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Q:
Describe the goals of the Federal Reserve. What happens when these goals come into conflict? How would one decide if lower inflation is more important than lower unemployment? Explain.
Q:
Financial modeling refers to the application of spreadsheet software to define simple arithmetic relationships among variables within the firms income, balance sheet, and cash-flow statements and to define the interrelationships among the various financial statements. True or False
Q:
If inflation and unemployment are of direct concern to Fed officials, why do they make such a big issue about money growth and interest rates? Why don't they just target the unemployment rate and the inflation rate directly? Explain.
Q:
A clear statement of all assumptions underlying the models projections forces the analyst to display their biases and to be prepared to defend their assumptions to others. True or False
Q:
"The interest rate targeting strategy employed by the Fed in the 1960s and 1970s led to procyclical money growth." True, false, or uncertain? Why?
Q:
Complex models because of their greater sophistication are necessarily more accurate than simple models. True or False
Q:
In determining the initial offer price, the acquirer must decide how much of the anticipated synergy to share with the target firms shareholders. True or False
Q:
Explain why the use of an interest rate targeting strategy may result in procyclical monetary growth.
Q:
Why does the Fed use open market operations to a greater extent than reserve requirements in its conduct of monetary policy?
Q:
Net synergy is the difference between the present value of the estimated sources of value and destroyers of
value. True of False
Q:
Common size financial statements are among the most commonly used tools to uncover data irregularities. True or False
Q:
Distinguish between the three types of Fed discount loans: primary credit, secondary credit, and seasonal credit.
Q:
In normalizing historical data, monthly revenue may be aggregated into quarterly or even annual data to minimize possible distortions in earnings or cash flow due to inappropriate accounting practices. True or False
Q:
Explain how the Fed's use of its three tools of monetary policy affect supply and demand in the market for reserves and the equilibrium federal funds interest rate.
Q:
An important lesson from the 20072009 financial crisis is that central banks and other regulators should have a laissez-faire attitude and let credit-driven bubbles proceed without any reaction. Intervention is always a mistake.
Q:
If the target firms ratio of bad debt reserves as a percent of projected revenue is increasing, the analyst can be confident that the firm is boosting revenue by not reserving enough to cover probable future losses.
True or False
Q:
Pro forma financial statements are frequently used to show what the acquirer and targets combined
financial statements would look like if they were merged. True or False
Q:
The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.
Q:
The output of M&A models is only as good as the accuracy and timeliness of the numbers that are used to create the model and the quality of the assumptions used in making the projections. True or False
Q:
Decreased transparency of the monetary policy strategy through communication with the public and the markets about the plans and objectives of monetary policymakers is an element of inflation targeting.
Q:
Collar agreements are employed in all cash purchases of the targets stock to preserve the value of the purchase price for acquirer shareholders. True or False
Q:
An open market sale leads to an expansion of reserves and deposits in the banking system and hence to a decline in the monetary base and the money supply.
Q:
The share exchange ratio indicates the number of acquirer shares to be exchanged for each share of target stock based on the target firms current share price. True or False
Q:
Inflation targeting makes the central bank less accountable.
Q:
The share exchange ratio is defined as offer price divided by the target firms current share price. True or False
Q:
The current stock price of the acquiring firm may decline, reflecting a potential dilution of its EPS or a growth in EPS of the combined firms, which is less than the growth that investors had anticipated for the acquirer as a standalone business. True or False
Q:
Flexibility is a requirement in selecting an intermediate target.
Q:
Open market purchases by the Fed cause the federal funds rate to rise.
Q:
The effects of synergy resulting from combining the acquirer and target firms do not affect the acquirers ability to finance the transaction. True or False
Q:
Open market purchases by the Fed increase the supply of nonborrowed reserves.
Q:
The acquiring firms existing loan covenants need not be considered in determining the feasibility of acquiring the target firm. True or False
Q:
The federal funds rate is an operating target.
Q:
If the acquisition of the target is believed to be very important to implement the acquirers strategy, the acquirer should be willing to pay up to the maximum purchase price. True or False
Q:
The discount rate is an operating target.
Q:
The maximum purchase price is the minimum price plus the present value of sources of value. True or False
Q:
When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called frictional unemployment.
