Quiz 11.docx

Quiz 11.docx

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Quiz11

十一CorporateFinance:

CorporateInvestingandFinancingDecisions

1.A:

AnOverviewofFinancialManagement

a:

Discusspotentialagencyproblemsofstockholdersversus1）managersand2）creditors.

QuestionID:

25907

Whichofthefollowingpartiesisleastlikelytobenefitfromriskystrategiesthatincreaseriskandexpectedreturnforacompany?

A.

Creditors

B.

Chiefexecutiveofficers

C.

Stockholders

D.

Chieffinancialofficers

Explanation:

Correctanswer:

A

Creditorsbeartheresponsibilityforbankruptcyinthattheywillnotreceivetheprincipalbackfromtheirinvestment.Iftheprojectisagreatsuccess,creditors’returnswillnotincrease;theywillonlyreceivethemoneyloanedplusinterest.Ontheotherhand,stockholderscouldseethevalueoftheirsharesrisemanytimesover,whilethereputationofthemanagers（andtheirbonuses）islikelytorapidlyincrease.

QuestionID:

17232

WhichofthefollowingstatementsisNOTamechanismtoreducetheagencyproblemandmotivatemanagers?

A.

Poisonpill.

B.

Threatoftakeover.

C.

Managerialcompensation.

D.

Threatoffiring.

Explanation:

Correctanswer:

A

QuestionID:

25905

WhichofthefollowingstatementsaboutagencyproblemsisTRUE?

A.

Aslongasmanagersstaywithinthelaw,therearenoeffectivecontrolsthatstockholderscanimplementtocontrolmanagerialactions.

B.

Agencyconflictsarecommon.

C.

Bondcovenantsareusedtomotivatemanagerstoactintheinterestsofshareholders.

D.

Theagencyconflictbetweenbondholdersandstockholderscannotexistifmanagersareattemptingtomaximizeshareprice.

Explanation:

Correctanswer:

B

Anytimethereisapubliclyheldcorporationandinanybusinessthatissueddebt,thereisthepotentialforagencyproblems.Anagencyrelationshipiscreatedwhendecision-makingauthorityisdelegatedtoanagentwithouttheagentbeingfullyresponsibleforthedecisionthatismade.Agencyrelationshipsoccurintwocommoncorporatescenarios:

1）stockholdersgiveresponsibilitytomanagerswhodonotreceivethefullcostsandbenefitsoftheirperformance,and2）debtholdersdelegateauthoritytomanagerswhoactonthebehalfofstockholders.Thereareseverallegalmeanstoreduceagencyproblems.Bondcovenantsmotivatemangerstoactintheinterestsofbondholders.Intheprocessofattemptingtomaximizeshareprice,companiesmaytakerisksthatputthematariskofdefault,therebyputtingbondholdersatrisk.

b:

Describefourmechanismsusedtomotivatemanagerstoactinstockholders'bestinterests.

QuestionID:

25909

Ifmanagersaregrantedtheopportunitytobuyadditionalfirmsharesatapredeterminedpriceonorbeforeafuturedate,theyaresaidtobeownersof:

A.

directintervention.

B.

performanceshares.

C.

takeoverthreats.

D.

executivestockoptions.

Explanation:

Correctanswer:

D

Executivestockoptionstypicallyhaveexercisepricessetabovethecurrentstockpricetogivemanagersanincentivetotakeactionsthatwillincreaseshareprice.Performancesharesaretypicallysharesofcommonstockgiveninrewardforeffort,withoutaspecifiedstockpricebeingpartoftheconsideration.Takeoverandinterventionthreatsaremeanstomotivateamismanagingmanager.

QuestionID:

17267

Withrespecttotheshareholder/managerrelationship,whichofthefollowingstatementsisFALSE?

A.

Executivestockoptionstendtobeissued"out-of-the-money."

B.

Performancesharescanbeusedtoalignmanager/shareholderinterests.

C.

Executivestockoptionsdonothaveexpirationdatesandareheldinperpetuity.

D.

Themanagerialsalarypackageshouldincludeanincentivecomponent.

Explanation:

Correctanswer:

C

QuestionID:

25908

WhichofthefollowingisNOTamethodofaligningmanagers’interestswiththeinterestsofshareholders?

A.

Thethreatoffiring.

B.

Annualperformancebonuses.

C.

Restrictiveloancovenants.

D.

Directinterventionbyshareholders.

Explanation:

Correctanswer:

C

Restrictiveloancovenantsaretechniquesusedbycreditorstolimittheriskstakenbyabusiness.Whileannualperformancebonuscanbeapositiveaffirmationofmanagerialeffort,shareholderscaninterveneandevenfireamanagerthathasunderperformedexpectations.

SECTORQUIZ:

1.A:

AnOverviewofFinancialManagement

QuestionID:

26262

AmericanSprocket,Inc.,amanufacturerofqualitybicycles,isreviewingseveralnewprojects.Assumingthatmanagerialtimeconstraintslimitthenumberofnewprojectstoonlyone,whichofthefollowingwouldshareholdersmostlikelyprefer?

