection in many developed foreign countries than they do in the U.S.
A)True
B)False
Q4) What were the motives for Arcelor's and ThyssenKrupp's interest in Dofasco?
Q5) What is a friendly takeover? Speculate as to why it may have turned hostile?
Q6) Why would rising commodity prices spark industry consolidation?
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