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Wiley Level 2 > Corporate > Flashcards

Corporate Flashcards

1
Q

Explain how investor preferences for dividends, capital gains, or share repurchase are influenced by tax rates.

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2
Q

Evaluate a takeover bid.

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3
Q

Describe characteristics of M&A transactions that create value.

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4
Q

Provide a general analysis of dividend safety.

A

Dividends of companies that have a record of stable or increasing dividends are considered safer.

Small, young companies generally do not pay dividends, preferring to reinvest internally for growth. However, as such companies grow, they typically initiate dividends and their payout ratios tend to increase over time. Large, mature companies typically target a payout ratio of 40% to 60%.

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5
Q

Explain the poison put and supermajority pre-offer takeover defense mechanisms.

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6
Q

Classify merger and acquisition (M&A) activities based on relatedness of business activities.

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7
Q

Explain the synergies rationale behind M&A activity.

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8
Q

Compare the effect of a share repurchase on earnings per share when 1) the repurchase is financed with the company’s surplus cash and 2) the company uses debt to finance the repurchase.

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9
Q

Explain the advantages and disadvantages of DCF analysis.

A

Merger-related synergies and cost structure changes inform cash flow projections. The model can be customized to reflect changes in assumptions and/or estimates.

Assumption changes drastically affect value calculation, and the assumptions are estimates at best sometimes.

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10
Q

Describe the motives for merger within the deceleration of growth and decline lifecycle stage.

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11
Q

Explain the difference between dispersed ownership and concentrated ownership.

A

Dispersed ownership reflects the existence of many shareholders, none of whom can individually exercise control over the corporation.

In contrast, concentrated ownership reflects an individual shareholder or a group (called controlling shareholders) with the ability to exercise control over the corporation.

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12
Q

List the factors that may explain the differences in capital structures across countries.

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13
Q

List the topics a board evaluation typically covers.

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14
Q

Calculate the yearly cash flows of expansion and replacement projects. (Note that salvage value components apply only to replacement projects.)

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15
Q

Define stranded assets.

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16
Q

Evaluate mutually exclusive projects with unequal lives using the least common multiple of lives approach.

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17
Q

Describe target capital structure and explain why a company’s actual capital structure may fluctuate around its target.

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18
Q

Describe why analysts should be sensitive to international differences in the use of financial leverage and factors that explain these differences.

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19
Q

Explain a golden parachute as a pre-offer takeover defense mechanism.

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20
Q

Explain other types of takeover defense mechanisms.

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21
Q

Explain the poison pill pre-offer takeover defense mechanism.

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22
Q

Identify the key attributes for consideration when evaluating a board’s structure.

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23
Q

Calculate and interpret the effective tax rate (ETR) on a given currency unit of corporate earnings (PTE) under a tax imputation system.

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24
Q

List the types of corporate shareholders that can have a significant influence on corporate governance.

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25
Q

Distinguish among the basic forms of restructuring.

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26
Q

Describe the tax argument.

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27
Q

Calculate the effect of a share repurchase on book value per share.

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28
Q

After accounting for the costs of financial distress, how is the value of the leveraged firm calculated?

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29
Q

Describe sensitivity analysis.

A

Sensitivity analysis determines the impact on NPV of changes in one input variable at a time holding all other input variables constant. This enables an analyst to identify the most significant variables in the analysis in terms of their effect on NPV, and their influence on the success/failure of the project.

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30
Q

Explain why dividend irrelevance does not apply in the real world.

A

Both companies and individuals incur transaction costs when trading shares.

Volatile stock prices can make it problematic to create homemade dividends.

Investors incur taxes on cash dividends.

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31
Q

Describe types of information (signals) that dividend initiations, increases, decreases, and omissions may convey.

A

Dividend policy changes may communicate new information about company prospects:

Initiations and increases may signal positive developments and confidence in the future. Such signals are hard to mimic for short-term gain because the company will not be able to continue high dividends in the future.

Decreases and omissions signal adverse developments and lack of confidence.

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32
Q

Describe how financial flexibility factors affect dividend policy.

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33
Q

Calculate the stable dividend (Lintner’s model).

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34
Q

Calculate the estimated postacquisition value.

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35
Q

Explain common reasons for restructuring.

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36
Q

Classify merger and acquisition (M&A) activities based on forms of integration and relatedness of business activities.

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37
Q

Describe assumptions underlying the Modigliani and Miller (MM) propositions regarding capital structure.

A

Homogeneous expectations regarding cash flows from an investment in bonds or stocks, and perfect capital markets where all market participants have the same information (investments with identical cash flow streams and risk must trade at the same price).

Borrowing/lending at the risk-free rate and no agency costs—shareholder interests rule.

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38
Q

Describe materiality in an ESG context and in overall financial reporting.

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39
Q

Describe the motives for merger within the stabilization and market maturity lifecycle stage.

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40
Q

Calculate and interpret the effective tax rate (ETR) on a given currency unit of corporate earnings under double taxation.

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41
Q

Describe the role of debt ratings in capital structure policy.

