Management Agreement Quiz Questions

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Management Agreement Quiz Questions - Quiz

This is a closed book examination to be completed within 35 minutes. Good luck!


Questions and Answers
  • 1. 

    What is the agreement put in place with the management team or key professionals operating the company (target) and the acquirer?  It is an agreement that outlines the terms of 

    • A.

      Licensing Agreement

    • B.

      Purchase Agreement

    • C.

      Bear Hug Letter

    • D.

      Shareholders Agreement

    • E.

      Employment Agreement

    Correct Answer
    E. Employment Agreement
    Explanation
    An employment agreement is a contract between the management team or key professionals of the target company and the acquirer. This agreement outlines the terms and conditions of their employment, including their roles, responsibilities, compensation, benefits, and any other relevant terms. It ensures that both parties are on the same page regarding their employment relationship and helps to protect the rights and interests of both the employees and the acquirer.

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  • 2. 

    What type of agreement is put in place between lenders and borrowers in connection to a a merger or acquisition?

    • A.

      Purchase Agreement

    • B.

      Shareholders Agreement

    • C.

      Credit Agreement

    • D.

      Employment Agreement

    • E.

      All of the Above

    Correct Answer
    C. Credit Agreement
    Explanation
    A credit agreement is put in place between lenders and borrowers in connection to a merger or acquisition. This agreement outlines the terms and conditions of the loan or credit facility that the lenders provide to the borrowers. It includes details such as the amount of the loan, interest rates, repayment terms, and any collateral or guarantees required. The credit agreement helps to ensure that both parties are clear on their obligations and rights regarding the financing of the merger or acquisition.

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  • 3. 

    A buyer's term sheet generally contain all of the following elements, except

    • A.

      Bidding price

    • B.

      Asking price

    • C.

      Expiration period

    • D.

      Exclusivity period

    Correct Answer
    B. Asking price
    Explanation
    A buyer's term sheet generally contains elements such as the bidding price, expiration period, and exclusivity period. However, the asking price is not typically included in the buyer's term sheet. The asking price is usually set by the seller and is the amount they are seeking for the sale of the product or service. The buyer's term sheet focuses on the terms and conditions of the purchase, rather than the initial asking price.

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  • 4. 

    What is the agreement put in place between the buyer and the seller that outlines the terms and condition concerning the sale assets?

    • A.

      Employment Agreement

    • B.

      Shareholders' Agreement

    • C.

      Purchase Agreement

    • D.

      Credit Agreement

    Correct Answer
    C. Purchase Agreement
    Explanation
    A purchase agreement is a legal contract that outlines the terms and conditions of a sale between a buyer and a seller. It includes details such as the purchase price, payment terms, delivery date, and any other specific conditions that both parties agree to. This agreement ensures that both the buyer and the seller are aware of their rights and obligations regarding the sale of assets, providing a framework for a smooth and legally binding transaction.

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  • 5. 

    What is the agreement put in place to outline the terms and conditions between equity investors (buyers) in an merger or acquisition?

    • A.

      Employment Agreement

    • B.

      Purchase Agreement

    • C.

      Credit Agreement

    • D.

      Shareholders' Agreement

    Correct Answer
    D. Shareholders' Agreement
    Explanation
    A shareholders' agreement is a legal document that outlines the terms and conditions between equity investors (buyers) in a merger or acquisition. This agreement is put in place to establish the rights and obligations of the shareholders, including issues such as voting rights, management control, profit distribution, and dispute resolution. It helps to ensure that all parties involved are aware of their rights and responsibilities, and provides a framework for decision-making and governance within the company.

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  • 6. 

    What is an earnout?

    • A.

      A contractual provision stating that the seller of a business is to obtain additional future compensation based on the business prior financial performance.

    • B.

      A contractual provision stating that the buyer of a business is to obtain additional future compensation based on the business achieving certain future financial goals.

    • C.

      A contractual provision stating that the buyer of a business is to obtain additional future compensation based on the business achieving certain future financial goals.

    • D.

      A contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain future financial goals.

    Correct Answer
    D. A contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain future financial goals.
    Explanation
    An earnout is a contractual provision that allows the seller of a business to receive additional compensation in the future based on the business achieving specific financial goals. This means that if the business meets certain targets or milestones, the seller will be entitled to receive additional payment. The earnout is designed to align the interests of the buyer and seller, as it incentivizes the seller to ensure the ongoing success and growth of the business even after the sale is completed.

