Chap032.pdf

Chapter 32 - Corporate Restructuring

Chapter 32 Corporate Restructuring Multiple Choice Questions

1. The following are some of the ways in which a company structure can be modified: I) LBOs II) Privatizations III) Spin-offs and carve-outs IV) Bankruptcies A. I and II only B. II only C. I and III only D. I, II, III, and IV

2. Leveraged buyouts (LBOs) almost always involve: I) a large part of the purchase price is financed mostly by debt II) most of this debt is below investment grade (junk) III) the firm goes private and its shares are no longer traded on the open market A. I only B. II only C. III only D. I, II, and III

3. When a leveraged buyout transaction is led by the firm's management then the transaction is called: A. IPO B. MBO C. MOBL D. CFO

4. The largest and best documented LBO of the 1980s is the: A. KKR acquiring RJR Nabisco through LBO B. Thompson Co acquiring Southland (7-11) through LBO C. KKR acquiring Beatrice through LBO D. None of the above

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5. The following are examples of LBOs except: A. KKR and RJR Nabisco B. America Online and Time Warner C. KKR and Beatrice D. Thompson and Southland

6. The following are examples of LBOs except: A. KKR and Safeway B. KKR and Owens-Illinois C. Fiat and Chrysler D. All of the above are LBOs

7. In 1991 RJR: A. reverted to being a public company B. went bankrupt because of the high debt burden C. stake held by KKR was completely sold off D. all of the above

8. Largest gainers from LBOs were: A. Junk bond holders B. Raiders C. Selling stockholders D. Investment banking firms

9. Junk bonds are bonds with: A. AAA or Aaa ratings B. BBB or Baa ratings C. BB or Ba ratings or lower D. D rated bonds

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10. The main characteristics of LBOs are: A. High debt B. Private ownership C. Management incentives D. All of the above

11. The gains from LBOs are from: A. Tax savings because of high debt servicing B. Loss in the value to bondholders C. Improved performance because of incentives to mangers and employees D. All of the above

12. In the case of RJR Nabisco LBO, the gain in market value RJR stockholders were several times more than: A. estimated value of additional interest tax shields generated by the LBO B. estimated losses to RJR bondholders as result of drastic decline in bond ratings C. (A) and (B) combined D. none of the above

13. The main characteristics of leveraged restructuring are: I) High debt II) Management incentives III) Private ownership A. I only B. I and II only C. I and III only D. I, II, and III

14. Leveraged restructurings are designed to force mature, successful but overweight firms to: A. reduce cash B. reduce operating costs C. use assets more efficiently D. all of the above

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15. The following are examples of spin-offs except: A. Abbot Laboratories and Hospira B. AT&T and Lucent C. General Motors and EDS D. Exxon and Mobil

16. In case of spin-offs: A. Shares of the new company are given to shareholders of the parent company B. Shares of the new company are sold as a public offering C. Shares of the new company are bought by borrowing or issuing junk bonds D. None of the above

17. Spin-offs are not taxed if the shareholders of the parent company are given at least: A. 90% of the shares in the new company B. 80% of the shares in the new company C. 70% of the shares in the new company D. 60% of the shares in the new company

18. A spin-off is a/an I) new company. II) independent company. III) company formed by detaching part of a parent firm's assets and operations. A. I only B. II only C. I and II only D. I, II and III

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19. The following are advantages of spin-offs: I) they widen investor choice by allowing them to invest in just one part of the business. II) they can improve incentives for managers. III) by spinning of businesses with "poor fit" parent firms can concentrate on its main activities. IV) they relieve investors of the worry that funds will be siphoned off from one business to support unprofitable capital investments in another. A. I and II only B. I, II and III only C. I, II, III and IV D. III and IV only

20. In case of carve-outs: A. Shares of the new company are given to the shareholders of the parent company B. Shares of the new company are sold in a public offering C. Shares of the new company are bought by borrowing or issuing junk bonds D. None of the above

21. The following are examples of carve-outs except: A. Bristol Myers Squibb and Mead Johnson Nutrition B. 3Com and Palm C. AT&T and Lucent D. All of the above are examples of carve-outs

22. Which of the following statements regarding spin-offs and carve-outs is not true? A. Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company B. Spin-offs are not taxed if the shareholders of the parent company are given at least 80% of the shares in the new company C. Gains or losses from carve-outs are taxed at the corporate tax rate D. In Carve-outs, parent company has the majority control

