The role of financial management.

1. __________ is concerned with the acquisition, financing, and management of assets with some overall goal in mind.

Financial management

Profit maximization

Agency theory

Social responsibility

2. Jensen and Mackling showed that………….. Can assure themselves that the …….... will make optimal decisions only if
appropriate incentives are given and only if they __________ are monitored.

Principals; agents; agents

Agents; principals; principals

Principals; agents; principals

Agents; principals; agents

3. __________ is concerned with the maximization of a firm's earnings after taxes.

Shareholder wealth maximization

Profit maximization

Stakeholder maximization

EPS maximization

4. What is the most appropriate goal of the firm?

Shareholder wealth maximization.

Profit maximization.

Stakeholder maximization.

EPS maximization.

5. Which of the following statements is correct regarding profit maximization as the primary goal of the firm?

Profit maximization considers the firm's risk level.

Profit maximization will not lead to increasing short-term profits at the expense of lowering expected future profits.

Profit maximization does consider the impact on individual shareholder's EPS.

Profit maximization is concerned more with maximizing net income than the stock price.

6.__________ is concerned with the branch of economics relating the behavior of principals and their agents

Financial management

Profit maximization

Agency theory

Corporate social responsibility

7. A concept that implies that the firm should consider issues such as protecting the consumer, paying fair wages, maintaining
fair hiring practices, supporting education, and considering environmental issues

Financial management Profit maximization

Agency theory corporate social responsibility

8. Which of the following is not normally a responsibility of the treasurer of the modern corporation but rather the controller

Budgets and forecasts

Asset management

Investment management

Financing management

9.The __________ decision involves determining the appropriate make-up of the right-hand side of the balance sheet.

asset management

financing

investment

capital budg

10.To whom does the Treasurer most likely report?

Chief Financial Officer.

Vice President of Operations.

Chief Executive Officer.

Board of Directors.

11.The…………. decision involves a determination of the total amount of assets needed, the composition of the assets, and
whether any assets need to be reduced, eliminated, or replaced.

asset management

financing

investment

accounting

12 How are earnings per share calculated?

Use the income statement to determine earnings after taxes (net income) and divide by the previous period's earnings after
taxes. Then subtract 1 from the previously calculated value.

Use the income statement to determine earnings after taxes (net income) and divide by the number of common shares
outstanding.

Use the income statement to determine earnings after taxes (net income) and divide by the number of common and
preferred shares outstanding.

Use the income statement to determine earnings after taxes (net income) and divide by the forecasted period's earnings
after taxes. Then subtract 1 from the previously calculated value.

13. According to the text's authors, what is the most important of the three financial management decisions?

Asset management decision.

Financing decision.

Investment decision.

Accounting decision.

14. The ………….. decision involves efficiently managing the assets on the balance sheet on a day-to-day basis, especially
current assets.

asset management financing investment accounting

15.Which of the following is not a perquisite (perk)?

Company-provided automobile.

Expensive office.

Salary.

Country club membership.

16.Which of the following is not normally a responsibility of the controller of the modern corporation?

Budgets and forecasts.

Asset management.

Financial reporting to the IRS.

Cost accounting.

17. All constituencies with a stake in the fortunes of the company are known as __________.

Shareholders

Stakeholders

Creditors

Customers

18. Which of the following statements is not correct regarding earnings per share (EPS) maximization as the primary goal of the
firm?

EPS maximization ignores the firm's risk level.

EPS maximization does not specify the timing or duration of expected EPS.

EPS maximization naturally requires all earnings to be retained.

EPS maximization is concerned with maximizing net income.

19.__________ is concerned with the maximization of a firm's stock price.

Shareholder wealth maximization

Profit maximization

Stakeholder welfare maximization

EPS maximization

20. Corporate governance success includes three key groups. Which of the following represents these three groups?

Suppliers, managers, and customers.

Board of Directors, executive officers, and common shareholders.

Suppliers, employees, and customers.

Common shareholders, managers, and employees.

The business, tax and financial environment

1. In finance we refer to the market for short-term government and corporate debt securities as the __________ market.

money capital

primary secondary
2.Which of the following would generally have unlimited liability?

A limited partner in a partnership.

A shareholder in a corporation.

The owner of a sole proprietorship.

