88 CFA Sample Exam Level 2 Questions on Corporate Finance

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Acquirer in hostile takeover offers to buy shares directly from the target shareholders and each shareholder either accepts or rejects offer

• Bear Hug
• Spin-Off
• Cash Offering
• Tender Offer

Creating a new, independent company by giving its equity to current shareholders and parent company gets no cash in transaction

• Bear Hug
• Spin-Off
• Poison Put
• Split-Off

When managers are allowed to increase their allocated capital budget if they can justify to senior management that the additional funds will create shareholder value

• Soft Capital Rationing
• Forward Integration
• Hard Capital Rationing
• Fundamental Options

After a hostile takeover offer, the target can defend itself by making a counteroffer to acquire the acquirer

• Expansion Options
• Pac-Man Defense
• White Squire Defense
• White Knight Defense

-Divides operating cash flows based on claims of debt and equityholders that provide capital to the company, and the sum of the present values of the claims is the value of the company

• Liquidation
• Price Setting Option
• Expansion Options
• Claims Valuation Approach

System of principles, policies, procedures and clearly defined responsibilities and accountabilities used by stakeholders to overcome conflicts of interest

• Corporate Governance
• Accounting Income
• Cash Offering
• Objectives of Corporate Governance

-Reflect the sale of the old asset in the calculation of the initial outlay-Calculate the incremental operating cash flows as the cash flows from the new asst minus the cash flow from the old asset

• Equivalent Annual Annuity Approach
• Key Differences in Evaluating a Replacement Project
• Target Payout Ratio Adjustment Model
• Long-Term Residual Dividend Model

Acquirer moves down the supply chain towards the raw materials

• Backward Integration
• Timing Options
• Consolidation
• Liquidation

-Dividends based on earnings less funds the firm retains to finance the equity portion of its capital budget-Model based on investment opportunity schedule, target capital structure, access to and cost of external capital

• Residual Income
• Real Options
• Subsidiary Merger
• Residual Dividend Model

A winner of a bidding war likely paid too much for the company

• Bonding Costs
• Winner's Curse
• Residual Income
• Horizontal Merger