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3 Feb 2019

1.
As far as the managerial talent of the target is concerned:
A) the manner in which the acquirer plans to deal with the managerial talent will affect the estimated cash flows to be generated by the target.
B) downsizing will reduce expenses and increase productivity and revenues.
C) governments of some countries are likely to intervene and prevent the acquisition if downsizing is anticipated.
D) A and C only.
E) all of the above.


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Over the past few years, the number of start-up companies attracted to either doing business themselves in the cloud, or specifically creating applications for others to use in the cloud, has grown significantly. A few but very promising enterprises have launched applications in “container” technology, which enables companies, programmers, or other enterprises to both launch and run applications solely in the cloud. There is still a lot of room in this emerging marketplace, and you are diving in. The product you’ve developed has a unique angle to tap into the local-grown/local-made/local-paid movement that’s also growing larger every day. Your initial market is your own small city, which operates independently but which is linked economically and via public safety provision to another small city sitting directly across a river separating the two. Once you’ve been able to launch your company in your city, you plan to approach the “sister city” leaders, then the county, state, and eventually go national. It’s too soon now, but your future plans entail an IPO offering to accomplish all this. Eventually, you hope to be able to re-imagine your product to go global. You have big plans, are close to being tapped out financially and you now need to plan for additional investors. Address the following considerations as they apply to your product launch. 1.Describe an agency relationship and how it may/will take shape for your small company. As the sole employee and investor in your startup, what agency conflicts might arise? 2.Six months have transpired, and you’ve been able to add two employees. In this new arrangement, what agency disputes might now develop that need to be addressed, and how might you address them? What resources do you need to use or consider? 3.Another three months have passed. You are now ready to expand to your sister city and you need more capital. You decide the wisest path is to sell some stock to outside investors, but you will maintain control over your company by holding onto the majority of the stock. In this new scenario, what type of agency conflict might occur? How can you address this in advance? 4.The IPO was a success, and you have a robust number of shareholders. With board support, you determine it is time to hire a financial manager to help your firm achieve current goals and set new ones appropriate to the firm’s growth strategy. What professional strengths and skills will an individual seeking this position need to possess? 5.Another consideration you feel you need to address at this point, now that your firm’s stock is publicly traded, is how to sustain the high ethical standards you’ve fostered thus far as you move into the firm’s future. What strategies can your management team implement to conduct your business with both personal and professional integrity? What steps can you take to ensure that ethical considerations for financial and other management decisions are embedded into the firm’s culture? 6.Congratulations - you are now at Year One, and everything is moving along faster than you anticipated. While this is great, you are at the point where you need to raise additional capital from outside lenders. With this decision, what type of agency costs might the company incur? How might a lender mitigate any agency costs? 7.Year Two rolls around. Your company has been able to expand beyond your local communities and into to localities and governments in half the counties of the state. The stakes are getting bigger and you welcome the idea of high-level input to ensure the company keeps growing and expanding. You cash out the majority of your stock and turn the company over to an elected board of directors. Neither you nor any other stockholders own a controlling interest (which is also the situation at most public companies). List six potential managerial behaviors the new board might take that could harm your company’s value, and what steps overall can put into place to avoid or mitigate these. 8.You are also aware from your prior career and from your research, that corporate governance can affect shareholder value. This greatly concerns you, as you still have lofty plans for your company’s growth and eventual global trajectory. Questions you’ve identified that need to be addressed at this stage include: a) What is corporate governance?; b) What five corporate governance provisions are internal to a firm and are under its control?; c) What characteristics of the board of directors usually lead to effective corporate governance?; d) What characteristics of the board of directors signal ineffective or problematic governance practices?; e) How can regulatory agencies and legal systems affect corporate governance? If there are differences in local versus national levels, expand upon these. 9.Lastly, one of your new board members is very concerned with “blockholders.” What is block ownership? How does it affect corporate governance? Explain the pros and cons.

