Chapter 32 Corporate Restructuring Complete Test Bank nan

Principles of Corporate Finance, 13e (Brealey)

Chapter 32 Corporate Restructuring

1) Which of the following are methods by which a company's structure can be modified?

A) LBOs and privatizations

B) Privatizations

C) LBOs and spin-offs and carve-outs

D) LBOs, privatizations, spin-offs and carve-outs, and bankruptcies

2) Leveraged buyouts (LBOs) almost always involve which of the following?

I) a large part of the purchase price is financed by debt;

II) most of the issued debt is below investment grade (i.e., junk);

III) the firm goes private and its shares are no longer traded on the open market

A) I only

B) II only

C) I and II only

D) I, II, and III

3) If a firm's management leads a leveraged buyout transaction, then the transaction is called a(n)

A) IPO.

B) MBO.

C) MACRS.

D) SEO.

4) The largest and best documented LBO of the 1980s was

A) KKR acquiring RJR Nabisco.

B) Thompson Co. acquiring Southland (7-11).

C) KKR acquiring Beatrice.

D) None of these options are correct.

5) The following are examples of LBOs EXCEPT:

A) KKR and RJR Nabisco.

B) Motorola and Motorola Mobility.

C) JAB and Keurig Green Mountain.

D) Carlyle Group and Veritas.

6) The following are examples of LBOs EXCEPT:

A) BC Partners and PetSmart.

B) Blackstone and Team Health Holdings.

C) Fiat and Ferrari.

D) All of these options are LBOs.

7) In 1991 RJR:

A) reverted to being a public company.

B) went bankrupt because of the high debt burden.

C) carved-out the stake held by KKR.

D) all of these options are correct.

8) The largest gainers from LBO transactions have typically been

A) junk bond holders.

B) raiders.

C) selling stockholders.

D) investment banking firms.

9) Junk bonds are bonds that

A) have ratings above investment grade.

B) have ratings below investment grade.

C) are used only for leveraged buyouts.

D) are used only for management buyouts.

10) The main characteristic(s) of LBOs is (are)

A) high debt.

B) private ownership.

C) management incentives.

D) All of these options are correct.

11) The gains from LBOs typically derive from

A) tax savings because of high debt servicing.

B) loss in the value to bondholders.

C) improved performance because of incentives to managers and employees.

D) All of these options are correct.

12) In the case of the RJR Nabisco LBO, the gain in market value for RJR stockholders was several times more than the

A) estimated value of additional interest tax shields generated by the LBO.

B) estimated losses to RJR bondholders as a result of drastic decline in bond ratings.

C) estimated value of additional interest tax shields generated by the LBO and the estimated losses to RJR bondholders as a result of drastic decline in bond ratings.

D) The gain in market value was never determined.

13) The main characteristic(s) of leveraged restructurings is (are)

A) high debt.

B) high debt and management incentives.

C) high debt and private ownership.

D) high debt, management incentives, and private ownership.

14) Leveraged restructurings are designed to force mature, successful, but overweight firms to

A) reduce cash.

B) reduce operating costs.

C) use assets more efficiently.

D) all of these options are correct.

15) The following are examples of spin-offs except:

A) Motorola and Motorola Mobility.

B) eBay and PayPal.

C) Altria and Kraft Foods.

D) Apollo Management and ADT.

16) In a spin-off:

A) shares of the new company are given to shareholders of the parent company.

B) shares of the new company are sold as a public offering.

C) shares of the new company are bought by borrowing or issuing junk bonds.

D) a private equity firm sells the assets of a portion of an acquired company.

17) Spin-offs are not taxed if the shareholders of the parent company are given at least

A) 90 percent of the shares in the new company.

B) 80 percent of the shares in the new company.

C) 70 percent of the shares in the new company.

D) 60 percent of the shares in the new company.

18) A spin-off is a(n)

I) new company;

II) independent company;

III) company formed by detaching part of a parent firm's assets and operations;

A) I only

B) II only

C) I and II only

D) I, II, and III

19) The following are advantages of spin-offs:

I) They widen investor choice by allowing them to invest in just one part of the business.

