Question 1

Which of the following is not a characteristic of a spin-off?
A) The parent creates a new legal subsidiary for the business to be spun-off
B) The shares of the new subsidiary are sold to the public
C) The ownership of shares in the new legal subsidiary is the same as the stockholders' proportional ownership of shares in the parent firm
D) The new business once spun-off has its own management and board
E) Spin-offs are generally not taxable to the parent's shareholders if properly structured

Accepted Answer

Selling shares of the new subsidiary to the public is not a necessary characteristic of a spin-off. The other options listed are typical characteristics of a spin-off.

Question 2

The board of directors of a firm approves an exchange offer in which their shareholders are offered stock in one of the firm's subsidiaries in exchange for their holdings of parent company stock.This offer is best described as a
A) Split-up
B) Split-off
C) Equity carve-out
D) Spin-off
E) Tender offer

Accepted Answer

A split-off involves the creation of a new subsidiary that is exchanged for a portion of the parent company's stock held by its shareholders. This differs from a split-up in which the parent company is divided into multiple independent entities. An equity carve-out and a spin-off typically involve the sale or distribution of a portion of a subsidiary's stock to the public or existing shareholders, respectively. A tender offer is a bid by an outside company to purchase a controlling stake in a company.

Question 3

Which one of the following is generally not a reason for issuing tracking stocks?
A) To give investors a "pure play" in a specific business owned by the parent
B) To create a currency for the business to acquire other firms
C) To enhance the likelihood that the business will be acquired
D) To create an incentive for management receiving the stock
E) To raise capital for the parent or for the business for which the tracking stock is created

Accepted Answer

Issuing tracking stocks is typically not done to enhance the likelihood of being acquired. The other options are all potential reasons for issuing tracking stocks. A tracking stock can give investors exposure to a specific business segment, provide a currency for acquisitions, incentivize management, and raise capital for the parent company or the specific business segment.

Question 4

Which of the following is a common problem associated with tracking stocks?
A) Tracking stocks often de-motivate managers of the business for which the stock is created
B) Such stocks are too complicated for investors to understand
C) Tracking stocks may create internal operating conflicts among the parent's business units
D) Such stocks often create huge tax liabilities for the parent
E) None of the above

Accepted Answer

Tracking stocks can create internal operating conflicts among the parent's business units as each unit may prioritize its own goals over the success of the overall company. This can lead to competition and clashes between units, causing inefficiencies and hindering growth.

Question 5

The board of directors of a large conglomerate has decided that the investment opportunities for the firm are limited and that greater value could be created for the shareholders if the firm were divided into four independent businesses.Following approval by shareholders,the firm executed this strategy which is best described as a
A) Split-up
B) Split-off
C) Spin-off
D) Equity carveout
E) Reverse merger

Accepted Answer

A split-up involves dividing a company into separate, independent businesses, which is exactly what this scenario describes. A split-off involves creating a new company by offering shares of an existing subsidiary to the public, while a spin-off involves distributing shares of a subsidiary to the parent company's shareholders. An equity carveout involves selling shares of a subsidiary to the public while retaining a controlling interest, and a reverse merger involves a private company acquiring a public company in order to become publicly traded. None of these options fit the scenario as well as a split-up.

Question 6

Which of the following is true about a voluntary bust-up?
A) Parent ceases to exist
B) Cash infusion to the parent
C) Parent stock is exchanged for subsidiary stock
D) New shares issued to the public
E) Parent remains in control

Accepted Answer

In a voluntary bust-up, the parent company ceases to exist as it conducts a strategic reorganization by spinning off or divesting one or more of its subsidiaries or business units.

Question 7

An equity carve-out differs from a spin-off for all but which one of the following reasons?
A) Generates a cash infusion into the parent
B) Is undertaken when the unit has very little synergy with the parent
C) The proceeds often are taxable to the parent
D) Continues to be influenced by the parent's management and board
E) The carve-out's shareholders may differ from those of the parent's shareholders

Accepted Answer

An equity carve-out is undertaken when the unit has little synergy with the parent, which is similar to a spin-off. However, an equity carve-out generates a cash infusion into the parent, which is not true for a spin-off. Both types of transactions can have taxable proceeds, and both can continue to be influenced by the parent's management and board. Additionally, the shareholders of the carve-out may differ from those of the parent, but this is not a distinguishing factor between a carve-out and a spin-off.

