Question 1:

2B7-AT02

Which of the following stakeholders has the highest priority of claim under U.S. bankruptcy
law?
Unsecured lenders.
Trade creditors filed prior to bankruptcy.
Employees.
Common shareholders.

The employees (subject to certain restrictions) are a priority creditor. Priority creditors follow
secured creditors in the ranking of creditors. All of the other options listed would rank below
employees.
Question 2:
2B7-AT05

Which of the following is least likely to lead to increased value through a merger or
acquisition?
The two entities have different information systems.
The new owners may be able to use the acquired assets more efficiently.
The two entities may be able to achieve economies of scale.
The combined company may be able to sell more through the same sales channels.

Increases in value from mergers and acquisitions result from synergies derived from the
combination of the organizations involved. The other choices involve synergies and are all
potential positive effects of a merger or acquisition. Different information systems cause
problems and challenges, not synergy. Those problems may depress value.
Question 3:
2B7-AT04

Which of the following best describes a major risk for Leveraged Buyouts (LBOs)?
Highly leveraged, with large debt service payments.
Financed based on predictable cash flows.
Private, so quarterly earnings reports are not required.
Financed based on the fixed assets of the target company.

An LBO involves using the proceeds of debt issues to repurchase the company's stock from
its shareholders. An LBO increases leverage (the ratio of debt to equity) and interest
payments (debt service payments).
Question 4:
2B7-AT03

Why do some bankruptcies lead to liquidation, while others lead to reorganization?

Management compensation schemes generally favor liquidation.
Government policy encourages weaker companies to reorganize.
Smaller companies are more likely to liquidate.
The creditors decide whether the assets or the operating company is worth more.

A reorganization can occur when the creditors have determined that the company's going
concern value exceeds its liquidation value. Otherwise, the organization may just be
liquidated.
Question 5:
2B7-AT01

All of the following transactions can be classified as divestitures except the sale of:
an operating division to another firm in exchange for cash and preferred stock.
a company's inventory in the normal course of business.
a subsidiary's assets for cash with the buyer also assuming any liabilities.
an operating division to a group of managers in a leveraged buyout.

A divestiture is the selling of all or part of a company, not the selling of its inventory in the
normal course of business.
Question 6:
2B7-LS03

The common stock of a subsidiary is sold directly to the public rather than distributing it to the
parent's shareholders, allowing the parent to control interest of the subsidiary during the
divestiture, is also referred to as a(n):
Equity carve-out.
Spin-off.
Split-up.
Merger.

An equity carve-out occurs when the common stock of the subsidiary is sold directly to the
public rather than distributing it to the parent's shareholders. Usually, the parent will contain a
controlling interest in the subsidiary during the equity carve-out.
Question 7:
2B7-CQ02

Company ABC is considering acquiring Company XYZ in a stock-for-stock exchange.

Financial data for the two companies are as follows:

Sales (millions)
Net income (millions)
Common shares outstanding (millions)
Earnings per share (EPS)
Common stock price per share

ABC Company
$1,050
$53
10.5
$9
$88

XYZ Company
$ 113
$14.5
6.0
$4
$30

Combined
$1,163
$67.5
?
?
$88

Using the comparative P/E ratio method, what would be the maximum combined common
shares outstanding required to maintain an EPS of $8.75 in the new combined organization?
7,714,286.
16,500,426.
6,875,286.
5,253,875.

The combined EPS target is determined to be $8.75 per share. To achieve the $8.75 targeted
earnings per share, the combined number of common shares outstanding would have to be
no more than 7,714,286 ($67.5 million combined net income divided by the required $8.75
EPS = 7,714,286 shares).
Question 8:
2B7-LS01

Which of the following is an example of a horizontal merger?

Two or more firms who work with each other in offering varying levels of the production process.
Two or more firms who are in separate markets.
Two or more firms who work with each other as supplier and producer.
Two or more firms who are within the same market.

A horizontal merger happens when two or more firms within the same market, also referred to
as competitors, join together. When a horizontal merger occurs, fewer competitors in the
market result; thus having the potential of leading towards a monopolistic circumstance.
Question 9:
2B7-LS02

A transaction in which a buyer of a company borrows a major portion of the purchase price
using the purchased assets as collateral for the borrowing is also known as a:
Conglomerate.
Merger.
Acquisition.
Leveraged buyout.

A leveraged buyout results from an acquisition that occurs when a buyer of a company
borrows a major portion of the purchase price using the purchased assets as collateral for the
borrowing.
Question 10:
2B7-CQ01

Company ABC is considering merging with Company XYZ. After analyzing both companies, it
is determined that the incremental after-tax free cash flow resulting from the merger is
estimated to be $3,500,000 and is expected to last for 20 years. Assuming a required rate of
return of 12% for the acquiring company, using the discounted cash flow method, what is the
maximum amount Company ABC should offer to purchase Company XYZ for?
$26,236,000.
$26,757,500.
$33,761,000.
$26,141,500.

Using the discounted cash flow method of valuation, the present value of the merger benefits
would be the $3,500,000 after-tax free cash flow multiplied by the Present Value of Annuity
Factor of 7.469, which equals $26,141,500. The price offered by the buyer should be less
than or equal to $26,141,500.