FIN 461 Exam 1 Passed A+ Rated
Guide with Questions And Answers 2025
Reasons M/A occurs in waves - Answer - (1) Liquidity (Low interest Rates, high stock prices)
(2) Disruptive Technology
(3) Regulation / Deregulation
(4) Price Shock
Why are regulated industries less competitive - Answer - Set profit margins, lack of consumer
care
M/A Motives - Answer - Synergies, Diversification, strategic, hubris, buy undervalued/sell over
valued, mismanagement, managerialism, market power
Operational Synergies - Answer - Cost savings, revenue enhancements, process involvements
Financial Synergies - Answer - Financial engineering, tax benefits
How do synergies come about - Answer - Shared know-how, shared tangible resources, pooled
negotiating power, coordinated strategies, vertical integration, combined business creation
What kind of synergies are more reliable - Answer - Cost synergies
Why can diversification destroy value - Answer - (1) Inefficient internal capital markets (lower
cost of capital to failing divisions)
(2) reduced managerial accountability / greater entrenchment
,(3) loss of focus
(4) incentive problems
What drives horizontal integration - Answer - economies of scale and scope
what drives vertical integration - Answer - greater control over production and distribution, can
be forward or backward integration
LBO - Answer - Acquisition of a target using debt to finance a large portion of the purchase price
What are the historical weights debt to equity for lbo? - Answer - 60-70% debt and 30-40%
equity
How does leverage play a role in an lbo? - Answer - (1) Enables sponsor to achieve desired
returns
(2) tax savings due to tax deductibility of interest payments
(3) some say it also improves firm governance
Types of M/A financing - Answer - Cash on hand
Debt financing
- revolving credit facility
- term loan
- bond / note
- commercial paper
Equity financing
Contingent consideration (earnout)
, What is a contingent consideration / earnout - Answer - Extra money is dished out to
management depending on how the target performs
Accretive - Answer - If earnings go up as a result of the transaction
Dillutive - Answer - If earnings go down as a result of the transaction
Main players in an acquisition - Answer - Acquirers, targets, investment banks, lawyers,
accountants, proxy solicitors, institutional investors, hedge and PE funds, M/A arbitrageurs
What is a proxy solicitor - Answer - Someone who tries to get shareholders to vote a certain
way.
What is a strategic acquirer - Answer - An operating company
What is a financial sponsor - Answer - A financial firm like a PE firm
What is a strategics strategy - Answer - typically hold for a long term and have strategic motives
What is a financial sponsors strategy - Answer - Purchase companies short term for roughly 5
years and then sell
What happens to targets returns when transaction is announced - Answer - around transaction
date, abnormal returns of about 20% for target shareholders in a friendly deal, 30-35% in a
hostile deal
Why does the stock price increase at announcement date - Answer - usually a premium is paid
Guide with Questions And Answers 2025
Reasons M/A occurs in waves - Answer - (1) Liquidity (Low interest Rates, high stock prices)
(2) Disruptive Technology
(3) Regulation / Deregulation
(4) Price Shock
Why are regulated industries less competitive - Answer - Set profit margins, lack of consumer
care
M/A Motives - Answer - Synergies, Diversification, strategic, hubris, buy undervalued/sell over
valued, mismanagement, managerialism, market power
Operational Synergies - Answer - Cost savings, revenue enhancements, process involvements
Financial Synergies - Answer - Financial engineering, tax benefits
How do synergies come about - Answer - Shared know-how, shared tangible resources, pooled
negotiating power, coordinated strategies, vertical integration, combined business creation
What kind of synergies are more reliable - Answer - Cost synergies
Why can diversification destroy value - Answer - (1) Inefficient internal capital markets (lower
cost of capital to failing divisions)
(2) reduced managerial accountability / greater entrenchment
,(3) loss of focus
(4) incentive problems
What drives horizontal integration - Answer - economies of scale and scope
what drives vertical integration - Answer - greater control over production and distribution, can
be forward or backward integration
LBO - Answer - Acquisition of a target using debt to finance a large portion of the purchase price
What are the historical weights debt to equity for lbo? - Answer - 60-70% debt and 30-40%
equity
How does leverage play a role in an lbo? - Answer - (1) Enables sponsor to achieve desired
returns
(2) tax savings due to tax deductibility of interest payments
(3) some say it also improves firm governance
Types of M/A financing - Answer - Cash on hand
Debt financing
- revolving credit facility
- term loan
- bond / note
- commercial paper
Equity financing
Contingent consideration (earnout)
, What is a contingent consideration / earnout - Answer - Extra money is dished out to
management depending on how the target performs
Accretive - Answer - If earnings go up as a result of the transaction
Dillutive - Answer - If earnings go down as a result of the transaction
Main players in an acquisition - Answer - Acquirers, targets, investment banks, lawyers,
accountants, proxy solicitors, institutional investors, hedge and PE funds, M/A arbitrageurs
What is a proxy solicitor - Answer - Someone who tries to get shareholders to vote a certain
way.
What is a strategic acquirer - Answer - An operating company
What is a financial sponsor - Answer - A financial firm like a PE firm
What is a strategics strategy - Answer - typically hold for a long term and have strategic motives
What is a financial sponsors strategy - Answer - Purchase companies short term for roughly 5
years and then sell
What happens to targets returns when transaction is announced - Answer - around transaction
date, abnormal returns of about 20% for target shareholders in a friendly deal, 30-35% in a
hostile deal
Why does the stock price increase at announcement date - Answer - usually a premium is paid
