CFA Corporate Issuer Questions

*** Dot.Com has determined that it could issue $1,000 face value bonds with an 8% coupon paid semi-annually and a five-year maturity at $900 per bond. If Dot.Com's marginal tax rate is 38%, its after-tax cost of debt is closest to: 6.2%. 6.4%. 6.6%

C is correct. FV = $1,000, PMT = $40, N = 10, and PV = $900. CPT I/Y = 5.3149%. YTM = 5.3149% × 2 = 10.62985%. rd(1 − t) = 10.62985%(1 − 0.38) = 6.5905%.

The business structure that provides the most operational simplicity and flexibility is a: limited partnership. general partnership. sole proprietorship. Which of the following represents a principal-agent conflict between shareholders and management? Risk tolerance Multiple share classes Accounting and reporting practices

sole proprietorship. Risk tolerance

Which of the following companies would most likely have a high level of macro risk? A coffee plantation in Brazil A Swedish mining equipment manufacturer A call center outsourcing business based in India

A Swedish mining equipment manufacturer B is correct. Macro risk is likely to be highest with a Swedish mining equipment manufacturer since product demand is very sensitive to the global economy. With the coffee plantation in Brazil, the call center outsourcing business based in India, and the Swedish mining equipment manufacturer, there is also exchange rate risk that could impact profitability and competitiveness.

[This is a tough tough question, I found an explanation on Reddit] ******** Consider the two investments below. The cash flows, as well as the NPV and IRR, for the two investments are given. For both investments, the required rate of return is 10%. Year. 0. 1. 2. 3. 4. NPV IRR (%) Investment 1 −100. 36. 36. 36. 36. 14.12. 16.37 Investment 2. −100. 0. 0. 0. 175. 19.53. 15.02 What discount rate would result in the same NPV for both investments? A rate between 0.00% and 10.00% A rate between 10.00% and 15.02% A rate between 15.02% and 16.37%

A rate between 10.00% and 15.02% So, the way to do this question is "find the difference between 2 investments CF and compute IRR" Thus: CF0. 0 CF1. 36 CF2. 36 CF3. 36 CF4. -139 CPT IRR = 13.16

Which of the following is the closest example of a one-sided network? An online employment website A dating website for men and women A social network for model train collectors A website for home improvement contractors

A social network for model train collectors C is correct. A social network for model train collectors involves a single group of users and thus is closest to a one-side network. The others involve two user groups: employers and job-seekers in A, men and women in B, and homeowners and contractors in D.

Which of the following statements regarding stakeholder management is most accurate? Company management ensures compliance with all applicable laws and regulations. Directors are excluded from voting on transactions in which they hold material interest. The use of variable incentive plans in executive remuneration is decreasing. [I got this wrong]

Directors are excluded from voting on transactions in which they hold material interest. B is correct. Often, policies on related-party transactions require that such transactions or matters be voted on by the board (or shareholders), excluding the director holding the interest.

**** Investments 1 and 2 have similar outlays, although the patterns of future cash flows are different. The cash flows, as well as the NPV and IRR, for the two investments are shown below. For both investments, the required rate of return is 10%. NPV. IRR (%) Investment 1. 13.40 21.86 Investment 2. 18.30. 18.92 [I skipped some data from the data] The two projects are mutually exclusive. What is the appropriate investment decision? Invest in both investments. Invest in Investment 1 because it has the higher IRR. Invest in Investment 2 because it has the higher NPV.

Invest in Investment 2 because it has the higher NPV. C is correct. When valuing mutually exclusive investments, the decision should be made with the NPV method because this method uses the most realistic discount rate—namely, the opportunity cost of funds. In this example, the reinvestment rate for the NPV method (here, 10%) is more realistic than the reinvestment rate for the IRR method (here, 21.86% or 18.92%).

Describe the process of going private by a public company.

LBO and MBO An LBO occurs when an outside investor or group of investors borrows money to purchase all of the equity of the public company. A premium to the market price must be paid to convince all shareholders to agree to the LBO. The investors typically pledge the assets of the company against the loan. An MBO is similar, except that the investors are part of the company's management team. Another way for a public company to go private is to be acquired by a private company. Once a company goes private, its shares are no longer listed on an exchange. A public company can also be acquired by another public company. When this happens, shares of the acquired company are delisted from the exchange; however, shares of the acquiring company remain listed.

Catherine Ndereba is an energy analyst tasked with evaluating a crude oil exploration and production company. The company previously announced that it plans to embark on a new project to drill for oil offshore. As a result of this announcement, the stock price increased by 10%. After conducting her analysis, Ms. Ndereba concludes that the project does indeed have a positive NPV. Which statement is true? The stock price should remain where it is because Ms. Ndereba's analysis confirms that the recent run-up was justified. The stock price should go even higher now that an independent source has confirmed that the NPV is positive. The stock price could remain steady, move higher, or move lower. [I got this wrong]

The stock price could remain steady, move higher, or move lower. [Silly mistake] There are many factors that can affect the stock price, including whether Ms. Ndereba's analysis indicates that the project is more or less profitable than investors expected.