ProjectA:

Updatethecompany’swebsite,includingmakingitinteractive.Therewillbeincreasedcosts,whicharelargelyone-timeexpenses,plussubsequentmaintenancecosts.Revenuesareexpectedtoexceedexpenses.

Expectedimpacts:

Changeinearnings:

+3%

Changeinearningsvariance:

+1%

Changeinshareprice:

+5%

ProjectB:

Updatethecolorschemeofthefirm’smostpopularproduct.Inadditiontodesignexpensesandnewrawmaterials（paint&decals）,AmericanSprocketexpectstorunanadvertisingcampaignhypingthe¡°new¡±bikes.Thenewversionwillbesoldfor$15moreperunit.

Expectedimpacts:

Changeinearnings:

+10%

Changeinearningsvariance:

+15%

Changeinshareprice:

+11%

ProjectC:

Replacetheheavieralloysusedwithlightercompounds;increasingthecostofthetypicalbicycleby$90.Althoughthenewalloyisexperimentalandhasunprovenresultsindurability,AmericanSprocketwouldhavetheedgeoveritscompetitionbyhavingthelightestbikesintheindustry.

Expectedimpacts:

Changeinearnings:

+45%

Changeinearningsvariance:

+35%

Changeinshareprice+19%

A.

ShareholderswouldselectProjectA.

B.

ShareholderswouldselectProjectC.

C.

ShareholderswouldselectProjectB.

D.

Shareholderswouldbeindifferent.

Explanation:

Correctanswer:

B

Shareholderwealthisafunctionofshareprice.Astheiragents,managersshouldselectoptionswhichmaximizesshareprice,orProjectCinthiscase.Sincealloftheprojectsincreaseshareprice,shareholderswouldfavoralloftheprojects,however,thequestionstatesthatresourcesforcemanagementtoselectoneproject.

QuestionID:

17231

WhichofthefollowingstatementsisFALSE?

Intheshareholder/debtorrelationship,the:

A.

interestsofthemanagementofthefirmtendtobealignedmorecloselywiththoseoftheshareholdersofthefirm.

B.

shareholdershaveanincentivetotakeonriskyprojectsbecausetheygettokeeptheresidualearningsofthefirm.

C.

shareholderanddebtorinterestsareincreasinglyalignedasthecompanytakesonmoredebt.

D.

debtoristheprincipalbecausetheyhavedelegatedauthoritytomanagement.

Explanation:

Correctanswer:

C

QuestionID:

26645

AmericanSprocket,Inc.,amanufacturerofqualitybicycles,isreviewingseveralnewindependentprojects.WhichofthefollowingwouldAmericanSprocket’screditorsmostlikelyprefer?

ProjectA:

Updatethecompany’swebsite,includingmakingthesiteinteractive.Therewillbeincreasedcosts,whicharelargelyone-timeexpenses,plussubsequentmaintenancecosts.Revenuesareexpectedtoexceedexpenses.

Expectedimpacts:

Changeinearnings:

+3%

Changeinearningsvariance:

+1%

Changeinshareprice:

+5%

ProjectB:

Updatethecolorschemeofthefirm’smostpopularproduct.Inadditiontodesignexpensesandnewrawmaterials（paint&decals）,AmericanSprocketexpectstorunanadvertisingcampaignhypingthe"new"bikes.Thenewversionwillbesoldfor$15moreperunit.

Expectedimpacts:

Changeinearnings:

+10%

Changeinearningsvariance:

+15%

Changeinshareprice:

+11%

ProjectC:

Replacetheheavieralloysusedwithlightercompounds;increasingthecostofthetypicalbicycleby$90.Althoughthenewalloyisexperimentalandhasunprovenresultsindurability,AmericanSprocketwouldhavetheedgeoveritscompetitionbyhavingthelightestbikesintheindustry.

Expectedimpacts:

Changeinearnings:

+45%

Changeinearningsvariance:

+35%

Changeinshareprice+19%

A.

CreditorswouldpreferProjectA.

B.

CreditorswouldpreferProjectC.

C.

Creditorswouldbeindifferent.

D.

CreditorswouldpreferProjectB.

Explanation:

Correctanswer:

A

Thebestcreditorscanexpectisareturnoftheamounttheylendandappropriateinterest.Consequently,theywouldpreferthatmanagerstakeprojectsthatincreaserevenuesandearningsbeforeinterestandtaxes（operatingprofit）withoutincreasingrisk.Inthisinstance,creditorswouldpreferthelowerriskoptionthatcreatestheminimumearningsvariance.AlthoughProjectChassubstantialupsidepotential,creditorswouldnotseeanyprofitsbeyondtheirpromisedinterestandprincipalpayments.

QuestionID:

25911

TheCEOofAmericanFoodshasmadeavarietyofsignificantinvestmentsthathavechangedthefirm’sfocusanddiminishedsharevalue.OneofAmericanFoods’shareholdershasaggressivelybeenacquiringsharesandnowowns10percentofthecompany.TheshareholderhasnominatedErikSorensontotheboardofdirectorsinanattempttooverseemanageractions.AlthoughSorensonhastheabilitytoaskforthemanager’sresignation,heprefersthatthemanagermakechoicesthatenhancefir