FINC 630 Final Exam

Which one of the following corporate board characteristics usually improves corporate governance?

CEO is not the chairman of the board.

A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.

False

Which of the following is NOT a good multiple to use for firm valuation using the comps approach? a. EV/EBITDA b. EV/Sales c. EV/Net Income d. P/E

c. EV/Net Income

Which of the following is NOT normally regarded as being a barrier to hostile takeovers?

Abnormally high executive compensation.

Which of the following statements is correct? a. One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account. b. Stock repurchases can be used by a firm that wants to increase its debt ratio. c. Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities. d. One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding. e. One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.

Stock repurchases can be used by a firm that wants to increase its debt ratio.

Which of the following statements is NOT CORRECT? a. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. b. Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. c. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. d. It is possible for a firm to go public and yet not raise any additional new capital. e. When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held."

"Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.

Which of the following statements is CORRECT? a. An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin. b. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. c. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. d. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. e. An increase in the DSO, other things held constant, could be expected to increase the ROE.

An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin.

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

False

Going public establishes a market value for the firm's stock, and it also ensures that a liquid market will continue to exist for the firm's shares. This is especially true for small firms that are not widely followed by security analysts.

False

One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

False

Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

False

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

False

The term "leaving money on the table" refers to the situation where an investment banking house makes a very low bid for the right to underwrite a firm's new stock offering. The banker is, in effect, "buying the job" with the low bid and thus not getting all the money his firm would normally earn on the job.

False

A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?

Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.

Which one of the following statements is TRUE? a. Inside directors are likely to side with the CEO since they are employees. b. In a classified board, it is easier for dissidents to gain representation since fewer seats are up for election each year. c. Inside directors are more concerned with shareholders' interests since they are more closely concerned with firm operations. d. Since outside directors have no other connection with the firm, they are indebted to the CEO for putting them on the board. e. The more members of a board of directors, the better its function.

Inside directors are likely to side with the CEO since they are employees.

Which one of the following statements is TRUE? a. It is harder for dissidents to gain board seats if a company's board is classified. b. A classified board is one in which an announcement requesting applications for board members appears in the newspaper. c. In a classified board, it is easier for dissidents to gain representation since fewer seats are up for election each year. d. Inside directors are more concerned with shareholders' interests since they are more closely concerned with firm operations. e. Management is said to be entrenched when the senior managers are consuming excessive perquisites.

It is harder for dissidents to gain board seats if a company's board is classified.

Which of the following is generally NOT true and an advantage of going public? a. Increases the liquidity of the firm's stock. b. Makes it easier to obtain new equity capital. c. Establishes a market value for the firm. d.Makes it easier for owner-managers to engage in profitable self- dealings. e. Facilitates stockholder diversification.

Makes it easier for owner-managers to engage in profitable self- dealings.

Which of the following statements is most CORRECT? a. The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. b. Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. c. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm. d. Operating economies are never a motive for mergers. e. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.

Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm.

Which one of the following statements is TRUE? a. One tool of corporate governance is the threat of removing current management. b. The commission required by the Federal Housing Agency for a small business loan is an example of an agency cost. c. One tool of corporate governance is the choice of how much dividends to pay. d. Corporate governance is when an officer of a corporation is elected to public office. e. One tool of corporate governance is the location of the company headquarters.

One tool of corporate governance is the threat of removing current management.

Which one of the following statements is TRUE? a. Shareholders benefit when the company is acquired because they usually receive a higher price for their shares b. Anti-takeover charter provisions are good for shareholders because they prevent a raider from stealing the company for a below-market price. c. Shareholders want to prevent takeovers because they don't want the company purchased out from under them. d. A shareholder rights provision encourages takeovers because shareholders have the right to approve the takeover if the terms are good. e. A classified board is one in which the board members serve anonymously.

Shareholders benefit when the company is acquired because they usually receive a higher price for their shares

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

The division's basic earning power ratio is above the average of other firms in its industry.

Which of the following should not influence a firm's dividend policy decision? a. A strong preference by most shareholders for current cash income versus capital gains. b. Constraints imposed by the firm's bond indenture. c. The fact that much of the firm's equipment has been leased rather than bought and owned. d. The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains. e. The firm's ability to accelerate or delay investment projects.

The fact that much of the firm's equipment has been leased rather than bought and owned.

A firm's capital structure does not affect its calculated free cash flows, because FCF reflects only operating cash flows.

True

If a firm's marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC.

True

Which of the following statements is correct? a. Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases. b. Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen. c. Stock repurchases increase the number of outstanding shares. d. The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter. e. If a company has a 2-for-1 stock split, its stock price should roughly double.

Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.