Question 8

For a spin-off to be tax-free to the shareholder it must satisfy which of the following:
A) The parent firm must have a controlling interest in the subsidiary before it is spun off.
B) After the spin-off, both the parent and the subsidiary must remain in the same line of business in which each was involved for at least 5 years before the spin-off.
C) The spin-off cannot have been used as a means of avoiding dividend taxation by converting ordinary income into capital gains.
D) The parent's shareholders must maintain significant ownership in both the parent and the subsidiary following the transactions.
E) All of the above

Accepted Answer

All of the conditions must be met for a spin-off to be tax-free to the shareholder.

Question 9

A spin-off may create shareholder wealth for all of the following reasons except for
A) Spin-offs are generally not taxable if properly structured
B) The spin-off's management and board is independent of the former parent
C) Investors will be better able to value the spin-off
D) The cost of capital of the spin-off is generally higher than when it was part of the parent
E) The spin-off may be subsequently acquired by another firm

Accepted Answer

The cost of capital of the spin-off is generally higher than when it was part of the parent, which can lead to reduced shareholder wealth. This is because the spin-off may have a smaller size and less diversification, which can increase its risk profile and make it more difficult to obtain financing at favorable rates. All of the other choices (A, B, C, and E) can potentially create shareholder wealth by improving the value or prospects of the spin-off. A properly structured spin-off can avoid taxes, giving more cash to shareholders. An independent management and board can focus on the unique needs of the spin-off, leading to more effective decision-making. A clearer understanding of the spin-off's operations and financials may lead to more accurate valuations by investors. Finally, the possibility of being acquired by another firm can result in a premium price for the spin-off's shares.

Question 10

To decide if a business is worth more to the shareholder if sold,the parent firm generally considers all of the following factors except for
A) The after-tax cash flows of the business to be sold
B) The after-tax sale value of the business to be sold
C) The parent's cost of capital
D) A and B
E) A, B, and C

Accepted Answer

The parent's cost of capital is not directly related to the decision of whether the business is worth more to the shareholder if sold. The focus is on the after-tax cash flows and sale value of the business itself.

Question 11

A firm decides to distribute all of the shares it holds in a subsidiary to its shareholders.The distribution would be called a
A) Divestiture
B) Split-up
C) Spin-off
D) Split-up.
E) Equity carveout

Accepted Answer

A spin-off is the distribution of shares of a subsidiary to the parent company's shareholders. A divestiture refers to the sale or disposal of a business unit or subsidiary. A split-up typically involves the separation of a company into two or more entities, either through sale or distribution of shares. An equity carveout involves the sale of a portion of shares in a subsidiary to outside investors.

Question 12

An equity carve-out by a parent of one of its subsidiaries is often a precursor to a
A) Complete divestiture or spin-off of the subsidiary
B) An acquisition
C) A merger
D) Joint venture
E) The creation of a tracking stock

Accepted Answer

An equity carve-out by a parent company is a process where the parent company sells a minority stake of its subsidiary through an initial public offering (IPO). This is often done as a precursor to a complete divestiture or spin-off of the subsidiary. The IPO of the subsidiary helps to establish a market value for the subsidiary, making it easier to sell or spin off in the future.

Question 13

Which of the following is not true of a divestiture?
A) May create cash infusion for the parent firm
B) Parent ceases to exist
C) Proceeds of sale taxable if returned to shareholders through a dividend or stock buyback
D) A new legal subsidiary may be created
E) B and C

Accepted Answer

A divestiture involves the sale or spin-off of a subsidiary or division of a company, and it does not necessarily mean that the parent firm ceases to exist. Therefore, statement B is not true. Statements A, C, and D are all possible outcomes of a divestiture.

Question 14

A diversified automotive parts supplier has decided to sell its valve manufacturing business.This sale is referred to as a
A) Merger
B) Divestiture
C) Spin-off
D) Equity carveout
E) Liquidation

Accepted Answer

The sale of a business by a company is referred to as a divestiture.

Question 15

Which of the following is generally considered a motive for exiting businesses?
A) Changing corporate strategy or focus
B) Underperforming businesses
C) Regulatory concerns
D) Lack of fit
E) All of the above

Accepted Answer

All of the above reasons are generally considered as motives for exiting businesses. Changing corporate strategy or focus may lead to divestment of certain businesses that no longer fit the new strategy or focus. Underperforming businesses may be sold off to free up resources or to focus on core profitable businesses. Regulatory concerns may make it difficult to operate in certain markets, leading to an exit from those markets. Lack of fit may refer to a business that no longer fits with the overall portfolio or strategy of the company.

