Series 79 – Investment Banking Representative Exam Due Diligence & Deal Structuring 2

Question 1

In an asset purchase transaction, which of the following is a primary advantage for the buyer?

Accepted Answer

The buyer receives a step-up in tax basis for acquired assets

Answer

The buyer assumes all known and unknown liabilities of the seller

Answer

The buyer avoids the need for target shareholder approval

Answer

The buyer inherits the seller's existing debt obligations

Question 2

An earnout provision in a deal structure requires the seller to receive additional consideration contingent upon:

Accepted Answer

The target achieving specified future financial performance milestones

Answer

The buyer successfully completing an IPO within two years of closing

Answer

The target's existing management team remaining employed for one year

Answer

The buyer refinancing the acquisition debt at favorable rates

Question 3

A 'material adverse change' (MAC) or 'material adverse effect' (MAE) clause in a purchase agreement primarily allows:

Accepted Answer

The buyer to terminate the agreement if a significant negative event occurs before closing

Answer

The seller to increase the purchase price if the company outperforms expectations

Answer

The target's board to solicit competing bids after signing

Answer

The investment bank to collect a higher advisory fee if the deal closes on schedule

Question 4

In deal structuring, an indemnification escrow arrangement typically serves to:

Accepted Answer

Provide the buyer with recourse for post-closing breaches of representations and warranties

Answer

Fund the target company's operations during the transition period post-closing

Answer

Compensate the seller's financial advisors for services rendered

Answer

Satisfy regulatory capital requirements imposed by the SEC

Question 5

A 'working capital adjustment' in a purchase agreement is designed to:

Accepted Answer

Ensure the buyer receives the target with a normal level of operating liquidity at closing

Answer

Compensate the seller for transaction-related expenses incurred before closing

Answer

Adjust the purchase price based on changes in the target's share price

Answer

Reallocate purchase price among individual assets for tax purposes

Question 6

A 'representations and warranties' section in a purchase agreement primarily serves to:

Accepted Answer

Allocate risk by having each party certify that certain statements of fact are true

Answer

Outline the buyer's post-closing integration plan for the target

Answer

Define the earnout performance metrics and measurement period

Answer

Establish the governance structure of the combined entity after closing

Question 7

In a leveraged buyout (LBO) transaction structure, the acquisition vehicle is typically:

Accepted Answer

A newly formed holding company that incurs debt to purchase the target

Answer

A publicly registered investment company regulated under the 1940 Act

Answer

An existing subsidiary of the private equity fund's portfolio

Answer

A special purpose acquisition company (SPAC) listed on a stock exchange