Q&A Hero

Q: What alternative valuation methods could Google have used to justify the purchase price it paid for YouTube? Discuss the advantages and disadvantages of each.

Q: Which of the following is not an operating target? A) Nonborrowed reserves B) Monetary base C) Federal funds interest rate D) Discount rate E) All are operating targets

Q: Which of the following are examples of intangible assets that may have value to the acquiring company? a. Patents b. Trade names c. Customer lists and relationships d. Covenants not to compete e. All of the above

Q: Which of the following is a potential operating target for the Fed? A) Nonborrowed reserves B) The federal funds rate C) The monetary base D) All of the above

Q: Which of the following is a potential operating target for the Fed? A) The monetary base B) The M1 money supply C) Nominal GDP D) The discount rate

Q: All of the following are true for market based valuation methods except for which of the following? a. Assumes that markets are efficient such that current values reflect all the information currently known about the business b. Current values represent what a willing buyer and seller are willing to pay for a business in the absence of full information c. Market based methods are always superior to discounted cash flow techniques d. Include comparable company and recent transactions methods e. Include the tangible book value approach

Q: Which of the following is not a requirement in selecting an intermediate target? A) measurability B) controllability C) flexibility D) predictability

Q: Which of the following is not generally considered a valuation method? a. Discounted cash flow method b. Comparable companies method c. Share exchange ratio method d. Liquidation value method e. Comparable transactions method

Q: An advantage of an intermediate targeting strategy is that it provides the Fed with A) more timely information regarding the effect of monetary policy. B) a slow adjustment process. C) a target that is precisely correlated with economic activity. D) all of the above. E) only A and B of the above.

Q: Which of the following represent advantages of the comparable companies valuation method? a. Uses the most accurate market-based valuation at a point in time b. Valuations need to be adjusted to reflect control premiums c. Adjusts for risk of future cash flows d. Adjusts for the timing of future cash flows e. A & B only

Q: Intangible assets often constitute a substantial source of value to the acquiring firm. Which of the following are not generally considered intangible assets? a. Patents and technical know-how b. Warranty and contingent claims c. Trademarks and customer lists d. Covenants not to compete and franchises e. Copyrights and software

Q: If the Fed's strategy for conducting monetary policy is thought of as a game plan that proceeds in stages, then the game plan can be summarized as follows: A) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the operating targets consistent with its intermediate targets. Finally, it adjusts its policy tools to effect the desired targets and goals. B) The Fed selects its policy goals, then the operating targets consistent with achieving its policy goals, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy tools to effect the desired targets and goals. C) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the policy tools consistent with its intermediate targets. Finally, it adjusts its operating targets to effect the desired targets and tools. D) The Fed selects its policy tools, then the operating targets consistent with achieving its policy tools, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy goals to effect the desired targets and tools. E) None of the above.

Q: Which of the following is not true about the liquidation/break-up valuation methods? a. Highly diversified companies are often valued in terms of the sum of the standalone values of their operating units b. The calculation of such values is heavily dependent on the skill of appraisers who are intimately familiar with the operations to be liquidated. c. Assets can sometimes be liquidated in an orderly fashion. d. Legal, appraisal, and consulting fees may comprise a substantial share of the total proceeds of the sale of the assets e. The liquidation value of most of the firms assets is about the same.

Q: The Fed's monetary policy strategy can be described as follows: A) The Fed uses its policy tools to adjust intermediate targets that directly impact its operating targets in a way that allows the Fed to achieve its goals. B) The Fed uses its policy tools to adjust operating targets that directly impact its intermediate targets in a way that allows the Fed to achieve its goals. C) The Fed uses its operating targets to adjust its intermediate targets that directly impact its policy tools in a way that allows the Fed to achieve its goals. D) None of the above.

Q: The tangible book value or equity per share method is applicable primarily to the following industries: a. Steel and financial services b. Distribution and financial services c. Electric and natural gas utilities d. Coal and copper mining e. Space and defense

Q: Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by A) encouraging firms to invest and people to save. B) encouraging firms to limit their price increases. C) encouraging people to consume. D) all of the above. E) only A and C of the above.

