Series 79 – Investment Banking Representative Exam Due Diligence & Deal Structuring 3

Question 1

In due diligence, 'customer concentration risk' is identified when:

Accepted Answer

A significant portion of the target's revenue is derived from a small number of customers

Answer

The target sells products in too many geographic markets simultaneously

Answer

The target's customer contracts contain unfavorable payment terms

Answer

The target's sales force lacks adequate coverage in key markets

Question 2

A 'carve-out' transaction involves:

Accepted Answer

A parent company separating and selling a subsidiary or business division

Answer

A company repurchasing a portion of its outstanding shares in the open market

Answer

A private equity firm selling its entire portfolio in a single transaction

Answer

A company restructuring its long-term debt obligations through a bond exchange

Question 3

Which of the following best describes the role of a 'fairness opinion' in an M&A transaction?

Accepted Answer

An investment bank's written assessment that the transaction consideration is fair from a financial point of view

Answer

A legal document certifying that the transaction complies with antitrust regulations

Answer

A regulatory filing submitted to the SEC certifying the accuracy of the proxy statement

Answer

A binding arbitration agreement between the buyer and seller regarding valuation disputes

Question 4

In an LBO due diligence process, analysis of the target's debt capacity primarily focuses on:

Accepted Answer

The target's ability to generate sufficient free cash flow to service and repay acquisition debt

Answer

The target's credit rating history and relationships with existing lenders

Answer

The target's existing equity capitalization and share price history

Answer

The target's compliance with SEC reporting requirements

Question 5

A 'go-shop' provision in a merger agreement permits the target company to:

Accepted Answer

Actively solicit competing acquisition proposals from third parties for a limited period after signing

Answer

Accelerate the closing timeline to prevent the acquirer from renegotiating terms

Answer

Require the acquirer to increase the offer price if a competing bid emerges

Answer

Terminate the agreement without paying a breakup fee if the deal does not close

Question 6

During due diligence on a target's intellectual property (IP), an investment banker would be most concerned about which of the following findings?

Accepted Answer

The target's key technology is not patented and may be freely replicated by competitors

Answer

The target holds patents that expire in 10 or more years

Answer

The target has licensed certain non-core IP to third parties on arm's-length terms

Answer

The target has registered trademarks in its primary markets

Question 7

In a stock purchase transaction, compared to an asset purchase, the buyer typically faces greater risk because:

Accepted Answer

The buyer inherits all of the target's liabilities, including unknown and contingent liabilities

Answer

The buyer receives a stepped-up tax basis in the target's assets

Answer

The transaction requires approval from the buyer's shareholders under exchange listing rules

Answer

The buyer must register the acquired shares with the SEC before the deal can close