Question CHAPTER 11 CORPORATE VALUATION AND VALUE-BASED MANAGEMENT

29 Jun Question CHAPTER 11 CORPORATE VALUATION AND VALUE-BASED MANAGEMENT

Question
CHAPTER 11
CORPORATE VALUATION AND VALUE-BASED MANAGEMENT

Easy:

(11.1) Corporate valuation model

[1]

. The corporate valuation model cannot be usedunlessa company doesn’t pay dividends.

a. True

b. False

(11.2) Free cash flows and valuation Answer

[2]

. Free cash flows should be discounted at thefirm’sweighted average cost of capital to find the value of its operations.

a. True

b. False

(11.3) Value-based management

[3]

. Value-based management focuses on sales growth, profitability, capital requirements, the weighted average cost of capital, andthedividend growthrate.

a. True

b. False

(11.5) Corporate governance Answer

[4]

. Two important issues in corporate governance are(1)the rules thatcoverthe board’s ability to fire theCEOand (2)the rules that cover the CEO’s ability to remove members of the board.

a. True

b. False

Medium:

(11.3) Return on invested capital and MVA

[5]

. If a company’s expected return on invested capital is less than its cost of equity, then the company must also have a negative market value added (MVA).

a. True

b. False

(11.5) Corporate governance M

[6]

. A poison pill is also known as acorporate restructuring.

a. True

b. False

(11.5) Stock options

[7]

. The CEOof D’Amico Motorshas been granted some stock optionsthat have provisions similar to most other executive stock options. If D’Amico’s stock underperforms the market, these options will necessarily be worthless.

a. True

b. False

(11.6) ESOP Answer

[8]

. ESOPs were originally designedtohelpimprove worker productivity, but today they are also usedtohelpprevent hostile takeovers.

a. True

b. False

Multiple Choice: Conceptual

Medium:

(11.2) Corporate valuation model M

[9]

. Which of the following statements isNOTCORRECT?

a. The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.

b. The corporate valuation model discounts free cash flows by the required return on equity.

c. The corporate valuation model can be used to find the value of a division.

d. An important step in applying the corporate valuation model is forecasting the firm’s pro forma financial statements.

e. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.

(11.3) Value-based management Answer

[10]

. Which of the followingdoesNOTalwaysincreaseacompany’s market value?

a. Increasing the expected growth rate of sales.

b. Increasing the expected operating profitability (NOPAT/Sales).

c. Decreasing the capital requirements (Capital/Sales).

d. Decreasing the weighted average cost of capital.

e. Increasing the expected rate of return on invested capital.

(11.5) Corporate governance

[xi]

. Which of the following isNOTnormally regarded as beinga barrier to hostile takeovers?

a. Abnormally high executive compensation.

b. Targeted share repurchases.

c. Shareholder rights provisions.

d. Restricted voting rights.

e. Poison pills.

(11.6) ESOP Answer

[xii]

. Which of the following isNOTnormally regarded as being a good reason to establish an ESOP?

a. To increase worker productivity.

b. To enable the firm to borrow at a below-market interest rate.

c. To make it easier to grant stock options to employees.

d. To help prevent a hostile takeover.

e. To help retain valued employees.

Multiple Choice: Problems