91 CFA Level 2 Mock Exam 2015 Questions and Answers on Corporate Finance

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results in a probability distribution of project NPV outcomes

• managerial hubris
• half year convention
• consolidation
• monte carlo simulation

1. investment opportunities2. expected volatility of future earnings3. financial flexibility4. tax considerations5. flotation costs6. contractual and legal restrictions

• market value added (MVA)
• bird-in-hand argument for dividend policy
• corporate governance
• factors that affect dividend policy

it has no effect on the price of a firm's stock or its cost of capital

• dividend irrelevance
• terminal value
• depreciable basis
• dividend safety

"just say no" defenselitigationgreenmailshare repurchaseleveraged capitalizationcrown jewel defensepac man defensewhite knight defensewhite squire defense

• Pre-offer defense mechanisms
• conglomerate merger
• takeover premium
• post-offer defense mechanisms

in many countries, dividends have historically been taxed at higher rates than capital gains. investors will prefer to not receive dividends due to their higher tax rates.

• tax aversion
• ESG factors
• takeover premium
• Cash flows

= NI + NCC + (INT * (1-t)) - FCinv - WCinv

• split offs
• FCFF
• NWCInv
• DCF

It arises when one group delegates decision making or control to another group. This relationship may be affected by the fact that each is motivated by self-interest, yet their interests may not be well aligned. E.g. CEO uses private jet for personal reasons.

• Equivalent annual annuity
• expansion option
• FCFE coverage ratio
• principal-agent relationship

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

• timing option
• Utilitarianism
• soft capital rationing
• bootstrapping

Posion pillpoison put - give bondholders option to demand immediate payment if there is hostile takeoverrestrictive takeover lawsstaggered boardrestricted voting rightssupermajority voting provision for mergersfair price amendementgolden parachutes

• dividend irrelevance
• takeover premium
• FCFE coverage ratio
• Pre-offer defense mechanisms

acquirer purchase the target company's assets, and payment is made directly to the target company- unless assets are substantial, approval is not required- no direct tax consequences for the shareholder- usually focus specific parts of the company

• stock purchase
• split offs
• split rate
• asset purchase

Environmental risk, social risk, governance risk

• DCF
• Externality
• Cash flows
• ESG factors

Based on Asymmetric information, it is related to the signals management sends to investors1. internally generated equity (most favored)2. debt3. external equity (least favored)

• ESG factors
• rights theories
• pecking order theory
• static trade-off theory