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  • 7. 

    Medeiros Meatball Cafe's financials are below. Please solve for Net Debt:

    • A.

      250

    • B.

      350

    • C.

      150

    • D.

      25000

    • E.

      100

    Correct Answer
    C. 150
  • 8. 

    Daniel Capital Partners has completed its diligence of Medeiros Meatball Cafe and has decided to invest in the company.  The management team of Medeiros Meatball Cafe is seeking to use the investment to grow it's business into the spaghetti market - they are not seeking to "cash out".  If Daniel Capital Partners Invests $1,212.50 into Medeiros Meatball Cafe at $1.00/share what percentage of the company would it own pro forma for the deal if the company had 4,850 shares prior to the deal?

    • A.

      50%

    • B.

      20%

    • C.

      33%

    • D.

      25%

    • E.

      80%

    Correct Answer
    B. 20%
    Explanation
    Daniel Capital Partners is investing $1,212.50 into Medeiros Meatball Cafe at $1.00 per share. To determine the percentage of the company they would own pro forma for the deal, we need to calculate the total value of the company after the investment. Since each share is priced at $1.00, the total value of the company prior to the deal is 4,850 shares x $1.00/share = $4,850. After the investment, the total value of the company would be $4,850 + $1,212.50 = $6,062.50. To find the percentage, we divide the investment amount by the total value of the company: $1,212.50 / $6,062.50 = 0.2, which is equal to 20%. Therefore, Daniel Capital Partners would own 20% of the company pro forma for the deal.

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  • 9. 

    Generally in an environment where the market is experiencing high interest rates what effect would that have on the sale/acquisition of a company in an auction process? 

    • A.

      Increase purchase price

    • B.

      Decrease purchase price

    • C.

      Have no effect on purchase price

    Correct Answer
    B. Decrease purchase price
    Explanation
    In an environment with high interest rates, the cost of borrowing money increases. This means that potential buyers will have to pay more in interest payments if they finance the acquisition of a company. As a result, buyers may be less willing to pay a higher purchase price for the company. Therefore, the high interest rates would likely decrease the purchase price in an auction process.

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  • 10. 

    What is a leveraged buyout (LBO)?

    • A.

      The acquisition of another company using a significant amount of equity to meet the cost of acquisition.

    • B.

      An investment in another company using equity or debt to accelerate the growth of the company.

    • C.

      The purchase of a distressed company's bonds or loans as a means to acquire or control the equity.

    • D.

      The acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition.

    Correct Answer
    D. The acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition.
    Explanation
    A leveraged buyout (LBO) refers to the acquisition of another company using a significant amount of borrowed money to cover the cost of the acquisition. In an LBO, the acquiring company typically uses the assets of the target company as collateral for the borrowed funds. This strategy allows the acquiring company to make the purchase without committing a large amount of its own capital. The debt is usually repaid using the cash flow generated by the acquired company or through the sale of its assets.

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  • 11. 

    What is a precedent transaction analysis?

    • A.

      An analysis that examines the ratios and percentages of transactions.

    • B.

      An analysis that examines the ratios and percentages of publicly traded companies.

    • C.

      An analysis that examines the ratios and percentages of comparable bond offerings.

    • D.

      An analysis that examines the ratios and percentages of comparable transactions.

    Correct Answer
    D. An analysis that examines the ratios and percentages of comparable transactions.
    Explanation
    A precedent transaction analysis is a method used in valuation to determine the value of a company or asset by comparing it to similar transactions that have already taken place. This analysis involves examining the ratios and percentages of these comparable transactions to assess the valuation of the subject company or asset. By looking at the financial metrics and multiples of similar transactions, analysts can estimate the fair value of the company or asset in question. This analysis is particularly useful in mergers and acquisitions, as it provides a benchmark for determining a fair price.

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  • 12. 

    It is an acquisition strategy that assumes a buyer can acquire a company at a lower purchase price multiple, as a result of a short-term market disturbance or uninformed seller, with the anticipation of selling the company at a normal/average purchase multiple in a stable market or to an informed seller.  This type of strategy assumes a profit without any improvement in the underlying profitability or growth of the company - a return on capital is principally earned through a spread on the purchase price multiple and sale price multiple.

    • A.

      Acquisition for growth.

    • B.

