Question

1. Which of the following statements is most CORRECT?

a.	Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may affect the firm's capital structure, it will not affect its overall required rate of return.
b.	The basic rationale for any financial merger is synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis.
c.	In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms.
d.	The primary rationale for most operating mergers is synergy.
e.	The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the 2 firms will have similar betas.

2. Which of the following statements is most CORRECT?

a.	A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover.
b.	Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition.
c.	Cash payments are used in takeovers but never in mergers.
d.	Managers often are fired in takeovers, but never in mergers.
e.	If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger.

3. Which of the following statements about interest rate and reinvestment rate risk is CORRECT?

a.	Interest rate price risk exists because fixed-rate debt securities lose value when interest rates rise, while reinvestment rate risk is the risk of earning less than expected when interest payments or debt principal are reinvested.
b.	Interest rate price risk can be eliminated by holding zero coupon bonds.
c.	Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.
d.	Interest rate risk can never be reduced.
e.	Variable (or floating) rate securities have more interest rate (price) risk than fixed rate securities.

4. A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT?

a.	The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
b.	Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
c.	A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
d.	A company can swap fixed interest payments for floating interest payments.
e.	A swap involves the exchange of cash payment obligations.

5. Which of the following statements is most CORRECT?

a.	Futures contracts generally trade on an organized exchange and are marked to market daily.
b.	Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.
c.	There are futures contracts for currencies but no forward contracts for currencies.
d.	Futures contracts don't have any margin requirements but forward contracts do.
e.	One advantage of forward contracts is that they are default free.

6. Chapter 7 of the Bankruptcy Act is designed to do which of the following?

a.	Establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments.
b.	Ensure that the firm is viable after emerging from bankruptcy.
c.	Allow the firm to negotiate with each creditor individually.
d.	Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt.
e.	Protect shareholders against creditors.

7. Which of the following statements is most CORRECT?

a.	Federal bankruptcy law deals only with corporate bankruptcies. Municipal and personal bankruptcy are governed solely by state laws.
b.	All bankruptcy petitions are filed by creditors seeking to protect their claims against firms in financial distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective of the firm's management.
c.	Chapters 11 and 7 are the most important bankruptcy chapters for financial management purposes. If a reorganization plan cannot be worked out under Chapter 11, then the company will be liquidated as prescribed in Chapter 7 of the Act.
d.	"Restructuring" a firm's debt can involve forgiving a certain portion of the debt, but it cannot call for changing the debt's maturity or its contractual interest rate.
e.	Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have remained unaltered since that time.

8. Which of the following statements is most CORRECT?

a.	The primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization plan.
b.	The basic doctrine of fairness states that all debtholders must be treated equally.
c.	Since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the "public interest" is not a relevant concern.
d.	While a firm is in bankruptcy, the existing management is always allowed to retain control, though the court will monitor its actions closely.
e.	To a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually.

Answer 1

1]

(d) is the most correct.  The primary rationale for most operating mergers is synergy.

(a) is incorrect. The choice of how to pay for a merger is irrelevant because it will affect its overall required rate of return. This is because the cost of each source of capital used to pay for the merger will be different

(b) is incorrect. The basic rationale of a financial merger is receiving cash flows. It is a financial investment.

(c) is incorrect.

(e) is incorrect. Beta will differ based on capital structures

2]

(a) is correct.

(b) is incorrect. This signals their stock is overvalued

(c) is incorrect. There is no such generalization

(d) is incorrect. There is no such generalization

(e) is incorrect. This is a conglomerate merger

3]

(a) is correct

(b) is incorrect. Zero coupon bonds have interest rate risk because their price fluctuates with changes in interest rates

(c) is incorrect. Reinvestment rate risk still exists because interest rates may fall, or the bonds may be called

(d) is incorrect. Interest rate risk can be reduced

(e) is incorrect.