****** With regard to capital allocation, an appropriate estimate of the incremental cash flows from an investment is least likely to include: externalities. interest costs. opportunity costs. [I got this wrong]

interest costs. B is correct. Costs to finance the investment are taken into account when the cash flows are discounted at the appropriate COC; including interest costs in the cash flows would result in double-counting the cost of debt.

As of 31 December £ thousands Cash. 200 Accounts receivable. 350 Inventory 1,250 Accounts payable 300 Taxes payable 200 Installment loan payable, due in three equal annual payments on 30 June. 600 The current ratio for the firm's industry is 3.2. Based on the current ratio, the firm's liquidity compared with the industry is best described as being: higher. equivalent. lower.

lower. = (200 + 350 + 1250) / (300 + 200 + 600) = 1800 / 700 = 2.6

*** Morgan Insurance Ltd. issued a fixed-rate perpetual preferred stock three years ago and placed it privately with institutional investors. The stock was issued at $25 per share with a $1.75 dividend. If the company were to issue preferred stock today, the yield would be 6.5%. The stock's current value is: $25.00. $26.92. $37.31.

$26.92. 1.75/0.065 = 26.92

************ Bouchard Industries is a Canadian company that manufactures gutters for residential houses. Its management believes it has developed a new process that produces a superior product. The company must make an initial investment of CAD190 million to begin production. If demand is high, cash flows are expected to be CAD40 million per year. If demand is low, cash flows will be only CAD20 million per year. Management believes there is an equal chance that demand will be high or low. The investment, which has an investment horizon of ten years, also gives the company a production-flexibility option allowing the company to add shifts at the end of the first year if demand turns out to be high. If the company exercises this option, net cash flows would increase by an additional CAD5 million in Years 2-10. Bouchard's opportunity cost of funds is 10%. The internal auditor for Bouchard Industries has made two suggestions for improving capital allocation processes at the company. The internal auditor's suggestions are as follows: Suggestion 1: "In order to treat all capital allocation proposals in a fair manner, the investments should all use the risk-free rate for the required rate of return." Suggestion 2: "When rationing capital, it is better to choose the portfolio of investments that maximizes the company NPV than the portfolio that maximizes the company IRR." What is the NPV (CAD millions) of the original project for Bouchard Industries without considering the production-flexibility option? -CAD6.11 million -CAD5.66 million CAD2.33 million What is the NPV (CAD millions) of the optimal set of investment decisions for Bouchard Industries including the production-flexibility option? -CAD6.34 million CAD7.43 million CAD31.03 million Should the capital allocation committee accept the internal auditor's suggestions? No for Suggestions 1 and 2 No for Suggestion 1 and yes for Suggestion 2 Yes for Suggestion 1 and no for Suggestion 2 [I got both wrong]

-CAD5.66 million So, you find NPV of CF 40 and you find NPV of CF 20 million. It will be 55.78 and -67.11. You do 0.50(55.78) + 0.50(-67.11) = -C$5.66 million. Or You do: CP0 = - 190 CF1 = 30 F01= 10 CPT NPV = -5.66 ---------------------------------- CAD7.43 million So, again, we use the number: 55.78 and -67.11. You do 0.50(55.78) + 0.50(-67.11) = -C$5.66 million. Now, we calculate the CF 5 million separately: CF0 = 0 CF 1 = 5 F01 = 9 CFA answer: 26.18 -5.66 + (0.5 * 26.18) = 7.43 (I got a whole different answer, but you get the idea) ----------------------------------------------- No for Suggestion 1 and yes for Suggestion 2 NPV is superior to IRR. Choosing projects based on IRR might cause the company to concentrate on short-term investments that do not maximize the company's NPV.

************************ Equity risk premium, Sweden 4.82% Risk-free rate of interest, Sweden 4.25% Industry debt-to-equity ratio 0.3 Market value of Kruspa's debt €900 million Market value of Kruspa's equity €2.4 billion Kruspa's equity beta 1.3 Kruspa's before-tax cost of debt 9.25% Trutan credit A2 country risk premium 1.88% Corporate tax rate 37.5% Interest payments each year Level Using the capital asset pricing model, Kruspa's cost of equity capital for its typical project is closest to: 7.62%. 10.52%. 12.40%. Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in the Trutan project. This weighted average cost of capital is closest to: 7.65%. 9.23%. 10.17%. In his estimation of the project's cost of capital, Sandell would like to use the asset beta of Kruspa as a base in his calculations. The estimated asset beta of Kruspa prior to the Trutan project is closest to: A.1.053. B.1.110. C.1.327. [I got it wrong, I used indiustry's D/E instead of Krupa. you should've use 900/2400] Sandell is performing a sensitivity analysis of the effect of the new project on the company's cost of capital. If the Trutan project has the same asset risk as Kruspa, the estimated project beta for the Trutan project, if it is financed 80% with debt, is closest to: A.1.300. B.2.635. C.3.686. [I got it wrong, I used the wrong D/E again. you should've use 80/20] they are great questions

