Mergers and Bankruptcy

Question 1

What is a stockholder

Answer 1

an owner

Question 2

what are bondholders

Answer 2

creditors

Question 3

what is the difference between stock holders and bondholders

Answer 3

bondholders (creditors) are offered certain guarantees

Question 5

what are some economic reasons for businesses to fail

Answer 5

industry weakness
poor location/product
changing market conditions

Question 6

what are some financial reasons for businesses to fail

Answer 6

too much debt
poor cash management
insufficient capital
risk management

Question 7

what are the two options for financial insolvency

Answer 7

informal (workouts)
Formal (Bankruptcy)

Question 8

what are some informal ways to work out of a financial bankruptcy

Answer 8

restructure.
extension of loans
composition of loan values in exchange for equity in the company

Question 9

what are some benefits of an informal workout

Answer 9

less cost
quicker
allows creditors to receive money faster
flexible

Question 10

what is formal bankruptcy

Answer 10

a mechanism for formulating a plan to resolve debts through an allocation of assets among creditors

Question 11

what are the two types of bankruptcy

Answer 11

Voluntary
involuntary

Question 12

what is voluntary bankruptcy

Answer 12

a bankruptcy petition filed in court by the firms management

Question 13

what is involuntary bankruptcy

Answer 13

a bankruptcy petition filed in court by the distressed firms creditors

Question 14

what are the two Chapters of Bankruptcy

Answer 14

Chapter 7 - liquidation
Chapter 11 - reorganization

Question 15

what are the three main factors to credit analysis

Answer 15

covenants
collateral
ability to repayw

Question 16

what are covenants in credit analysis

Answer 16

covenants offer protections to bondholders and require firms to do certain things, or restrict them from doing other things

could be debt limits, ratio limits, etc.

Question 17

what is collateral in credit analysis

Answer 17

Corporate debt obligations can be secured or unsecured

Question 18

what is ability to repay in credit analysis

Answer 18

analyzing liquidity ratios for cash management

analyzing leverage ratios to understand distress

Question 19

what is financial risk

Answer 19

considering whether a firm will be able to meet its obligations

Question 20

what are some important financial ratios to analyze financial risk

Answer 20

interst coverage
leverage
cash flow
net assets
working capital

Question 21

how do you use ratios to analyze a businesses financial risk

Answer 21

compare it to a benchmark, such as industry average and trending them over time

Question 22

what is a horizontal merger

Answer 22

a larg firm acquires a smaller firm in the same line of business

Question 23

what is a vertical merger

Answer 23

a firm acquires input producer

Question 24

what is a congeneric merger

Answer 24

two firms in related industries but with different products merge

Question 25

what is a conglomerate merger

Answer 25

firms with multiple divisions purchases another firm

Question 26

what is synergies

Answer 26

when a whole is greater than the sum of it's parts lower borrowing costs, better financial coverage

Question 27

what is divestiture

Answer 27

when the breakup value is greater than the firm together (true for many congolmerates)

Question 28

what is LBO and MBO

Answer 28

Leverage Buy Out (LBO) Management buyout (MBO)

Question 29

what is a leverage buy out

Answer 29

small group of investors acquires a firm in a transaction financed by debt

Question 30

what is a management buyout

Answer 30

when the firms management leads the new investor group

Question 31

why do an LBO

Answer 31

it's a tool to obtain control and possibly turn around a struggling firm

Question 32

what are the basic steps to adjust business value approach

Answer 32

The sum of Discounted Cash Flows Plus any Benefits from a Tax Shield Minus any debt that must be assumed or paid off