Financial Strategy Practice Exam
Course Introduction
Financial Strategy explores the processes and frameworks organizations use to make long-term decisions about resource allocation, capital structure, and value creation. The course analyzes how firms evaluate investment opportunities, manage risks, determine optimal financing, and align financial objectives with overall business strategy. Students develop analytical skills to assess company financial health, design strategic financial plans, and respond to changing economic environments, preparing them to contribute to the sustainable growth and competitive advantage of their organizations.
Recommended Textbook Mergers Acquisitions and Corporate Restructurings 6th Edition by Patrick A. Gaughan
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Chapter 1: Introduction
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Sample Questions
Q1) In risk arbitrage the following is true:
A)Investors may expect the bidder's stock price to fall
B)Investors may expect the target's stock price to rise
C)Both a and b
D)Neither a and b
Answer: C
Q2) Bidders use merger arbitrage as a way of lowering their takeover costs.
A)True
B)False
Answer: False
Q3) The merger between Exxon and Mobil is an example of:
A)Vertical merger
B)Horizontal merger
C)Conglomerate merger
D)Reverse merger
Answer: B
Q4) SPACs have not been popular since the 1990s.
A)True
B)False
Answer: False
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Chapter 2: History of Mergers
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Sample Questions
Q1) The 1940s were a period of intense M&A activity.
A)True
B)False
Answer: False
Q2) Which of the following merger waves were truly global?
A)First
B)Second
C)Third
D)Fifth
Answer: D
Q3) Which of the following factors contributed to the end of the third merger wave?
A)Stock market downturn
B)Economic slowdown
C)Antitrust enforcement
D)None of the above
E)a, b, and c
Answer: E
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Page 4
Chapter 3: Legal Framework
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Q1) What transaction changed the way that Germany approached takeovers of German companies by non-German bidders:
A)Porsche v.Volkswagen
B)Vodafone v.Mannesmann
C)UBS v.Deutsche Bank
D)None of the above
Answer: B
Q2) In the United States after shareholders tender their shares, they:
A)Cannot withdraw them
B)Can withdraw them at any time
C)Can withdraw them at the end of the year
D)Must sell them to a third party True or False
Answer: B
Q3) Research by Lisa Muelbroek empirically confirmed that stock price run-ups before takeover announcements often occur.This reflects:
A)Toe Holds
B)Insider Trading
C)Anticompetitive behavior
D)None of the above
Answer: B
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Chapter 4: Merger Strategy
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Sample Questions
Q1) Mitchell and Lehn found that bad bidders are more likely to become takeover targets.
A)True
B)False
Q2) Haywood and Hambrick found:
A)Horizontal integration yields positive shareholder wealth effects
B)Horizontal deals yield negative shareholder wealth effects
C)Hubris-related deals have higher premiums
D)There is a diversification discount
Q3) Schipper and Thompson found positive stock market announcement effects from diversification acquisition programs in the 1960s.
A)True
B)False
Q4) The process of consolidation of fragmented industries is referred to as:
A)Synergistic deals
B)Roll-ups
C)Vertical integration
D)None of the above
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Chapter 5: Antitakeover Measures
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Q1) Flip-in provisions allow holders of rights to acquire stock in the target, as opposed to flip-over rights, which allow holders to acquire stock in the acquirer.
A)True
B)False
Q2) Research has shown that shareholders in companies that become white knights experience increased shareholder wealth.
A)True
B)False
Q3) Goldsmith was able to circumvent this particular Crown-Zellerbach defense by:
A)Poison pill
B)Greenmail
C)Corporate charter amendment
D)None of the above
Q4) Poison pills can increase shareholder values through facilitating an auction process.
A)True
B)False
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Chapter 6: Takeover Tactics
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Sample Questions
Q1) In a bear hug the bidder makes an overture directly to the target company's shareholders.
A)True B)False
Q2) The target will generally pay the insurgent's costs of a proxy fight even if the fight is not successful.
A)True B)False
Q3) Two-tiered tender offers are sometimes referred to as front -end-loaded tender offers.
A)True
B)False
Q4) Bris found that toe holds were used in what percent of the tender offers he examined?
A)30%
B)75%
C)15%
D)Nearly 100%
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Page 8
Chapter 7: Hedge Funds As Activist Investors
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Q1) Which of the following may be a valid criticism of activist hedge funds?
A)May cause target firms to be too short-term oriented
B)Tend to reduce target financial performance
C)Often fail to yield positive returns for investors
D)All of the above
E)None of the above
Q2) Which of the following is not an example of an activist hedge funds?
A)Carl Icahn Enterprises
B)Relational Investors
C)Goldman Sachs
D)Jana
Q3) Activists acquire stock positions with intent to make changes in the company which will increase the stock price and give them a profit.
A)True
B)False
Q4) There is research which supports the view that Investments in activist funds tend to outperform nonactivist hedge fund investments.
A)True
B)False
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Chapter 8: Going-Private Transactions and Leveraged Buyouts
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Q1) Harris, Siegel, and Wright found productivity improvements for European companies that underwent an MBO.
A)True
B)False
Q2) 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
Q3) Research by Cao and also data from Mergerstat showed that LBO premiums were less than M&A premiums.
A)True
B)False
Q4) Lehan and Poulson showed that buyout premiums were unrelated to the target's free cash flows.
A)True
B)False
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Chapter 9: The Private Equity Market
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Q1) Carried interest refers to the gains on transactions by private equity firms.
