Series 79 – Investment Banking Representative Exam Mergers & Acquisitions Transactions 2 — Questions and Answers
Question 1: Which valuation methodology is most commonly used as a 'floor' in M&A analysis because it reflects the minimum standalone value of a company?
- Discounted Cash Flow (DCF)
- Precedent transactions analysis
- 52-week trading range (Correct answer)
- Leveraged buyout (LBO) analysis
Correct answer: 52-week trading range
The 52-week trading range represents the stock's historical market price and is often used as a reference floor showing where the company's shares have actually traded.
Question 2: A 'go-shop' provision in a merger agreement allows the target to:
- Negotiate better financing terms with lenders post-signing
- Actively solicit competing bids for a defined period after the merger agreement is signed (Correct answer)
- Delay closing if market conditions deteriorate
- Repurchase shares before the deal closes
Correct answer: Actively solicit competing bids for a defined period after the merger agreement is signed
A go-shop provision permits the target company to actively canvas other potential buyers for a specified window (typically 30–50 days) after signing, providing a market check.
Question 3: What is the primary purpose of a 'reverse termination fee' in an M&A deal?
- To compensate the seller if the buyer walks away from the transaction (Correct answer)
- To reimburse the buyer for due diligence costs if the seller terminates
- To penalize the target for accepting a competing bid
- To cover SEC filing fees if the deal is abandoned
Correct answer: To compensate the seller if the buyer walks away from the transaction
A reverse termination fee (reverse break-up fee) is paid by the acquirer to the target if the buyer fails to close the transaction, compensating the seller for lost time and opportunity.
Question 4: In a leveraged buyout (LBO), the primary source of equity returns typically comes from:
- Dividend recapitalizations only
- Multiple expansion, earnings growth, and debt paydown (Correct answer)
- Refinancing at lower interest rates
- Selling non-core assets immediately after acquisition
Correct answer: Multiple expansion, earnings growth, and debt paydown
LBO returns are driven by the combination of EBITDA growth, debt amortization reducing leverage, and potential multiple expansion at exit.
Question 5: Under SEC Rule 14e-1, a tender offer must remain open for at least:
- 10 business days
- 20 business days (Correct answer)
- 30 calendar days
- 5 business days
Correct answer: 20 business days
SEC Rule 14e-1 requires that a tender offer be held open for a minimum of 20 business days, giving shareholders adequate time to make an informed decision.
Question 6: What distinguishes a 'triangular merger' from a direct merger?
- It involves three separate acquirers pooling resources
- The acquirer uses a wholly owned subsidiary to merge with the target, shielding the parent from liabilities (Correct answer)
- It requires approval from three regulatory agencies
- It is limited to cross-border transactions
Correct answer: The acquirer uses a wholly owned subsidiary to merge with the target, shielding the parent from liabilities
In a triangular merger, the acquirer creates a subsidiary that merges with the target, so the parent company avoids directly assuming the target's liabilities or requiring its shareholder vote.
Series 79 – Investment Banking Representative Exam Mergers & Acquisitions Transactions 2
Which valuation methodology is most commonly used as a 'floor' in M&A analysis because it reflects the minimum standalone value of a company?