Corporate Issuers - Governance and Uses and Sources of Funds

Which of the following most likely represents a principal–agent conflict between shareholders and management?

• Risk tolerance

• Multiple share classes

• Accounting and reporting practices

Which of the following issues discussed at a shareholders’ general meeting

would most likely require only a simple majority vote for approval?

• Voting on a merger

• Election of directors

• Amendments to bylaws

Corporate governance:

• complies with a set of global standards.

• is independent of both shareholder theory and stakeholder theory.

• seeks to minimize and manage conflicting interests between insiders and external shareholders.

Which of the following statements about environmental, social, and governance

(ESG) in investment analysis is correct?

• ESG factors are strictly intangible in nature.

• ESG terminology is easily distinguishable among investors.

• Environmental and social factors have been adopted in investment analysis more slowly than governance factors.

Which of the following statements regarding corporate shareholders is most

accurate?

• Cross-shareholdings

  help promote corporate mergers.

• Dual-class

  structures are used to align economic ownership with control.

• Affiliated shareholders can protect a company against hostile takeover bids.

A three-year investment requires an initial outlay of £1,000. It is expected to

provide three year-end cash flows of £200 plus a net salvage value of £700 at the

end of three years. Its internal rate of return is closest to:

• 10%.

• 11%

• 20%

An investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in

Year 2, and $120 in Year 3. The required rate of return is 20%. The net present

value is closest to:

• $42.22.

• $58.33.

• $68.52.

The Bearing Corp. invests only in positive-NPV projects. Which of the following

statements is true?

• Bearing’s return on invested capital (ROIC) is greater than its cost of capital (COC).

• Bearing’s COC is greater than its ROIC.

• We can’t reach any conclusions about the relationship between the company’s

  ROIC and COC.

With regard to capital allocation, an appropriate estimate of the incremental

cash flows from an investment is least likely to include:

• externalities.

• interest costs.

• opportunity costs.

Suppose thee internal auditor for Bouchard Industries has made two suggestions for improving capital allocation processes at the company. The internal auditor’s suggestions are as follows:

Suggestion 1 “In order to treat all capital allocation proposals in a fair manner, the investments should all use the risk- free rate for the required rate of return.”

Suggestion 2 “When rationing capital, it is better to choose the portfolio of investments that maximizes the company NPV than the portfolio that maximizes the company IRR.”

Should the capital allocation committee accept the internal auditor’s suggestions?

• No for Suggestions 1 and 2

• No for Suggestion 1 and yes for Suggestion 2

• Yes for Suggestion 1 and no for Suggestion 2