Question 1

Equity carve-outs have some of the characteristics of both divestitures and spin-offs.

Accepted Answer

Equity carve-outs involve the partial divestiture of a subsidiary, which is similar to a divestiture. However, the subsidiary being carved out is still partially owned by the parent company, which is similar to a spin-off.

Question 2

The timing of a divestiture is important.If the business to be sold is highly cyclical,the sale should be timed to coincide with the firm's peak year earnings.

Accepted Answer

Timing the sale of a business to coincide with peak year earnings can help maximize the sale price and ensure that potential buyers are willing to pay a premium for the business's future earnings potential. However, this strategy only applies to businesses that are highly cyclical and experience significant fluctuations in earnings from one year to the next. For businesses with more stable earnings, the timing of a divestiture may be less critical.

Question 3

In deciding to sell a business,a parent firm should compare the business' after-tax value in sale with its pre-tax value to the parent as part of the parent.

Accepted Answer

The parent firm should compare the business's after-tax value in sale with its after-tax value if retained, not pre-tax value.

Question 4

Antitrust regulatory agencies may make their approval of a merger contingent on the willingness of the merger partners to divest certain businesses.

Accepted Answer

Antitrust regulatory agencies often require divestitures as a condition for approving a merger to prevent the merged entity from having excessive market power in certain markets.

Question 5

When a parent creates a tracking stock for a subsidiary,it is giving up all control of that subsidiary.

Accepted Answer

Creating a tracking stock for a subsidiary does not necessarily mean giving up control of that subsidiary. The parent company can still retain voting control over the subsidiary even with the tracking stock structure in place.

Question 6

A spin-off is a transaction in which a parent creates a new legal subsidiary and distributes shares it owns in the subsidiary to its current shareholders as a stock dividend.

Accepted Answer

This is the definition of a spin-off transaction.

Question 7

An equity carve-out is often a prelude to a complete divestiture of a business by the parent.

Accepted Answer

An equity carve-out involves selling a portion of the ownership of a subsidiary while still retaining majority control. It is often a way for the parent company to realize the value of a subsidiary without giving up complete ownership. However, it can also be a prelude to a complete divestiture in the future. By selling a portion of the subsidiary, the parent company can gauge investor interest and potentially increase the value of the remaining ownership before selling the rest of the business.

Question 8

Although the parent often retains control in an equity carve-out,the shareholder base of the subsidiary may be different that that of the parent.

Accepted Answer

Equity carve-out involves selling a portion of a subsidiary to outside investors, thereby creating a separate shareholder base for the subsidiary. While the parent may still retain a controlling interest in the subsidiary, the shareholder base may be different from that of the parent.

Question 9

Tracking stocks are often created to give investors a pure play investment opportunity in one of the parent's subsidiaries.

Accepted Answer

This statement is true. Tracking stocks are usually created to provide investors with a focused investment in one of the parent company's subsidiaries, which allows them to better understand the performance and potential of that particular business.

Question 10

Tracking stocks may create internal operating conflicts among the parent's business units in terms of how the consolidated firm's cash is allocated among its business units.

Accepted Answer

Tracking stocks allow investors to invest in specific business units within a larger parent company, leading to potential conflicts over the allocation of cash among different units.

Question 11

A spin-off is a transaction involving a separate legal entity whose shares are sold to the parent firm's shareholders.

Accepted Answer

The answer of A spin-off is a transaction involving a...

Question 12

Empirical studies show that the desire by parent firms to increase strategic focus is an important motive for exiting businesses.

Accepted Answer

Empirical studies have indeed shown that parent firms exit businesses in order to increase their strategic focus. This allows them to concentrate on their core competencies and better allocate resources towards their most profitable business units.

Question 13

A split-up involves the creation of a new class of stock for each of the parent's operating subsidiaries,paying current shareholders a dividend of each new class of stock,and then dissolving the remaining corporate shell.

Accepted Answer

The answer of A split-up involves the creation of a...

Question 14

Divestitures,spin-offs,equity carve-outs,split-ups,and bust-ups are commonly used strategies to exit businesses.

Accepted Answer

These strategies are commonly used to exit businesses.

Question 15

Both a divestiture and a spin-off generally generate a cash infusion for the parent.

Accepted Answer

A divestiture often results in a cash infusion for the parent company because it involves selling a part of the company. However, a spin-off, where a unit is separated into a new independent entity and shares are distributed to existing shareholders, does not typically generate cash for the parent company.

Question 16

In a spin-off,the proportional ownership of shares in the new legal subsidiary is the same as the stockholders' proportional ownership of shares in the parent firm.

Accepted Answer

This is true, as the shares in the subsidiary will be distributed to the parent company's stockholders based on their respective ownership percentage in the parent company.

Question 17

In an equity carve-out,the cash raised by the subsidiary in this manner may be transferred to the parent as a dividend or as an inter-company loan.

Accepted Answer

In an equity carve-out, the subsidiary raises cash by selling a portion of its equity to the public. This cash may be transferred to the parent company as a dividend or as an inter-company loan.

Question 18

Spin-offs are generally immediately taxable to shareholders.

Accepted Answer

Spin-offs are generally tax-free transactions for shareholders. However, there may be some tax implications for certain shareholders depending on the specifics of the spin-off.

Question 19

In a spin-off,the board of directors is the same as the board of directors of the parent firm.

Accepted Answer

In a spin-off, the board of directors of the new company is typically different from the board of directors of the parent firm. The new company will have its own independent board to oversee its operations and strategic decisions.

Question 20

The parent firm generally retains control of the business involved in an equity carve-out.

Accepted Answer

In an equity carve-out, the parent firm sells a portion of its business to the public while retaining control over the remaining portion. The parent firm generally retains control of the business involved in an equity carve-out.

Quiz 16: Alternative Exit and Restructuring Strategies: Divestitures, spin-Offs, carve-Outs, split-Ups, and Split-Offs