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23. Asset sales are: I) Good news for investors in the selling firm II) On average the assets are employed more productively after the sale III) Transfer business units to the companies that can manage them more efficiently A. I only B. I and II only C. I, II, and III D. III only

24. The simplest way to divest an asset is: A. to spin-off B. to carve-out C. to sell it D. none of the above

25. Asset sales are common in: A. manufacturing B. banking C. services D. none of the above

26. A privatization is a: A. Sale of a government-owned company to private investors B. Sale of private companies to the government C. Sale of a publicly traded company to private investors D. None of the above

27. Most privatizations resemble: A. spin-offs B. carve-outs C. both (A) and (B) D. none of the above

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28. The following are examples of privatization except: A. Habib Bank B. AT&T C. West Japan Railway Company D. ONGC

29. Privatizations transactions resemble: A. Carve-outs B. Spin-offs C. LBOs D. None of the above

30. The following are important motives for privatization except: A. Revenue for the government B. Increased efficiency C. Share ownership D. Economies of scale

31. The following are private equity groups: A. Blackstone B. Cerberus Capital management C. KKR D. All of the above are private equity groups

32. Which of the following statements is/are true of limited partnerships? A. Limited partners enjoy limited liability but do not participate in management. B. Generally limited partners put up most of the money. C. Generally limited partners are institutional investors. D. All of the above statements are true of limited partnerships.

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33. A private-equity investment fund is organized as a: A. corporation B. sole proprietorship C. partnership D. none of the above

34. The following statements are true of partnership agreements: I) The partnership agreement has a limited term, 10 years or less. II) The general partners get a management fee plus carried interest in 20% of any profits earned by the partnership. III) The limited partners get paid off first, but they get only 80% of any further returns. IV) The general partners can reinvest the limited partners' money. A. I and II only B. I, II and III only C. I, II, III and IV D. II and III only

35. The following are advantages of private-equity partnerships: I) carried interest gives the general partners potential for high profits. II) carried interest, because it a call option, gives the general partners incentives to take risks as they are strongly motivated to earn back the limited partners' investment and deliver a profit. III) There is no separation of ownership and control and general partners can intervene in the fund's portfolio companies any time performance lags or strategy needs change. IV) There is no free cash flow problem as cash from first round must be distributed to investors. A. I, II and IV only B. I and II only C. I and IV only D. I, II, III and IV

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36. Private-equity partnerships can cash out in the following ways: I) by an IPO of portfolio companies. II) a trade sale to another firm. III) limited partner financing. A. I only B. II only C. I and II only D. III only

37. A conglomerate is a: A. firm that invests in one industry only B. firm that diversifies across several unrelated businesses C. firm that integrates vertically D. none of the above

38. Conglomerate discount means: I) The market value of the whole conglomerate is greater than the sum of the value of the parts II) The market value of the whole conglomerate is less than the sum of the value of the parts III) The book value of the whole conglomerate is greater than the sum of the value of the parts IV) The book value of the whole conglomerate is less than the sum of the value of the parts A. I only B. II only C. III only D. IV only

39. The following are characteristics of a public conglomerate: I) they are designed to operate various divisions for the long run. II) has an internal capital market where each division competes for funds. III) a hierarchy of corporate staff evaluates divisions' plans and performance. IV) divisional managers' compensation depends mostly on earnings of their respective divisions. A. I and II only B. I, II and III C. II, III and IV only D. I, II, III and IV

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40. Two in-court options for dealing with financial distress of a firm are: A. Merger and acquisition B. Liquidation and reorganization C. Leasing and LBO D. Issue stocks and bonds

41. Indirect costs of bankruptcy are borne principally by A. Bondholders B. Stockholders C. Managers D. The government

42. A bankrupt firm while being in the process of developing a reorganization plan is allowed to buy goods on credit and borrow money to finance needed working capital. Such an arrangement is called: A. Debtor-in-possession debt B. Junior creditors C. Workout D. Receiver

43. Which of the following is NOT a motive for privatization? A. Increased efficiency B. Share ownership C. Expansion of government D. Revenue for the government

44. Macquarie Bank of Australia invested in what US government assets? A. Airlines B. Parks C. Sewer systems D. Toll highways

True / False Questions

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45. Leveraged buyouts are the same as acquisitions. True False

46. LBOs are financed with junk bonds. True False

47. A spin-off is a new, independent company created by detaching part of a parent company's assets. True False

48. Spin-offs are not taxed as long as shareholders of the parent company are given at least 80% of the shares in the new company. True False

49. Carve-outs are identical to spin-offs. True False

50. Privatization is the same as going private in a LBO. True False

51. A privatization is a sale of a government-owned company to private investors. True False

52. A major beneficiary of privatization is the government that receives the revenues. True False

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53. Private-equity partnerships can be thought of as temporary conglomerates. True False

54. In a private-equity partnership arrangement the general partners put up most of the money and receive a management fee and get a carried interest in the fund's profits. True False

55. Private-equity partnerships can run portfolio companies for ever. True False

56. There are only two types of bankruptcy procedures in the United States, which are set out Chapter 7 and 11 of the 1978 Bankruptcy Reform Act. True False

57. Securities and Exchange Commission (SEC) plays an important role in the reorganization of, particularly for large, public companies by ensuring that all relevant and material information is disclosed to the creditors before they vote on the proposed reorganization plan. True False

58. Private-equity ownership is more focused on shareholder value than public company ownership. True False

59. Mergers often occur because managers are not maximizing shareholder value. True False

Short Answer Questions

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60. What is a leveraged buyout?

61. Briefly explain the difference between leveraged buyouts and leveraged restructurings.

62. What is a spin-off?

63. Briefly explain the difference between a spin-off and a carve-out.

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64. Briefly explain what is meant by privatization?

65. What are some of the benefits of privatization?

66. Explain how private-equity partnerships are set up.

67. Briefly explain the main differences between private-equity partnerships and public conglomerates.

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68. Briefly explain the Bankruptcy Reform Act of 1978.

69. Briefly explain the role of Securities and Exchange Commission (SEC) in bankruptcy reorganizations.

70. Briefly explain why private equity has an advantage in creating value over public firms.

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Chapter 32 - Corporate Restructuring

Chapter 32 Corporate Restructuring Answer Key

Multiple Choice Questions

1. The following are some of the ways in which a company structure can be modified: I) LBOs II) Privatizations III) Spin-offs and carve-outs IV) Bankruptcies A. I and II only B. II only C. I and III only D. I, II, III, and IV

Type: Medium

2. Leveraged buyouts (LBOs) almost always involve: I) a large part of the purchase price is financed mostly by debt II) most of this debt is below investment grade (junk) III) the firm goes private and its shares are no longer traded on the open market A. I only B. II only C. III only D. I, II, and III

Type: Medium

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3. When a leveraged buyout transaction is led by the firm's management then the transaction is called: A. IPO B. MBO C. MOBL D. CFO

Type: Easy

4. The largest and best documented LBO of the 1980s is the: A. KKR acquiring RJR Nabisco through LBO B. Thompson Co acquiring Southland (7-11) through LBO C. KKR acquiring Beatrice through LBO D. None of the above

Type: Medium

5. The following are examples of LBOs except: A. KKR and RJR Nabisco B. America Online and Time Warner C. KKR and Beatrice D. Thompson and Southland

Type: Easy

6. The following are examples of LBOs except: A. KKR and Safeway B. KKR and Owens-Illinois C. Fiat and Chrysler D. All of the above are LBOs

Type: Easy

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7. In 1991 RJR: A. reverted to being a public company B. went bankrupt because of the high debt burden C. stake held by KKR was completely sold off D. all of the above

Type: Medium

8. Largest gainers from LBOs were: A. Junk bond holders B. Raiders C. Selling stockholders D. Investment banking firms

Type: Medium

9. Junk bonds are bonds with: A. AAA or Aaa ratings B. BBB or Baa ratings C. BB or Ba ratings or lower D. D rated bonds

Type: Easy

10. The main characteristics of LBOs are: A. High debt B. Private ownership C. Management incentives D. All of the above

Type: Medium

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11. The gains from LBOs are from: A. Tax savings because of high debt servicing B. Loss in the value to bondholders C. Improved performance because of incentives to mangers and employees D. All of the above

Type: Medium

12. In the case of RJR Nabisco LBO, the gain in market value RJR stockholders were several times more than: A. estimated value of additional interest tax shields generated by the LBO B. estimated losses to RJR bondholders as result of drastic decline in bond ratings C. (A) and (B) combined D. none of the above

Type: Difficult

13. The main characteristics of leveraged restructuring are: I) High debt II) Management incentives III) Private ownership A. I only B. I and II only C. I and III only D. I, II, and III

Type: Medium

14. Leveraged restructurings are designed to force mature, successful but overweight firms to: A. reduce cash B. reduce operating costs C. use assets more efficiently D. all of the above

Type: Medium

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15. The following are examples of spin-offs except: A. Abbot Laboratories and Hospira B. AT&T and Lucent C. General Motors and EDS D. Exxon and Mobil

Type: Medium

16. In case of spin-offs: A. Shares of the new company are given to shareholders of the parent company B. Shares of the new company are sold as a public offering C. Shares of the new company are bought by borrowing or issuing junk bonds D. None of the above

Type: Difficult

17. Spin-offs are not taxed if the shareholders of the parent company are given at least: A. 90% of the shares in the new company B. 80% of the shares in the new company C. 70% of the shares in the new company D. 60% of the shares in the new company

Type: Difficult

18. A spin-off is a/an I) new company. II) independent company. III) company formed by detaching part of a parent firm's assets and operations. A. I only B. II only C. I and II only D. I, II and III

Type: Medium

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19. The following are advantages of spin-offs: I) they widen investor choice by allowing them to invest in just one part of the business. II) they can improve incentives for managers. III) by spinning of businesses with "poor fit" parent firms can concentrate on its main activities. IV) they relieve investors of the worry that funds will be siphoned off from one business to support unprofitable capital investments in another. A. I and II only B. I, II and III only C. I, II, III and IV D. III and IV only

Type: Medium

20. In case of carve-outs: A. Shares of the new company are given to the shareholders of the parent company B. Shares of the new company are sold in a public offering C. Shares of the new company are bought by borrowing or issuing junk bonds D. None of the above

Type: Difficult

21. The following are examples of carve-outs except: A. Bristol Myers Squibb and Mead Johnson Nutrition B. 3Com and Palm C. AT&T and Lucent D. All of the above are examples of carve-outs

Type: Medium

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22. Which of the following statements regarding spin-offs and carve-outs is not true? A. Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company B. Spin-offs are not taxed if the shareholders of the parent company are given at least 80% of the shares in the new company C. Gains or losses from carve-outs are taxed at the corporate tax rate D. In Carve-outs, parent company has the majority control

Type: Medium

23. Asset sales are: I) Good news for investors in the selling firm II) On average the assets are employed more productively after the sale III) Transfer business units to the companies that can manage them more efficiently A. I only B. I and II only C. I, II, and III D. III only

Type: Easy

24. The simplest way to divest an asset is: A. to spin-off B. to carve-out C. to sell it D. none of the above

Type: Medium

25. Asset sales are common in: A. manufacturing B. banking C. services D. none of the above

Type: Easy

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26. A privatization is a: A. Sale of a government-owned company to private investors B. Sale of private companies to the government C. Sale of a publicly traded company to private investors D. None of the above

Type: Difficult

27. Most privatizations resemble: A. spin-offs B. carve-outs C. both (A) and (B) D. none of the above

Type: Easy

28. The following are examples of privatization except: A. Habib Bank B. AT&T C. West Japan Railway Company D. ONGC

Type: Easy

29. Privatizations transactions resemble: A. Carve-outs B. Spin-offs C. LBOs D. None of the above

Type: Easy

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30. The following are important motives for privatization except: A. Revenue for the government B. Increased efficiency C. Share ownership D. Economies of scale

Type: Medium

31. The following are private equity groups: A. Blackstone B. Cerberus Capital management C. KKR D. All of the above are private equity groups

Type: Easy

32. Which of the following statements is/are true of limited partnerships? A. Limited partners enjoy limited liability but do not participate in management. B. Generally limited partners put up most of the money. C. Generally limited partners are institutional investors. D. All of the above statements are true of limited partnerships.

Type: Medium

33. A private-equity investment fund is organized as a: A. corporation B. sole proprietorship C. partnership D. none of the above

Type: Easy

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34. The following statements are true of partnership agreements: I) The partnership agreement has a limited term, 10 years or less. II) The general partners get a management fee plus carried interest in 20% of any profits earned by the partnership. III) The limited partners get paid off first, but they get only 80% of any further returns. IV) The general partners can reinvest the limited partners' money. A. I and II only B. I, II and III only C. I, II, III and IV D. II and III only

Type: Difficult

35. The following are advantages of private-equity partnerships: I) carried interest gives the general partners potential for high profits. II) carried interest, because it a call option, gives the general partners incentives to take risks as they are strongly motivated to earn back the limited partners' investment and deliver a profit. III) There is no separation of ownership and control and general partners can intervene in the fund's portfolio companies any time performance lags or strategy needs change. IV) There is no free cash flow problem as cash from first round must be distributed to investors. A. I, II and IV only B. I and II only C. I and IV only D. I, II, III and IV

Type: Difficult

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36. Private-equity partnerships can cash out in the following ways: I) by an IPO of portfolio companies. II) a trade sale to another firm. III) limited partner financing. A. I only B. II only C. I and II only D. III only

Type: Medium

37. A conglomerate is a: A. firm that invests in one industry only B. firm that diversifies across several unrelated businesses C. firm that integrates vertically D. none of the above

Type: Easy

38. Conglomerate discount means: I) The market value of the whole conglomerate is greater than the sum of the value of the parts II) The market value of the whole conglomerate is less than the sum of the value of the parts III) The book value of the whole conglomerate is greater than the sum of the value of the parts IV) The book value of the whole conglomerate is less than the sum of the value of the parts A. I only B. II only C. III only D. IV only

Type: Difficult

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39. The following are characteristics of a public conglomerate: I) they are designed to operate various divisions for the long run. II) has an internal capital market where each division competes for funds. III) a hierarchy of corporate staff evaluates divisions' plans and performance. IV) divisional managers' compensation depends mostly on earnings of their respective divisions. A. I and II only B. I, II and III C. II, III and IV only D. I, II, III and IV

Type: Medium

40. Two in-court options for dealing with financial distress of a firm are: A. Merger and acquisition B. Liquidation and reorganization C. Leasing and LBO D. Issue stocks and bonds

Type: Easy

41. Indirect costs of bankruptcy are borne principally by A. Bondholders B. Stockholders C. Managers D. The government

Type: Medium

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42. A bankrupt firm while being in the process of developing a reorganization plan is allowed to buy goods on credit and borrow money to finance needed working capital. Such an arrangement is called: A. Debtor-in-possession debt B. Junior creditors C. Workout D. Receiver

Type: Difficult

43. Which of the following is NOT a motive for privatization? A. Increased efficiency B. Share ownership C. Expansion of government D. Revenue for the government

Type: Easy

44. Macquarie Bank of Australia invested in what US government assets? A. Airlines B. Parks C. Sewer systems D. Toll highways

Type: Easy

True / False Questions

45. Leveraged buyouts are the same as acquisitions. FALSE

Type: Medium

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46. LBOs are financed with junk bonds. TRUE

Type: Medium

47. A spin-off is a new, independent company created by detaching part of a parent company's assets. TRUE

Type: Medium

48. Spin-offs are not taxed as long as shareholders of the parent company are given at least 80% of the shares in the new company. TRUE

Type: Medium

49. Carve-outs are identical to spin-offs. FALSE

Type: Medium

50. Privatization is the same as going private in a LBO. FALSE

Type: Difficult

51. A privatization is a sale of a government-owned company to private investors. TRUE

Type: Medium

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52. A major beneficiary of privatization is the government that receives the revenues. TRUE

Type: Medium

53. Private-equity partnerships can be thought of as temporary conglomerates. TRUE

Type: Medium

54. In a private-equity partnership arrangement the general partners put up most of the money and receive a management fee and get a carried interest in the fund's profits. FALSE

Type: Medium

55. Private-equity partnerships can run portfolio companies for ever. FALSE

Type: Medium

56. There are only two types of bankruptcy procedures in the United States, which are set out Chapter 7 and 11 of the 1978 Bankruptcy Reform Act. TRUE

Type: Medium

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57. Securities and Exchange Commission (SEC) plays an important role in the reorganization of, particularly for large, public companies by ensuring that all relevant and material information is disclosed to the creditors before they vote on the proposed reorganization plan. TRUE

Type: Medium

58. Private-equity ownership is more focused on shareholder value than public company ownership. TRUE

Type: Medium

59. Mergers often occur because managers are not maximizing shareholder value. TRUE

Type: Medium

Short Answer Questions

60. What is a leveraged buyout? A leveraged buyout (LBO) is the takeover of the firm by a group of investors using borrowed funds. Generally, borrowed funds are obtained by issuing junk bonds. LBO goes private and its shares are no longer on the open market.

Type: Medium

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61. Briefly explain the difference between leveraged buyouts and leveraged restructurings. The financial characteristics of LBOs and leveraged restructurings are similar. The three main characteristics of LBOs are: high debt, incentives to managers and private ownership. Leveraged restructurings share the first two characteristics but continue to operate as public companies.

Type: Medium

62. What is a spin-off? A spin-off is a new independent company created by detaching part of a parent company's assets and operations. Shares of the new company are distributed to the parent company's stockholders.

Type: Medium

63. Briefly explain the difference between a spin-off and a carve-out. Carve-outs are similar to spin-offs, except that the shares in the new company are sold in a public offering. The cash flows to the parent company are subject to taxes. In the case of spinoffs the shares of the new company are distributed to the shareholders of the parent company and the transaction is not taxed as long as the shareholders of the parent company receive 80% of the shares.

Type: Medium

64. Briefly explain what is meant by privatization? A privatization is a sale of a government-owned company to private investors. A privatization is somewhat similar to a carve-out in that the shares of the company are sold to investors.

Type: Medium

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65. What are some of the benefits of privatization? Importantly, there are three benefits to privatization. First, the revenue for the government is enhanced. Second, widespread share ownership and lastly, increased efficiency of operations.

Type: Medium

66. Explain how private-equity partnerships are set up. Private equity partnerships manage private-equity investment fund that is used to buy firms. The general partner sets up and manages the partnership. The limited partners put up most of the money. They are mostly institutional investors, including pension funds, endowments and insurance companies. The general partners, who organize and manage the funds, receive a management fee and get a carried interest in the fund's profits. Once the investment is returned limited partners get 80% of any profits. The general partners get a 20% carried interest. The partnership agreement has a limited term which is 10 years or less. At the end of the term the portfolio companies are sold and the proceeds distributed. There are only two ways to cash out. The portfolio companies are cashed out through an IPO issue or through a trade sale to another company.

Type: Difficult

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67. Briefly explain the main differences between private-equity partnerships and public conglomerates. Both private-equity partnerships and public conglomerates diversify by investing in a portfolio of unrelated businesses. But their financial structures and organizations are totally different. Private-equity partnerships are limited-life partnerships and are forced to divest the portfolio firms through IPOs or sale to another firm at the end of the term. Public conglomerates are designed to run and operate their divisions for the long run. Firms owned by private-equity funds do not have any direct financial links or fund transfers between portfolio firms. Public conglomerates have an internal capital market and various divisions are competing for funds. In the case of private-equity partnerships, general partners execute the deals and monitor the performance of the portfolio firms. Similarly, lenders also monitor. In the case of conglomerates, corporate staff evaluates divisions' plans and monitor performance. In the case of private-equity partnerships, managers' compensation depend on the exit value of the firm. In the case of conglomerates, divisional mangers' compensation depends on earnings.

Type: Difficult

68. Briefly explain the Bankruptcy Reform Act of 1978. The Bankruptcy Reform Act of 1978 established a federal bankruptcy court system with exclusive jurisdiction over bankruptcy cases. Under this Act, a company may file a petition for liquidation under Chapter 7 or for reorganization under Chapter 11. Court acceptance of the petition protects the debtor from legal actions by creditors. When a firm files for Chapter 7, all remaining assets are liquidated and the firm no longer exists. When firm files for Chapter 11, it is allowed to reorganize under court protection, to restructure debts and to emerge from bankruptcy after certain conditions imposed by the court is met.

Type: Medium

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69. Briefly explain the role of Securities and Exchange Commission (SEC) in bankruptcy reorganizations. The SEC plays an important role in reorganizations, particularly for large, public Companies by ensuring that all relevant and material information is disclosed to the creditors before they vote on the proposed plan of reorganization under Chapter 11 of the bankruptcy code.

Type: Difficult

70. Briefly explain why private equity has an advantage in creating value over public firms. Public firms suffer from agency problems and a separation of management from ownership. This tension causes managers to look out for their own interests at the expense of owner's interests. Private equity firms offer owners much more control over the managers of the company. As such, the managers work to maximize owner value and not their own.

Type: Difficult

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