Q:
Minimum purchase price or initial offer price for a target is the targets standalone value or market value. True or False
Q:
An objective of the Federal Reserve in its conduct of monetary policy is high employment.
Q:
Cost savings are likely to be greatest when firms with dissimilar operations are consolidated. True or False
Q:
In response to an asset-price bubble, macroprudential regulation appears to be the right tool. What is macroprudential regulation?
A) Increasing the federal funds rate across the macroeconomy.
B) The use of tax incentives to capture some of the gains from bubbles.
C) Regulatory policy to affect what is happening in credit markets in the aggregate.
D) None of the above is correct.
Q:
Non-compliance with environmental laws, product liabilities, pending lawsuits, poor product quality, patents, poorly written or missing customer contracts, and high employee turnover are all considered destroyers of value. True or False
Q:
If the Fed wants to "prick" an asset-pricing bubble driven by a credit boom, what is the primary tool for accomplishing this?
A) Raising interest rates.
B) Lowering interest rates.
C) Increasing reserve requirements.
D) Taking a short position in the overpriced asset.
Q:
A target firms high employee turnover is often considered a destroyer of value. True or False
Q:
Which of the following statements is true?
A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity.
B) Bubbles driven solely by irrational exuberance lead to a failure of financial institutions.
C) Both A and B are correct.
D) Neither A nor B is correct.
Q:
The target firms underutilized borrowing capacity is often considered a source of value. True or False
Q:
Which of the following statements is true regarding the Fed's procedures for operating the discount window?
A) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.
B) The Fed's operating procedures and paying interest on reserves creates more fluctuation in the federal funds rate than if they simply didn't pay interest on reserves.
C) The Fed's operating procedures and paying interest on reserves has no impact on the fluctuation of the federal funds rate.
D) None of the above is correct.
Q:
During the 2007-2009 financial crisis, what actions did the Fed take to limit the scope of the crisis?
A) The Fed lowered the spread on the discount rate to 50 basis points, and then to 25.
B) The Fed set up the Term Auction Facility to provide further liquidity to banks.
C) The Fed purchased assets of Bear Stearns to facilitate the purchase of Bear Stearns by J.P. Morgan.
D) all of the above.
Q:
When the target firm is an operating division of a larger firm, it is common for the parent to provide services to the target at below market prices. In calculating the targets standalone value, it is necessary to subtract the difference between the market price of these services and actual cost paid to the parent from the target firms net income. True or False
Q:
Inflation targeting involves
A) a public announcement of medium-term numerical targets for inflation.
B) increased accountability of the central bank for attaining its inflation objectives.
C) an information-inclusive approach in which many variables are used in making decisions about monetary policy.
D) all of the above.
Q:
Net synergy may be estimated as the difference between the sum of the present values of the target and acquiring firms, including the effects of synergy, and the value of the target firm including the effects of synergy. True or False
Q:
What goals are continually mentioned by central bank officials when discussing the objectives of monetary policy?
A) High unemployment
B) Instability in foreign exchange markets
C) Interest-rate stability
D) All of the above
Q:
The present value of net synergy is the difference between the present value of projected cash flows from sources and destroyers of value. True or False
Q:
The type of open market operation intended to offset movements in other factors that affect reserves and the monetary base is
A) the dynamic open market operations.
B) the defensive open market operations.
C) the reserve requirements.
D) market equilibrium.
Q:
Projecting as many of the key income, cash flow, and balance sheet components as a percent of projected revenue helps to ensure the internal consistency of the model. True or False
Q:
Which type of open market operation is intended to change the level of reserves?
A) Defensive open market operations
B) Reserve requirements
C) Dynamic open market operations
D) Market equilibrium
Q:
Common size financial statements are useful for comparing businesses of different sizes in the same industry at different points in time. True or False
Q:
Regulations making it obligatory for depository institutions to keep a certain fraction of their deposits in accounts with the Fed are
A) open market operations.
B) federal funds rate.
C) required reserve ratio.
D) reserve requirements.
Q:
In order to normalize the historical data of the target firm, it may be necessary to subtract large increases in reserves and add back large decreases in reserves from cash flow. True or False
Q:
Improper revenue recognition is the most common form of financial reporting fraud. True or False
Q:
An open market ________ leads to a(n) ________ of reserves and deposits in the banking system and hence to a(n) ________ of the monetary base and the money supply.