10.52%. = 0.0425 + 1.3*0.0482 = 0.1052, or 10.52%. --- 9.23%. step 1 D/E = 0.3. Wd= 3/13, We=10/13 step 2 =0.23 * 0.0925 * (1 - 0.375) + 0.77 * 0.1052 = 0.0943 --- A.1.053. Asset beta = Equity beta * [ 1/ (1 + (1-t)*D/E)] Asset beta = Unlevered beta = 1.3/{1 + [(1 − 0.375)(€900/€2,400)]} = 1.053. --- C.3.686. Project beta = Asset beta * ( 1 + (1-t)*D/E) = 1.053 * (1 + 0.625*0.8/0.2) = 1.053*3.5 = 3.6855

**** A three-year investment requires an initial outlay of GBP1,000. It is expected to provide three year-end cash flows of GBP200 plus a net salvage value of GBP700 at the end of three years. Its IRR is closest to: 10%. 11%. 20%

11%. CF0 = -1000 CF1= 200 F01 = 2 CF2 = 200 + 700 CPT IRR = 11.02

********** A firm is considering a project that would require an initial investment of THB270 million (Thai baht). The project will help increase the firm's after-tax net cash flows by THB30 million per year in perpetuity, and it is found to have a negative NPV of THB20 million. The IRR (%) of the project is closest to: 11.1%. 10.3%. 12.0%. [I got it wrong]

11.1%. A is correct. The IRR is the discount rate that makes the NPV = 0. Because the cash flow stream is in perpetuity, it can be solved as follows: 0 = -270 + (30/IRR) IRR = 11.1% B is incorrect. It assumes a positive NPV of 20 and solves for IRR = 30/290 = 10.34%. C is incorrect. It assumes a negative NPV of 20 and solves for IRR = 30/250 = 12.00%.

Year 0 Year 1 Year 2 Year 3. Year 4 ‒$4,662,005. $22,610,723. ‒$41,072,261. $33,116,550. ‒$10,000,000 Which of the following discount rates most likely produces the highest net present value (NPV)? 8% 15% 10% (I finished up to 63, we will do the rest of the questions next time. Most likely M4. You start with M5 next time)

15% [I skipped the calculation, it's the same. You just calculate all. There's no shortcut. You should be very familiar with CF/NPV/IRR rn]

**** An investment of USD150,000 is expected to generate an after-tax cash flow of USD100,000 in one year and another USD120,000 in two years. The COC is 10%. What is the IRR? 28.39% 28.59% 28.79%

28.79% [I skipped the calculation, it's the same. You should be very familiar with CF/NPV/IRR rn]

*** The Gearing Company has an after-tax cost of debt capital of 4%, a cost of preferred stock of 8%, a cost of equity capital of 10%, and a weighted average cost of capital of 7%. Gearing intends to maintain its current capital structure as it raises additional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is: 4%. 7%. 8%.

7%. The weighted average cost of capital, using weights derived from the current capital structure, is the best estimate of the cost of capital for the average-risk project of a company.

*** Which of the following is an example of significant execution risk? A manufacturer replaces aging factory machinery with similar but more efficient equipment. A marketer of high-fashion pet accessories tests the market to see if there is demand for glamourous dog harnesses made with faux fur. A company with consistent operating margins of about 5% with stable market share of 5% for swimming pool chemicals plans to double its margins and triple its market share over the next five years.

A company with consistent operating margins of about 5% with stable market share of 5% for swimming pool chemicals plans to double its margins and triple its market share over the next five years. C is correct. A company with consistent operating margins and a stable market share in a highly specialized business embarks on a significant and ambitious strategic change. Its success will depend entirely on how well management succeeds in delivering on its objective by improving margins (either by increasing prices or reducing costs) and taking market share from its competitors. Considering the relatively small size of the business, it may be difficult. Considering that many manufacturing businesses in the same industry typically operate around similar margins, any margin improvement may be difficult. That a manufacturer replaces aging factory machinery with similar but more efficient equipment is not an example of execution risk; it is part of regular improvement and capital investment. That a marketer of high-fashion pet accessories tests the market to see if there is demand for glamourous dog harnesses made with faux fur is a standard and common expansion of an existing product line with limited risk.

*** The SOA Company needs to raise 75 million, in local currency, for substantial new investments next year. Specific details, all in local currency, are as follows: Investments of 10 million in receivables and 15 million in inventory will be made. Fixed capital investments of 50 million, including 10 million to replace depreciated equipment and 40 million of net new investments, will also be made. Net income is expected to be 30 million, and dividend payments will be 12 million. Depreciation charges will be 10 million. Short-term financing from accounts payable of 6 million is expected. The firm will use receivables as collateral for an 8 million loan. The firm will also issue a 14 million short-term note to a commercial bank. Any additional external financing needed can be raised from an increase in long-term bonds. If additional financing is not needed, any excess funds will be used to repurchase common shares. What additional financing does SOA require? SOA will need to issue 19 million of bonds. SOA will need to issue 26 million of bonds. SOA can repurchase 2 million of common shares. (I got it wrong)

A is correct. SOA must issue 19 million of bonds. Accounts payable 6 + Bank loan against receivables 8 + Short-term note 14 + [Net income + depreciation - dividends] 28 = Total sources 56 Look at the 3rd and 4th paragraphs!

