Chapter 10 Practice Question Answers
- 1. Answer: B. A typical engagement letter includes information about the length and scope of the engagement and the conditions under which the parties may terminate the representation. The engagement letter also includes the fee arrangement. However, in most cases the investment bank’s compensation is based, at least in part, on a stated percentage of the deal value. Therefore, it is usually not possible to determine the total dollar amount of the bank’s fee until a deal is struck.
- 2. Answer: C. The transaction described is a spin-off. A split-off similarly involves the divestiture of a division or subsidiary, but shares of the subsidiary’s stock are distributed only to those shareholders of the parent corporation that are willing to exchange their shares for shares of the new corporation.
- 3. Answer: A. In a tender offer, the buyer makes a public offer to purchase stock directly from shareholders. A shareholder vote is not required. The other types of transactions listed normally require approval by a vote of the seller’s shareholders.
- 4. Answer: A. The stock of the buyer must comprise a significant portion of the consideration for the transaction—anywhere from 40% to 100%, depending on the deal structure. Moreover, any part of the consideration that is paid in cash is taxable. Although the stock portion of the deal is tax-free, it is not tax exempt; taxes are deferred until a later taxable event (such as the sale of stock received as consideration) occurs, which could occur at any time after the reorganization takes place. Therefore, option II is incorrect. Furthermore, in a tax-free reorganization, the buyer must continue to operate the company, or a significant portion of the purchased assets; for this reason, option III is also incorrect.
- 5. Answer: B. Such a payment is known as a golden parachute.
- 6. Answer: A. The buyer is typically motivated to obtain a step-up in the basis of t