CORPORATE FINANCE

Question 1

With a on-tier board structure:

Answer 1

Both execs and non execs can serve on the board of directors (independent directors, and senior managers)

Question 2

organizational structure is best described as:

Answer 2

a company’s internal systems and practices for managing stakeholder relationships

ACTUAL PROCEDURE, NOT A FRAMEWORK

Question 3

The relationship between a company’s shareholders and its senior managers is best described as a __________ relationship:

Answer 3

agency relationship

principal-agent relationship

Question 4

stakeholders most likely to be concerned with their legal liabilities are:

Answer 4

directors

Question 5

Thematic investing is most accurately described as:

Answer 5

considering a single environmental or social factor when selecting investments. (ESG)

Question 6

Define stakeholder theory

Answer 6

the interests of community groups affected by a company’s operations

Question 7

Four steps of the capital budgeting process

Answer 7

Generate investment ideas
Analyze project ideas
Create firm-wide capital budget
Monitor decisions and conduct a post-audit

Question 8

Categories of capital projects include:

Answer 8

Replacement for maintaining the business or for cost reduction
Expansion
New product/Market Development
Mandatory environmental/regulatory requirements
Other, such as R&D, or pet projects of senior management

Question 9

For a project with cash outflows during its life, the least preferred capital budgeting tool would be:

Answer 9

IRR

Question 10

The discounted payback period is generally ________ than the regular payback

Answer 10

Longer

Question 11

in an NPV profile, the IRR is represented as the intersection of the NPV profile with the ______ axis.

Answer 11

X-Axis (hoizontal)

NPV
|
|\
|_\\_\_\_\_\_\_\_\_\_\_\_\_\_cost of capital
   IR

Question 12

3 approaches to estimating k_ce

Answer 12

1. CAPM Approach

2. dividend discount model: = (D_1/P_0)+g

Question 13

Define Business Risk

Answer 13

the uncertainty about EBIT, resulting from variability in sales and expenses; MAGNIFIED BY OPERATING LEVERAGE

Question 14

Define Financial Risk

Answer 14

additional variability of EPS compared to EBIT

increases with greater use of fixed cost financing (debt) in a company’s capital structure

Question 15

Using more debt and less equity in a firm’s capital structure _____ Net Income, via added _______.

Answer 15

reduces; interest expense

Question 16

What is the net effect of using more debt and less equity on ROE?

Answer 16

Increase -OR- Decrease, in ROE

Question 17

Business Risk is higher when fixed costs are the _______ portion of expenses

Answer 17

highest

higher operating expense = higher operating leverage;
EBIT is lower, therefore a firm is more susceptible to changes in the BUSINESS CYCLE

Question 18

If two Stock X and Stock Y have identical Betas, but the unsystematic risk is higher for X than Y, than according to CAPM, in equilibrium:

Answer 18

Stock X will have higher standard deviation (total risk), than Stock Y, but an equal E(R) to Stock Y.

Question 19

Investor in a sponsored depository receipt (DR):

Answer 19

holds the voting rights for the DR shares.

Question 20

With cumulative voting system, an investor who holds 1000 shares can cast a _____ votes for a board member serving 3-year terms. What is it under a statutory voting system?

Answer 20

3,000; 1,000 per seat on the board.

Question 21

What is the reason a Commodities Index, and a Fixed Income Index require frequent reconstitution?

Answer 21

Futures contracts expire; and Bonds mature

Question 22

Matching by order is and not by a specified PRICE or QUOTE is an example of a ___________ network.

Answer 22

Electronic Crossing Network (i.e. Order-Driven Market)