Question 1

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 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

These are indeed commonly used strategies for exiting businesses and redeploying corporate assets.

Question 3

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 4

When a firm is unable to pay its liabilities as they come due,it is said to be in bankruptcy.

Accepted Answer

A firm is considered insolvent when it cannot pay its liabilities as they come due. Bankruptcy is a legal process that may follow insolvency.

Question 5

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 strategic importance of the business to the parent company may outweigh the potential monetary gain from selling the business.

Question 6

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

Accepted Answer

For financial reporting, the gain or loss is recognized as the difference between the fair value of the consideration received and the book value of the divested operation, not the book value of the consideration.

Question 7

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 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

The decision should compare the after-tax equity value of the subsidiary with the after-tax sale value, not pre-tax and interest sale value, to accurately assess the financial impact.

Question 9

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. Many corporations, especially those that are large and diversified, regularly review their strategies and operations to find ways to enhance shareholder value, including through changes to their assets, liabilities, equity, and operations.

Question 10

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 11

Management may sell assets to fund diversification opportunities?

Accepted Answer

Management may choose to sell assets in order to obtain funds to pursue new business opportunities and diversify the company's portfolio.

Question 12

Equity carve-outs are similar to divestitures and spin-offs in that they provide a cash infusion to the parent.

Accepted Answer

The answer of Equity carve-outs are similar to divestitures and...

Question 13

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

A parent firm may choose to divest an undervalued business and return cash to shareholders through a liquidating dividend or share repurchase if they believe the return on investment is too low or if the business is not a strategic fit for the overall company.

Question 14

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.True of False

Accepted Answer

This statement is true. Acquiring companies may divest certain assets or operations of the acquired company that do not align with their primary strategy, in order to raise capital for future investments.

Question 15

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 16

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

Accepted Answer

Divestitures can result in a variety of forms of compensation for the parent company, including cash, stock, debt, or a combination of these. The exact terms of the divestiture will depend on the specific circumstances and negotiations between the parent and the buyer. It is possible for a divestiture to result in no compensation for the parent other than the elimination of the divested business's expenses and liabilities.

Question 17

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 18

Voluntary bust-ups or liquidations by the parent firm reflect management's judgment that the sale of individual parts of the firm could realize greater value than the value created by a continuation of the combined corporation.

Accepted Answer

This statement accurately describes the rationale behind voluntary bust-ups or liquidations by a parent firm.

Question 19

In general,a voluntary bust-up or liquidation has the advantage over mergers of deferring the recognition of a gain by the stockholders of the selling company until they eventually sell the stock.

Accepted Answer

The answer of In general,a voluntary bust-up or liquidation has...

Question 20

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

Accepted Answer

The divestiture of a business may not always result in the parent receiving cash from the buyer. It could also result in the parent receiving stock or other assets in exchange for the divested business.

Quiz 16: Alternative Exit and Restructuring Strategies: Divestitures, spin-Offs, carve-Outs, split-Ups, and Split-Offs