Financial Strategy
Pre-Test Questions
Course Introduction
Financial Strategy explores the frameworks and analytical tools essential for making sound long-term financial decisions within organizations. The course focuses on the integration of strategic planning and financial management, covering topics such as capital structure, financial risk management, investment appraisal, valuation, dividend policy, and mergers and acquisitions. Through case studies and practical applications, students learn to align financial strategies with overall business objectives, optimize resource allocation, and drive value creation in dynamic market environments.
Recommended Textbook Mergers Acquisitions and Corporate Restructurings 6th Edition by Patrick A. Gaughan
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Chapter 1: Introduction
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Sample Questions
Q1) Following Smith v.Van Gorkom:
A)Targets must immediately announce all overtures from potential bidders
B)Directors are more likely to seek outside fairness opinions
C)We have seen more use of debt financing
D)None of the above
Answer: B
Q2) In a de facto merger:
A)Bidders may be able to avoid all of the target's liabilities
B)Bidders own at least 30% of the target's stock
C)Only California law applies
D)The bidder is considered to have acquired the target even if no formal acquisition took place
True or False
Answer: D
Q3) A letter of intent:
A)Is legally required in all U.S.deals
B)Sets for more detailed terms than a term sheet
C)Is more common in closely held acquisitions
D)None of the above
Answer: B
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Chapter 2: History of Mergers
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Q1) LBOs became increasingly popular during the fourth merger wave.
A)True
B)False
Answer: True
Q2) The first merger wave was significantly curtailed by the Sherman Antitrust Act.
A)True
B)False Answer: False
Q3) Which of the following factors contributed to the end of the third merger wave?
A)Stock market downturn
B)Economic slowdown
C)Antitrust enforcement
D)None of the above
E)a, b, and c
Answer: E
Q4) The United Technologies takeover of Otis Elevator is an example of a failed merger.
A)True
B)False Answer: False
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Chapter 3: Legal Framework
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Q1) Research by Lisa Muelbroek empirically confirmed that stock price run-ups before takeover announcements often occur.This reflects:
A)Toe Holds
B)Insider Trading
C)Anticompetitive behavior
D)None of the above
Answer: B
Q2) 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
Q3) Bidders doing a mini-tender offer must file a Schedule TO within 20 business days from when the offer is announced.
A)True
B)False
Answer: False
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Chapter 4: Merger Strategy
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Q1) United Airlines' merger with Continental Airlines is an example of:
A)Vertical integration
B)Conglomerate formation
C)Horizontal integration
D)None of the above
Q2) 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
Q3) 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
Q4) Vivendi under Meissier is a good example of a hubris-related M&A program.
A)True
B)False
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Chapter 5: Antitakeover Measures
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Sample Questions
Q1) Research has shown that shareholders in companies that become white knights experience increased shareholder wealth.
A)True
B)False
Q2) Morck, Shleifer, and Vishny found that with higher share ownership by management there tends to be:
A)More antitakeover defense
B)Higher Tobin q's
C)Lower shareholder values
D)None of the above
Q3) The case involving this company established the legality of poison pills in the United States:
A)Crown-Zellerbach
B)Kraft Foods
C)Universal Foods
D)Household International
Q4) Poison pills can increase shareholder values through facilitating an auction process.
A)True
B)False
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Chapter 6: Takeover Tactics
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Q1) Research shows that once a proxy fight begins, it is more than likely that there will eventually be significant changes in the operation and even independence of the target company.
A)True
B)False
Q2) The tender offer was first introduced in the Inco - ESB takeover battle.
A)True
B)False
Q3) In a bear hug the bidder makes an overture directly to the target company's shareholders.
A)True
B)False
Q4) 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%
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Chapter 7: Hedge Funds As Activist Investors
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Q1) There is research which supports the view that Investments in activist funds tend to outperform nonactivist hedge fund investments.
A)True
B)False
Q2) 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
Q3) 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
Q4) Activists acquire stock positions with intent to make changes in the company which will increase the stock price and give them a profit.
A)True
B)False
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Chapter 8: Going-Private Transactions and Leveraged Buyouts
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Sample Questions
Q1) 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
Q2) Unsecured debt is sometimes also called subordinate debt.
A)True
B)False
Q3) The first LBOs occurred in the fourth merger wave.
A)True
B)False
Q4) In Hansen Trust v.SCM the court concluded: n.
A)Merrill Lynch was given favorable treatment o.
B)Use of lockup option was inappropriate p.
C)An appropriate auction was preempted q.
D)All of the above r.
E)None of the above
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Chapter 9: The Private Equity Market
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Q1) Examples of the types of institutions that become limited partners in private equity funds include:
A)insurance companies
B)pension funds
C)endowments
D)all of the above
True or False
Q2) Private equity firms used to be referred to as LBO firms.
