Alternatives

Question 1

Restructuring alternatives (6)

Answer 1

• asset sales
• equity carve out/subsidiary IPO
• spin off
• split up
• tracking stocks
• exchange offer/ split off

Question 2

Asset sales (1)

Answer 2

• sales of division or assets to another firm, usually cash

Question 3

Equity carve out/subsidiary IPO (1)

Answer 3

• public offering with partial interest by subsidiary to create a new firm with at least some autonomy

Question 4

Spinoff (1)

Answer 4

• pro rata distribution of subsidiary to create new independent firms

Question 5

Split up (1)

Answer 5

• separate firms to 2+ parts, via spinoff

Question 6

Tracking stock (1)

Answer 6

• creation of new class of stocks with value based on CF of division

Question 7

Exchange offer/split off (1)

Answer 7

• distribution giving SH choice of parent or subsidiary stocks, separate public firms

Question 8

Restructuring and divestiture motives (3)

Answer 8

• corporate strategy
• force changes
• market conditions

Question 9

Value in divestiture from information (2)

Answer 9

• management is easier to monitor

- separate entity of incentive rights to improve efficiency

Question 10

Value in divestiture transaction cost (2)

Answer 10

• assets manage more profitably

- contract are hard to enforce

Question 11

Leverage recapitalization (3)

Answer 11

• large issues of debt
• payment of large cash dividend to non management SH
• alternative of cash dividend or combined with it, repurchase of common share

Question 12

Dual class stock recapitalization (2)

Answer 12

• create a second class of common shares that has limited voting rights and preferential claims to firms CF
• distribution of pro rating to existing SH

Question 13

Security exchange offer (3)

Answer 13

• right or options
• exchange holding for different class of firm’s securities
• new securities have higher market value of induced exchange

Question 14

Reorganization process (1)

Answer 14

• financial distress: liquidation of value firm less FV creditor claims

Question 15

Types of reorganization process (3)

Answer 15

• out of court procedures
• merger into another firm
• legal proceedings

Question 16

Bankruptcy code (2)

Answer 16

• liquidation: management losses control of appointed trustee
• reorganization: restructure plan

Question 17

Canada bankruptcy code (2)

Answer 17

• bankruptcy and insolvency act

- company creditor agreement

Question 18

US bankruptcy code (2)

Answer 18

• chapter 7: liquidation

- chapter 11: reorganization

Question 19

Liquidation characteristics (2)

Answer 19

• voluntary: SH receive more if firm sold its parts

- involuntary: creditor force to liquidate (better dead than alive)

Question 20

Empirical studies (3)

Answer 20

• large positive return on voluntary liquidation
• acquired firm have small, insignificant positive return
• executive ownership and compensation incentive increase probability of liquidation

Question 21

Leverage buyout (2)

Answer 21

• purchase a company with small group of investors for high percentage of debt financing
• management ownership equity share increases

Question 22

Typical LBO operation stages (4)

Answer 22

• planning and funding
• firms to private
• attempt to increase CF
• reverse LBO, increase liquidation

Question 23

Source of gains in LBO (5)

Answer 23

• tax benefit
• wealth transfer effect
• management incentive and agency cost effect
• asymmetrical information and underpricing
• other efficiency condition

Question 24

Advantage of LBO (2)

Answer 24

• add value to increase magnitude tax shield

- change in incentive: increase value

Question 25

Disadvantage of LBO (1)

Answer 25

- cost of financial distress

Question 26

Valuation of LBO (1)

Answer 26

- recalculation of WACC to reflect leverage (use APV without interest tax shield)

Question 27

Cooperative mechanism (5)

Answer 27

- joint venture - strategic alliance and agreement - franchising - licensing - cross sharing

Question 28

Cooperative mechanism uses (5)

Answer 28

- pool resources - expand capabilities - increase geographic scope - enter new product market - transition mechanism: slow entry/exit

Question 29

Rationale of cooperative mechanism (5)

Answer 29

- strategic planning - tax advantage - international operations - risk reduction - knowledge acquisition and transfer

Question 30

Restructuring effort typically center on three key financial characteristics of company (3)

Answer 30

- assets on B/S - liability on B/S - CF on operations

Question 31

forces driving cross border mergers (10)

Answer 31

- growth - technology - advantage of differentiated product - roll up - diversification - following client - exchange rate - government policy - economic and political stability - consolidation

Question 32

Strategic choices of cross border (3)

Answer 32

- location: domestic or international - mode: build: greenfield, trade: export, import - mode: buy: invest, joint venture, acquire

Question 33

Strategic choice of cross border (3)

Answer 33

- location: domestic or international - mode: build: greenfield, trades: import, export - mode: buy: invest, join venture, acquire

Question 34

Country differences (6)

Answer 34

- restriction - culture - currency exchange - rules - ability to exit - legal

Question 35

Valuation international finance relationship (4)

Answer 35

- IRPT - FPT - PPPT - IFR

Question 36

Cost of capital- international (1)

Answer 36

- interest rate parity is forward and spot rate = foreign and domestic nominal rate

Question 37

DCF- international (3)

Answer 37

- forward parity: spot future or forward exchange should be unbiased predictor of future spot rate - purchasing power parity: law of one price - international fisher relation: nominal interest rate reflects the anticipated rate of inflation

Question 38

Assuming global capital market, two approaches (2)

Answer 38

- In CAD: convert EUR cash flow into CAD using forward rate, CAD wacc - in EUR: discount EUR FCF at EUR wacc, convert CAD at spot price