Question 1

Divestitures always result in the parent receiving stock or debt from the buyer.

Accepted Answer

Divestitures can result in various forms of consideration, including cash, stock, debt, or other assets. It is not always the case that the parent company receives stock or debt from the buyer.

Question 2

Divestitures, spin-offs, equity carve-outs, split-ups, split-offs, and bust-ups are commonly used strategies to exit businesses and to redeploy corporate assets by returning cash or noncash assets through a special dividend to shareholders.

Accepted Answer

The statement is true. These strategies are indeed commonly used to exit businesses and return value to shareholders.

Question 3

Management may sell assets to fund diversification opportunities?

Accepted Answer

Management may choose to sell assets to generate funds for entering new businesses or investments, thereby diversifying their portfolio.

Question 4

A business that is rich in high-growth opportunities may be an excellent candidate for divestiture to a strategic buyer with significant cash resources and limited growth opportunities.

Accepted Answer

A business rich in high-growth opportunities but potentially lacking in the necessary capital or strategic focus can benefit significantly from divestiture to a strategic buyer. Such a buyer, especially one with significant cash resources and limited growth opportunities within their current operations, can provide the necessary investment and strategic alignment to capitalize on the growth potential of the acquired business, making it an excellent candidate for divestiture.

Question 5

A substantial body of evidence indicates that increasing a firm's degree of diversification can improve substantially financial returns to shareholders.

Accepted Answer

While diversification can potentially reduce risk, there is no guarantee it will always improve financial returns to shareholders. In some cases, excessive diversification can lead to a dilution of focus and inefficiencies, potentially harming shareholder value.

Question 6

Like divestitures or equity carve-outs, the spin-off generally results in an infusion of cash to the parent company.

Accepted Answer

In a spin-off, the parent company distributes shares of the subsidiary to its shareholders, and there is no direct infusion of cash to the parent company as a result of this transaction.

Question 7

The divestiture of a business always results in the parent receiving cash from the buyer?

Accepted Answer

The divestiture of a business may result in the parent receiving cash from the buyer, but it can also result in other types of compensation, such as stock, assets or even assumption of existing liabilities.

Question 8

A parent firm's decision to sell or to retain a subsidiary is often made by comparing the after-tax equity value of the subsidiary with the pre-tax and interest sale value of the business.

Accepted Answer

A parent firm's decision to sell or retain a subsidiary is typically based on comparing the after-tax equity value of the subsidiary with the after-tax sale value of the business, not the pre-tax and interest sale value.

Question 9

Acquiring companies often find themselves with certain assets and operations of the acquired company that do not fit their primary strategy. Such assets may be divested to fund future investments.

Accepted Answer

This statement is true. Companies may divest certain assets acquired through an acquisition if they do not align with their primary strategy. These assets can be sold off to generate funds that can be used for future investments more closely aligned with the company's goals.

Question 10

The divesting firm is required to recognize a gain or loss for financial reporting purposes equal to the difference between the fair value of the consideration received for the divested operation and its market value.

Accepted Answer

The gain or loss for financial reporting purposes is recognized as the difference between the fair value of the consideration received and the carrying amount (book value) of the divested operation's net assets, not its market value.

Question 11

The decision to sell or to retain the business depends on a comparison of the pre-tax value of the business to the parent with the after-tax proceeds from the sale of the business.

Accepted Answer

The answer of The decision to sell or to retain...

Question 12

Managing highly diverse and complex portfolios of businesses is both time consuming and distracting. This is particularly true when the businesses are in largely related industries.

Accepted Answer

Managing highly diverse and complex portfolios can indeed be time-consuming and potentially distracting, but the statement is incorrect in saying this is particularly true when the businesses are in largely related industries. In fact, managing businesses in related industries can offer synergies and efficiencies, making it potentially less distracting and time-consuming than managing businesses in completely unrelated industries.

Question 13

In a spin-off, some shareholders receive proportionately more shares than others.

Accepted Answer

In a spin-off, shareholders typically receive shares of the new company in proportion to their existing holdings, ensuring an equitable distribution.

Question 14

In a private solicitation, the parent firm may hire an investment banker or undertake on its own to identify potential buyers to be contacted.

Accepted Answer

In a private solicitation, the parent firm may hire an investment banker or undertake on its own to identify potential buyers to be contacted.

Question 15

Many corporations, particularly large, highly diversified organizations, constantly are reviewing ways in which they can enhance shareholder value by changing the composition of their assets, liabilities, equity, and operations.