II) They can improve incentives for managers.

III) By spinning off businesses with "poor fit," parent firms can concentrate on their core businesses.

IV) They relieve investors of the worry that funds will be siphoned off from one business to support unprofitable capital investments in another.

A) I and II only

B) I, II, and III only

C) I, II, III, and IV

D) III and IV only

20) In carve-out transactions:

A) shares of the new company are given to the shareholders of the parent company.

B) shares of the new company are sold in a public offering.

C) shares of the new company are bought by borrowing or issuing junk bonds.

D) None of these options are correct.

21) The following are examples of carve-outs except:

A) RWE and Innogy.

B) 3Com and Palm.

C) Altria and Philip Morris International.

D) All of these options are examples of carve-outs.

22) Which of the following statements regarding spin-offs and carve-outs is not true?

A) Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company.

B) Spin-offs are not taxed if the shareholders of the parent company are given at least 80 percent of the shares in the new company.

C) Gains or losses from carve-outs are taxed at the corporate tax rate.

D) In carve-outs, the parent company retains majority control.

23) Asset sales:

I) are perceived as good news for investors of the selling firm;

II) generally result in the assets being employed more productively after the sale;

III) transfer business units to companies that can manage them more efficiently;

A) I only

B) I and II only

C) II and III only

D) I, II, and III

24) The simplest way to divest an asset is to

A) spin it off.

B) carve it out.

C) sell it.

D) All of these methods are equally complex.

25) Asset sales are common in

A) manufacturing.

B) banking.

C) services.

D) None of these options are correct.

26) A privatization is a

A) sale of a government-owned company to private investors.

B) sale of private companies to the government.

C) sale of a publicly traded company to private investors.

D) sale, by a private equity fund's limited partners, of their partnership stakes.

27) Most privatizations resemble

A) spin-offs.

B) carve-outs.

C) LBOs.

D) both spin-offs and carve-outs.

28) The following are examples of privatization EXCEPT:

A) Postbank.

B) AT&T.

C) West Japan Railway Company.

D) Air India.

29) The Chrysler bankruptcy and reorganization into New Chrysler resulted in which of the following events?

A) Termination of dealer and warranty obligations

B) LBO

C) Chapter 7 liquidation

D) Reverse priority

30) The following are important motives for privatization EXCEPT:

A) revenue for the government.

B) increased efficiency.

C) share ownership.

D) economies of scale.

31) The following are private equity funds:

A) Blackstone.

B) Cerberus Capital Management.

C) KKR.

D) All of these options are private equity funds.

32) Which of the following statements is (are) true of limited partnerships?

A) Limited partners enjoy limited liability but do not participate in management.

B) Generally, limited partners put up most of the money.

C) Generally, limited partners are institutional investors.

D) All of these statements are true of limited partnerships.

33) Private-equity investment funds are organized as

A) C-corporations.

B) sole proprietorships.

C) partnerships.

D) nonprofit corporations.

34) The following statements are true of private-equity partnership agreements:

I) The partnership agreement has a limited term, typically 10 years or less.

II) The general partners get a management fee plus carried interest in 20% of any profits earned by the partnership.

III) The limited partners get paid off first, but they get only 80% of any further returns.

IV) The general partners can reinvest the limited partners' money.

A) I and II only

B) I, II, and III only

C) I, II, III, and IV

D) II and III only

35) The following are advantages of private-equity partnerships:

I) Carried interest gives the general partners potential for high profits.

II) Carried interest, because it is a call option, gives the general partners incentives to take risks.

III) There is no separation of ownership and control as general partners can intervene in the fund's portfolio companies any time performance lags or strategy needs change.

IV) There is no free cash flow problem as cash from the first round must be distributed to investors and not reinvested.

A) I, II, and IV only

B) I and II only

C) I and IV only

D) I, II, III, and IV

36) Private-equity partnerships can cash out of companies in the partnership's portfolio in the following ways:

I) an IPO of portfolio companies;

II) a trade sale to another firm;

III) a carve-out of portfolio companies;

A) I only.

