What are the two types of divestitures? - ANS A sell-off is a divestiture in which assets are sold
to another company. In a spin-off, a new company is created from the assets divested.
Shareholders of the divesting company become shareholders of the new company as well.
What is an LBO? - ANS a leveraged buyout is a transaction in which public shareholders are
bought out, and the company reverts to private status. LBOs are usually finance with large
amounts of borrowed money.
Define synergy. - ANS the term used to describe the benefits produced by a merger or
acquisition. It is the notion that the combined company is worth more than the buyer and the
target are individually.
Shareholders of the divesting company become shareholders of the new company as a merger
is a combination of two or more companies into one company. An acquisition is a transaction in
which one
company buys another. Even in a merger, there is a buyer and a seller (called the target). - ANS
The buyer offers cash,
securities, or a combination of the two in return for the target's shares. Mergers and acquisitions
should be evaluated as
any large investment is: by comparing the costs with the benefit
Synergy is the term used to describe the benefits a
merger or acquisition is expected to produce. A leveraged buyout (LBO) is a transaction in
which shares are purchased
from public shareholders, and the company reverts to private status. Usually LBOs are financed
with substantial amounts
of borrowed funds. Private equity companies are often major financers of LBOs. - ANS
Divestitures are the opposite of mergers,
in which companies sell assets such as subsidiaries, product lines, or production facilities. A
sell-off is a divestiture in
which assets are sold to another company. In a spin-off, a new company is created from the
assets divested.
Long-term funds are repaid over many years. There are three sources: long-term loans obtained
from financial institutions, bonds sold to investors, and equity financing. Public sales of
securities represent a major source of funds for corporations. These securities can generally be
traded in secondary markets. Public sales can vary substantially from year
to year depending on the conditions in the financial markets. - ANS Private placements are
securities sold to a small number of
, institutional investors. Most private placements involve debt securities. Venture capitalists are
an important source of
financing for new companies. If the business succeeds, venture capitalists stand to earn large
profits
Private equity funds are investment companies that raise funds from wealthy individuals and
institutional investors and use the funds to make investments in both public and private
companies. Unlike venture capitalists, private equity funds invest in all types of businesses.
Sovereign wealth funds are investment companies owned by governments. - ANS What is the
most common type of security sold privately? Corporate debt securities are the most common
type of security sold privately.
Describe venture capitalists - ANS Venture capitalists raise money from wealthy individuals and
institutional investors and invest the funds in promising companies. If the business succeeds,
venture capitalists can earn substantial profits.
What is a sovereign wealth fund? - ANS sovereign wealth fund is a government-owned
investment company. These companies make investments in a variety of financial and real
assets, such as real estate. Although most
investments are based on the best risk-return trade-off, political, social, and strategic
considerations play roles
as well.
The three major short-term funding options are trade credit, short-term loans from banks and
other financial institutions, and commercial paper. Trade credit is extended by suppliers when a
company receives goods or services, agreeing to pay for them at a later date - ANS Trade credit
is relatively easy to obtain and costs nothing unless a supplier offers a cash discount. Loans
from commercial banks are a significant source of short-term financing and are often used to
finance accounts receivable and inventory. Loans can be either unsecured or secured, with
accounts receivable or inventory pledged as collateral
Commercial paper is a short-term IOU sold by a company. Although large amounts of money
can be raised through the sale of commercial paper, usually at rates below those charged by
banks, access to the
commercial- the paper market is limited to large, financially strong corporations. - ANS
What are the three sources of short-term funding? - ANS The three sources of short-term
funding are trade credit,
short-term loans, and commercial paper.
Explain trade credit - ANS Trade credit is extended by suppliers when a buyer agrees to pay for
goods and services at a later date. Trade credit is relatively easy to obtain and costs nothing
unless a cash discount is offered.
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