A)True
B)False
Q2) Which of the following are examples of private equity firms?
A)KKR
B)Blackstone
C)Morgan Stanley
D)Apollo Group
E)All of the above
F)Both a and c
G)a, b, and d
Q3) Officer et al.found that target companies received higher takeover premiums in club deals.
A)True
B)False
Q4) Private equity firms used to be referred to as LBO firms.
A)True
B)False
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Chapter 10: The Junk Bond and the Leveraged Loan Market and
Stapled Financing
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Q1) The fallout from the S&L crisis caused the market supply of high-yield bonds to sharply rise.
A)True
B)False
Q2) Highly confident letters can allow small bidders to make bids for large targets.
A)True
B)False
Q3) Which of the following investment banks refused to participate in the junk bond market?
A)Drexel Burnham Lambert
B)Goldman Sachs
C)First Boston
D)Merrill Lynch
E)None of the above
True or False
Q4) The original issue high-yield bond market got its start in the late 1970s.
A)True
B)False
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Chapter 11: Corporate Restructuring
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Sample Questions
Q1) Cash flow needs motivated the sell-off of Hertz by GM.
A)True
B)False
Q2) Involuntary divestitures generally have what effects?
A)Positive
B)Negative
C)No consistent effects
D)None of the above
Q3) In the United States, in order for a spin-off to be nontaxable, the following must be the case:
A)Both the parent company and the spun-off entity must be in business for at least ve years before the restructuring.
B)The subsidiary must be at least 80% owned by the parent company.
C)The parent company and the spun-off entity must be in the same industry
D)Both a and b
E)Both b and c
Q4) First Data shareholders were able to realize increased value when Western Union was spun off.
A)True
B)False
Page 13
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Chapter 12: Restructuring in Bankruptcy
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Sample Questions
Q1) DIP financing refers to financing of leveraged buyouts.
A)True
B)False
Q2) Tashjian, Lease, and McConnell found that pre-voted prepacks:
A)Spend less time in bankruptcy court
B)Devote more time to pre ling negotiations
C)Have lower direct costs as a fraction of assets
D)Have higher recovery rates
E)All of the above
F)Both a and c
Q3) Dun & Bradstreet showed that which of the following are causes of business failure?
A)Economic factors e.g., industry weakness, insufficient profits)
B)Financial factors e.g., heavy operating expenses, insufficient capital)
C)Neglect e.g., poor work habits, business conflicts)
D)Fraud
E)All of the above
Q4) Larger companies tend to do better in Chapter 11 bankruptcy than smaller ones.
A)True
B)False
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Chapter 13: Corporate Governance
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Q1) Research shows that companies tend to have positive shareholder wealth effects when outside directors are added to a company's board.
A)True
B)False
Q2) Stock options are one method which may be used to align management and shareholder's interests.
A)True
B)False
Q3) Cooper, Gulen, and Rau found that firms in the highest decile ranking of executive compensation earned significant negative excess returns.
A)True
B)False
Q4) A study by Core, Holthausen, and Larker, as well as other research, indicates the following characteristics of boards would be desirable:
A)Fewer or no gray directors
B)Fewer inside board members
C)Fewer interlocked directorships
D)All of the above
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Chapter 14: Joint Ventures and Strategic Alliances
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Q1) One of the reasons why companies enter into strategic alliances is to:
A)Jointly benefit from specific knowledge resources of one of the partners
B)Gain from a situation where a smaller partner possesses specific knowledge and expertise
C)Totally avoid antitrust conflicts
D)Both a and b
E)Both a and c
Q2) Strategic alliances are common in the pharmaceutical industry.
A)True
B)False
Q3) Koh and Venkatraman found:
A)The positive shareholder wealth effects from joint venture announcements were greater for deals involving companies that were more related to each other
B)The smaller joint venture partner benefited more than the larger one
C)Contractual relationships yield greater benefits than joint ventures
D)Both a and b
E)Both b and c
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Page 16
Chapter 15: Valuation
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Sample Questions
Q1) Which of the following are desirable characteristics of targets?
A)Rapidly growing cash flows and earnings
B)Low P/E ratios
C)Market value less than book value
D)All of the above
True or False
Q2) Acquiring firm shareholders tend to earn zero or negative returns from mergers.
A)True
B)False
Q3) Research by Kaplan and Ruback found that:
A)Median estimates of the DCF were within 10% of the market values
B)Comparable multiples yielded significantly higher values than DCF measures
C)Comparable multiples yielded significantly lower values than DCF measures
D)None of these
Q4) Business valuation is as much of an art as it is a science.
A)True
B)False
Q5) In bear markets, control premiums (relative to current market prices)) may rise.
A)True
B)False
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Chapter 16: Tax Issues in Mergers & Acquisitions
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Q1) Research by Hayn on the role that the tax attributes of transactions played in determining abnormal returns for targets and acquirers found:
A)Tax-free status is a prerequisite of certain deals.Targets that do not receive such a status may decline to continue with the deal and may look to other bidders who can structure the transaction so that such a status is attained
B)Potential tax benefits stemming from net operating loss carryforwards and unused tax credits positively affect announcement period returns of firms involved in tax-free acquisitions
C)Capital gains and the step-up in the acquired assets basis affects returns of firms involved in taxable acquisitions
D)All of the above
Q2) In a Type C reorganization, cash may be used only if 50% of the target shares were purchased with stock.
A)True
B)False
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