Which of the following businesses is least likely to have network effects? A stock exchange A telephone company A classified advertising website A price comparison website for travel airfares A resume preparation service for online job seekers [I got this wrong]

A resume preparation service for online job seekers E is correct. The resume preparation service benefits from the network effects on various online job sites, but the service is not the source of those network effects. Each of the other businesses (A, B, C, and D) becomes more valuable to its customers as it attracts users. A stock exchange is valuable and worth joining because many securities trade on it. The telephone network is very useful because most people are on it. A classified advertising website becomes more useful as it attracts more listings. An airfare price comparison website is valuable to airlines because it has many shoppers and valuable to shoppers because it features prices for multiple airlines and routes.

**** Kim Corporation is considering an investment of KRW750 million with expected after-tax cash inflows of KRW175 million per year for seven years. The required rate of return is 10%. What is the investment's NPV and IRR: A. KRW102 million. 14.0% B. KRW157 million. 23.3% C. KRW193 million. 10.0%

A. KRW102 million. 14.0% [I skipped the calculation, it's the same. You should be very familiar with CF/NPV/IRR rn]

****** USD2.2 million investment will result in the following year-end cash flows: Year. Cash flow (millions)USD1.3USD1.6USD1.9USD0.8 1. USD1.3 2. USD1.6 3. USD1.9 4 USD0.8 Using an 8% opportunity COC, the investment's NPV is closest to: A.USD2.47 million. B.USD3.40 million. C.USD4.67 million.

A.USD2.47 million. [ this is easy. You don't even need to do after-tax calculation CF. You usually need after tax CF for NPV. Second, There's no final terminal CF that adds to regular CF. ] CF0 -2.2 CF1 1.3 CF2 1.6 CF3 1.9 CF4 0.8 I = 8 CPT NPV = 2.47 [I skipped a few steps of the calculator for simplicity]

*** Which of the following are considered internal sources of financing for a company's working capital management? Committed and uncommitted lines of credit Accounts receivable and inventory Accounts payable and accruals

Accounts payable and accruals C is correct. Accounts payable and accruals are internal and a source of cash as they are payments not yet made to suppliers, employees, or other related parties. Lines of credit are external sources of financing. Accounts receivable and inventory are internal uses of cash since a company must access financing to purchase inventory and lend to its customers.

Which of the following is most consistent with good corporate governance practices? All stakeholders should have the right to participate in the governance of the firm. An audit committee that benefits from the direct guidance of management. Appropriate controls and procedures to effectively manage the firm should be in place.

Appropriate controls and procedures to effectively manage the firm should be in place. C is correct. Effective corporate governance requires a system of appropriate controls and procedures to protect financial markets and investors. A is incorrect. Only shareholders have the right (not all stakeholders) to participate in the governance of the firm. B is incorrect. The audit and compensation committees are best structured with exclusively independent directors, and no management involvement.

**** The Bearing Corp. invests only in positive-NPV projects. Which of the following statements is true? Bearing's ROIC is greater than its COC. Bearing's COC is greater than its ROIC. We cannot reach any conclusions about the relationship between the company's ROIC and COC.

Bearing's ROIC is greater than its COC. [My own notes: - If ROIC > Cost of Capital(required rate of return in NPV) -> it's a good investment. Inversely, ROIC < COC, it's destroying the value. ]

Which of the following issues discussed at a shareholders' general meeting would most likely require only a simple majority vote for approval? Voting on a merger Election of directors Amendments to bylaws [I got this wrong] Which of the following statements about environmental, social, and governance (ESG) in investment analysis is correct? ESG factors are strictly intangible in nature. ESG terminology is easily distinguishable among investors. Environmental and social factors have been adopted in investment analysis more slowly than governance factors. [I got this wrong]

Election of directors B is correct. The election of directors is considered an ordinary resolution and, therefore, requires only a simple majority of votes to be passed. Environmental and social factors have been adopted in investment analysis more slowly than governance factors. C is correct. The risks of poor corporate governance have long been understood by analysts and shareholders. In contrast, the practice of considering environmental and social factors has been slower to take hold

What type of project is most likely to yield new revenues for a company? Regulatory/compliance Going concern Expansion

Expansion Expansion projects increase the scale of a firm's existing activities and/or extend a firm's reach into new product or service categories and markets, in the hopes of generating longer-term expected gains. Regulatory/compliance projects are required for the business to continue operations but otherwise might not be undertaken by a company. Going concern projects benefit the company through improved efficiencies and cost savings over time.