B) II only.

C) I and II only.

D) III only.

37) A conglomerate is a firm that

A) invests in one industry only.

B) diversifies across several unrelated businesses.

C) integrates vertically.

D) is usually formed by combining private-equity partnerships.

38) A conglomerate discount refers to which circumstance?

A) The market value of the whole conglomerate is greater than the sum of the value of the parts.

B) The market value of the whole conglomerate is less than the sum of the value of the parts.

C) The book value of the whole conglomerate is greater than the sum of the value of the parts.

D) The book value of the whole conglomerate is less than the sum of the value of the parts.

39) The following are characteristics of a public conglomerate:

I) It is designed to operate various divisions for the long run.

II) It has an internal capital market wherein each division competes for funds.

III) A hierarchy of corporate staff evaluates divisions' plans and performance.

IV) Divisional managers' compensation depends mostly on earnings of their respective divisions.

A) I and II only

B) I, II, and III

C) II, III, and IV only

D) I, II, III, and IV

40) Two in-court options for dealing with firms in financial distress are

A) merger and acquisition.

B) liquidation and reorganization.

C) leasing and LBO.

D) issuance of stocks or bonds.

41) Indirect costs of bankruptcy are borne principally by

A) bondholders.

B) stockholders.

C) managers.

D) the government.

42) Suppose that a bankrupt firm, while in the process of developing a reorganization plan, is allowed to buy goods on credit and borrow money to finance needed working capital. Such an arrangement is called

A) debtor-in-possession financing.

B) prepack bankruptcy.

C) workout by creditors.

D) appointment of receiver.

43) Which of the following is not a motive for privatization?

A) Increased efficiency

B) Share ownership

C) Expansion of government

D) Revenue for the government

44) Which class of creditor suffered the most during the Chrysler reorganization?

A) Dealer and warranty obligations

B) Trade creditors

C) Pension liabilities

D) Secured creditors

45) Leveraged buyouts are the same as acquisitions.

46) LBOs are typically financed with junk bonds.

47) A spin-off is a new, independent company created by selling some of a parent company's assets to new investors.

48) Spin-offs are not taxed as long as shareholders of the parent company are given at least 80 percent of the shares in the new company.

49) Carve-outs are identical to spin-offs.

50) A "privatization" is the same type of transaction as taking a company private in an LBO.

51) A privatization is a sale of a government-owned company to private investors.

52) A major beneficiary of privatization is the government that receives the revenues from the sale.

53) Private-equity partnerships avoid the free cash flow problem that often troubles conglomerates.

54) In a private-equity partnership arrangement, the general partners put up most of the money but receive a management fee and get a carried interest in the fund's profits.

55) Private-equity partnerships are designed to run portfolio companies indefinitely.

56) There are two common types of bankruptcy procedures in the United States, which are set out in Chapter 7 and Chapter 11 of the 1978 Bankruptcy Reform Act.

57) The Securities and Exchange Commission (SEC) usually plays an important role in the reorganization of large, public companies by ensuring that all relevant and material information is disclosed to creditors before they vote on the proposed reorganization plan.

58) Private-equity ownership relies less on internal capital markets than conglomerates do.

59) LBOs often occur because managers are not maximizing shareholder value.

60) What is a leveraged buyout?

61) Briefly explain the difference between leveraged buyouts and leveraged restructurings.

62) What is a spin-off?

63) Briefly explain the difference between a spin-off and a carve-out.

64) Briefly explain what is meant by privatization.

65) What are some of the benefits of privatization?

66) Explain how private-equity partnerships are organized.

67) Describe the main differences between private-equity partnerships and public conglomerates.

68) Briefly describe the main features of the Bankruptcy Reform Act of 1978.

69) Briefly describe the role of the Securities and Exchange Commission (SEC) in bankruptcy reorganizations.

70) Briefly explain why private equity has an advantage, versus publicly owned firms, in creating value.