A member in a limited liability company (LLC).

3.The Chance Dice Corporation had taxable income (excluding capital gains) of $16 million. The firm's $10,000 of realized
capital gains will be taxed at __________.

39 percent 35 percent 34 percent the average tax rate of the firm

4.A corporation in the U.S. estimates and pays it taxes __________.

Monthly quarterly semi-annually annually

5.The average tax rate is equal to the __________.

total tax liability divided by taxable income

rate that will be paid on the next dollar of taxable income

median marginal tax rate

percentage increase in taxable income from the previous period

6.Accounting.com has purchased 3-year class equipment for $100,000. It uses the MACRS method of depreciation. What is tax
depreciation for the fourth year?

$0 $7,410 $25,000 $33,333

7.In finance we refer to the market where existing securities are bought and sold as the __________ market.

Money capital primary secondary

8.Which of the following is not an example of a financial intermediary?

Wisconsin S&L, a savings and loan association.

Strong Capital Appreciation, a mutual fund.

Microsoft Corporation, a software firm.

College Credit, a credit union.

9.How are funds allocated efficiently in a market economy?

The economic unit that considers itself most in need of funds receives funds first followed by those who are less in need.

Receipt of funds is rotated over time so that each economic unit can receive them in turn.

The largest economic units receive the funds first followed by smaller firms if sufficient funds are available.

The economic unit that is willing to pay the highest expected return for a given risk level receives the funds.

10.What mechanism ensures that large firms who benefit from tax laws pay some minimum amount of tax?

Annual minimum tax.

Alternative minimum tax.

Minimum tax law.

Corpulent minimum tax.

 11.A profitable firm would prefer to use which of the following methods of depreciation -- for tax purpose -- for a given
depreciable asset, all else equal?

Straight-line.

-declining-balance.

Modified accelerated cost recovery system.

All of the above techniques are equally useful for a profitable firm because they provide the same tax deductions over
the life of the asset.

12.A major disadvantage of the corporate form of organization is the __________.

double taxation of dividends

inability of the firm to raise large sums of additional capital

limited liability of shareholders

limited life of the corporate form

13.Which of the following examples would be deductible as an expense on the corporation's income statement?

Interest paid on outstanding bonds.

Cash dividends paid on outstanding common stock.

Cash dividends paid on outstanding preferred stock.

All of the above.

14.A corporation that receives $1,000 in dividends from another corporation, of which they have owned 10% for one full year,
will be taxed on how much of those dividends?

All $1,000 of the dividends.

None of the dividends since it is from another corporation.

$100 (10% of $1,000) since they owned a 10% position for at least 6 months.

$300 (30% of $1,000) since 70% of dividends is tax exempt.

15.In finance we refer to the market where new securities are bought and sold for the first time as the __________ market.

Money capital primary secondary

16.Limited liability companies (LLCs) generally possess no more than two of the following four (desirable) characteristics: (1)
limited liability, (2) centralized management, (3) unlimited life, and (4) the ability to transfer ownership interest without prior
consent of the other owners. The two characteristics most likely to be absent in LLCs are __________.

limited liability and centralized management

centralized management and unlimited life

centralized management and the ability to transfer ownership interest without prior consent of the other owners

unlimited life and the ability to transfer ownership interest without prior consent of the other owners

17.Which of the following is an advantage of a corporation that is not an advantage as a limited partner in a partnership?

Limited liability.

Easy transfer of ownership position.

Double taxation.

All of the above are advantages that the corporation has over the limited partner.
18.Which of the following statements is correct for a sole proprietorship?

The sole proprietor has limited liability.

The sole proprietor can easily dispose of their ownership position relative to a shareholder in a corporation.

The sole proprietorship can be created more quickly than a corporation.

The owner of a sole proprietorship faces double taxation unlike the partners in a partnership.

19. What is potentially the biggest advantage of a small partnership over a sole proprietorship?

Unlimited liability.

Single tax filing.

Difficult ownership resale.

Raising capital.

20. In finance we refer to the market for relatively long-term financial instruments as the __________ marke

Money capital primary secondary

21. Limited liability companies (LLCs) generally possess no more than two of the following four (desirable) characteristics: (1)
limited liability, (2) centralized management, (3) unlimited life, and (4) the ability to transfer ownership interest without prior
consent of the other owners. Which of the following forms of business organization in the U.S. generally possesses all four of
these characteristics?

