Download Corporate Finance Essentials: Shareholder Rights, Market Efficiency, and WACC and more Exams Financial Statement Analysis in PDF only on Docsity!
BUSI 7110 TEST 2 QUESTIONS AND CORRECT
ANSWERS 100% VERIFIED
voting, dividends, new shares, proxy - ANSWER 4 Rights of shareholders Proxy statement - ANSWER Vehicle for shareholders to vote efficient market hypothesis - ANSWER says that stock prices reflect info quickly and completely weak form efficiency - ANSWER says that stock prices reflect all past information semi-strong efficiency - ANSWER says that stock prices reflect all publicly available information strong form efficiency - ANSWER says that stock prices reflect all public and private information Variance - ANSWER The of returns is a measure of the volatility of returns Standard deviation - ANSWER the explains the deviation from expected returns as a percentage Coefficient of variation - ANSWER Standard deviation/ average return Covariance - ANSWER This tells us how returns of different securities moves together
unbounded - ANSWER Like variance, covariance is correlation coefficient - ANSWER A standardized measure of how returns move together risk - ANSWER uncertainty systematic - ANSWER risk that comes from market wide factors and affects a large number of assets Unsystematic - ANSWER risk that is asset specific diversification - ANSWER spreading your assets across different types of assets lower - ANSWER diversification will risk Beta - ANSWER measures the systematic risk of an asset 1 - ANSWER The beta risk of the market is 0 - ANSWER the beta of a risk-free asset is CAPM - ANSWER asset pricing model saying that return on an asset depends on time value of money and risk compensation up - ANSWER when there is an increase in inflation, we expect return to go up - ANSWER when there is an increase in risk aversion, we expect return to go
target capital structure - ANSWER Even if a firm has a capital structure, we will use their when calculating WACC Required rate of return - ANSWER WACC is the for the firm interest rates, market risk premium, taxes - ANSWER External factors to WACC capital structure, dividend policy, investment policy - ANSWER Internal factors to WACC cash flows - ANSWER Required rate of return reflects the risk of the Pure play method - ANSWER A company beta where the company operates in a single line of business accounting beta method - ANSWER Using accounting methods to measure beta WACC - ANSWER How do we calculate corporate value? Present value of future cash flows discounted at marketable securities, real estate investments, investments in other companies, excess cash - ANSWER Non operating assets include: operating assets + non operating assets - ANSWER Value of firm is equal to: Sales growth, operating profitability, capital requirements, wacc - ANSWER 4 drivers of firm growth: Sales growth - ANSWER Says that all else equal, an increase in sales will increase firm
value reduce - ANSWER If we can WACC, we can increase value corporate governance - ANSWER umbrella term referring to all tools we have to align incentives of managers with shareholders managerial entrenchment, compensation, board of directors - ANSWER 3 types of corporate governance: targeted share repurchase, shareholder rights provisions, restricted voting rights - ANSWER 3 ways we entrench managers and prevent hostile takeovers Targeted shares repurchase - ANSWER when a hostile entity acquires our stock, this allows the firm to buy back shares from the hostile bidder at a premium Greenmail Shareholder rights provisions - ANSWER allows the firm to sell shares of stock to existing shareholders at a discount Poison pills Restricted voting rights - ANSWER allows a firm to remove voting rights of a shareholder if they reach a certain % of ownership Stock options - ANSWER give the manager the right to purchase shares at a fixed price before a certain date WACC - ANSWER How do we calculate corporate value? Present value of future cash flows discounted at Employee Stock ownership program - ANSWER ESOP diversity - ANSWER The disadvantages of an ESOP is that it creates a lack of for employees inside directors, large board, Chairman and CEO duality, interlocking board, staggered