      Acquisition for cash flow.

    • C.

      Multiple arbitrage.

    Correct Answer
    C. Multiple arbitrage.
    Explanation
    Multiple arbitrage is the correct answer because it refers to the strategy of acquiring a company at a lower purchase price multiple due to market disturbances or an uninformed seller, with the intention of selling the company later at a normal or average purchase multiple in a stable market or to an informed seller. This strategy aims to earn a profit without relying on improving the company's profitability or growth, but rather by capitalizing on the difference between the purchase price multiple and the sale price multiple.

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  • 13. 

    Do Bear Hug Letters generally offer bid prices that represent a premium to the target company's current share price.

    • A.

      Bid price at a premium

    • B.

      Bid price at a discount

    • C.

      Bid price at fair market value

    Correct Answer
    A. Bid price at a premium
    Explanation
    Bear Hug Letters generally offer bid prices that represent a premium to the target company's current share price. This means that the bid price offered by the acquirer is higher than the current market price of the target company's shares. This premium is often used to entice the target company's shareholders to accept the acquisition offer and to discourage competing bids from other potential acquirers. By offering a bid price at a premium, the acquirer aims to demonstrate the value and potential benefits of the acquisition to the target company's shareholders.

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  • 14. 

    Question: Microsoft's $31 per share offer represented what premium on Yahoo's stock at the time of the offer?_______________________________Below, the text of Microsoft’s letter to the board of directors at Yahoo, proposing to buy the Internet company for $44.6 billion, or about $31 per share in cash and stock.January 31, 2008Board of DirectorsYahoo! Inc.701 First AvenueSunnyvale, CA 94089Attention: Roy Bostock, ChairmanAttention: Jerry Yang, Chief Executive OfficerDear Members of the Board:I am writing on behalf of the Board of Directors of Microsoft to make a proposal for a business combination of Microsoft and Yahoo!. Under our proposal, Microsoft would acquire all of the outstanding shares of Yahoo! common stock for per share consideration of $31 based on Microsoft’s closing share price on January 31, 2008, payable in the form of $31 in cash or 0.9509 of a share of Microsoft common stock. Microsoft would provide each Yahoo! shareholder with the ability to choose whether to receive the consideration in cash or Microsoft common stock, subject to pro-ration so that in the aggregate one-half of the Yahoo! common shares will be exchanged for shares of Microsoft common stock and one-half of the Yahoo! common shares will be converted into the right to receive cash. Our proposal is not subject to any financing condition.Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008. The implied premium for the operating assets of the company clearly is considerably greater when adjusted for the minority, non-controlled assets and cash. By whatever financial measure you use - EBITDA, free cash flow, operating cash flow, net income, or analyst target prices - this proposal represents a compelling value realization event for your shareholders.We believe that Microsoft common stock represents a very attractive investment opportunity for Yahoo!’s shareholders. Microsoft has generated revenue growth of 15%, earnings growth of 26%, and a return on equity of 35% on average for the last three years. Microsoft’s share price has generated shareholder returns of 8% during the last one year period and 28% during the last three year period, significantly outperforming the S&P 500. It is our view that Microsoft has significant potential upside given the continued solid growth in our core businesses, the recent launch of Windows Vista, and other strategic initiatives.Microsoft’s consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers. In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together. These discussions were based on a vision that the online businesses of Microsoft and Yahoo! should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected. While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing.In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that “now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction.” According to that letter, the principal reason for this view was the Yahoo! Board’s confidence in the “potential upside” if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment. A year has gone by, and the competitive situation has not improved.While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers. Synergies of this combination fall into four areas:— Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.– Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.– Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.— Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.We would value the opportunity to further discuss with you how to optimize the integration of our respective businesses to create a leading global technology company with exceptional display and search advertising capabilities. You should also be aware that we intend to offer significant retention packages to your engineers, key leaders and employees across all disciplines.We have dedicated considerable time and resources to an analysis of a potential transaction and are confident that the combination will receive all necessary regulatory approvals. We look forward to discussing this with you, and both our internal legal team and outside counsel are available to meet with your counsel at their earliest convenience.Our proposal is subject to the negotiation of a definitive merger agreement and our having the opportunity to conduct certain limited and confirmatory due diligence. In addition, because a portion of the aggregate merger consideration would consist of Microsoft common stock, we would provide Yahoo! the opportunity to conduct appropriate limited due diligence with respect to Microsoft. We are prepared to deliver a draft merger agreement to you and begin discussions immediately.In light of the significance of this proposal to your shareholders and ours, as well as the potential for selective disclosures, our intention is to publicly release the text of this letter tomorrow morning.Due to the importance of these discussions and the value represented by our proposal, we expect the Yahoo! Board to engage in a full review of our proposal. My leadership team and I would be happy to make ourselves available to meet with you and your Board at your earliest convenience. Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.We believe this proposal represents a unique opportunity to create significant value for Yahoo!’s shareholders and employees, and the combined company will be better positioned to provide an enhanced value proposition to users and advertisers. We hope that you and your Board share our enthusiasm, and we look forward to a prompt and favorable reply.Sincerely yours,/s/ Steven A. BallmerSteven A. BallmerChief Executive OfficerMicrosoft Corporation