General partnership.

Limited partnership.

Corporation.

None of the above.

Time value of money

1. The Short Holder bank pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit. If you deposit
$20,000 you would expect to earn around __________ in interest.

$840 $858 $1,032 $1,121

2. With continuous compounding at 8 percent for 20 years, what is the approximate future value of a $20,000 initial investment?

$52,000 $93,219 $99,061 $915,240

3. In 2 years you are to receive $10,000. If the interest rate were to suddenly decrease, the present value of that future amount to
you would __________.

fall rise remain unchanged The correct answer cannot be determined without more information.

4. Assume that the interest rate is greater than zero. Which of the following cash-inflow streams totaling $1,500 would you
prefer? The cash flows are listed in order for Year 1, Year 2, and Year 3 respectively.

$700 $500 $300

$300 $500 $700

$500 $500 $500

Any of the above, since they each sum to $1,500.

5. You are considering investing in a zero-coupon bond that sells for $500. At maturity in 8 years, it will be redeemed for
$1,000. During the life of the bond NO interest coupons will be paid. Using the Rule of 72, what approximate annual rate of
growth does this represent?

8 percent. 9 percent. 12 percent. 25 percent

6.To increase a given future value, the discount rate should be adjusted __________.

upward

downward

first upward and then downward

None of the above answers are correct; you should use PVIF.

7. For $1,000 you can purchase a 5-year ordinary annuity which will pay you a yearly payment of $263.80 for 5 years. What is
the annual interest rate implicit in this investment to the nearest whole percentage point?

8 percent. 9 percent. 10 percent. 11 percent.

8. You are considering borrowing $100,000 for 30 years at a compound annual interest rate of 9 percent. The loan agreement
calls for 30 equal annual payments, to be paid at the end of each of the next 30 years. (Payments include both principal and
interest.) What is the annual payment that will fully amortize the loan?

$3,333.33 $6,400.30 $9,733.63 $12,333.33

9. Interest paid (earned) on only the original principal borrowed (lent) is often referred to as __________.

present value

simple interest

future value

compound interest

10. Interest paid (earned) on both the original principal borrowed (lent) and previous interest earned is often referred to as
__________.

present value

simple interest

future value

compound interest

11. You are going to place $12,500 into a certificate of deposit (CD) at a 6% annual rate (compounded annually) with a maturity
of 30 months. How much money will you receive when the CD matures?

Necessary information is not available to solve the problem.

$14,460

$14,491

$14,518

12. You have just graduated and have decided to purchase a brand new sports car to enjoy your newfound freedom. Your local
credit union will provide financing for 60 months at a 9 percent annual rate, compounded monthly. You will give 15 percent of
the $26,000 purchase price in cash to the dealer. The credit union will be used to finance the remaining 85 percent of the
purchase price with the first payment due 1 month from today. What will be your monthly payment?

$539.71 $458.76 $433.33 $368.33

13. You have just agreed to a new loan and have purchased a $3,000 computer today. The loan has a 19.6% annual interest rate,
compounded monthly. The minimum monthly payment is $58 and you do not expect to ever pay more than the minimum
payment. Assuming no additional charges or costs will occur with this loan, approximately what will you owe on the loan at the
end of 3 years (36 months) when you expect to need another new computer?

$2,676 $2,564 $2,304 $2,088

14. What is the present value of a $1,000 ordinary annuity that earns 8% annually for an infinite number of periods?

$80 $800 $1,000 $12,500

15. You want to have $1,000,000 when you retire in 30 years. You expect to earn 12% compounded monthly over the entire 30-
year period. How much extra money per month must you deposit if you choose to fund using an ordinary annuity technique
rather than an annuity due technique?

$2.84 $37.00 $286.13 $443.97

16. You expect to deposit the following cash flows at the end of years 1 through 5, $1,000; $4,000; $9,000; $5,000; and $2,000
respectively. What is the future account value at the end of year 6 if you can earn 10% compounded annually?

$15,633.62 $21,000.00 $25,178.10 $27,695.91

17. Which of the following investment alternatives would provide the greatest ending wealth for your investment?

10% compounded daily (360 days).

