Question 1

Lehan and Poulson showed that buyout premiums were unrelated to the target's free cash flows.

Accepted Answer

False

Question 2

In the United States two-tiered tender offers are not that common any more.

Accepted Answer

Two-tiered tender offers were more popular in the past, but changes to U.S. securities laws have made them less common.

Question 3

Which of the following are desirable characteristics for LBO candidates? i.
A)Stable cash flows j.
B)Unused debt capacity k.
C)Ability to cut costs l.
D)All of the above m.
E)None of the above

Accepted Answer

All of the above characteristics are desirable for LBO candidates. Stable cash flows ensure that the company can generate enough cash to pay down the debt used in the transaction, unused debt capacity provides the opportunity for the LBO sponsor to add additional leverage and potentially increase returns, and the ability to cut costs can increase profitability and cash flow, making it easier to service debt.

Question 4

A study by Travlos and Cornett shows a statistically significant negative correlation between abnormal returns to shareholders and the P/E ratio of the ﬁrm relative to the industry

Accepted Answer

The study by Travlos and Cornett shows a statistically significant negative correlation between abnormal returns to shareholders and the P/E ratio of the ﬁrm relative to the industry.

Question 5

In Revlon v.McAndrews and Forbes Holdings, the court held:
A)The bidding process was unfair
B)Pantry Pride's premium was not high enough
C)Forstmann Little's bid was appropriate
D)All of the above

Accepted Answer

The answer of In Revlon v.McAndrews and Forbes Holdings, the...

Question 6

Research by Cao and also data from Mergerstat showed that:
A)LBO premiums were less than M&A premiums but increased over time
B)Decreased over time
C)No discernable pattern
D)None of the above

Accepted Answer

Research by Cao and data from Mergerstat both showed that LBO premiums were less than M&A premiums but increased over time.

Question 7

In Hansen Trust v.SCM the court concluded: n.
A)Merrill Lynch was given favorable treatment o.
B)Use of lockup option was inappropriate p.
C)An appropriate auction was preempted q.
D)All of the above r.
E)None of the above

Accepted Answer

The court in Hansen Trust v. SCM concluded that Merrill Lynch was given favorable treatment, the use of a lockup option was inappropriate, and an appropriate auction was preempted, thus all of the above are correct.

Question 8

Kaplan found that the post-buyout investors did not enjoy the tax-related benefits of LBOs.

Accepted Answer

Kaplan's research found that while the private equity firms and management teams involved in LBOs often profit from tax-related benefits, such as deductible interest payments on debt, the post-buyout investors do not typically enjoy the same benefits.

Question 9

Research by Cao and also data from Mergerstat showed that LBO premiums were less than M&A premiums.

Accepted Answer

Research by Cao and data from Mergerstat both suggest that LBO premiums are lower than M&A premiums.

Question 10

Kaplan found that the tax benefits in LBOs were:
A)Predictable
B)Built into the takeover premium
C)Did not affect the premium
D)Both a and c
E)Both a and b

Accepted Answer

Kaplan found that the tax benefits in LBOs were built into the takeover premium, so they affected the premium. However, they were also predictable, meaning that investors could factor them into their evaluation of the deal. Therefore, both choices a and b are correct. Choice c is incorrect, as the tax benefits do affect the premium.

Question 11

Private equity firm is a more modern name for LBO firms.

Accepted Answer

Private equity firms and LBO firms are often used interchangeably, but "private equity" has become a more common and preferred term in recent years as these firms engage in a wider range of investments beyond just leveraged buyouts.

Question 12

Which of the following is true of senior debt?
A)The rate on senior debt is 2% to 3% above prime
B)Senior debt is usually about a quarter to a third of total LBO debt
C)The term is usually 5 to 10 years
D)All of the above

Accepted Answer

All three options are true of senior debt. The rate on senior debt is typically 2% to 3% above prime, it usually represents about a quarter to a third of total LBO debt, and the term of senior debt is typically 5 to 10 years.

Question 13

In his study of buyouts in the 1980s, Kaplan found post-buyout CEO ownership percentages:
A)Fell
B)Rose
C)No consistent pattern
D)None of the above

Accepted Answer

Kaplan found that post-buyout CEO ownership percentages generally rose, indicating that CEOs had more equity in the company after buyouts.

Question 14

Vertical strips:
A)Refers to acquiring targets with whom the bidder has backward relationship
B)Refers to acquiring targets with whom the bidder has forward relationship
C)Refers to participating in several layers of LBO financing
D)None of the above

Accepted Answer

The answer of Vertical strips:
A)Refers to acquiring targets with whom...

Question 15

The first LBOs occurred in the fourth merger wave.

Accepted Answer

The first Leveraged Buyouts (LBOs) occurred before the fourth merger wave, with notable examples happening as early as the 1960s, while the fourth merger wave is generally considered to have taken place in the 1980s.

Question 16

LBOs began to be a global phenomena starting in the fifth merger wave.

Accepted Answer

LBOs (leveraged buyouts) started to gain popularity and become a global phenomenon during the fifth merger wave, which occurred in the 1980s. During this wave, LBOs became a popular way for companies to acquire other companies and take them private using a large amount of debt.

Question 17

Which of the following firms were or are considered "LBO firms"?
A)KKR
B)Forstmann Little
C)Blackstone Group
D)All of the above
E)None of the above

Accepted Answer

KKR, Forstmann Little, and Blackstone Group are all well-known private equity firms that have engaged in leveraged buyouts (LBOs) in the past or currently.

Question 18

Research shows that audit fees constitute what percent of total costs of being public?
A)25% to 35%
B)Approximately 90%
C)50% to 60%
D)Roughly one third

Accepted Answer

The answer of Research shows that audit fees constitute what...

Question 19

Harris, Siegel, and Wright found productivity improvements for European companies that underwent an MBO.

Accepted Answer

Harris, Siegel, and Wright's study found that European companies that implemented an MBO program showed average productivity improvements of 20-25%.

Question 20

Unsecured debt is sometimes also called subordinate debt.

Accepted Answer

The answer of Unsecured debt is sometimes also called subordinate...

Quiz 8: Going-Private Transactions and Leveraged Buyouts

Lehan and Poulson showed that buyout premiums were unrelated to the target's free cash flows.

In the United States two-tiered tender offers are not that common any more.

Which of the following are desirable characteristics for LBO candidates? i.

A study by Travlos and Cornett shows a statistically significant negative correlation between abnormal returns to shareholders and the P/E ratio of the ﬁrm relative to the industry

In Revlon v.McAndrews and Forbes Holdings, the court held:

Research by Cao and also data from Mergerstat showed that:

In Hansen Trust v.SCM the court concluded: n.

Kaplan found that the post-buyout investors did not enjoy the tax-related benefits of LBOs.

Research by Cao and also data from Mergerstat showed that LBO premiums were less than M&A premiums.

Kaplan found that the tax benefits in LBOs were:

Private equity firm is a more modern name for LBO firms.

Which of the following is true of senior debt?

In his study of buyouts in the 1980s, Kaplan found post-buyout CEO ownership percentages:

Vertical strips:

The first LBOs occurred in the fourth merger wave.

LBOs began to be a global phenomena starting in the fifth merger wave.

Which of the following firms were or are considered "LBO firms"?

Research shows that audit fees constitute what percent of total costs of being public?

Harris, Siegel, and Wright found productivity improvements for European companies that underwent an MBO.

Unsecured debt is sometimes also called subordinate debt.