1) The subarea of finance where you need to value uncertain cash flows occurring at different points in time is:

a. investments

b. corporate finance

c. capital markets

d. bank management.

e. all of the above subareas

2) Which of the following statements is correct?

a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.

b. Corporations face fewer regulations than sole proprietorships.

c. One disadvantage of operating a business as a sole proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the Owner level.

d. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents ace required.

e. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

3) Which of the following statements is correct?

a. Corporations generally face fewer regulations than sole proprietorships.

b. Corporate shareholders are exposed to unlimited liability.

c. It is usually easier to transfer ownership in a corporation than in a partnership.

d. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.

e. Less of a corporation's income is generally subject to federal taxes.

4) The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to:

a. Maximize its expected total corporate income.

b. Maximize its expected EPS.

c. Minimize the chances of losses.

d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.

e. Maximize the stock price on a specific target date.

5) Which of the following is correct?

a. In most corporations, the CFO ranks above the CEO.

b. By Law in most states, the chairman of the board must also be the CEO.

c. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.

d. The CFO generally reports to the firm's chief accounting officer, who is normally the controller.

e. The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility.

6) The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

a. Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth.

b. Maximize the firm’s expected EPS, which must also maximize the firm’s price per share.

c. Minimize the firm’s risks because most stockholders dislike risk in turn, this will maximize the firm’s stock price.

d. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.

e. Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.

7) Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?

a. Compensating managers with stock options.

b. Financing risky projects with additional debt.

c. The threat of hostile takeovers.

d. The use of covenants in bond agreements that limit the firm’s use of additional debt and constrain managers' actions.

e. Abolishing the Security and Exchange Commission.

8) Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

a. Pay managers large cash salaries and give them no stock options.

b. Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.

c. Beef up the restrictive covenants in the firm’s debt agreements.

d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm’s stock.

e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

9) Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

a. Decrease the use of restrictive covenants in bond agreements.

b. Take actions that reduce the possibility of a hostile takeover.

c. Elect a board of directors tlta.t allows managers greater freedom of action.

d. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

e. Eliminate a requirement that members of the board of directors have a substantial investment in the firm’s stock.

10) Which of the following is correct?

a. Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.

b. Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.

c. There is no good reason to expect a firm’s stockholders and bondholders to react differently to the types of assets in which it invests.

d. Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.

e. Bondholders should generally be happier titan stockholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.

11) You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction?

a. This is an example of a direct transfer of capital

b. This is an example of a primary market transaction.

c. This is an example of an exchange of physical assets.

d. This is an example of a money market transaction.

e. This is an example of a derivative market transaction.

12) Which of the following statements is correct?

a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically.

b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.

c. Capital market instruments include both long-term debt and common stocks.

d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.

e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

13) Which of the following is a primary market transaction?

a. You sell 200 shares of IBM stock on the NYSE through your broker.

b. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you just give him cash and he gives you the stock.

c. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.

d. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction.

e. IBM sells 2,000.000 shares of treasury stock to its employees when they exercise options that were granted in prior years.

14) Money Markets are markets for:

a. Foreign currencies.

b. Consumer automobile loans.

c. Common stocks.

d. Long-term bonds.

e. Short-term debt securities such as Treasury bills and commercial paper.

15) You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:

a. A money market transaction.

b. A primary market transaction.

c. A secondary market transaction.

d. A futures market transaction.

e. An over-the-counter market transaction.

16) Which of the following statements is correct?

a. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.

b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.

c. Hedge funds have more in common with investment banks than with any other type of financial institution.

d. Hedge funds have more in common with commercial banks than with any other type of financial institution.

e. Hedge funds are not as highly regulated as most other types of financial institutions.

17) Which of the following factors statements is correct?

a. The New York Stock Exchange is an auction market, and it has a physical location.

b. Home mortgage loans are traded in the money market.

c. If an investor sells shares of stock through a broker, then it would be a primary market transaction.

d. Capital markets deal only with common stocks and other equity securities.

e. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

18) Which of the following statements is correct?

a. The term "IPO" stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public.

b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public.

c. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.

d. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed.

e. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell.