10.5% compounded annually.

10.25% compounded quarterly.

There is not sufficient information to determine the best alternative from the above information.

18. You won a contest at a local business that has paid you a single $5,000. At 22, you have decided to invest these funds for 45
years until you retire. During this time your account will earn 13%, compounded annually, every year. As soon as you retire
(exactly 45 years from today) you will start withdrawing retirement funds every year for an additional 33 years, but you are
investing more conservatively at 8% compounded annually. How much can you withdraw each year in retirement?

$23,306 $106,237 $282,201 $1,223,207

19. Which of the following will decrease the present value of the mixed cash flows for years 1 through 5 of $1,000; $4,000;
$9,000; $5,000; and $2,000 respectively given a 10% discount rate?

Decrease the discount rate by 2%.

Switch cash flows for years 1 and 5 so that year 1 is $2,000 and year 5 is $1,000.

Switch cash flows for years 2 and 4 so that year 2 is $5,000 and year 4 is $4,000.

Switch cash flows for years 2 and 5 so that year 2 is $2,000 and year 5 is $4,000.

20. Which of the following statements is most correct?

The future value of an annuity due is greater than an otherwise identical ordinary annuity.

A reduction in the discount rate will increase the future value of an otherwise identical cash flow stream.

Continuous compounding will result in a higher present value relative to an otherwise identical investment that is
compounded monthly at the same nominal rate.

The FVIFA (i%, N periods) equals the sum of the PVIF(i%, n) for n=1 to N periods.

21. You expect to deposit the following cash flows at the end of years 1 through 5, $1,000; $4,000; $9,000; $5,000; and $2,000
respectively. Alternatively, you could deposit a single amount today at the beginning of year 1 (end of year 0). How large does
the single deposit need to be today if you can earn 10% compounded annually? Hint: the present value today (t=0) is identical to
the single cash flow amount.

$15,633.62 $21,000.00 $25,178.10 $27,695.91

The valuation of long-term securities
What is the market value of a $1,000 face-value bond with a 10 percent coupon rate when the market's rate of return is 9 percent?

More than its face value. Less than its face value. $1,000
 2. If the intrinsic value of a share of common stock is less than its market value, which of the following is the most reasonable
conclusion?

The stock has a low level of risk.

The stock offers a high dividend payout ratio.

The market is undervaluing the stock.

The market is overvaluing the stock.

3. When the market's required rate of return for a particular bond is less than its coupon rate, the bond is referred to as a
__________.

premium bond discount bond par bond face bond

4. If an investor may have to sell a bond prior to maturity and interest rates have risen since the bond was purchased, the investor
is exposed to __________.

the coupon effect

interest rate risk

a perpetuity

an indefinite maturity

5. Beta Budget Brooms will pay a big $2 dividend next year on its common stock, which is currently selling at $50 per share.
What is the market's required return on this investment if the dividend is expected to grow at 5% forever?

4% 5% 7% 9%

6. If a coupon bond sells at a large discount from par, then which of the following relationships holds true? (P0 > represents the
price of a bond and YTM is the bond's yield to maturity.)

P0 < par and YTM > the coupon rate.

P0 > par and YTM > the coupon rate.

P0 > par and YTM < the coupon rate.

P0 < par and YTM < the coupon rate.

7. Market interest rates and the prices of bonds in the secondary market:

generally move in opposite directions.

generally move in the same direction.

sometimes move in the same direction, sometimes in opposite directions.

have no relationship with each other (i.e., they are independent).

8. In the formula ke = (D1/P0) + g, what does (D1/P0) represent?

The expected capital gains yield from a common stock.

The expected dividend yield from a common stock.

The dividend yield from a preferred stock.

The interest payment from a bond.

9. Which of the following best describes going-concern value?

The price a security "ought to have" based on all factors bearing on valuation.

The amount a firm could be sold for as a continuing operating business.

The amount of money that could be realized if an asset or a group of assets is sold separately from its operating
organization.

The market price at which an asset trades.

10. Which of the following best describes liquidation value?

The price a security "ought to have" based on all factors bearing on valuation.

The amount a firm could be sold for as a continuing operating business.

The amount of money that could be realized if an asset or a group of assets is sold separately from its operating
organization.