A) sale; expansion; contraction
B) purchase; expansion; contraction
C) sale; expansion; expansion
D) purchase; expansion; expansion
Q:
The scrupulous application of GAAP ensures both consistency in comparing one firms financial performance with another and the accuracy of the data. True or False
Q:
Banks' holding of deposits in accounts with the Fed, plus currency that is physically held in banks are called
A) the monetary base.
B) government securities.
C) open market operations.
D) reserves.
Q:
The first country to mandate that its central bank adopt inflation targeting was
A) the United States.
B) the United Kingdom.
C) Canada.
D) New Zealand.
Q:
Why do you believe that the percentage difference between the maximum and minimum valuation estimates varies so much from one valuation method to another? See Table 8-7.
Q:
Under inflation targeting, a central bank must pursue policies that
A) keep the inflation rate at a target value of zero.
B) keep the inflation rate at some specific target value.
C) keep the inflation rate within a specific target range.
D) lower the inflation rate, provided this can be done without raising the unemployment rate above a specified target value.
Q:
Discuss the strengths and weaknesses of each valuation method employed by these investment banks in constructing estimates of SunGards value for the Fairness Opinion Letter. Be specific.
Q:
If the Fed uses the federal funds rate as an interest rate target, an increase in the demand for reserves will result in a(n) ________ in ________.
A) increase; nonborrowed reserves
B) decrease; nonborrowed reserves
C) increase; the federal funds interest rate
D) decrease; the federal funds interest rate
Q:
What method of accounting would Merrill use to show its investment in BlackRock?
Q:
If the Fed uses the federal funds rate as an interest rate target, fluctuations in the reserves demand curve will cause ________ to fluctuate.
A) nonborrowed reserves
B) the federal funds interest rate
C) Treasury bill interest rates
D) the inflation rate
Q:
Why do you believe Merrill was willing to limit its influence in the combined firms?
Q:
If the Fed uses nonborrowed reserves, a reserve aggregate, as a target, an increase in the demand for reserves will result in a(n) ________ in ________.
A) increase; nonborrowed reserves
B) decrease; nonborrowed reserves
C) increase; the federal funds interest rate
D) decrease; the federal funds interest rate
Q:
Merrill owns less than half of the combined firms, although it contributed more than one- half of the combined firms assets and net income. Discuss how you might use DCF and relative valuation methods to determine Merrills proportionate ownership in the combined firms.
Q:
If the Fed uses nonborrowed reserves, a reserve aggregate, as a target, fluctuations in the reserves demand curve will cause ________ to fluctuate.
A) nonborrowed reserves
B) the federal funds interest rate
C) monetary aggregates
D) the inflation rate
Q:
What are the key valuation assumptions implicit in the valuation method discussed in this case study?
Q:
If the desired intermediate target is a monetary aggregate, then the preferred operating target will be a(n) ________ variable like the ________.
A) interest rate; three-month Treasury bill rate
B) interest rate; federal funds rate
C) reserve aggregate; monetary base
D) reserve aggregate; nonborrowed reserves
Q:
What is the appropriate cost of equity for discounting future cash flows? Should it be Googles or YouTubes? Explain your answer.
Q:
To what extent might the use of stock by Google have influenced the amount they were willing to pay for YouTube? How might the use of overvalued shares impact future appreciation of Google stock?
Q:
If the desired intermediate target is an interest rate, then the preferred operating target will be a(n) ________ variable like the ________.
A) interest rate; three-month Treasury bill rate
B) interest rate; federal funds rate
C) reserve aggregate; monetary base
D) reserve aggregate; nonborrowed base
Q:
The purchase price paid for YouTube represented more than one percent of Googles then market value. If you were a Google shareholder, how might you have evaluated the wisdom of the acquisition?
Q:
When it comes to choosing an operating target, both the ________ rate and ________ aggregates are easily controllable using the Fed's policy tools.
A) federal funds; monetary
B) federal funds; reserve
C) three-month Treasury bill; monetary
D) ten-year Treasury bond; reserve