Tutorial 1 week 3 Flashcards
(21 cards)
Which of the following is/are NOT corporate monitors?
A) Security Analysts
B) Lenders
C) SEC
D) All of the above are monitors
D) All of the above are monitors
Which of the following is NOT a direct action that can be taken by shareholders?
A) Submitting shareholder resolutions directing the board to take specific actions
B) Withholding votes for the board of directors candidates
C) Initiating a proxy contest
D) Voting to remove the management team
D) Voting to remove the management team
A board of directors is said to be captured when:
A) A majority of the directors are independent directors
B) A majority of the directors are outside directors
C) Its monitoring duties have been compromised by connections or perceived loyalties to management
D) When the CEO also serves as chairman of the board
C) Its monitoring duties have been compromised by connections or perceived loyalties to management
(D could be partially correct)
Regarding board size, researchers have found that:
A) smaller boards are associated with greater firm value and performance, since small groups make better decisions than larger groups.
B) smaller boards are associated with lower firm value and performance, since small groups are more likely to be compromised by connections to management.
C) larger boards are associated with greater firm value and performance, since larger boards tend to have directors with a more diverse range of backgrounds and talents.
D) larger boards are associated with lower firm value and performance, since larger groups are more likely to be compromised by connections to management.
A) smaller boards are associated with greater firm value and performance, since small groups make better decisions than larger groups.
Directors who are employees, former employees, or family members of employees are called:
A) Managing directors
B) Independent directors
C) Inside directors
D) Gray directors
C) Inside directors
Inside directors are members of the board who have a direct connection to the company, such as:
Current employees (e.g., executives like the CEO or CFO).
Former employees who still have ties to the company.
Family members of executives or major stakeholders.
Which of the following statements is FALSE?
A) A board is said to be classified when its monitoring duties have been compromised by connections or perceived loyalties to management.
B) Even the most active independent directors spend only one or two days per month on firm business, and many independent directors sit on multiple boards, further dividing their attention.
C) On a board composed of insider, gray, and independent directors, the role of the independent director is really that of a watchdog.
D) Because independent directors’ personal wealth is likely to be less sensitive to performance than that of insider and gray directors, they have less incentive to closely monitor the firm.
A) A board is said to be classified when its monitoring duties have been compromised by connections or perceived loyalties to management.
(A classified board is the same as a staggered board)
Backdating refers to:
A) choosing the strike price of a stock option retroactively.
B) choosing the exercise date of the stock option retroactively.
C) choosing the share conversion ratio retroactively.
D) choosing the grant date of a stock option retroactively.
D) Choosing the grant date of a stock option retroactively.
Which of the following statements is FALSE?
A) Backdating refers to the practice of choosing the grant date of a stock option retroactively, so that the date of the grant would coincide with a date when the stock price was at its low for the quarter or for the year.
B) Unless it is reported in a timely manner to the IRS and to shareholders, and reflected in the
firm’s financial statements, backdating is illegal.
C) The use of backdating suggests that some executive stock option compensation may not truly have been earned as the result of good future performance of the firm.
D) By backdating the option the executive receives a stock option that is already out-of-the money, with a strike price equal to the higher price on the supposed grant date
D) By backdating the option the executive receives a stock option that is already out-of-the money, with a strike price equal to the higher price on the supposed grant date.
Which of the following statements is FALSE?
A) The relationship between managerial ownership and firm value is unlikely to be the same for every firm, or even for different executives of the same firm.
B) Even with the risk benefits of separating ownership and control, there are still examples of
corporations in which the top managers have substantial ownership interests.
C) Academic studies do not support the notion that greater managerial ownership is associated with fewer value-reducing actions by managers.
D) While increasing managerial ownership may reduce perquisite consumption, it also makes managers harder to fire—thus reducing the incentive effect of the threat of dismissal.
C) Academic studies do not support the notion that greater managerial ownership is
associated with fewer value-reducing actions by managers
Which of the following statements is FALSE?
A) Recently, shareholders have started organizing “no” votes. That is, when they are dissatisfied with a board, they simply refuse to vote to approve the slate of nominees for the board.
B) One early study of proxy contests found that the announcement of a contest increased firm stock price by 8% on average, even if the challenge was eventually unsuccessful and the incumbents won reelection.
C) Shareholders’ only real role in governance is in electing the directors of the company.
D) Perhaps the most extreme form of direct action that disgruntled shareholders can take is to hold a proxy contest and introduce a rival slate of directors for election to the board.
C) Shareholders’ only real role in governance is in electing the directors of the company.
Dual class shares are best defined as:
A) a process where a company issues both common and preferred stock to finance the company.
B) a scenario in which companies have more than one class of shares and one class has superior voting rights over the other class.
C) a scenario in which 51% of the shares are held by a holding company which is part of a pyramid structure.
D) a process where a company issues shares in two separate countries each trading on a separate stock exchange.
B) a scenario in which companies have more than one class of shares and one class has superior voting rights over the other class.
Inventory days = Inventory / (COGS/365)
Inventory days = 90/(560/365) = 58.66
B) 59
Luther’s account receivables days is the closest to X
A) 42 days
B) 39 days
C) 32 days
D) 59 days
Account receivables days = AR / (Sales/365)
AR days = 85 / (980/365) = 31.66
C) 32 days
Luther’s Accounts Payable days is closest to ________.
A) 39 days
B) 32 days
C) 59 days
D) 42 days
Explanation: A) Accounts Payables days = Accounts Payable / (COGS / 365)
= $60 million / ($560 million / 365) = 39.11 days or 39 days
Luther’s net working capital is closest to ___________.
A) $330 million
B) $250 million
C) - $250 million
D) - $330 million
Answer: D
Explanation: D)
Net working capital = Current Assets – Current Liabilities = 200 – 530 = -$330 million
Based upon the average P/E ratio of the comparable firms, Ideko’s target market value of equity is
closest to:
A) $157 million
B) $155 million
C) $193 million
D) $165 million
Answer: D
Explanation: D) Average P/E = 23.67
Price = earnings × P/E = 6.939 × 23.67 = $164.22 million
Based upon the average EV/Sales ratio of the comparable firms, Ideko’s target enterprise value is
closest to:
A) $191 million
B) $155 million
C) $165 million
D) $157 million
Based upon the average EV/Sales ratio of the comparable firms, if Ideko holds $6.5 million of cash in
excess of its working capital needs, then Ideko’s target market value of equity is closest to:
A) $165 million
B) $157 million
C) $193 million
D) $191 million
4) Based upon the average EV/EBITDA ratio of the comparable firms, Ideko’s target enterprise value is
closest to:
A) $191 million
B) $155 million
C) $157 million
D) $193 million
Based upon the average EV/EBITDA ratio of the comparable firms, if Ideko holds $6.5 million of cash
in excess of its working capital needs, then Ideko’s target market value of equity is closest to:
A) $155 million
B) $157 million
C) $165 million
D) $193 million
What range for the market value of equity for Ideko is implied by the range of P/E multiples for the
comparable firms?
Answer: Low P/E (Nike) = 18.2
Low Price = earnings × P/E = 6.939 × 18.2 = $126.29 million
High P/E (Luxottica Group) = 28.0
High Price = earnings × P/E = 6.939 × 28.0 = $194.29 million