Q: Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by A) encouraging firms to invest. B) encouraging people to save. C) both A and B of the above. D) neither A nor B of the above.

Q: Which of the following statements about the comparable companies valuation method is not true? a. Requires the use of firms that are substantially similar to the target firm b. Uses market based rather than cash flow based valuations c. Often used as the basis of investment banker fairness opinions d. Generally provides the most accurate valuation method e. Provides an estimate of the target firm at a moment in time.

Q: The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the A) frictional rate of unemployment. B) structural rate of unemployment. C) natural rate of unemployment. D) ideal rate of unemployment.

Q: Which of the following represent limitations of real options? a. Key assumptions often are very difficult to quantify, especially volatility b. Project delays may incur significant opportunity costs c. Options often are not independent; therefore, selecting one option may foreclose other options d. Often requires complex modeling e. All of the above

Q: When there is a mismatch between job requirements and the skills of available workers, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment.

Q: Which of the following is not true about real options? a. All investment decisions contain identifiable and measurable real options. b. Under certain circumstances, management may be able to delay their initial investment in a project or M&A. c. Real options may be valued as the expected value of various alternative cash flow projections. d. Real options can be valued using the Black-Sholes method. e. None of the above

Q: When workers voluntarily quit a job or decline a job offer so they can search for a better one, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment.

Q: Which one of the following is not a commonly used method of valuing target firms? a. Discounted cash flow b. Comparable companies method c. Recent transactions method d. Asset oriented method e. Share exchange ratio method

Q: Which of the following represent options available to managers in making investment decisions? a. Delay initial investment b. Accelerate cumulative investment c. Abandon the investment at a later date d. A & B only e. A, B, & C

Q: The Federal Reserve desires interest rate stability because A) it allows for less uncertainty about future planning. B) interest rate volatility often leads to demands to curtail the Fed's power. C) it guarantees full employment. D) both A and B of the above.

Q: Price stability is desirable because A) inflation creates uncertainty, making it difficult to plan for the future. B) everyone is better off when prices are stable. C) price stability increases the profitability of the Fed. D) it guarantees full employment.

Q: Limitations in applying the comparable companies method of valuation include which of the following? a. Finding truly comparable companies is difficult b. The use of market-based methods can result in significant under- or overvaluation during periods of declining or rising stock markets c. Market-based methods can be manipulated easily, because the methods do not require a clear statement of assumptions with respect to risk, growth, or the timing or magnitude of future earnings and cash flows. a. A, B, & C b. A & B only

Q: In determining the purchase price for an acquisition target, which one of the following valuation methods does not require the addition of a purchase price premium? a. Discounted cash flow method b. Comparable companies method c. Comparable industries method d. Recent transactions method e. A & B only

Q: At its inception, the Federal Reserve was intended to be A) the Treasury's banker. B) the issuer of government debt. C) a lender of last resort. D) a regulator of bank holding companies.

Q: Which one of the following factors is not considered calculating a firms PEG ratio? a. Projected growth rate of the value indicator (e.g., earnings) b. Ratio of market price to value indicator (e.g., P/E) c. Share exchange ratio d. Historical growth rate of the value indicator e. None of the above

Q: When the Federal Reserve was created, its most important role was intended to be A) a storage facility for the nation's gold. B) a lender of last resort. C) a regulator of bank holding companies. D) none of the above.

Q: An option to abandon an investment (i.e., divest or liquidate) will often increase the NPV because of its effect on reducing risk. By exiting the business, the acquirer may be able to recover a portion of its original investment and truncate projected negative cash flows associated with the acquisition. True or False

Q: The Fed is reluctant to use reserve requirements to control the money supply because A) of their overly-powerful impact on the money supply. B) they have the potential to create liquidity problems for banks with low excess reserves. C) frequent changes in reserve requirements complicate liquidity management for banks. D) of all of the above. E) of only A and B of the above.

Q: All investment decisions include clearly identifiable and measurable real options whose estimated value should be included in the valuation of the opportunity. True or False

Q: Disadvantages of using reserve requirements to control the money supply include A) their overly-powerful impact on the money supply. B) creating potential liquidity problems for banks with high levels of excess reserves. C) their overly-powerful impact on the monetary base. D) all of the above.

