Deck 32: Corporate Restructuring

Question 1

The following are examples of spin-offs except:

A) Abbot Laboratories and Hospira
B) AT&T and Lucent
C) General Motors and EDS
D) Exxon and Mobil

Answer 1

Exxon and Mobil

Question 2

The main characteristics of leveraged restructuring are:
I. High debt
II. Management incentives
III. Private ownership

A) I only
B) I and II only
C) I and III only
D) I, II, and III

Answer 2

I and II only

Question 3

Leveraged restructurings are designed to force mature, successful but overweight firms to:

A) reduce cash
B) reduce operating costs
C) use assets more efficiently
D) all of the above

Answer 3

all of the above

Question 4

Leveraged buyouts (LBOs) almost always involve:
I. a large part of the purchase price is financed mostly by debt
II. most of this debt is below investment grade (junk)
III. the firm goes private and its shares are no longer traded on the open market

A) I only
B) II only
C) III only
D) I, II, and III

Question 5

Largest gainers from LBOs were:

A) Junk bond holders
B) Raiders
C) Selling stockholders
D) Investment banking firms

Question 6

In case of spin-offs:

A) Shares of the new company are given to shareholders of the parent company
B) Shares of the new company are sold as a public offering
C) Shares of the new company are bought by borrowing or issuing junk bonds
D) None of the above

Question 7

The following are some of the ways in which a company structure can be modified:
I. LBOs
II. Privatizations
III. Spin-offs and carve-outs
IV. Bankruptcies

A) I and II only
B) II only
C) I and III only
D) I, II, III, and IV

Question 8

The following are examples of LBOs except:

A) KKR and RJR Nabisco
B) America Online and Time Warner
C) KKR and Beatrice
D) Thompson and Southland

Question 9

The main characteristics of LBOs are:

A) High debt
B) Private ownership
C) Management incentives
D) All of the above

Question 10

In 1991 RJR:

A) reverted to being a public company
B) went bankrupt because of the high debt burden
C) stake held by KKR was completely sold off
D) all of the above

Question 11

Junk bonds are bonds with:

A) AAA or Aaa ratings
B) BBB or Baa ratings
C) BB or Ba ratings or lower
D) D rated bonds

Question 12

A spin-off is a/an
I. new company.
II. independent company.
III. company formed by detaching part of a parent firm's assets and operations.

A) I only
B) II only
C) I and II only
D) I, II and III

Question 13

In the case of RJR Nabisco LBO, the gain in market value RJR stockholders were several times more than:

A) estimated value of additional interest tax shields generated by the LBO
B) estimated losses to RJR bondholders as result of drastic decline in bond ratings
C) (A) and (B) combined
D) none of the above

Question 14

The largest and best documented LBO of the 1980s is the:

A) KKR acquiring RJR Nabisco through LBO
B) Thompson Co acquiring Southland (7-11) through LBO
C) KKR acquiring Beatrice through LBO
D) None of the above

Question 15

The gains from LBOs are from:

A) Tax savings because of high debt servicing
B) Loss in the value to bondholders
C) Improved performance because of incentives to mangers and employees
D) All of the above

Question 16

When a leveraged buyout transaction is led by the firm's management then the transaction is called:

A) IPO
B) MBO
C) MOBL
D) CFO

Question 17

The following are advantages of spin-offs:
I. they widen investor choice by allowing them to invest in just one part of the business.
II. they can improve incentives for managers.
III. by spinning of businesses with "poor fit" parent firms can concentrate on its main activities.
IV. they relieve investors of the worry that funds will be siphoned off from one business to support unprofitable capital investments in another.

A) I and II only
B) I, II and III only
C) I, II, III and IV
D) III and IV only

Question 18

In case of carve-outs:

A) Shares of the new company are given to the shareholders of the parent company
B) Shares of the new company are sold in a public offering
C) Shares of the new company are bought by borrowing or issuing junk bonds
D) None of the above

Question 19

The following are examples of LBOs except:

A) KKR and Safeway
B) KKR and Owens-Illinois
C) Fiat and Chrysler
D) All of the above are LBOs

Question 20

Spin-offs are not taxed if the shareholders of the parent company are given at least:

A) 90% of the shares in the new company
B) 80% of the shares in the new company
C) 70% of the shares in the new company
D) 60% of the shares in the new company

Question 21

Conglomerate discount means:
I. The market value of the whole conglomerate is greater than the sum of the value of the parts
II. The market value of the whole conglomerate is less than the sum of the value of the parts
III. The book value of the whole conglomerate is greater than the sum of the value of the parts
IV. The book value of the whole conglomerate is less than the sum of the value of the parts

A) I only
B) II only
C) III only
D) IV only

Question 22

The following are advantages of private-equity partnerships:
I. carried interest gives the general partners potential for high profits.
II. carried interest, because it a call option, gives the general partners incentives to take risks as they are strongly motivated to earn back the limited partners' investment and deliver a profit.
III. There is no separation of ownership and control and general partners can intervene in the fund's portfolio companies any time performance lags or strategy needs change.
IV. There is no free cash flow problem as cash from first round must be distributed to investors.

A) I, II and IV only
B) I and II only
C) I and IV only
D) I, II, III and IV

Question 23

Two in-court options for dealing with financial distress of a firm are:

A) Merger and acquisition
B) Liquidation and reorganization
C) Leasing and LBO
D) Issue stocks and bonds

Question 24

The simplest way to divest an asset is:

A) to spin-off
B) to carve-out
C) to sell it
D) none of the above

Question 25

Asset sales are:
I. Good news for investors in the selling firm
II. On average the assets are employed more productively after the sale
III. Transfer business units to the companies that can manage them more efficiently

A) I only
B) I and II only
C) I, II, and III
D) III only

Question 26

The following are examples of carve-outs except:

A) Bristol Myers Squibb and Mead Johnson Nutrition
B) 3Com and Palm
C) AT&T and Lucent
D) All of the above are examples of carve-outs

Question 27

Which of the following statements is/are true of limited partnerships?