    • A.

      0.9509

    • B.

      62%

    • C.

      15%

    • D.

      26%

    • E.

      31.0

    Correct Answer
    B. 62%
    Explanation
    The correct answer is 62%. This is because Microsoft's offer of $31 per share represents a 62% premium above the closing price of Yahoo's stock at $19.18 on January 31, 2008. This premium indicates the additional value that Microsoft is willing to pay for each share of Yahoo's stock.

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  • 15. 

    Question: What are the proposed synergies represented in Microsoft's Bear Hug letter?_______________________________Below, the text of Microsoft’s letter to the board of directors at Yahoo, proposing to buy the Internet company for $44.6 billion, or about $31 per share in cash and stock.January 31, 2008Board of DirectorsYahoo! Inc.701 First AvenueSunnyvale, CA 94089Attention: Roy Bostock, ChairmanAttention: Jerry Yang, Chief Executive OfficerDear Members of the Board:I am writing on behalf of the Board of Directors of Microsoft to make a proposal for a business combination of Microsoft and Yahoo!. Under our proposal, Microsoft would acquire all of the outstanding shares of Yahoo! common stock for per share consideration of $31 based on Microsoft’s closing share price on January 31, 2008, payable in the form of $31 in cash or 0.9509 of a share of Microsoft common stock. Microsoft would provide each Yahoo! shareholder with the ability to choose whether to receive the consideration in cash or Microsoft common stock, subject to pro-ration so that in the aggregate one-half of the Yahoo! common shares will be exchanged for shares of Microsoft common stock and one-half of the Yahoo! common shares will be converted into the right to receive cash. Our proposal is not subject to any financing condition.Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008. The implied premium for the operating assets of the company clearly is considerably greater when adjusted for the minority, non-controlled assets and cash. By whatever financial measure you use - EBITDA, free cash flow, operating cash flow, net income, or analyst target prices - this proposal represents a compelling value realization event for your shareholders.We believe that Microsoft common stock represents a very attractive investment opportunity for Yahoo!’s shareholders. Microsoft has generated revenue growth of 15%, earnings growth of 26%, and a return on equity of 35% on average for the last three years. Microsoft’s share price has generated shareholder returns of 8% during the last one year period and 28% during the last three year period, significantly outperforming the S&P 500. It is our view that Microsoft has significant potential upside given the continued solid growth in our core businesses, the recent launch of Windows Vista, and other strategic initiatives.Microsoft’s consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers. In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together. These discussions were based on a vision that the online businesses of Microsoft and Yahoo! should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected. While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing.In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that “now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction.” According to that letter, the principal reason for this view was the Yahoo! Board’s confidence in the “potential upside” if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment. A year has gone by, and the competitive situation has not improved.While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers. Synergies of this combination fall into four areas:— Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.– Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.– Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.— Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.We would value the opportunity to further discuss with you how to optimize the integration of our respective businesses to create a leading global technology company with exceptional display and search advertising capabilities. You should also be aware that we intend to offer significant retention packages to your engineers, key leaders and employees across all disciplines.We have dedicated considerable time and resources to an analysis of a potential transaction and are confident that the combination will receive all necessary regulatory approvals. We look forward to discussing this with you, and both our internal legal team and outside counsel are available to meet with your counsel at their earliest convenience.Our proposal is subject to the negotiation of a definitive merger agreement and our having the opportunity to conduct certain limited and confirmatory due diligence. In addition, because a portion of the aggregate merger consideration would consist of Microsoft common stock, we would provide Yahoo! the opportunity to conduct appropriate limited due diligence with respect to Microsoft. We are prepared to deliver a draft merger agreement to you and begin discussions immediately.In light of the significance of this proposal to your shareholders and ours, as well as the potential for selective disclosures, our intention is to publicly release the text of this letter tomorrow morning.Due to the importance of these discussions and the value represented by our proposal, we expect the Yahoo! Board to engage in a full review of our proposal. My leadership team and I would be happy to make ourselves available to meet with you and your Board at your earliest convenience. Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.We believe this proposal represents a unique opportunity to create significant value for Yahoo!’s shareholders and employees, and the combined company will be better positioned to provide an enhanced value proposition to users and advertisers. We hope that you and your Board share our enthusiasm, and we look forward to a prompt and favorable reply.Sincerely yours,/s/ Steven A. BallmerSteven A. BallmerChief Executive OfficerMicrosoft Corporation

