Q1)
The motivation for an equity carve-out is (select the correct statement):
A. to raise cash by selling a portion of an existing subsidiary to the public.
B. to prevent regulatory intervention by the US Securities and Exchange Commission.
C. to facilitate exercising employee stock options.
D. to establish a public market valuation for an existing subsidiary.
E. Answers (a) and (d) are correct.
Q2)
The motivation for a spin-off that follows an equity carve-out is (select the correct statement):
A. to raise cash by selling an existing subsidiary to the public.
B. to prevent regulatory intervention by the US Securities and Exchange Commission.
C. to facilitate exercising employee stock options.
D. to establish a public market valuation for an existing subsidiary.
E. to increase the parent company valuation by focusing on core business.
Q3)
Company X spins-off 90% of the shares in company Y by giving shareholders A1, A2, A3, … A9 10,000 shares each. Shareholder A10 received $200,000 in cash. Select the correct answer:
A. Shareholder A10 must pay tax on the $200,000 received in cash.
B. Company X does not recognize any gains/losses on the transaction.
C. Company X must recognize a gain/loss on the transaction because this is not a pro-rata distribution.
D. This is a pro-rata distribution that meets the definition of a spin-off, because each shareholder received exactly 10% of company Y’s shares.
E. Company X still consolidates Company Y because both X and Y have the same share-holders.
Q4)
Identify the correct answer about Special Purpose Entities (SPEs):
A. SPEs are created to accomplish a narrow and well-defined (often temporary) objective of the sponsoring/originator entity.
B. SPEs are typically designed so that voting rights do not represent the primary factor in deciding who controls them.
C. The primary accounting question about SPEs is who consolidates them.
D. SPEs are usually bankruptcy-proof.
E. All of the above.
Q5)
SPEs are used (circle to incorrect answer):
A. As a vehicle in securitizations.
B. As a vehicle in selling receivables.
C. As a vehicle to avoid federal taxation.
D. To separate high-risk R&D projects.
E. In synthetic lease structures.
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