19) The stock market is thought to be efficient because:

a. There are many brokers working the exchange floors

b. Computers can make very fast calculations these days

c. There are many stock analysts following the same stocks

d. Stocks are available and are very inexpensive

e. Speed trading is now an acceptable trading technique

20) If the stock is priced correctly but with better management the firm could be worth even more, then the firm would be:

a. A potential target for a stock investor

b. A potential target for a private equity firm

c. A potential target for a bond fund

d. A potential target for the SEC

e. A potential target for share repurchases

Scenario: Your team has been hired to provide financial analysis for a start-up company, Bobble in Style, which produces customized bobble heads. The bobble heads are made out of less rigid materials and are more true to life than those of competitors. The company inventors, Mr. and Mrs. Lee, are going to pitch their idea to Shark Tank in a few months, but first they need to have a better understanding of the business financials. The Lee’s are already creating and selling their product from their home-based office and work area. They know what costs are involved with making the bobble heads on a small scale, but they don’t have an understanding of financial figures beyond basic costs. They need you to make sense of various financial figures for them.

1. Financial Statements: Develop an Income Statement, Cash Flow Statement, and Balance Sheet based on the provided data for year 20XX (the previous year) that follows. Explain the purpose of each financial statement.

a. Income Statement Data for 20XX:

* Gross Sales = $33,291

* Coupons and Discounts = $549

*Cost of Goods = $10,276

* Labor = $0 (Mr. and Mr. Lee were the only ones working and did not pay themselves)

* advertising fees =$2000

* bank fees = $120

* phone/internet = $1200

* shipping = $1380

* utilities = $900

* office supplies = $785

* Income tax = 26 %

B. Cash Flow Statement Data for 20XX:

* Cash in bank = $21,120

* Depreciation = $800

* Proceeds from disposal of investment = $3,000

* Capital Expenditure = -$1,600

* Repayment of Bank Loan = -$5,000

* Interest Expense Associated with Bank Loan = -$345

* Consider any data relevant from the income statement.

C. Balance Sheet Data for 20XX:

* Cash = $21,120

* Accounts Receivable = $496

* Accounts Payable = $200

* Inventory = $10,507

* Accumulated Depreciation = -$1,000

* Common Stock = $0

2. Financial Ratios: Calculate the following financial ratios and explain the meaning of the results.

a. Net Profit Margin

b. Quick Ratio

c. Debt-to-Equity Ratio

3. Cost Classification: The Lee’s have provided you with the following costs and relevant information that are assumed for year 20XY. Classify the costs as variable costs or fixed costs. Explain the importance of distinguishing between variable and fixed costs. If business is expected to be steady from month to month, provide a monthly budget based on these figures.

a. Advertising Fees = $4,000

b. Labor = $400/month

One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month.

c. Packaging Supplies = $3,000

d. Office Supplies = $800

e. Phone and Internet Service = $115/month

f. Product Supplies = $9,000

g. Shipping Fees = $1,000/month

h. Conference Exhibitor Fee = $3,000

i. Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1,200

j. Utilities for the Home Workshop = $105/month

4. Net Present Value: The Lees are considering adding a new piece of equipment that will speed up the process of building the bobble heads. The cost of the piece of equipment is $42,000. It is expected that the new piece of equipment will lead to cash flows of $17,000, $29,000, and $40,000 over the next 3 years. If the appropriate discount rate is 12%, what is the NPV of this investment? Explain the findings.

5. Budget Preparation: The Lees believe that there production could quadruple in one month after being on Shark Tank. They want to be prepared for this. Based on the monthly budget calculated above, create a new monthly budget for quadrupled production. Assume that 70 units were produced in the first budget and 280 units will be produced per month with the new budget.

6. Incremental Analysis: If production does increase dramatically after their presentation on Shark Tank, the Lees will need more space for production. They have two options. Option 1 is to rent out a spacious warehouse nearby. If they pursue this option, there rent will be $1,200 per month and utilities are estimated to cost an additional $350 per month. Their second option, Option 2, is to rent a smaller storefront space that is also nearby. The storefront rent is $1350 per month. However, utilities will likely only cost an additional $150 per month. They want to compare their options over one year’s time (since each rental contract is a 1 year commitment). What is the incremental analysis if the Lees choose Option 1 over Option 2?

7. Break-Even Analysis: You have been asked to calculate how many units need to be sold to break even, based on the costs provided in task #3. Assume that only one conference will be attended and the estimated expenses associated with this conference are on target. Also assume that the value for total units per year is based on sales of 70 units per month. Therefore total units sold per year are 840. The selling price per unit is $79.

8. Contribution Margin: Based on the Break-Even Analysis just performed, what is the contribution margin per unit?

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