Question 1

Balance sheet adjustments most often are used in purchases of stock when the elapsed time between the agreement on price and the actual closing date is short.

Accepted Answer

Balance sheet adjustments are more commonly used in stock purchases when there is a significant elapsed time between the agreement on price and the actual closing date, to account for changes in the company's financial position during this period.

Question 2

Buyers and sellers generally view purchase price adjustments as a form of insurance against any erosion or accretion in assets,such as plant and equipment..

Accepted Answer

The answer of Buyers and sellers generally view purchase price...

Question 3

A fixed exchange collar agreement may involve a fixed exchange ratio as long as the acquirer's share price remains within a narrow range,calculated as of the effective date of the signing of the agreement of purchase and sale.

Accepted Answer

The answer of A fixed exchange collar agreement may involve...

Question 4

Offering sellers consulting contracts to defer a portion of the purchase price is illegal in most states.

Accepted Answer

Offering sellers consulting contracts to defer a portion of the purchase price is not inherently illegal. It can be a legitimate business strategy for structuring deals, especially in mergers and acquisitions, as long as it complies with applicable laws and tax regulations.

Question 5

The use of convertible preferred stock as a form of payment provides some downside protection to sellers in the form of continuing dividends,while providing upside potential if the acquirer's common stock price increases above the conversion point.

Accepted Answer

Convertible preferred stock allows sellers to receive regular dividends, providing them with some protection if the acquirer's common stock price does not increase as anticipated. Additionally, if the acquirer's common stock price does increase above the conversion point, the seller can convert their preferred stock into common stock, allowing them to benefit from the increase in stock price.

Question 6

Earnouts tend to shift risk from the seller to the acquirer in that a higher price is paid only when the seller or acquired firm has met or exceeded certain performance criteria.True of False

Accepted Answer

The answer of Earnouts tend to shift risk from the...

Question 7

The seller's preference for stock or cash will reflect their desire for liquidity,the attractiveness of the acquirer's shares,and whether the seller is organized as a joint venture corporation.

Accepted Answer

The answer of The seller's preference for stock or cash...

Question 8

A bidder may choose to use cash rather than to issue voting shares if the voting control of its dominant shareholder is threatened as a result of the issuance of voting stock to acquire the target firm.

Accepted Answer

By using cash rather than issuing voting shares, the bidder can avoid diluting the voting control of its dominant shareholder and maintain their power in the company.

Question 9

Sellers who are structured as C corporations generally prefer to sell assets for cash than acquirer stock because of more favorable tax treatment.

Accepted Answer

Sellers structured as C corporations often prefer to sell stock rather than assets due to the potential for double taxation on asset sales. In an asset sale, the corporation is taxed on any gains from the sale, and then shareholders are taxed again when the proceeds are distributed, making stock sales more tax-efficient for them.

Question 10

Whether cash is the predominant form of payment will depend on a variety of factors.These include the acquirer's current leverage,potential near-term earnings per share dilution of issuing new shares,the seller's preference for cash or acquirer stock,and the extent to which the acquirer wishes to maintain control over the combined firms.

Accepted Answer

The statement provides reasons why cash may or may not be the predominant form of payment in mergers and acquisitions, indicating that it is dependent on a variety of factors.

Question 11

Stock purchases involve the exchange of the target's stock for acquirer stock only..

Accepted Answer

Stock purchases can involve the exchange of cash, debt, or a combination of both, in addition to acquirer stock.

Question 12

The multiple option bidding strategy introduces a certain level of uncertainty in determining the amount of cash the acquirer will have to ultimately pay out to target firm shareholders,since the number choosing the all cash or cash and stock option is not known prior to the completion of the tender offer.

Accepted Answer

The statement is true.

Question 13

Collar agreements provide for certain changes in the exchange ratio contingent on the level of the acquirer's share price around the effective date of the merger.

Accepted Answer

Collar agreements are designed to mitigate the risk of a merger falling through or becoming financially unfavorable for one of the parties involved. These agreements provide a range, or "collar," around the exchange ratio that is contingent on the acquirer's share price. For example, if the acquirer's share price falls below a certain level, the exchange ratio may be adjusted to be more favorable to the target company or its shareholders.

Question 14

Bidders may use a combination of cash and non-cash forms of payment as part of their bidding strategies to broaden the appeal to target shareholders.

Accepted Answer

Bidders often use a combination of cash and non-cash payment methods, such as stocks or bonds, to make their offers more attractive to shareholders. This allows shareholders to choose the payment method that suits them best, and can also help the bidder conserve their cash resources.

Question 15

The risk to the bidder associated with bidding strategy of offering target firm shareholders multiple payment options is that the range of options is likely to discourage target firm shareholders from participating in the bidder's tender offer for their shares..

Accepted Answer

Offering target firm shareholders multiple payment options may actually attract more shareholders to participate in the tender offer as it provides flexibility and allows them to choose the option that best suits their needs. However, the risk associated with this strategy is that it could increase the complexity of the offer and make it harder for shareholders to understand, potentially discouraging some from participating.

Question 16

An earnout agreement is a financial contract whereby a portion of the purchase price of a company is to be paid to the buyer in the future contingent on the realization of a previously agreed upon future earnings level or some other performance measure.

Accepted Answer

An earnout agreement is a financial contract whereby a portion of the purchase price of a company is to be paid to the seller in the future contingent on the realization of a previously agreed upon future earnings level or some other performance measure.

Question 17

Acquirer stock is a rarely used form of payment in large transactions.

Accepted Answer

Acquirer stock is actually a commonly used form of payment in large transactions, particularly in the field of mergers and acquisitions.

Question 18

Both the acquirer and target boards of directors have a fiduciary responsibility to demand that the merger terms be renegotiated if the value of the offer made by the bidder changes materially relative to the value of the target's stock or if their has been any other material change in the target's operations.

Accepted Answer

Both the acquirer and target boards have a fiduciary responsibility to ensure that the merger terms are fair and in the best interest of their shareholders. If there is a material change in the value of the offer or the target's operations, they must renegotiate the terms.

Question 19

Using stock as a form of payment is generally less complicated than using cash from the buyer's point of view.

Accepted Answer

Using stock as a form of payment involves determining the value of the stock, which can fluctuate, and agreeing on the number of shares to be exchanged. This can be more complex than using cash, which has a set value and can be easily exchanged.

Question 20

The value of an earnout payment is never subject to a cap so as not to discourage the seller from working diligently to exceed the payment threshold.

Accepted Answer

The statement is false. Earnout payments are often subject to a cap to limit the buyer's risk and to ensure that the seller doesn't receive an excessive payout.

Quiz 11: Structuring the Deal: Payment and Legal Considerations