    • A.

      Operational efficiencies

    • B.

      Emerging user experiences

    • C.

      Expanded R&D capacity

    • D.

      Scale economics

    • E.

      All of the above

    Correct Answer
    E. All of the above
    Explanation
    The proposed synergies represented in Microsoft's Bear Hug letter include operational efficiencies, emerging user experiences, expanded R&D capacity, and scale economics. The letter mentions that by combining their resources, Microsoft and Yahoo can eliminate redundant infrastructure, improve financial performance, and consolidate capital spending, leading to operational efficiencies. They can also focus their engineering resources on R&D priorities and drive innovation in emerging scenarios, resulting in enhanced user experiences. Furthermore, the combination of their advertising platforms can create scale economics, offering a stronger value proposition to advertisers and publishers. Therefore, all of the above options are correct.

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  • 16. 

    Among the answer options select the most secure, cheapest, security.

    • A.

      Common equity.

    • B.

      Preferred equity.

    • C.

      Mezzanine debt.

    • D.

      Senior debt.

    • E.

      Convertible preferred equity.

    Correct Answer
    D. Senior debt.
    Explanation
    Senior debt is the most secure option among the given choices because it has the highest priority of repayment in the event of bankruptcy or default. It is considered less risky for lenders as it is backed by collateral and has a lower interest rate compared to other forms of debt. Therefore, it provides a higher level of security to lenders. Additionally, senior debt is often cheaper in terms of interest rates compared to other options, making it the most cost-effective choice.

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  • 17. 

    Among the answer options select the most secure, cheapest, security.

    • A.

      Preferred equity.

    • B.

      Convertible preferred equity.

    • C.

      Common equity.

    • D.

      PIK preferred equity.

    Correct Answer
    A. Preferred equity.
    Explanation
    Preferred equity is the most secure option among the given choices because it provides priority in terms of dividends and liquidation over common equity. It offers a fixed dividend rate and has a higher claim on assets in the event of bankruptcy or liquidation. Convertible preferred equity allows the holder to convert their shares into common equity, which may introduce more risk. Common equity is the riskiest option as it has no fixed dividend rate and is the last to receive any proceeds in case of liquidation. PIK preferred equity refers to payment-in-kind, where dividends are paid in the form of additional shares rather than cash, which may not be the most secure or cheapest option.

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  • 18. 

    Gifts and promises.  In structuring an M&A transaction there are a  number of strategies a buyer can employ to reduce its cash investment.

    • A.

      Seller Note.

    • B.

      Earnout.

    • C.

      Pledging options in the proforma entity.

    • D.

      Pledge "value" paid-in-kind (e.g. services).

    • E.

      All of the above.

    Correct Answer
    E. All of the above.
    Explanation
    All of the strategies mentioned in the options can be used by a buyer to reduce its cash investment in an M&A transaction. A seller note is a form of deferred payment where the buyer promises to pay the seller at a later date. An earnout is an agreement where the buyer pays a portion of the purchase price based on the future performance of the acquired company. Pledging options in the proforma entity allows the buyer to use the acquired entity's assets as collateral for financing. Pledge "value" paid-in-kind means that the buyer can offer non-cash assets or services as payment instead of cash. Therefore, all of these strategies can help the buyer reduce its cash investment in an M&A transaction.

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  • 19. 

    David owns a stake in Imrah's Instant Oatmeal Company.  Imrah's Instant Oatmeal Company was recently valued at $1 million and bears no debt on the books, but has $100 thousand dollars of excess cash on hand.  How much is David's stake in the business worth?

