Q1 Current events/ Corporate governance (9 points)
Staggered boards or “classified” boards are boards in which the different directors’ terms expire
during different years. As the figure highlights, there has been a big decrease in the number of
S&P500 firms with staggered boards since 2005.
1. Explain how staggered boards can be a powerful anti-takeover mechanism (4 points, 4
"Classified" boards or “staggered” boards are boards in which directors serve staggered,
multiyear terms. It is a powerful anti-takeover mechanism because it limits the ability for
outsiders to replace the entire board quickly. If every board director had a one-year term,
it would make the replacement of the board (with pro-bidder people) much easier. Hence
staggered board serves as a deterrent for outside shareholders to make a bid on a badly
2. Other than staggered boards, give one example of an anti-takeover measure at the
disposition of entrenched management and briefly explain how it works (3 points, 3
a. Scorched-earth strategy (increase debt massively, sell crown jewels, etc.) These
are actions that make the acquisition much less attractive. The key is to “poison
the well”: Make the firm worse off to deter a takeover but making sure it doesn’t
get into financial distress or wreck shareholder value in the process! b. Poison pill: Rule in by-laws of a firm that allows firm to make an extremely
dilutive share issuance hurting/targeting specifically the shareholder that has gone
beyond a certain threshold (e.g. 15%) in terms of ownership. All other
shareholders can buy the new shares for almost nothing, maintaining their stake
while the bidder loses everything.
3. By looking at the downward trend observed in the number of S&P500 firms with
staggered boards over the last few years, what can you infer about the evolution of
corporate governance for S&P500 firms since 2005? (2 points, 2 sentences max.)
"Classified" boards used to be the norm in the U.S. But in recent years many
companies, often under pressure from shareholders, have shifted to holding
annual election for every board seat. This is part of a large push towards better
corporate governance under the pressure of many large and active shareholders
such as Calpers. Q3 Current events / Payout policy (4 points)
Cisco had more than $40Bn in cash and marketable securities at the end of 2011, of which $35
billion are in foreign subsidiaries.
Long gone are the days of high growth for Cisco and Ralph Nader, a famous activist and
disgruntled shareholder of Cisco, has recently demanded the firm to start paying out a bigger
dividend than what it already pays out.
What would be the biggest disadvantage of a $10Bn one-off special dividend from a
shareholders’ perspective beyond the dividend income tax of 15%?
(4 points, justify your answer to get full credit, two sentences max.)
Correct answer: It is the fact that most of the cash is sitting outside of the US and will be taxed
up to 35% if it is brought back to the U.S. to pay a dividend. I specifically provide the
information that only $5Bn of Cisco’s cash is sitting in U.S. accounts.
Potential invalid answers:
i. Costs of financial distress (lack of financial flexibility, etc.). Wrong: Still have plenty
of cash and free cash flow after the payout.
ii. Managers will be under pressure to keep up with high payments. Wrong: It is a one-
off special dividend not a permanent increase. More importantly, I specifically ask the
question from the perspective of shareholders, not managers. iii. It could be a bad signal to the market: Slower growth ahead. But it is already a low
growth firm. I have explicitly put this fact in the text to avoid that issue.
Q10 M&A and valuation (21 points = 4+6+4+4+1+2)
Imagine your firm, BC semiconductors, is considering acquiring a long-time competitor
Georgetown Semiconductors. Before your firm makes an offer, the Board and CEO want to
know the standalone value of Georgetown Semiconductors and the value of that firm once it
would be under the control of BC semiconductors. As CFO, you were asked to perform this
Part I: Standalone evaluation
Your team of financial analysts came up with the following information on Georgetown
1. Its fiscal year just finished. It generated the following:
i. Revenues of $12,046MM
ii. EBIT of $391.38MM
iii. Capital expenditures of $475MM
iv. Depreciation of $461MM
2. Net working capital is 15% of revenues every