A

Increasing leverage may prompt a debt ratings downgrade. Lower ratings signify higher risk, and lead to higher required returns for both equity and debt holders, which make it more expensive for the company to raise capital going forward.

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42
Q

Describe the motives for merger within mature growth life-cycle stage.

A

Growth potential remains but competition moderates. Horizontal and vertical mergers are most common. Mergers attempt to achieve savings through operational efficiencies.

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43
Q

Describe the challenges of integrating ESG factors into investment analysis.

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44
Q

Describe dual-class shares.

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45
Q

Explain how price and payment method affect the distribution of risks and benefits in M&A transactions.

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46
Q

Compare theories of dividend policy and explain implications of each for share value given a description of a corporate dividend action.

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47
Q

Explain the difference between horizontal ownership and vertical ownership.

A

Horizontal ownership involves companies with mutual business interests (e.g., key customers or suppliers) that have cross-holding share arrangements with each other. This structure can help facilitate strategic alliances and foster long-term relationships among such companies.

Vertical ownership (or pyramid ownership) involves a company or group that has a controlling interest in two or more holding companies, which in turn have controlling interests in various operating companies.

48
Q

Describe voting caps.

A
49
Q

Describe the messages a company’s cash dividend payout record sends.

A
50
Q

Identify the approaches to evaluating projects with real options.

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51
Q

Characterize cash flows of expansion and replacement projects.

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52
Q

Describe the motives for merger within the pioneering development and rapid acceleration and growth life-cycle stages.

A
53
Q

Explain the Modigliani-Miller propositions regarding the effects of financial distress, agency costs, and asymmetric information.

A

Business risk determines the cost of capital, while capital structure determines financial risk. Increasing leverage increases the probability of default and the optimal use of debt decreases.

Equity-agency cost savings accrue from use of debt; managers cannot unwisely use resources or take on too much more debt. Also, manager use of debt signals confidence about ability to repay, thus decreasing fear and reducing cost.

54
Q

Describe types of real options.

A
55
Q

Describe how a Monte Carlo simulation is used to assess projects.

A

Monte Carlo simulation uses a probability distribution for each input variable over thousands of runs of the simulation to establish a distribution for possible values of NPV and IRR. In contrast, sensitivity and scenario analysis input point estimates for each variable a single output estimate.

56
Q

Explain how inflation affects capital budgeting analysis.

A
57
Q

Describe the benefits and drawbacks of a family ownership corporate structure.

A

A benefit of family control is lower risks associated with principal-agent problems as a result of families having concentrated ownership and management responsibility.

Conversely, the drawbacks of family ownership may include poor transparency, lack of management accountability, modest consideration for minority shareholder rights, and difficulty in attracting quality talent for management positions.

58
Q

Explain factors an analyst should consider in evaluating the effect of capital structure policy on valuation.

A

Changes in the company’s capital structure over time.

The capital structure of competitors that have similar business risks.

Company-specific factors such as cash flow volatility, need for financial flexibility, the significance of information asymmetries, and the value of tangible assets held.

59
Q

Describe the WACC curve when it is U-shaped.

A
60
Q

Describe the ownership structure that can result in a principal-agent problem.

A

The combination of dispersed ownership and dispersed voting power is associated with shareholders who lack the power to exercise control over managers. Under this combination, shareholders are interested in maximizing shareholder value, while managers may seek to use a company’s resources to pursue their own interests.

61
Q

Define green bonds.

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62
Q

Explain other types of pre-offer takeover defense mechanisms.

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63
Q

Describe the difference between straight voting and dual-class share structures.

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64
Q

Contrast merger transaction characteristics by method of payment.

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65
Q

Explain scenario analysis.

A
66
Q

Describe the proprietary method approach for identifying a company’s ESG factors.

A

With the proprietary method approach, analysts use their own judgment or their firm’s proprietary tools to identify ESG information by researching companies, news reports, industry associations, environmental groups, financial markets, labor organizations, industry experts, and government organizations. Company-specific ESG data are generally publicly available from such sources as annual reports, corporate citizenship or sustainability reports, proxy reports, and regulatory filings.

67
Q

Define independent board directors.

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68
Q

Identify the approaches analysts typically use to identify a company’s ESG factors.

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69
Q

Define CEO duality.

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70
Q

Describe clawback policy.

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71
Q

Explain how agency costs may affect a company’s payout policy.

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72
Q

Explain the Modigliani and Miller (MM) propositions regarding capital structure.

A
73
Q

Describe the expected effect of stock dividends, stock splits, and reverse splits on shareholders’ wealth and a company’s financial ratios.

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74
Q

Define insiders.

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75
Q

Explain how analysts typically use scenario analysis to determine a company’s optimal capital structure.

A
76
Q

Describe common capital budgeting pitfalls.

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77
Q

Explain factors that affect dividend policy in practice.

A

Investment opportunities

The expected volatility of future earnings

Financial flexibility

Tax considerations

Flotation costs

Contractual and legal restrictions

78
Q

Calculate the effect of a share repurchase on earnings per share when 1) the repurchase is financed with the company’s surplus cash and 2) the company uses debt to finance the repurchase.