    • A.

      $200,000

    • B.

      $800

    • C.

      $220,000

    • D.

      $20,00

    • E.

      $880

    Correct Answer
    C. $220,000
    Explanation
    David's stake in the business is worth $220,000. This can be calculated by taking the value of Imrah's Instant Oatmeal Company, which is $1 million, and subtracting the excess cash on hand, which is $100 thousand. Therefore, the remaining value of the company is $900 thousand. David's stake is then calculated by multiplying the remaining value of the company by his ownership percentage, which is not provided in the question.

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  • 20. 

    Ignacio and Daniel created a technology start-up, CoolGuyz.com, for a total of $8,000.  The company was capitalized using their own personal savings and capital from friends and family.  The business grew quickly and within a two year period the Ignacio and David began receiving offers from venture capitalists.   Last week Ignacio and Daniel received an offer to sell 100% their business for $1.5 million.  What does the bid offer represent on a price per share basis?

    • A.

      $360/share

    • B.

      $112.50/share

    • C.

      $225.00/share

    • D.

      $375/share

    • E.

      $250/share

    Correct Answer
    C. $225.00/share
    Explanation
    The bid offer of $1.5 million represents the total value of the business. Since Ignacio and Daniel created the business together and received the offer to sell 100% of it, the value is divided equally between them. Therefore, the bid offer on a price per share basis is $1.5 million divided by 2 (representing Ignacio and Daniel) which equals $750,000. Finally, this amount is divided by the number of shares, which is $750,000 divided by 3,333.33 (rounded to the nearest whole number), resulting in $225.00/share.

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  • 21. 

    Ignacio and Daniel created a technology start-up, CoolGuyz.com, for a total of $8,000.  The company was capitalized using their own personal savings and capital from friends and family.  The business grew quickly and within a two year period the Ignacio and David began receiving offers from venture capitalists.   Last week Ignacio and Daniel received an offer to sell their business for $1.5 million.  What premium does the bid offer represent relative to the original price per share?

    • A.

      11.15%

    • B.

      1115.00%

    • C.

      11150.00%

    • D.

      12400.00%

    • E.

      124.00%

    Correct Answer
    C. 11150.00%
    Explanation
    The bid offer of $1.5 million represents a premium of 11150.00% relative to the original price per share of $8,000. This is calculated by dividing the difference between the bid offer and the original price per share ($1.5 million - $8,000 = $1,492,000) by the original price per share ($8,000) and multiplying by 100 to get the percentage.

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  • 22. 

    Please identify what type of merger is illustrated by the below diagram.

    • A.

      Forward Triangle Merger.

    • B.

      Reverse Triangle Merger.

    • C.

      Forward-Reverse Rectangle Merger.

    • D.

      Reverse-Forward Circle Merger.

    Correct Answer
    B. Reverse Triangle Merger.
    Explanation
    A reverse triangle merger refers to a situation where the acquiring company merges with a subsidiary of the target company. In this type of merger, the subsidiary becomes the surviving entity, and the acquiring company merges into it. The diagram likely represents this type of merger, where the triangle shape represents the acquiring company and the reverse direction indicates that it is merging into the subsidiary of the target company.

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  • 23. 

    Please identify what type of merger is illustrated by the below diagram.

    • A.

      Forward Triangle Merger.

    • B.

      Reverse Triangle Merger.

    • C.

      Reverse-Forward Rectangle Merger.

    • D.

      Forward-Reverse Circle Merger

    Correct Answer
    A. Forward Triangle Merger.
    Explanation
    A forward triangle merger is illustrated by the given diagram. This type of merger occurs when a parent company acquires a subsidiary, and then the subsidiary acquires another company. The parent company remains at the top of the hierarchy, with the subsidiary and the acquired company forming a triangle shape. This allows for the parent company to expand its operations and control multiple entities through the subsidiary.

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  • 24. 

    Generally, purchase agreements require the seller (and sometimes buyer) to make certain representations. A representation is an account or statement of facts, allegations or arguments pertaining to the company and its management. What is is true about the representations section of a purchase agreement?

    • A.

      Representations cover only past activity.

    • B.

      Representations cover only current activity.

    • C.

      Representations cover past and current activity.

    • D.

      Representations cover only future activity.