Question 16

As part of its restructuring plan,a holding company plans to undertake an IPO for 35 percent of the shares it owns in a subsidiary.The sale of these shares would be called a
A) Divestiture
B) Split-off
C) Split-up
D) Equity carveout
E) Breakup

Accepted Answer

The sale of these shares is called an equity carveout. An equity carveout is a type of divestiture in which a company sells a portion of its subsidiary's shares to the public through an initial public offering (IPO), but still maintains control of the subsidiary. The objective is to raise capital and unlock the value of the subsidiary, while maintaining strategic control over it.

Question 17

Which of the following is generally not considered a common motive for exiting businesses?
A) Changing strategy or focus
B) Desire to achieve economies of scale
C) Lack of fit with the parent's other businesses
D) Discarding unwanted businesses from prior acquisitions
E) All of the above

Accepted Answer

Desire to achieve economies of scale is not a common motive for exiting businesses. Instead, it is usually a motive for expanding and acquiring more businesses. The other options - changing strategy, lack of fit with the parent company, and discarding unwanted businesses - are all common reasons for exiting businesses.

Question 18

Which of the following is not true of a split-off?
A) A split-off is a variation of a spin-off
B) Parent company shareholders receive shares in a subsidiary in return for surrendering their parent company shares
C) Split-offs are best suited for disposing of a less than 100 percent investment stake in a subsidiary,
D) A split-off reduces the parent firm's earnings per share.
E) The split-off reduces the pressure on the spun-off firm's share price

Accepted Answer

A split-off does not necessarily reduce the parent firm's earnings per share. In fact, it may increase the earnings per share if the spun-off subsidiary was previously dragging down the parent company's earnings.

Question 19

Which of the following is not true of an equity carve-out?
A) Creates cash infusion for the parent
B) Change in equity ownership of the unit involved in the carve-out
C) New shares issued to the public
D) Taxable if proceeds returned to shareholders through a dividend or stock buyback
E) Parent ceases to exist

Accepted Answer

An equity carve-out does not result in the parent company ceasing to exist. Rather, it involves the parent company selling a portion of its subsidiary to the public, creating a new publicly-traded company while maintaining partial ownership of the unit involved in the carve-out.

Question 20

Which of the following is not true of a spin-off?
A) Creates cash infusion for parent
B) Change in equity ownership of the spin-off
C) New legal entity created
D) New shares issued to the public
E) A, B, and D

Accepted Answer

All of the options listed (A, B, and D) are true of a spin-off. A spin-off creates a new legal entity, changes the equity ownership of the spin-off from the parent company, and new shares are issued to the public, which generates cash infusion for the parent company. Therefore, the correct answer is option E, which states that all of the options are true.

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

Which of the following is not a characteristic of a spin-off?

The board of directors of a firm approves an exchange offer in which their shareholders are offered stock in one of the firm's subsidiaries in exchange for their holdings of parent company stock.This offer is best described as a

Which one of the following is generally not a reason for issuing tracking stocks?

Which of the following is a common problem associated with tracking stocks?

Which of the following is true about a voluntary bust-up?

An equity carve-out differs from a spin-off for all but which one of the following reasons?

For a spin-off to be tax-free to the shareholder it must satisfy which of the following:

A spin-off may create shareholder wealth for all of the following reasons except for

To decide if a business is worth more to the shareholder if sold,the parent firm generally considers all of the following factors except for

A firm decides to distribute all of the shares it holds in a subsidiary to its shareholders.The distribution would be called a

An equity carve-out by a parent of one of its subsidiaries is often a precursor to a

Which of the following is not true of a divestiture?

A diversified automotive parts supplier has decided to sell its valve manufacturing business.This sale is referred to as a

Which of the following is generally considered a motive for exiting businesses?

As part of its restructuring plan,a holding company plans to undertake an IPO for 35 percent of the shares it owns in a subsidiary.The sale of these shares would be called a

Which of the following is generally not considered a common motive for exiting businesses?

Which of the following is not true of a split-off?

Which of the following is not true of an equity carve-out?

Which of the following is not true of a spin-off?