XY1 Corporation's CFO has decided to pursue a moderate approach to funding the firm's working capital. Which of the following methods would best fit that particular approach? Finance permanent and variable current assets with long-term financing. Finance permanent and variable current assets with short-term financing. Finance permanent current assets with long-term financing and variable current assets with short-term financing.

Finance permanent current assets with long-term financing and variable current assets with short-term financing. C is correct. In a moderate approach, XY1 would attempt to match the duration of the assets with the liabilities. This would allow the company to use long-term financing for permanent working capital needs while at the same time looking to minimize interest expense through the use of more flexible short-term financing on an as-needed basis.

Which of the following is least likely to be a key feature of a business model? Unit economics Channel strategy Financial forecasts Customer cost of ownership Target customer identification [I got this wrong]

Financial forecasts C is correct. Financial forecasts are normally part of a more detailed business plan. A business model should convey how the business makes money, so unit economics (i.e., per-unit revenue and costs) are a key element of a business model. Based on the product and market, the target market (who the business serves), the channel strategy (where they purchase), and the total cost of ownership, including maintenance after purchase, would also be key business model elements.

*** Which of the following statements is correct? The appropriate tax rate to use in the adjustment of the before-tax cost of debt to determine the after-tax cost of debt is the average tax rate because interest is deductible against the company's entire taxable income. For a given company, the after-tax cost of debt is generally less than both the cost of preferred equity and the cost of common equity. For a given company, the after-tax cost of debt is generally higher than both the cost of preferred equity and the cost of common equity. [I got it wrong] great questions

For a given company, the after-tax cost of debt is generally less than both the cost of preferred equity and the cost of common equity. B is correct. Debt is generally less costly than preferred or common stock. The cost of debt is further reduced if interest expense is tax deductible.

Explain potential conflicts of interest between debtholders and equityholders.

From an investor's perspective, debt is less risky than equity because the company has a contractual obligation to repay the debt but no obligation to repay equity capital. Furthermore, debtholders are entitled only to the promised interest payments and the return of principal. As a result, debtholders would prefer that the company invest in relatively safe projects that produce sufficient returns to service the debt. They see no added benefit of taking greater risks that might generate larger returns. The gains to equityholders, however, are unlimited. As a result, equityholders prefer that the company invest in projects that might be riskier but that have the potential to produce much larger returns.

*** Two analysts are discussing the costs of external financing sources. The first states that the company's bonds have a known interest rate but that the interest rate on accounts payable and the interest rate on equity financing are not specified. They are implicitly zero. Upon hearing this, the second analyst advocates financing the firm with greater amounts of accounts payable and common shareholders equity. Is the second analyst correct in his analysis? He is correct in his analysis of accounts payable only. He is correct in his analysis of common equity financing only. He is not correct in his analysis of either accounts payable or equity financing. [I got it wrong] [I got it wrong again]

He is not correct in his analysis of either accounts payable or equity financing. C is correct. Although accounts payable do not charge an explicit interest rate, the cost of accounts payable is reflected in the costs of the services or products purchased and in the costs of any discounts not taken. Accounts payable can have a very high implicit cost. Similarly, equity financing is not free. A required return is expected on shareholder financing just as on any other form of financing.

Describe the process of going public by a private company.

IPO, SPAC, Direct Listing Private companies can go public through a process known as the initial public offering (IPO). This means that the company is offering its shares to all investors for the first time. An investment bank (or group of investment banks) acts as the underwriter of the offering, meaning that they guarantee the sale of the shares for the issuer. Once the IPO process is completed, the shares are listed on an exchange and available for trading. Another way a private company can go public is through a direct listing (DL), which is a process that does not involve underwriters or the issuance of new shares. Private companies can also go public indirectly by being acquired by another company that is already public or through a special purpose acquisition company (SPAC). A SPAC is a publicly-listed holding company created for the sole purpose of acquiring a private company.

Which is most likely considered a secondary source of liquidity? Centralized cash management system Trade credit Liquidating long-term assets --- Which of the following is most likely a secondary source of liquidity? Bank line of credit Inventory liquidation Trade credit

Liquidating long-term assets C is correct. Liquidating long-term assets is a secondary source of liquidity. A is incorrect. Centralized cash management system is considered as a primary source of liquidity. B is incorrect. Trade credit (part of short-term funds) is considered as a primary source of liquidity. --- Inventory liquidation

When dealing with mutually exclusive projects, the most reliable decision rule is: time-weighted rate of return. IRR. NPV.

NPV. C is correct. The NPV rule's assumption about reinvestment rates is more realistic and more economically relevant than the IRR rule because it incorporates the market-determined opportunity cost of capital as a discount rate. In contrast, the IRR calculation assumes reinvestment at the IRR, which sometimes cannot be achieved because it is too high. Time-weighted rate of return suffers similar shortcomings as IRR.

Which of the following stakeholders are least likely to be positively affected by increasing the proportion of debt in the capital structure? Senior management Non-management employees Shareholders [I got this wrong]

Non-management employees I picked C right away, but they actually benefit from the expansion.