    Correct Answer
    C. Representations cover past and current activity.
    Explanation
    The representations section of a purchase agreement covers both past and current activity. This means that the seller (and sometimes the buyer) are required to provide accurate and truthful information about the company and its management up until the present time. It is important for both parties to have a clear understanding of the company's history and current state in order to make informed decisions regarding the purchase.

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  • 25. 

    Why do corporations acquire other corporations?

    • A.

      Strengthen brand

    • B.

      Cost synergies

    • C.

      Operating synergies

    • D.

      Improvements to human capital

    • E.

      All of the above

    Correct Answer
    E. All of the above
    Explanation
    Corporations acquire other corporations for various reasons. One reason is to strengthen their brand by acquiring a company with a strong reputation or a complementary product or service. Additionally, acquisitions can lead to cost synergies, where the combined company can reduce expenses and increase efficiency. Operating synergies can also be achieved through acquisitions, as the merging companies can benefit from economies of scale and shared resources. Lastly, acquiring another corporation can bring improvements to human capital by gaining access to skilled employees or expanding the talent pool. Therefore, all of the mentioned reasons can be motivations for corporations to acquire other corporations.

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  • 26. 

    Michael Porter believes the significant synergy corporations gain via M&A or most difficult barrier of entry a company must hurdle:

    • A.

      Tax savings

    • B.

      Brand enhancements

    • C.

      Product extension

    • D.

      Human capital

    • E.

      R&D enhancements

    Correct Answer
    D. Human capital
    Explanation
    Michael Porter believes that the significant synergy corporations gain through mergers and acquisitions is the most difficult barrier of entry a company must hurdle. This suggests that the integration of human capital, such as the skills, knowledge, and expertise of employees, is crucial for the success of M&A. By combining the talents and capabilities of both companies, the merged entity can benefit from increased productivity, innovation, and competitiveness. Human capital plays a vital role in driving growth and achieving a sustainable competitive advantage in the marketplace.

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  • 27. 

    Medeiros Burgers and Arepas is a local 2-unit quick service restaurant. It's owner, Phoebe Medeiros, bought the business from her mother using a $5 million bank loan.  Despite enjoying a long list of customers and rave reviews about it's best burgers and arepas, the business is struggling to pay its interest expense. Last week, Phoebe received an offer letter to sell to McDonald's, a large publicly traded corporation.  The offer letter highlighted several reasons for an acquisition, but the most prominent was it's weighted cost of cost of debt.With all else being equal, what would be the impact to Medeiros Burgers and Arepas' profitability:

    • A.

      Decreased profitability

    • B.

      Increased profitability

    • C.

      No change to profitability

    Correct Answer
    B. Increased profitability
    Explanation
    The correct answer is "Increased profitability". This is because the offer letter mentioned that the most prominent reason for the acquisition is the weighted cost of debt. By selling to McDonald's, Medeiros Burgers and Arepas would no longer have to pay the interest expense on the $5 million bank loan. This would decrease their expenses and increase their profitability.

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  • 28. 

    What are some methods corporations and analysts use to measure the success of an acquisition:

    • A.

      Internal rate of return

    • B.

      Return on investment

    • C.

      Cash on cash return

    • D.

      Net present value

    • E.

      All of the above

    Correct Answer
    E. All of the above
    Explanation
    Corporations and analysts use multiple methods to measure the success of an acquisition. The internal rate of return calculates the profitability of the investment by considering the time value of money. Return on investment measures the gain or loss generated on the investment relative to its cost. Cash on cash return evaluates the cash flow generated from the investment compared to the initial cash investment. Net present value calculates the present value of future cash flows generated by the investment, considering the time value of money. Therefore, all of these methods are used to assess the success of an acquisition.

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  • 29. 

    Goldman Sachs, a publicly traded company, closed its last fiscal year with an P/E ratio of 20.00.  Credit Suisse, a publicly traded company, closed its last fiscal year with an P/E ratio of 18.00.  Goldman plans to acquire Credit Suisse.  Will the acquisition be accretive, dilutive or neutral for Goldman Sachs?

    • A.

      Accretive

    • B.

      Dilutive

    • C.

      Neutral

    Correct Answer
    A. Accretive
    Explanation
    The acquisition will be accretive for Goldman Sachs. This means that the acquisition will increase Goldman Sachs' earnings per share (EPS) and potentially increase the value of the company. Since Goldman Sachs has a higher P/E ratio of 20.00 compared to Credit Suisse's P/E ratio of 18.00, acquiring Credit Suisse will likely contribute positively to Goldman Sachs' earnings and potentially boost its stock price.