A)True
B)False
Q3) Which of the following are examples of private equity firms?
A)KKR
B)Blackstone
C)Morgan Stanley
D)Apollo Group
E)All of the above
F)Both a and c
G)a, b, and d
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Chapter 10: The Junk Bond and the Leveraged Loan Market and
Stapled Financing
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Q1) Altman and Kishore showed that:
A)High-yield bonds had a 4% higher average return than investment-grade bonds
B)Recovery rates varied by bond seniority
C)Returns are sometimes not closely related to risk
D)None of the above
Q2) Which of the following investment banks refused to participate in the junk bond market?
A)Drexel Burnham Lambert
B)Goldman Sachs
C)First Boston
D)Merrill Lynch
E)None of the above
True or 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
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Chapter 11: Corporate Restructuring
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Sample Questions
Q1) 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
Q2) Boise Cascade abandoned its core business and focused on the business of Office Max, which it had previously acquired.
A)True
B)False
Q3) Asian spin-off volume:
A)Historically follows the same pattern as the U.S.spin-off volume
B)Followed the same pattern as European spin-off volume
C)Has declined in the past when spin-offs rose in European and the United States
D)None of the above
Q4) Cash flow needs motivated the sell-off of Hertz by GM.
A)True
B)False
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Chapter 12: Restructuring in Bankruptcy
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Q1) Which of the following bankruptcies were related to fraud?
A)Parmalat
B)Enron
C)Refco
D)All of the above
Q2) Which of the following are drivers of economic failure?
A)Revenues less than costs
B)Return on investment below costs of capital
C)Profitability below expected levels
D)All of the above
Q3) DIP financing refers to financing of leveraged buyouts.
A)True
B)False
Q4) In Chapter 11, when an automatic stay has been granted creditors cannot seize the assets of bankrupt companies without getting court approval.
A)True
B)False
Q5) The Crystal Oil Company was the first major prepackaged bankruptcy.
A)True
B)False
Page 14
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Chapter 13: Corporate Governance
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Q1) Research, such as research by David Yermack, has found which of the following with respect to larger board size:
A)Positive shareholder wealth effects
B)Negative shareholder wealth effects
C)No significant market reactions
Q2) Research, such as a study by Hallock, shows the CEO compensation is higher for company with interlocked boards.
A)True
B)False
Q3) Core, Holthausen, and Larker's research found that CEO compensation was greater for the directors who were gray, over age 69, or who served on three or more boards.
A)True
B)False
Q4) Lambert and Larker found that the trigger control percentage for activation of golden parachutes agreements was when a bidder acquired approximately 51% of the company outstanding stock.
A)True
B)False
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Chapter 14: Joint Ventures and Strategic Alliances
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Q1) Chan, Kensinger, Keown, and Martin found significant transfers of wealth from alliance partners.
A)True
B)False
Q2) The following factors should govern the allocation of control rights in joint ventures except for:
A)The degree to which there may be an underinvestment of either party that could have an adverse effect on the success of the alliance
B)The relative bargaining parties of the two partners.
C)The extent to which one party may engage in opportunistic behavior, which can have an adverse effect on the outcomes
D)All of the above
E)Both a and c
Q3) Enhancing R&D is a common reason why companies form joint ventures.
A)True
B)False
Q4) Strategic alliances carry a lower probability of antitrust conflicts than M&As.
A)True
B)False
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Chapter 15: Valuation
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Sample Questions
Q1) Moeller, Schlingemann, and Stulz's research shows that during the period 1998-2001, acquiring firm shareholders gained a total of $240 billion!
A)True
B)False
Q2) Which of the following is true:
A)FCF = EBITDA - CE - CWC + CTP
B)FCF = EBITDA - CE - CWC - CTP
C)FCF = EBITDA - CE + CWC + CTP
D)None of these
Q3) A study by Varaiya showed the following about takeover premiums:
A)Significant support for the role of competitive forces in the auction process in determining premiums
B)Significant role for antitakeover measures in determining premiums
C)Mixed results for the role of anticipated benefits
D)All of the above
E)Both b and c
Q4) In bear markets, control premiums (relative to current market prices)) may rise.
A)True
B)False
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Chapter 16: Tax Issues in Mergers & Acquisitions
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Q1) In a Type A reorganization in the United States, at least what percent of the payment to the target must be stock in the acquiring company:
A)20%
B)50%
C)80%
D)100%
E)No specific percentage
Q2) In a Type C reorganization, cash may be used only if 50% of the target shares were purchased with stock.
A)True
B)False
Q3) In the United States, a transaction may be partially taxable if the consideration is a combination of stock and cash.
A)True
B)False
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