The market price at which an asset trades.

11. Which of the following best describes intrinsic value?

The price a security "ought to have" based on all factors bearing on valuation.

The amount a firm could be sold for as a continuing operating business.

The amount of money that could be realized if an asset or a group of assets is sold separately from its operating
organization.

The market price at which an asset trades.

12. What is the intrinsic value of a $1,000 face value, zero-coupon bond that matures in 20 years if an investor's required rate of
return for the bond is 8%? (Assume annual discounting.)

$1,373.87 $705.46 $376.89 $214.55

13. What is the intrinsic value of a $1,000 face value, 8% coupon paying perpetual bond if an investor's required rate of return is
6%? (Assume annual interest payments and discounting.)

$1,333.33

$1,000.00

$750.00

Impossible to value this bond since no final maturity date is provided.

14. A $250 face value share of preferred stock, pays a $20 annual dividend and investors require a 7% return on this investment.
If the security is currently selling for $276, what is the difference (overvaluation) between its intrinsic and market value (rounded
to the nearest whole dollar)?

Approximately $26.

Approximately $10.

Approximately $6.

Approximately $1.

15. WeeWiggly Woodcarvers (WWW) common stock is currently expected to maintain its current earnings level indefinitely
(earnings will stay at the current $4.00 per share). Investors in WWW expect to earn 10% on this investment since the firm
anticipates retaining only 10% of earnings. What is the intrinsic value of a share of WWW?

$4 $36 $40

It is not possible to calculate the intrinsic value since there is important information missing from the problem.
 16. You have been asked to determine the intrinsic value of a share of Quick Quilters, Inc. (QQ) common stock. The stock most
recently paid a $2.00 annual dividend (D0). You expect dividends to grow at a supernormal rate of 15% for the next three years.
You then expect that dividends will grow at a normal 5% rate thereafter (indefinitely). As a potential investor, you would expect
to earn 10% on this investment. What is the intrinsic value of a share of QQ?

$21.00 $52.01 $56.03 $63.88

17. What is the earnings multiplier for a firm that is expected to grow annually at 15%, retain 20% of earnings, and require a
20% rate of return for investors?

16 4 5.33 1.33

18. What is the approximate yield to maturity (YTM) of a bond that is currently selling for $1,150 in the market place? The
annual bond has 20 years remaining until maturity and pays a 14% coupon. (Assume annual interest payments and discounting.)

14% 12% 7% 6%

19. What is the yield on a share of preferred stock, which has a $100 par value and is currently selling for $140 in the market
place? The share of preferred stock pays a 14% annual dividend.

19.6% 14% 10% 5.6%

20. Which of the following accurately describes the behavior of bond prices?

For a given change in market required rate of return, the price of a bond will change by proportionally less, the lower the
coupon.

For a given change in the market required rate of return, the price of a bond will change by a smaller amount, the longer its
maturity.

If interest rates rise so that the market required rate of return increases, the bond's price will fall.

When the market required rate of return equals the stated coupon rate, the price of the bond be greater than its face value.
(Assume annual interest payments and discounting.)
Risk and returns
The firm of Sun and Moon purchased a share of Acme.com common stock exactly one year ago for $45. During the past year the
common stock paid an annual dividend of $2.40. The firm sold the security today for $85. What is the rate of return the firm has
earned?

5.3% 194.2% 88.9% 94.2%

2. A set of possible values that a random variable can assume and their associated probabilities of occurrence are referred to as
__________.

probability distribution

the expected return

the standard deviation

coefficient of variation

3. A statistical measure of the variability of a distribution around its mean is referred to as __________.

a probability distribution

the expected return

the standard deviation

coefficient of variation
4. The ratio of the standard deviation of a distribution to the mean of that distribution is referred to as __________.

a probability distribution

the expected return

the standard deviation

coefficient of variation

5. The weighted average of possible returns, with the weights being the probabilities of occurrence is referred to as __________.

a probability distribution

the expected return

the standard deviation

coefficient of variation

6. Clive Rodney Megabucks offers your friend, Melanie, an interesting gamble involving giving her the choice of the contents in
one of two sealed, identical-looking boxes. One box has $20,000 in cash and the second has nothing inside. There is an equal
probability that the chosen box contains cash versus nothing. Melanie states that she would not call off the gamble if you offered
her a certain $10,999 instead of her choice of box. However, she would be indifferent if $11,000 was offered in place of the risky
gamble; and she would definitely take $11,001 to call off the gamble. We would describe Melanie as __________ in this
instance.

