C201 BUSINESS ACUMEN QUESTIONS & ANSWERS
What are the two types of divestitures? - Answers -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? - Answers -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. - Answers -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.
What is a sovereign wealth fund? - Answers -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 - Answers -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. -
Answers -
What are the three sources of short-term funding? - Answers -The three sources of
short-term funding are trade credit,
short-term loans, and commercial paper.
Explain trade credit - Answers -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.
, Why is commercial paper an attractive short-term financing option? - Answers -
Commercial paper is an attractive financing option because companies can raise large
amounts of money by selling commercial paper at rates that are generally lower than
those charged by banks.
Businesses have two sources of funds: debt capital and equity capital. Debt capital
consists of funds obtained through borrowing, and equity capital consists of funds
provided by the company's owners. The mix of debt and equity capital is known as the
company's capital structure, and the financial manager's job is to find the proper mix. -
Answers -Leverage is a technique of increasing the rate of return on funds invested by
borrowing. However, leverage increases risk. Also, overreliance on borrowed funds may
reduce management's flexibility in future financing decisions. Equity capital also has
drawbacks. When additional equity capital is sold, the control of existing shareholders is
diluted
In addition, equity capital is more expensive than debt capital. Financial managers are
also faced with decisions concerning the appropriate
mix of short- and long-term funds. - Answers -Short-term funds are generally less
expensive than long-term funds but expose companies to more risk. Another decision
involving financial managers is determining the company's dividend policy.
Explain the concept of leverage. - Answers -Leverage is a technique of increasing the
rate of return on funds invested by borrowing funds. However, leverage also increases
risk
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). - Answers -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. -
Answers -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.
What are the two types of divestitures? - Answers -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? - Answers -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. - Answers -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.
What is a sovereign wealth fund? - Answers -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 - Answers -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. -
Answers -
What are the three sources of short-term funding? - Answers -The three sources of
short-term funding are trade credit,
short-term loans, and commercial paper.
Explain trade credit - Answers -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.
, Why is commercial paper an attractive short-term financing option? - Answers -
Commercial paper is an attractive financing option because companies can raise large
amounts of money by selling commercial paper at rates that are generally lower than
those charged by banks.
Businesses have two sources of funds: debt capital and equity capital. Debt capital
consists of funds obtained through borrowing, and equity capital consists of funds
provided by the company's owners. The mix of debt and equity capital is known as the
company's capital structure, and the financial manager's job is to find the proper mix. -
Answers -Leverage is a technique of increasing the rate of return on funds invested by
borrowing. However, leverage increases risk. Also, overreliance on borrowed funds may
reduce management's flexibility in future financing decisions. Equity capital also has
drawbacks. When additional equity capital is sold, the control of existing shareholders is
diluted
In addition, equity capital is more expensive than debt capital. Financial managers are
also faced with decisions concerning the appropriate
mix of short- and long-term funds. - Answers -Short-term funds are generally less
expensive than long-term funds but expose companies to more risk. Another decision
involving financial managers is determining the company's dividend policy.
Explain the concept of leverage. - Answers -Leverage is a technique of increasing the
rate of return on funds invested by borrowing funds. However, leverage also increases
risk
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). - Answers -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. -
Answers -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.