A
79
Q

Describe broad trends in corporate payout policies.

A
80
Q

Define shareholder activism.

A

Shareholder activism refers to the strategies used by shareholders to attempt to compel a company to act in a desired manner.

81
Q

Contrast merger transaction characteristics by form of acquisition.

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82
Q

Calculate a company’s postmerger EPS.

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83
Q

Compare stable dividend, constant dividend payout ratio, and residual dividend payout policies.

A
84
Q

Explain how opportunity factors affect dividend policy.

A
85
Q

Explain bootstrapping of earnings per share (EPS):

A

Illusion of synergies or growth when EPS increases due to a merger transaction itself rather than from transaction benefits:

  • The shares of the acquirer trade at a higher P/E ratio than shares of the target; and
  • The acquirer’s P/E does not fall after the merger.
86
Q

Evaluate mutually exclusive projects with unequal lives using the equivalent annual annuity (EAA) approach.

A
87
Q

Calculate and interpret dividend coverage ratios based on 1) net income and 2) free cash flow.

A
88
Q

Explain the advantages and disadvantages of comparable company analysis.

A
89
Q

Describe interlocking directorates.

A
90
Q

Describe the ESG data providers approach for identifying a company’s ESG factors.

A
91
Q

Describe the split-rate tax system.

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92
Q

Compare share repurchase methods.

A
93
Q

Explain fair price amendments as a pre-offer takeover defense mechanism.

A
94
Q

Classify merger and acquisition (M&A) activities based on forms of integration.

A

Statutory merger: Acquirer assumes all target’s assets and liabilities; acquirer survives.

Subsidiary merger: The target becomes a subsidiary of the acquirer.

Consolidation: The target and acquirer merge (consolidate) into a entity; common in mergers with similar-size entities.

95
Q

Describe the difference between a one-tier board and a two-tier board.

A
96
Q

Explain the unique capabilities and resources rationale behind M&A activity.

A
97
Q

List the activities a supervisory board can perform to serve as control functions over the management board as part of the two-tier board structure.

A
98
Q

How is the stand-alone risk of a capital project measured?

A
99
Q

Explain how clientele effects may affect a company’s payout policy.

A
100
Q

Explain share repurchase, leveraged recapitalization, and greenmail as postoffer takeover defense mechanisms.

A
101
Q

Contrast merger transaction characteristics by attitude of target management.

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102
Q

Explain the choice between paying cash dividends and repurchasing shares.

A
103
Q

Explain factors that affect dividend policy in practice.

A
104
Q

Describe ESG integration and how it differs between equity and fixed-income analyses.

A
105
Q

Explain the advantages and disadvantages of comparable transaction analysis.

A

There is no need to estimate the takeover premium separately; it is built into transaction prices used to calculate price multiples. Litigation risk decreases due to using recent comparable transaction prices.

Susceptible to market mispricing. Data on takeover premiums may be scarce. It is difficult to incorporate any anticipated target capital structure changes and merger synergies into the analysis.

106
Q

Differentiate between abandonment options and growth options.

A

Abandonment options give the company an option to abandon the project if the cash flow from abandoning the project exceeds the present value of the cash flows from continuing it.

Growth options give the company an option to expand a project if future financial performance is expected to be strong.

107
Q

Describe ESG-related adjustments that may be made to a company’s financial statements or valuation.

A
108
Q

Describe the benefits and drawbacks of a long board tenure.

A

A board member with a long tenure may have a comprehensive understanding of how the corporation’s business operates, as well as how effective company management has been during the director’s tenure.

On the other hand, a long tenure may affect the independence of board members (i.e., they could be too closely aligned with management), or may result in directors being less willing to embrace changes in the corporation’s business.

109
Q

List the key governance concerns investors assess when evaluating a company’s board committees.

A
110
Q

Evaluate capital projects and determine the optimal capital project in situations of capital rationing.

A
111
Q

Explain the two different types of controlling shareholders.

A
112
Q

Define stock dividend

A

A stock dividend or a bonus issue occurs when a company issues additional common shares in the company (instead of cash) to shareholders. The price per share decreases as does the earnings per share, leaving the ratio the same.

113
Q

Describe the expected effect of various dividends on shareholders’ wealth and a company’s financial ratios.

A
114
Q

Describe the not-for-profit industry organizations and initiatives approach for identifying a company’s ESG factors.

A

The not-for-profit industry organizations and initiatives approach involves the consideration of not-for-profit initiatives that provide data and insights on ESG issues. These include the International Integrated Reporting Council (IIRC), the Global Reporting Initiative (GRI), and the Sustainable Accounting Standards Board (SASB).

115
Q

Identify the key elements of the ESG Integration Framework.

A
116
Q

Explain factors that affect dividend policy in practice.

A

Bond indentures may limit total distributions, restrict dividend payments financed by selling operating assets or issuing new debt, or may require certain minimum levels of EBITDA and/or EBIT before the company can pay dividends.

Wiley Level 2 (11 decks)

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