Accepted Answer

This statement is true as corporations are constantly looking for ways to increase shareholder value by reviewing and changing their financial and operational strategies.

Question 16

In either a public or private solicitation, interested parties are asked to sign confidentiality agreements after they are given access to proprietary information but before they are asked to make a bid.

Accepted Answer

Interested parties are typically asked to sign confidentiality agreements before they are given access to proprietary information, to ensure that the information remains protected throughout the solicitation process.

Question 17

In a public solicitation, a firm can announce publicly that it is putting itself, a subsidiary, or a product line up for sale. Either potential buyers contact the seller or the seller actively solicits bids from potential buyers or both.

Accepted Answer

This statement is true - a public solicitation allows a seller to publicly announce that they are looking to sell a company, subsidiary, or product line and invites potential buyers to submit bids.

Question 18

Empirical studies show that exit strategies, which return cash to shareholders, tend to have a highly unfavorable impact on shareholder wealth creation.

Accepted Answer

Empirical studies generally show that exit strategies, such as share buybacks or dividends, which return cash to shareholders, can have a favorable impact on shareholder wealth by signaling the company's financial health and distributing excess cash to shareholders, potentially increasing the stock price and shareholder value.

Question 19

Although the sale value may exceed the equity value of the business, the parent may choose to retain the business for strategic reasons.

Accepted Answer

Sometimes, the parent company may decide to keep the business even when the sale value is higher than its equity value. This could be due to various strategic reasons such as maintaining control of a key business unit, avoiding layoffs or negative impact on brand image, or leveraging the business for synergies with other parts of the parent company.

Question 20

A parent firm rarely chooses to divest an undervalued business and return the cash to shareholders either through a liquidating dividend or share repurchase.

Accepted Answer

If a business is undervalued, the parent firm may choose to divest it and return the cash to shareholders in order to improve its overall financial performance and increase shareholder value.

Quiz 16: Alternative Exit and Restructuring Strategies

Divestitures always result in the parent receiving stock or debt from the buyer.

Divestitures, spin-offs, equity carve-outs, split-ups, split-offs, and bust-ups are commonly used strategies to exit businesses and to redeploy corporate assets by returning cash or noncash assets through a special dividend to shareholders.

Management may sell assets to fund diversification opportunities?

A business that is rich in high-growth opportunities may be an excellent candidate for divestiture to a strategic buyer with significant cash resources and limited growth opportunities.

A substantial body of evidence indicates that increasing a firm's degree of diversification can improve substantially financial returns to shareholders.

Like divestitures or equity carve-outs, the spin-off generally results in an infusion of cash to the parent company.

The divestiture of a business always results in the parent receiving cash from the buyer?

A parent firm's decision to sell or to retain a subsidiary is often made by comparing the after-tax equity value of the subsidiary with the pre-tax and interest sale value of the business.

Acquiring companies often find themselves with certain assets and operations of the acquired company that do not fit their primary strategy. Such assets may be divested to fund future investments.

The divesting firm is required to recognize a gain or loss for financial reporting purposes equal to the difference between the fair value of the consideration received for the divested operation and its market value.

The decision to sell or to retain the business depends on a comparison of the pre-tax value of the business to the parent with the after-tax proceeds from the sale of the business.

Managing highly diverse and complex portfolios of businesses is both time consuming and distracting. This is particularly true when the businesses are in largely related industries.

In a spin-off, some shareholders receive proportionately more shares than others.

In a private solicitation, the parent firm may hire an investment banker or undertake on its own to identify potential buyers to be contacted.

Many corporations, particularly large, highly diversified organizations, constantly are reviewing ways in which they can enhance shareholder value by changing the composition of their assets, liabilities, equity, and operations.

In either a public or private solicitation, interested parties are asked to sign confidentiality agreements after they are given access to proprietary information but before they are asked to make a bid.

In a public solicitation, a firm can announce publicly that it is putting itself, a subsidiary, or a product line up for sale. Either potential buyers contact the seller or the seller actively solicits bids from potential buyers or both.

Empirical studies show that exit strategies, which return cash to shareholders, tend to have a highly unfavorable impact on shareholder wealth creation.

Although the sale value may exceed the equity value of the business, the parent may choose to retain the business for strategic reasons.

A parent firm rarely chooses to divest an undervalued business and return the cash to shareholders either through a liquidating dividend or share repurchase.