FI410

Owner-manager conflicts of interest are primarily between A) 1) owners of controlling shares and 2) senior management. B) 1) all equity owners and 2) senior management. C) 1) equity owners and debt owners and 2) senior management. D) 1) equity owners and 2) debt owners

B) 1) all equity owners and 2) senior management.

When a private equity firm purchases the outstanding equity of a publicly traded firm, thereby taking the company private, the transaction is called a(n): A) private leveraged transaction B) leveraged buyout C) cash offer D) initial public offering

B) leveraged buyout

Which of the following statements is FALSE? A) In the flow-to-equity valuation method, the cash flows to equity holders are discounted using the weighted-average cost of capital. B) In the WACC and APV methods, we value a project based on its free cash flow, which is computed ignoring interest and debt payments. C) In the flow-to-equity (FTE) method, we explicitly calculate the free cash flow available to equity holders taking into account all payments to and from debt holders. D) The first step in the FTE method is to determine the project's free cash flow to equity (FCFE).

A) In the flow-to-equity valuation method, the cash flows to equity holders are discounted using the weighted-average cost of capital.

Which of the following statements is FALSE? A) Increasing the pay-for-performance sensitivity comes with the added benefit of reducing manager's risk. B) Stock and option grants give managers a direct incentive to increase the stock price to make their stock or options as valuable as possible. C) By tying compensation to performance, the shareholders effectively give the manager an ownership stake in the firm. D) During the 1990s, most companies adopted compensation policies that more directly gave managers an ownership stake by including grants of stock or stock options to executives.

A) Increasing the pay-for-performance sensitivity comes with the added benefit of reducing manager's risk. Increasing pay-for-performance sensitivity comes at the cost of burdening managers with risk.

Which of the following statements is FALSE? A) Managers are much less committed to dividend payments than to share repurchases. B) Share repurchases are a credible signal that the shares are under-priced, because if they are over-priced a share repurchase is costly for current shareholders. C) While an increase of a firm's dividend may signal management's optimism regarding its future cash flows, it might also signal a lack of investment opportunities. D) Managers will clearly be more likely to repurchase shares if they believe the stock to be under-valued.

A) Managers are much less committed to dividend payments than to share repurchases.

Which of the following statements is FALSE? A) Unlike with capital structure, taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares. B) If dividends are taxed at a higher rate than capital gains, which has been true until the most recent change to the tax code, shareholders will prefer share repurchases to dividends. C) Shareholders typically must pay taxes on the dividends they receive. They must also pay taxes on capital gains taxes when they sell their shares. D) Because long-term investors can defer the capital gains tax until they sell, there is still a tax advantage for share repurchases over dividends.

A) Unlike with capital structure, taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares.

If Microsoft merged with the Coca-Cola Company, this would be an example of a ____ merger. A) conglomerate B) vertical C) horizontal D) diagonal

A) conglomerate A conglomerate merger is a merger between firms that are involved in totally unrelated business activities. These mergers typically occur between firms within different industries or firms located in different geographical locations. There are two types of conglomerate mergers: pure and mixed.

Directors who are not employees, former employees, or family members of employees and who do not have existing or potential business relationships with the firm are called A) monitoring directors B) independent directors C) gray directors D) inside directors

B) independent directors

Which of the following statements is FALSE? A) To determine the project's debt capacity for the interest tax shield calculation, we need to know the value of the project. B) To compute the present value of the interest tax shield, we need to determine the appropriate cost of capital. C) Because we don't value the tax shield separately, with the APV method we need to include the benefit of the tax shield in the discount rate as we do in the WACC method. D) A target leverage ratio means that the firm adjusts its debt proportionally to the project's value or its cash flows.

C) Because we don't value the tax shield separately, with the APV method we need to include the benefit of the tax shield in the discount rate as we do in the WACC method.

Which of the following statements is FALSE? A) In perfect capital markets, holding fixed the investment policy of a firm, the firm's choice of dividend policy is irrelevant and does not affect the initial share price. B) In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend. C) In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead. D) In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases. By reinvesting dividends or selling shares, they can replicate either payout method on their own.

C) In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead.

In a ___ merger, the target and the acquirer operate in the same indsutry. A) conglomerate B) vertical C) horizontal D) diagonal

C) horizontal

Agency costs are best defined as: A) the costs imposed on a corporation through the laws and regulations that control corporations. B) the costs a corporation incurs as a result of fraud. C) the costs that arise when there are conflicts of interest between a firm's stakeholders. D) the costs associated with compensating managers when ownership and control are separated in a firm.

C) the costs that arise when there are conflicts of interest between a firm's stakeholders.

Which of the following methods are used in capital budgeting decisions? A) WACC method B) APV method C) FTE method D) All of the above are used in capital budgeting decisions

D) All of the above are used in capital budgeting decisions

A(n) ________ is the most common way that firms repurchase shares. A) targeted repurchase B) Dutch auction share repurchase C) tender offer D) open market share repurchase

D) open market share repurchase

When a firm payout cash to investor through share repurchase, they are committed to payout the entire amount announced, therefore the commitment payout is bigger when using repurchase compared to payout through dividend. True or False?

False

Which one of the following is not a financial distress cost? a. Having debt would increase the probability of bankruptcy b. Having debt would incentivize managers to undertake risky projects c. Having debt would help to mitigate the shirking problem d. Having debt would incentivize managers to forego profitable investments

c. Having debt would help to mitigate the shirking problem