The incremental after-tax cash flows (in € thousands) and information on two mutually exclusive projects are as follows: Y ear. 0. 1. 2. 3. 4. Net Present Value Internal Rate of Return ProjectX. -15,000. 2,000. 5,000. 8,000. 8,000. 354.0. 16.0 ProjectY -13,250 200 500 7,000. 15,000 ? ? he appropriate hurdle rate to use in evaluating the projects is 15.0%. Which of the following statements is most accurate? The company should accept: Both projects. Project Y only. Project X only.

Project Y only. Note: I was questioning myself because of "mutually exclusive" mutually exclusive: 2 cannot happen on the same time. [I skipped the calculation, it's the same. You just calculate NPV and IRR. You should be very familiar with CF/NPV/IRR rn]

State a reason for the declining number of public companies in developed markets.

Reason 1. Mergers and acquisitions are partly responsible. When a public company is acquired by a private company or by another public company, there is one less public company. Reason 2. LBOs and MBOs are also responsible since they are structured to take public companies private. Reason 3: Many private companies choose to remain private. Greater ease in accessing capital in private markets (venture capital, private equity, and private debt) has enabled companies to source the capital they might need and avoid the regulatory burden associated with being a public company.

*** Which of the following is most likely to increase a business's operating leverage? Reducing prices Borrowing rather than issuing equity Using casual labor rather than a salaried work force *** Which of the following is most likely to increase financial leverage? Cutting prices Replacing short-term debt with long-term debt Entering a sale-leaseback transaction for the company's head office building [I got this wrong]

Reducing prices A is correct. Reducing prices decreases the business's margin, and as such, it increases its sensitivity to changes in demand, revenue, and costs and its operating leverage. The choice between debt and equity financing has no bearing on operating leverage, although it should be noted that interest expenses on debt are contractually determined payments, while dividends are discretionary payments. Using casual labor rather than a salaried work force reduces the fixed employee expenses, which reduces operating leverage. -------------------------------------------- Entering a sale-leaseback transaction for the company's head office building C is correct. Entering a sale-leaseback transaction for the company's head office building increases financial leverage. The company sells assets with the obligation to repurchase the assets in the future as well as make lease payments. These transactions increase its financial leverage. Additionally, sale and leaseback transactions reduce the business's overall asset base, which, in turn, reduces its ability to add more debt should the company need to raise debt. Cutting prices reduces the profit margin for the business, thereby increasing operating leverage. Replacing short-term debt with long-term debt does not change financial leverage: Debt, irrespective of maturity, is simply debt.

*** Kwam Solutions must raise €120 million. Kwam has two primary sources of liquidity: €60 million of marketable securities (which can be sold with minimal liquidation/brokerage costs) and €30 million of bonds (which can be sold with 3% liquidation costs). Kwam can sell some or all of either of these portfolios. Kwam has a secondary source of liquidity, which would be to sell a large piece of real estate valued at €70 million (which would incur 10% liquidation costs). If Kwam sells the real estate, it must be sold entirely. (A fractional sale is not possible.) What is the lowest cost strategy for raising the needed €120 million? Sell €60 million of the marketable securities, €30 million of the bonds, and €34.3 million of the real estate property. Sell the real estate property and €50 million of the marketable securities. Sell the real estate property and €57 million of the marketable securities. Just read better! usual mistake!

Sell the real estate property and €57 million of the marketable securities. C is correct. Kwam must sell the entire real estate property because the two primary sources (marketable securities and bonds) will not raise the needed €120 million. A is incorrect because it assumes a fractional real estate sale. The real estate sale will raise a net of €63 million (€70 million minus 10% liquidation expenses). To raise the rest of the funds needed (€120 million - €63 million = €57 million), Kwam can sell €57 million of marketable securities, which have minimal liquidation/brokerage costs.

* Paloma Villarreal has received three suggestions from her staff about how to address her firm's liquidity problems. Suggestion 1. Reduce the firm's inventory turnover rate. Suggestion 2. Reduce the average collection period on accounts receivable. Suggestion 3. Accelerate the payments on accounts payable by paying invoices before their due dates. Which suggestion should Villarreal employ to improve the firm's liquidity position? Suggestion 1 Suggestion 2 Suggestion 3

Suggestion 2

A flower shop has preferred supplier arrangements with an answering service, to take orders after hours, and a bicycle delivery service, to ensure that it can make deliveries quickly, reliably, and at a reasonable cost. Which of the following statements is most accurate for the flower shop? The answering service is part of its supply chain. The bicycle delivery service is part of its value chain. The bicycle delivery service is part of its supply chain. The bicycle delivery service is not a part of the value proposition for the flower shop.

The bicycle delivery service is part of its supply chain. C is correct. A supply chain includes all the steps involved in producing and delivering a physical product to the end customer, regardless of whether those steps are performed by a single firm. A value chain includes only those functions performed by a single firm, but it also includes functions that are valuable to customers but may not involve physical transformation or handling of the product. The bicycle delivery service is a source of value to customers, so it is part of the flower shop's value proposition, but it is performed by a third party, so it is not part of the flower shop value chain but, rather, is part of its supply chain. The answering service is not a step in the physical goods flow, so it is not a part of the supply chain.