being risk averse

being risk indifferent

having a risk preference

7. Clive Rodney Megabucks offers your friend, Yunyoung, an interesting gamble involving giving her the choice of the contents
in one of two sealed, identical-looking boxes. One box has $20,000 in cash and the second has nothing inside. There is an equal
probability that the chosen box contains cash versus nothing. Yunyoung states that she would not call off the gamble if you
offered her a certain $4,999 instead of her choice of box. However, she would be indifferent if $5,000 was offered in place of the
risky gamble; and she would definitely take $5,001 to call off the gamble. We would describe Yunyoung as __________ in this
instance.

being risk averse

being risk indifferent

having a risk preference

8. Which of the following statements regarding covariance is correct?

Covariance always lies in the range -1 to +1.

Covariance, because it involves a squared value, must always be a positive number (or zero).

Low covariances among returns for different securities leads to high portfolio risk.

Covariances can take on positive, negative, or zero values.

9. Which of the following portfolio statistics statements is correct?

A portfolio's expected return is a simple weighted average of expected returns of the individual securities comprising the
portfolio.

A portfolio's standard deviation of return is a simple weighted average of individual security return standard deviations.

The square root of a portfolio's standard deviation of return equals its variance.

The square root of a portfolio's standard deviation of return equals its coefficient of variation.
10. Total portfolio risk is __________.

equal to systematic risk plus nondiversifiable risk

equal to avoidable risk plus diversifiable risk

equal to systematic risk plus unavoidable risk

equal to systematic risk plus diversifiable risk

11.__________ is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable
through diversification.

Systematic risk

Standard deviation.

Unsystematic risk

Coefficient of variation.

12.__________ is the variability of return on stocks or portfolios associated with changes in return on the market as a whole.

Systematic risk

Standard deviation

Unsystematic risk

Coefficient of variation

13. Which of the following indexes would be most the appropriate proxy to measure the return of the market portfolio in the
CAPM?

Dow Jones Industrial Index.

Standard & Poor's 500.

Solomon Brothers Bond Index.

Wilshire Gold Index.

14. The __________ describes the linear relationship between expected rates of return for individual securities (or portfolios)
and __________.

characteristic line; standard deviation

characteristic line; beta

security market line; standard deviation

security market line; beta

15. The __________ describes the relationship between an individual security's returns and returns on the market portfolio. The
slope of this line is __________.

security market line; beta

characteristic line; beta

security market line; equal to +1.

characteristic line; equal to +1

16. Which of the following items describes an index measure of systematic risk?

Beta. Standard deviation.

Coefficent of variation. Variance.

 17. Which of the following items is a model that describes the relationship between risk and expected return (in this model the
expected return is equal to the risk-free return plus a premium based on the systematic risk of the security)?

Beta.

Characteristic line.

Capital asset pricing model.

Efficient markets model.

18. What is the beta for an average risk security? What is the beta for a Treasury bill?

1; 0. 0; 1. Greater than 1; 1. 1; Greater than 1.

Assume that a firm's common stock can be valued using the constant dividend growth model. As an analyst you expect that the
return on the market will be 15% and the risk-free rate is 7%. You have estimated that the dividend next period will be $1.50, the
firm will grow at a constant 6%, and the firm beta is 0.50. The common stock is currently selling for $30.00 in the market place.
Which of the following statements is correct?

The firm's stock is over priced.

The firm's stock is fairly priced.

The firm's stock is under priced.

The firm's stock cannot be valued because of missing information.

20. Which form of market efficiency states that current security prices fully reflect all information, both public and private?

Weak. Semi-strong. Strong.

21. Which form of market efficiency states that current prices fully reflect the historical sequence of prices?

Weak. Semi-strong. Strong.

22. Which form of market efficiency states that current prices fully reflect all publicly available information?

Weak. Semi-strong. Strong.