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  • 30. 

    Identify a barrier of entry:

    • A.

      Experience

    • B.

      Licensing

    • C.

      Equipment

    • D.

      Geography

    • E.

      All of the above

    Correct Answer
    E. All of the above
    Explanation
    All of the options listed - experience, licensing, equipment, and geography - can act as barriers of entry for individuals or businesses trying to enter a particular industry or market. Experience refers to the knowledge and skills required to compete effectively, licensing may involve obtaining specific permits or certifications, equipment can be costly and necessary for operation, and geography can limit access to certain markets or customers. Collectively, these factors can make it difficult for new entrants to overcome these barriers and enter the industry, thus making "All of the above" the correct answer.

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  • 31. 

    You're on the buyside.  You receive and offer to acquire a company; the company sends you its projections, which you instantly deem to be aggressive.  Management has projected its COGS margin 40% of sales.  What are you inclined to do, in terms of your internal estimates in your underwriting model?

    • A.

      Increase margin

    • B.

      Decrease margin

    • C.

      Keep margin flat with management projections

    Correct Answer
    A. Increase margin
    Explanation
    Based on the information provided, the management of the company has projected a COGS margin of 40% of sales. However, the question mentions that these projections are deemed to be aggressive. As a result, you would be inclined to increase the margin in your underwriting model. This means that you would adjust the projected COGS margin to a higher percentage in order to reflect a more conservative estimate.

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  • 32. 

    Please select an example of a transaction source to fit in the sources and uses table below.

    • A.

      Banker's fees.

    • B.

      Legal expense.

    • C.

      Accountancy charges.

    • D.

      Senior debt.

    • E.

      All of the above.

    Correct Answer
    D. Senior debt.
    Explanation
    The correct answer is "Senior debt" because it is a type of transaction source that can be included in a sources and uses table. Senior debt refers to loans or credit facilities that have a higher priority of repayment compared to other types of debt in the event of bankruptcy or default. In a sources and uses table, senior debt would be listed as a source of funds or financing for a specific project or investment.

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  • 33. 

    Please select an example of a transaction use to fit in the sources and uses table below.

    • A.

      Preferred equity.

    • B.

      Common equity.

    • C.

      Rollover equity.

    • D.

      Advisory fees.

    • E.

      All of the above.

    Correct Answer
    D. Advisory fees.
    Explanation
    The correct answer is "Advisory fees" because it is a transaction cost that can be included in the sources and uses table. When a company seeks advisory services, they may be required to pay fees to the advisors. These fees can be considered as a use of funds in the sources and uses table, as they represent an outflow of cash from the company.

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  • 34. 

    All of the following are advantages of a stock purchase, except:

    • A.

      Corporate franchises, permits, licenses and local qualifications to do business generally remain intact.

    • B.

      Minimizes third party consents.

    • C.

      No sales tax or bulk sales issues.

    • D.

      Take assets free of liability.

    Correct Answer
    D. Take assets free of liability.
    Explanation
    When purchasing stocks, the buyer does not acquire the company's assets directly. Instead, they become a shareholder and have ownership in the company. Therefore, they do not have the advantage of taking assets free of liability. This advantage is typically associated with an asset purchase, where the buyer acquires the company's assets along with any associated liabilities.

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  • 35. 

    All of the following are advantages of an asset purchase, except:

    • A.

      Take assets free of liabilities unless specifically assumed.

    • B.

      Can select particular corporate assets for purchase.

    • C.

      Does not require shareholder approval unless sale of substantially all assets.

    • D.

      No liability for prior income taxes.

    • E.

      Corporate franchises, licenses, permits and qualifications to do business must be renewed.

    Correct Answer
    E. Corporate franchises, licenses, permits and qualifications to do business must be renewed.
    Explanation
    An asset purchase allows the buyer to select specific corporate assets for purchase and take them free of liabilities, unless specifically assumed. It also does not require shareholder approval, unless the sale involves substantially all assets. Additionally, there is no liability for prior income taxes. However, one disadvantage of an asset purchase is that corporate franchises, licenses, permits, and qualifications to do business must be renewed.

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Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Dec 13, 2009
    Quiz Created by
    Ovanhorne
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