Which of the following is least likely to affect the capital structure of Longdrive Trucking Company? Longdrive has moderate leverage today. The acquisition of a major competitor for shares A substantial increase in share price The payment of a stock dividend

The payment of a stock dividend

True or false: Bondholders can become shareholders through non-market-based means. Justify your answer. True. False

True. A is correct; the statement is true. If a company fails to meet its obligation to bondholders and ultimately needs to petition the courts for bankruptcy protection, a potential alternative to asset liquidation to maximize proceeds for debt repayment is business reorganization. Following that path through the legal process as opposed to transactions in private or public markets, the company can be reorganized with shareholders getting wiped out and bondholders becoming its new shareholders.

*****Wilson Flannery is concerned that the following investment has multiple IRRs. Year 0. 1. 2. 3w Cash flows. −50. 100. 0 −50 How many discount rates produce a zero NPV for this investment? One, a discount rate of 0% Two, discount rates of 0% and 32% Two, discount rates of 0% and 62%

Two, discount rates of 0% and 62% I tried to do the IRR, but I got 0. Somtime it won't be accurate because you have unconventional CF. Thus, they say you do plug and chug. 0, NPV = 0 32, NPV = 4.... 62, NPV = 0. [Technically, it shows -0.03.... But, i guess the practice it's sloppy. I'm pretty sure the exam will do a better job]

******* Given the following cash flows for a capital investment, calculate the NPV and IRR. The required rate of return is 8%. Year. 0. 1 . 2. 3. 4. 5 Cash flow−50,000. 15,000. 15,000. 20,000. 10,000. 5,000 NPV. IRR USD 1,905. 10.9% USD 1,905. 26.0% USD 3,379. 10.9%

USD 3,379. 10.9% [I skipped the calculation, it's the same. You should be very familiar with CF/NPV/IRR rn]

**** An investment of USD100 generates after-tax cash flows of USD40 in Year 1, USD80 in Year 2, and USD120 in Year 3. The required rate of return is 20%. The NPV is closest to: USD42.22. USD58.33. USD68.52.

USD58.33. [I skipped the calculation, it's the same. You should be very familiar with CF/NPV/IRR rn]

Which of the following scenarios can best be described as offering superior protection of shareholder interests? When common law is practiced When CEO duality is common When stakeholder theory prevails ----------------------------------------- Which of the following statements concerning the legal environment and shareholder protection is most accurate? A.A civil law system offers better protection of shareholder interests than does a common law system. B.A common law system offers better protection of shareholder interests than does a civil law system. C.Neither system offers an advantage over the other in the protection of shareholder interests.

When common law is practiced A is correct. Unlike civil law systems, common law systems provide judges with the ability to create law by setting precedents that are followed in subsequent cases. Shareholders are viewed as better protected under common law because judges may rule against management actions in situations that are not specifically addressed by statutes. B is incorrect. Under CEO duality, the CEO also serves as chairperson of the board. All else equal, this decreases the protection of shareholder interests in favor of those of management. C is incorrect. Stakeholder theory incorporates the interests of non-shareholders such as customers, suppliers, and employees. This inevitably dilutes the focus on shareholders. ---------------------------------------------------- B.A common law system offers better protection of shareholder interests than does a civil law system.

* A company increasing its credit terms for customers from 1/10, net 30 to 1/10, net 60 will most likely experience: an increase in cash on hand. a lower level of uncollectible accounts. an increase in the average collection period.

an increase in the average collection period. C is correct. A longer average collection period will certainly occur. Higher cash balances and a lower level of uncollectible accounts will not occur.

The cost of debt can be determined using the yield-to-maturity and bond rating approaches. If the bond rating approach is used, the: coupon is the yield. yield is based on the interest coverage ratio. company is rated and the rating can be used to assess the credit default spread of the company's debt.

company is rated and the rating can be used to assess the credit default spread of the company's debt. C is correct. The bond rating approach depends on knowledge of the company's rating and can be compared with yields on bonds in the public market.

**** The IRR is best described as the: opportunity COC. time-weighted rate of return. discount rate that makes the NPV equal to zero.

discount rate that makes the NPV equal to zero.