A) Limited partners enjoy limited liability but do not participate in management.
B) Generally limited partners put up most of the money.
C) Generally limited partners are institutional investors.
D) All of the above statements are true of limited partnerships.

Question 28

The following are important motives for privatization except:

A) Revenue for the government
B) Increased efficiency
C) Share ownership
D) Economies of scale

Question 29

The following are private equity groups:

A) Blackstone
B) Cerberus Capital management
C) KKR
D) All of the above are private equity groups

Question 30

Which of the following statements regarding spin-offs and carve-outs is not true?

A) Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company
B) Spin-offs are not taxed if the shareholders of the parent company are given at least 80% of the shares in the new company
C) Gains or losses from carve-outs are taxed at the corporate tax rate
D) In Carve-outs, parent company has the majority control

Question 31

The following statements are true of partnership agreements:
I. The partnership agreement has a limited term, 10 years or less.
II. The general partners get a management fee plus carried interest in 20% of any profits earned by the partnership.
III. The limited partners get paid off first, but they get only 80% of any further returns.
IV. The general partners can reinvest the limited partners' money.

A) I and II only
B) I, II and III only
C) I, II, III and IV
D) II and III only

Question 32

A private-equity investment fund is organized as a:

A) corporation
B) sole proprietorship
C) partnership
D) none of the above

Question 33

Privatizations transactions resemble:

A) Carve-outs
B) Spin-offs
C) LBOs
D) None of the above

Question 34

The following are examples of privatization except:

A) Habib Bank
B) AT&T
C) West Japan Railway Company
D) ONGC

Question 35

A privatization is a:

A) Sale of a government-owned company to private investors
B) Sale of private companies to the government
C) Sale of a publicly traded company to private investors
D) None of the above

Question 36

Asset sales are common in:

A) manufacturing
B) banking
C) services
D) none of the above

Question 37

A conglomerate is a:

A) firm that invests in one industry only
B) firm that diversifies across several unrelated businesses
C) firm that integrates vertically
D) none of the above

Question 38

The following are characteristics of a public conglomerate:
I. they are designed to operate various divisions for the long run.
II. has an internal capital market where each division competes for funds.
III. a hierarchy of corporate staff evaluates divisions' plans and performance.
IV. divisional managers' compensation depends mostly on earnings of their respective divisions.

A) I and II only
B) I, II and III
C) II, III and IV only
D) I, II, III and IV

Question 39

Private-equity partnerships can cash out in the following ways:
I. by an IPO of portfolio companies.
II. a trade sale to another firm.
III. limited partner financing.

A) I only
B) II only
C) I and II only
D) III only

Question 40

Most privatizations resemble:

A) spin-offs
B) carve-outs
C) both (A) and (B)
D) none of the above

Question 41

Securities and Exchange Commission (SEC) plays an important role in the reorganization of, particularly for large, public companies by ensuring that all relevant and material information is disclosed to the creditors before they vote on the proposed reorganization plan.

Question 42

There are only two types of bankruptcy procedures in the United States, which are set out
Chapter 7 and 11 of the 1978 Bankruptcy Reform Act.

Question 43

A major beneficiary of privatization is the government that receives the revenues.

Question 44

Private-equity partnerships can be thought of as temporary conglomerates.

Question 45

Macquarie Bank of Australia invested in what US government assets?

A) Airlines
B) Parks
C) Sewer systems
D) Toll highways

Question 46

A spin-off is a new, independent company created by detaching part of a parent company's assets.

Question 47

Leveraged buyouts are the same as acquisitions.

Question 48

In a private-equity partnership arrangement the general partners put up most of the money and receive a management fee and get a carried interest in the fund's profits.

Question 49

Carve-outs are identical to spin-offs.

Question 50

Which of the following is NOT a motive for privatization?

A) Increased efficiency
B) Share ownership
C) Expansion of government
D) Revenue for the government

Question 51

Indirect costs of bankruptcy are borne principally by

A) Bondholders
B) Stockholders
C) Managers
D) The government

Question 52

Private-equity ownership is more focused on shareholder value than public company ownership.

Question 53

What is a leveraged buyout?

Question 54

Privatization is the same as going private in a LBO.

Question 55

A bankrupt firm while being in the process of developing a reorganization plan is allowed to buy goods on credit and borrow money to finance needed working capital. Such an arrangement is called:

A) Debtor-in-possession debt
B) Junior creditors
C) Workout
D) Receiver

Question 56

Mergers often occur because managers are not maximizing shareholder value.

Question 57

Spin-offs are not taxed as long as shareholders of the parent company are given at least
80% of the shares in the new company.

Question 58

Private-equity partnerships can run portfolio companies for ever.

Question 59

LBOs are financed with junk bonds.

Question 60

A privatization is a sale of a government-owned company to private investors.

Question 61

Briefly explain the main differences between private-equity partnerships and public conglomerates.

Question 62

Briefly explain the difference between leveraged buyouts and leveraged restructurings.

Question 63

What are some of the benefits of privatization?

Question 64

Briefly explain the difference between a spin-off and a carve-out.

Question 65

Briefly explain why private equity has an advantage in creating value over public firms.

Question 66

Briefly explain what is meant by privatization?

Question 67

Explain how private-equity partnerships are set up.

Question 68

What is a spin-off?

Question 69

Briefly explain the role of Securities and Exchange Commission (SEC) in bankruptcy reorganizations.

Question 70

Briefly explain the Bankruptcy Reform Act of 1978.