Test questions IV weeks Flashcards
What is the purpose of the planetary boundaries?
A. Defines the limits in nine areas of the planet which humanity must not exceed to
maintain a liveable planet.
B. Outlines the maximum GDP levels beyond which climate change will be irreversible.
C. Shows the amount of import / export that a country should not exceed, to protect
domestic companies.
D. Indicates the annual date when the earth’s yearly resources have been exhausted
A
How does the integrated stakeholder model differ from the traditional version?
A. Its main focus is the potential positive impact of considering ecological risk.
B. It moves away from viewing business from a purely economic point of view.
C. Social and ecological value are equally relevant as financial value.
D. It recognises that good relations with stakeholders might boost financial firm value
D
A company that generates economic profits, will likely…
A. Create social and ecological value.
B. Destroy social and ecological value.
C. Create social value but destroy ecological value.
D. Destroy social value but create ecological value.
E. All of the above are possible
E
If the negative externalities of a product are internalised into the price, but the cost of sales
remains the same, how does a firm’s gross profit margin change?
A. Increase
B. Decrease
C. Remain
D. Not possible to say based on the provided information
A
Which of the following broad statements about corporate governance issues is false?
A. The two core problems of corporate governance aggravate one another.
B. Information asymmetry can be broken by social and ecological reporting.
C. Amount of debt does not impact the main corporate governance problems.
D. Corporate governance must consider non-financial factors
B
How does governance impact the valuation of a company?
6
A. Corporate governance does not impact traditional valuation models, such as
multiples or the DCF.
B. It purely impacts the integrated value of the company, not the financial value.
C. Strong governance reduces the risk of a firm and accordingly its cost of capital.
D. Bad governance reduces the cost of debt.
C
Consider a steel company with a value of €60 billion. The steelmaker’s production process is
centred around coal, a fossil fuel. The probability of transition from fossil fuels to
renewables is 75%. The steel company has a low adaptation capacity of 20%.
The steelmaker is considering a €20 billion investment in renewable technology to replace
the current coal powered production process. Should the steelmaker do this large
investment?
Step 1: calculate the expected transition losses with the current technology.
Using equation 2.1:
𝐸𝑇𝐿𝑖,𝑗 = 𝑏𝑗 ∙ 𝑉𝑖 ∙ 𝑃𝑇𝑗 ∙ (1 ― 𝑎𝑖) = 1 ∙ €60 billion ∙ 0.75 ∙ (1 ― 0.2) = €36 billion
Note that the parameters are as follows:
𝑏 = 1 the whole steel sector is exposed to transition
𝑃𝑇 = 0.75 the probability of transition
𝑎 = 0.2 the company’s adaptation capacity
Step 2: calculate the expected transition losses with the new technology
Using equation 2.1:
𝐸𝑇𝐿𝑖,𝑗 = 1 ∙ €60 billion ∙ 0.75 ∙ (1 ― 1) = €0 billion
Note that only parameter 𝑎 changes from 𝑎 = 0.2 to 𝑎 = 1, because of the new technology
(the company is then fully adapted to the energy transition).
Step 3: cost-benefit analysis of investment
3
The reduction in expected transition losses is €36 billion (step 1 minus step 2). This is the
benefit. The cost of the investment is €20 billion. The steelmaker should do the investment,
which has a net present value of €16 billion (=€36 billion - €20 billion).
What is the integrated value model?
Would such a strategic approach (of underweighting financial value) be realistic for
publicly-listed firms?
The integrated value model is as follows: 𝐼𝑉 = 𝑎.𝐹𝑉 + 𝑏.𝑆𝑉 + 𝑐.𝐸𝑉 (the parameter 𝑎 is
usually standardised to 1 and therefore omitted)
The strategic approach of underweighting FV would likely not be realistic.
Such a strategy is built and retained through a long-term orientation of committed
shareholders. Public listing might increase short-term incentivisation for agents and
principals. Additionally, publicly-listed firms often lack one dominant/committed
shareholder like the family office.
For a company with 90 debt at 3%, 60 equity at 8%, and 30 social equity at 2%, what is the integrated cost of capital?
The integrated cost of capital of B: 4.5% - calculated as 90/1803% + 60/1808% +
30/180*2%
For a company with debt 90 at 3%, equity 60 at 8%, and environmental equity -50 at 2%, what is the integrated cost of capital?
The integrated cost of capital of C: 6.5% - calculated as 90/1003% + 60/1008% + -
50/100*2%
What is NOT true regarding materiality?
A. Materiality looks at all potential impacts on people and environment
B. Materiality changes over time
C. Materiality differs per country and industry
D. Labour practices and business ethics are always material
A
Explanation: Material social and environmental topics are those that reflect a company’s
most significant impacts (positive or negative) on people and environment. Materiality
depends on the specific situation, and can differ per industry and country and change over
time. According to Kuh et al. (2020), there is a core set of social and environmental factors
that should always be included: GHG emissions, labour practices, and business ethics
Assuming a company has a revenue of €200 million and a price elasticity of demand of 1.67.
What would be the estimated consumer surplus?
A. €10 million
B. €40 million
C. €60 million
D. €100 million
C
Explanation: Inserting the values into equation 5.7, gives:
𝑝𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = 𝑠𝑎𝑙𝑒𝑠
𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 ∙ 1
2 ⟶ 1.67 = €200 million
consumer surplus ∙ 1
2
Consumer surplus is €60 million
