Question 1

A standalone business is one whose financial statements reflect all the costs of running the business and all of the revenues generated by the business.

Accepted Answer

A standalone business includes all costs and revenues related to running the business in its financial statements, making it a complete and independent representation of the business's financial position.

Question 2

When one company acquires another,year over year historical earnings comparisons for the acquiring firm are unaffected.

Accepted Answer

When one company acquires another, the historical earnings comparisons for the acquiring firm can be affected. This is because the acquisition can lead to changes in the assets, liabilities, and income of the acquiring firm, which can impact its earnings. Additionally, the acquisition can lead to one-time charges or gains that can distort the earnings comparisons.

Question 3

Financial modeling refers to the application of spreadsheet software to define simple arithmetic relationships among variables within the firm's income,balance sheet,and cash-flow statements and to define the interrelationships among the various financial statements.

Accepted Answer

Financial modeling is the process of using spreadsheet software to create models of a company's financial statements and analyzing the interrelationships among them.

Question 4

Pro forma financial statements are frequently used to show what the acquirer and target's combined
financial statements would look like if they were merged.

Accepted Answer

Pro forma financial statements are indeed used to show the combined financials of the acquirer and target if they were merged.

Question 5

The output of M&A models is only as good as the accuracy and timeliness of the numbers that are used to create the model and the quality of the assumptions used in making the projections.

Accepted Answer

The accuracy and timeliness of the numbers used and the quality of assumptions play a crucial role in determining the output of M&A models. Therefore, the given statement is true.

Question 6

While it is legitimate for a firm to follow different accounting practices for financial reporting and tax purposes,the relationship between book and tax accounting is likely to remain constant over time,unless there are changes in tax rules or accounting standards.

Accepted Answer

It is true that the relationship between book and tax accounting is likely to remain constant over time, unless there are changes in tax rules or accounting standards. While firms may use different accounting practices for financial reporting and tax purposes, the basic principles governing these two types of accounting are consistent and unlikely to change. However, changes in tax rules or accounting standards can impact the relationship between book and tax accounting, leading to changes in how firms report their financial results.

Question 7

If the target firm's ratio of bad debt reserves as a percent of projected revenue is increasing,the analyst can be confident that the firm is boosting revenue by not reserving enough to cover probable future losses.

Accepted Answer

An increasing ratio of bad debt reserves as a percent of projected revenue suggests that the firm is setting aside more reserves relative to its revenue, indicating caution rather than boosting revenue by under-reserving.

Question 8

Pro forma financial statements rarely deviate from those compiled in accordance with GAAP.

Accepted Answer

Pro forma financial statements are often used to show projected financial statements based on hypothetical scenarios or future plans, and may make adjustments that deviate from GAAP to reflect these projections.

Question 9

In normalizing historical data,monthly revenue may be aggregated into quarterly or even annual data to minimize possible distortions in earnings or cash flow due to inappropriate accounting practices.True or False

Accepted Answer

Normalizing historical data involves adjusting for any anomalies or irregularities that may exist in the financial data. One way to do this is by aggregating monthly data into quarterly or even annual data to smooth out any fluctuations that may be the result of accounting practices or seasonal factors. This can help provide a more accurate and consistent picture of a company's financial performance over time.

Question 10

Pro forma financial statements are simply another name for GAAP financial statements.

Accepted Answer

Pro forma financial statements are not the same as GAAP (Generally Accepted Accounting Principles) financial statements. While GAAP statements show an accurate representation of a company's financial position, pro forma statements are hypothetical and show the potential impact of certain events or transactions. Pro forma statements can be used to project future financial performance or to estimate the effects of changes in business strategy or structure.

Question 11

Net synergy is the difference between the present value of the estimated sources of value and destroyers of
value.True of False

Accepted Answer

Net synergy is the net present value of the expected combined company, which is the difference between the present value of the estimated sources of value and the present value of the estimated destroyers of value.

Question 12

While GAAP does not ensure accuracy,it is helpful to the analyst in that statements that conform to GAAP rules must adhere to certain standards.

Accepted Answer

While GAAP does not guarantee accuracy, it does provide a standardized framework to ensure consistency and transparency in financial reporting. This makes it easier for analysts and investors to compare and evaluate financial statements across different companies.

Question 13

A clear statement of all assumptions underlying the model's projections forces the analyst to display their biases and to be prepared to defend their assumptions to others.

Accepted Answer

A clear statement of assumptions forces the analyst to be transparent about their biases and justifications, making it easier for others to evaluate the model's projections.

Question 14

Complex models because of their greater sophistication are necessarily more accurate than simple models.

Accepted Answer

Greater complexity does not necessarily equate to greater accuracy in models. Simple models can sometimes provide accurate results, particularly in cases with limited data or variables. It is important to assess the accuracy of a model based on its predictive power and ability to explain observed data, rather than purely on its complexity.

Question 15

Financial models can be used to answer the following questions: How much is the target company worth without the effects of synergy? What is the value of expected synergy? What is the maximum price that the acquiring company should pay for the target?

Accepted Answer

Financial models can indeed be used to answer these questions.

Question 16

Although public companies still are required to file their financial statements with the Securities and Exchange Commission in accordance with GAAP,companies increasingly are using pro forma statements to portray their financial performance in what they argue is a more realistic (and usually more favorable)manner.

Accepted Answer

The statement accurately reflects the trend of companies using pro forma statements to portray their financial performance in a more favorable manner. However, it is important to note that these pro forma statements are not recognized as part of GAAP and should be reviewed with caution.

Question 17

Common size financial statements are among the most commonly used tools to uncover data irregularities.

Accepted Answer

Common size financial statements allow for easier comparison between companies and periods, which can highlight inconsistencies or abnormalities in the data.

Question 18

Discrepancies between the way a firm records its financial statements and GAAP accounting standards are common and should be ignored.

Accepted Answer

Discrepancies between a firm's financial statements and GAAP accounting standards should not be ignored as they can impact the credibility and accuracy of the financial statements. It is essential for firms to adhere to GAAP guidelines to ensure consistency and comparability in financial reporting. Ignoring these discrepancies can lead to incorrect financial analysis and decision making.

Question 19

In determining the initial offer price,the acquirer must decide how much of the anticipated synergy to share with the target firm's shareholders.

Accepted Answer

The initial offer price may include a portion of the expected synergy value that the acquirer intends to share with the target firm's shareholders. This decision impacts the attractiveness of the offer and the likelihood of the deal being accepted.

Question 20

Collar agreements are employed in all cash purchases of the target's stock to preserve the value of the purchase price for acquirer shareholders.

Accepted Answer

Collar agreements are used in stock-for-stock transactions to manage the risk of price fluctuations, not in all-cash purchases.

Quiz 9: Applying Financial Models to Value, structure, and Negotiate Mergers and Acquisitions