Which of the following statements is most CORRECT? Which of the following statements is most CORRECT? Answer In a private placement, securities are sold to private (individual) investors rather than to institutions. Private placements occur most frequently with stocks, but bonds can also be sold in a private placement. Private placements are convenient for issuers, but the convenience is offset by higher flotation costs. The SEC requires that all private placements be handled by a registered investment banker. Private placements can generally bring in funds faster than is the case with public offerings. 8 points Question 2 Which of the following statements is most CORRECT? Answer A conglomerate merger is one where a firm combines with another firm in the same industry. Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm. Defensive mergers are designed to make a company less vulnerable to a takeover. Hostle mergers always create value for the acquiring firm. In a tender offer, the target firm’s management always remain after the merger is completed. 8 points Question 3 Which of the following statements about valuing a firm using the APV approach is most CORRECT? Answer The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity. The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt. The horizon value is calculated by discounting the expected earnings at the WACC. The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC. The horizon value must always be more than 20 years in the future. 8 points Question 4 Firms use defensive tactics to fight off undesired mergers. These tactics do not include Answer raising antitrust issues. getting a white squire to purchase stock in the firm. getting white knights to bid for the firm. repurchasing their own stock. changing the bylaws to eliminate supermajority voting requirements. 8 points Question 5 Which of the following is generally NOT true and an advantage of going public? Answer Facilitates stockholder diversification. Increases the liquidity of the firm’s stock. Makes it easier to obtain new equity capital. Establishes a market value for the firm. Makes it easier for owner-managers to engage in profitable self-dealings. 8 points Question 6 From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee’s Answer equity cash flows. capital budgeting project cash flows. debt cash flows. pension fund cash flows. sales. 8 points Question 7 Which of the following statements is NOT CORRECT? Answer When a corporation’s shares are owned by a few individuals who own most of the stock or are part of the firm’s management, we say that the firm is “closely, or privately, held.” “Going public” establishes a firm’s true intrinsic value and ensures that a liquid market will always exist for the firm’s shares. Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. When stock in a closely held corporation is offered to the public for the first time, the transaction is called “going public,” and the market for such stock is called the new issue market. It is possible for a firm to go public and yet not raise any additional new capital. 8 points Question 8 Chapter 7 of the Bankruptcy Act is designed to do which of the following? Answer Protect shareholders against creditors. Establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments. Ensure that the firm is viable after emerging from bankruptcy. Allow the firm to negotiate with each creditor individually. Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt.