AFM Corporate reconstruction and re-organisation

ACCA · Strategic Professional · 7 questions

Name: ____________________ Date: ____________

A management buyout is where:
- A A rival acquires the business
- B The company is split into two listed companies
- C The existing management team buys the business or a division from its owners
- D The company buys back shares
A demerger results in:
- A A cash payment to creditors only
- B The delisting of the business
- C A company splitting into separate companies, with shareholders holding shares in each
- D Two firms combining
The main source of funds in a buyout financed mainly by borrowing (an LBO) is:
- A Equity from the public
- B Retained earnings
- C Debt secured on the assets and cash flows of the target
- D Government grants
A company in financial distress offers its creditors new shares in exchange for debt. This is a:
- A Demerger
- B Debt for equity swap
- C Share buyback
- D Rights issue
A company sells part of its business to raise cash and focus on its core activities. This is a:
- A Merger
- B Share split
- C Divestment
- D A bonus issue of shares
An acquisition has been financed by new debt and the company's gearing rises sharply. Which risk has increased the most?
- A Political risk
- B Financial risk
- C Inflation risk
- D Business risk
A scheme of arrangement with creditors is generally approved when:
- A A majority in number and a high share by value of each class agree and the court sanctions it
- B Any single creditor agrees
- C The directors vote
- D The auditor consents

Answer key

1. C, 2. C, 3. C, 4. B, 5. C, 6. B, 7. A

MBOs are usually financed with high levels of debt and private equity.
Demergers may release value by letting each business focus on its own strategy.
High gearing creates tax benefits and discipline, but also higher financial risk.
A debt for equity swap reduces gearing and avoids liquidation, but dilutes existing shareholders.
Divestments may release cash, remove poor performers or satisfy competition rules.
Higher fixed financing charges make profits to shareholders more volatile.
Schemes bind dissenting creditors in a class if the statutory majority and court approval are obtained.