Mergers and other forms of corporate restructuring
1. A firm that acquires another firm as part of its strategy to sell off assets, cut costs, and operate the remaining assets more
efficiently is engaging in __________.

a strategic acquisition

a financial acquisition

two-tier tender offer

shark repellent

2. A would-be acquirer's offer to buy stock directly from shareholders is referred to as __________.

a white knight a joint venture a tender offer a takeover

3. The restructuring of a firm should be undertaken if __________.

the restructuring is expected to create value for shareholders

the restructuring is expected to increase earnings per share (EPS) next year

the restructuring is expected to increase the firm's market share power within the industry

the current employees will receive additional stock options to align employee interest
 4. Economies of scale, market share dominance, and technological advances are reasons most likely to be offered to justify a
__________.

financial acquisition

strategic acquisition

divestiture

supermajority merger approval provision

5. Suppose that the market price per share of Company A is $100 and that of Company B is $40. If A offers one-half (1/2) a
share of common stock for each share of B, the exchange ratio with respect to market prices would be __________.

0.40 0.80 1.25 2.50

6. A reason suggested by the authors for a divestiture, such as a sell-off or spin-off, is __________.

synergy reverse synergy hubris economies of scale

7. What is the most likely reason that a firm (who is highly profitable) might consider acquiring a firm that has had large recent
losses and will continue to have losses into the near future?

Hubris. White knight. Tax-loss usage. Increase assets.

8. Richard Roll makes a case with the __________ hypothesis that takeovers are motivated by bidder pride and confidence in
their abilities relative to others.

Hubris efficient markets management success synergy

9. A merger that signals to the investors in the market place a change in strategy or operating efficiency that can not be conveyed
in another manner is referred to as __________.

the information effect

the wealth effect

strategic effect

bootstrapping effect

10. A firm that acquires another firm as part of its overall business strategy is engaging in __________.

a strategic acquisition

a financial acquisition

a two-tier tender offer

a shark repellent

11. The average takeover premium a target firm has historically received is closest to which of the following percentages?

5% 12% 30% 80%

12. What remains after we subtract operating costs and capital expenditures necessary to at least sustain cash flows from total
firm revenues?

Free cash flows.

Strategic cash flows.

Net income.

Earnings before interest and taxes (EBIT).

13. How should a successful acquisition be evaluated in the long-run?

The acquisition is successful if the acquirer is able to increase its earnings per share (EPS), relative to what it would
have been without the acquisition.

The acquisition is successful if the acquirer is able to reduce its debt-to-total asset ratio, and hence risk, relative to
what it would have been without the acquisition.

The acquisition is successful if the acquirer is able to diversify its asset base and reduce its overall risk.

The acquisition is successful if the market price of the acquirer's stock increases over what it would have been
without the acquisition.

14. What is the landmark piece of legislation designed to promote competition by combating monopolistic behaviors through
antitrust law?

The Securities Act of 1933.

The Securities Act of 1934.

The Antitrust Act of 1915.

The Clayton Act.

15. A firm can acquire another firm __________.

only by purchasing the assets of the target firm

only by purchasing the common stock of the target firm

by either purchasing the assets or the common equity of the target firm.

None of the above are methods of acquiring the target firm

16. Which of the following hypotheses attempt to explain the motivation behind creating barriers to receiving unsolicited
takeover offers?

Only the managerial entrenchment hypothesis.

Only the shareholders' interest hypothesis.

Only the takeover barrier hypothesis.

Both the first and second answers are hypotheses that attempt to explain this motivation.

17. What is a business organizational model that involves the large-scale outsourcing of business functions?

Virtual corporation.

Joint venture.

Corporate liquidation.

Equity carve-out.

18. A bidder that offers a higher price to the first fixed quantity of shares tendered and a lower second price for all remaining
shares is engaging in __________.

a strategic acquisition

a financial acquisition

a two-tier tender offer

shark repellent
19. How do you refer to the public sale of stock in a subsidiary in which the parent usually retains majority control?

Virtual corporation.

Joint venture.

Corporate liquidation.

Equity carve-out.

20. By using a __________, the firm can independently control considerable assets with a very limited amount of equity.

joint venture

leveraged buyout (LBO)

spin-off

consolidation

21. As discussed in the text, the creation of a global 24-hour news and information cable network called MSNBC is an example
of a __________.

strategic acquisition

financial acquisition

joint venture

virtual corporation