The existence of "stranded assets" is a specific concern among investors of: energy companies. health care companies. property companies. -------------------- An investor concerned about clean-up costs resulting from breaches in a publicly traded company's safety standards would most likely consider which factors in her investment analysis? Social factors Governance factors Environmental factors --------------------- An investor concerned about a publicly traded company's data privacy and security practices would most likely incorporate which type of ESG factors in an investment analysis? Social Governance Environmental [I got this wrong] ------------------------ Which of the following statements regarding ESG investment approaches is most accurate? Negative screening excludes industries and companies that do not meet the investor's ESG criteria. Thematic investing considers multiple factors. Positive screening excludes industries with unfavorable ESG aspects.

energy companies. My own notes in QUizlet: referred to "carbon asset" ..... are at risk of no longer being economically viable because of changes in regulations or investor sentiment. A is correct. A specific concern among investors of energy companies is the existence of "stranded assets," which are carbon-intensive assets at risk of no longer being economically viable because of changes in regulation or investor sentiment. ------------------------------------------- Environmental factors C is correct. Material environmental effects can arise from strategic or operational decisions based on inadequate governance processes or errors in judgment. For example, oil spills, industrial waste contamination events, and local resource depletion can result from poor environmental standards, breaches in safety standards, or unsustainable business models. Such events can be costly in terms of regulatory fines, litigation, clean-up costs, reputational risk, and resource management. ----------------------------------------------- Social A is correct. Social factors considered in ESG implementation generally pertain to the management of the human capital of a business, including data privacy and security. ------------------------------------------------- Negative screening excludes industries and companies that do not meet the investor's ESG criteria. A is correct. Negative screening refers to the practice of excluding certain sectors, companies, or practices that do not meet specific ESG criteria based on the investor's values, ethics, or preferences.

*** When a new project reduces the cash flows of an existing project of the same firm, it is best described as a(n): sunk cost. opportunity cost. externality. [I got it wrong]

externality. C is correct. A new project reducing the cash flows of an existing project is an externality called cannibalization. A is incorrect because it is an example of cannibalization and not a sunk cost. B is incorrect because it is an example of cannibalization and not an opportunity cost.

From the corporate issuer's perspective, the risk level of bonds compared to stocks is ___________. lower. higher. the same.

higher. B is correct. From the issuer's perspective, bonds are riskier than stocks for the same reason bonds are safer than stocks for investors. Bonds increase risk to the corporation by increasing leverage. If the company is struggling and cannot meet its promised obligations to bondholders, bondholders have the legal standing to force certain actions upon the corporation, such as bankruptcy and liquidation.

The primary motivation of activist shareholders is to promote: improved shareholder value. environmentally sustainable business practices. consideration of human rights in employee relations.

improved shareholder value. A is correct. The primary motivation of activist shareholders is to increase shareholder value. If they feel management or the board has failed to act in the best interests of shareholders, they may attempt to force changes by gaining control of the board.

The NPV of an investment is equal to the sum of the expected cash flows discounted at the: internal rate of return. risk-free rate. opportunity COC [I got this wrong, I didn't know what's COC]

opportunity COC [or Cost of Capital]

The owner exposed to the least business liability is a: sole trader. partner in a general partnership. general partner in a limited partnership. [I got this wrong]

partner in a general partnership. B is correct because "[g]eneral partnerships are like sole proprietorships with the important distinction that they allow for additional resources to be brought into the business along with the sharing of business risk among a larger group of individuals." A is incorrect because a sole trader "retains all return and assumes all risk." C is incorrect because "[a] limited partnership must have at least one general partner with unlimited liability who is responsible for the management of the business."

*** The cost of equity is equal to the: expected market return. rate of return required by stockholders. cost of retained earnings plus dividends.

rate of return required by stockholders. B is correct. The cost of equity is defined as the rate of return required by stockholders.

*** A company has arranged a $20 million line of credit with a bank, allowing the company the flexibility to borrow and repay any amount of funds as long as the balance does not exceed the line of credit. These arrangements are called: convertibles. factoring. revolvers.

revolvers. C is correct. A revolver is a short-term borrowing facility in which a bank allows the firm to borrow and repay loans during the life of the line of credit.

** Compared to a private company, public company investors have greater: return potential. share transferability. control over management.

share transferability B is correct because public shares trade on exchange whereas private shares do not. "In most cases, public companies have their shares listed and traded on an exchange. An exchange listing allows ownership to be more easily transferred because buyers and sellers transact directly with one another in the secondary market, on the exchange." "If an owner of a private company wants to sell shares, he must find a willing buyer." A is incorrect because "the potential returns in private companies can be much larger than those earned from investing in public companies." C is incorrect because "[w]ith often smaller numbers of shareholders in private companies, investors have greater control over management."

When should an analyst expect a business model to employ premium pricing? When: the company is a price taker. the firm is small and returns are highly scale sensitive. significant differentiation is possible in the product category. the firm is a market leader and demand is very price sensitive.

significant differentiation is possible in the product category.

**** Erin Chou is reviewing a profitable investment that has a conventional cash flow pattern. If the cash flows for the initial outlay and future after-tax cash flows all double, Chou would predict that the IRR would: increase and the NPV would increase. stay the same and the NPV would increase. stay the same and the NPV would stay the same. [I got this wrong]

stay the same and the NPV would increase. B is correct. The IRR would stay the same because both the initial outlay and the after-tax cash flows double, so the return on each dollar invested would remain the same. All the cash flows and their present values double. The difference between the total present value of the future cash flows and the initial outlay (the NPV) also doubles.