Q: The NPV of an acquisition of a manufacturer operating at full capacity may have a lower value than if the NPV is adjusted for a decision made at a later date to expand capacity. If the additional capacity is fully utilized, the resulting higher level of future cash flows may increase the acquisitions NPV. In this instance, the value of the real option to expand is the difference between the NPV with and without expansion. True or False

Q: Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are called A) primary credit. B) secondary credit. C) seasonal credit. D) lender-of-last-resort credit.

Q: Investment decisions, including M&As, often contain certain embedded options such as the ability to accelerate growth by adding to the initial investment (i.e., expand), to delay the timing of the initial investment (i.e., delay), or to walk away from the project (i.e., abandon). True or False

Q: Discount loans to banks experiencing severe liquidity problems are called A) primary credit. B) secondary credit. C) seasonal credit. D) lender-of-last-resort credit.

Q: Since real options provide flexibility that can greatly change the value of a project, it should be considered in capital budgeting methodology. True or False

Q: The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently

Q: Real options, also called strategic management options, refer to managements ability to adopt and later revise corporate investment decisions. True or False

Q: If the Fed wants to temporarily drain reserves from the banking system, it will engage in A) a repurchase agreement. B) a matched sale-purchase transaction. C) a "pump" agreement. D) none of the above.

Q: Real options include the right to buy land, commercial property, and equipment. Such assets can be valued as call options if its current value exceeds the difference between the assets current value and some predetermined level. True or False

Q: The Federal Reserve will engage in an outright purchase if it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently

Q: An option is the exclusive right, but not the obligation, to buy, sell, or use property for a specific period of time in exchange for a predetermined amount of money. True or False

Q: If the Federal Reserve wants to drain reserves from the banking system, it will A) purchase government securities. B) lower the discount rate. C) sell government securities. D) raise reserve requirements.

Q: Valuing the assets separately in terms of what it would cost to replace them may seriously overstate the firms true going concern value. True or False

Q: An open market transaction intended to change the level of bank reserves is a A) repurchase agreement. B) reverse repo. C) dynamic operation. D) defensive operation.

Q: The replacement cost approach to valuation estimates what it would cost to replace the target firms assets at current market prices using professional appraisers less the present value of the firms liabilities. True or False

Q: The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of A) Chicago. B) Boston. C) New York. D) San Francisco.

Q: In determining the liquidation value of inventories, it is not necessary to look at their composition. True or False

Q: The actual execution of open market operations is done at A) the Board of Governors in Washington, D.C. B) the Federal Reserve Bank of New York. C) the Federal Reserve Bank of Philadelphia. D) the Federal Reserve Bank of Boston.

Q: When estimating liquidation value, analysts often make a simplifying assumption that the assets can be sold in an orderly fashion, which is defined as a reasonable amount of time to solicit bids from qualified buyers. True or False

Q: If the Fed increases reserve requirements, the demand for reserves ________ and the equilibrium federal funds rate ________. A) increases; drops B) decreases; rises C) decreases; drops D) increases; rises

Q: Liquidation or breakup value is the projected price of the firms assets sold separately in liquidating or breaking up the firm. True or False

Q: Under usual circumstances, an increase in the discount rate causes A) the federal funds rate to fall. B) the federal funds rate to rise. C) no change in the federal funds rate. D) the supply of reserves to increase. E) the supply of reserves to decrease.

Q: Tangible book value is widely used for valuing financial services companies, where tangible book value is primarily cash or liquid assets. True or False

Q: The demand curve for reserves shifts to the left and the federal funds rate falls when the Fed A) decreases reserve requirements or does an open market purchase. B) lowers the discount rate. C) lowers the discount rate or does an open market purchase. D) decreases reserves requirements. E) does an open market sale.

Q: The major advantage of the value driver approach to valuation is the implied assumption that a single value driver or factor is representative of the total value of the business. True or False

Q: The supply curve for reserves shifts to the left and the federal funds rate rises when the Fed A) raises reserves requirements. B) does an open market purchase. C) does an open market sale. D) raises the discount rate.

Q: Micro value drivers are those factors affecting specific functions within the firm. True or False

Q: The supply curve for reserves is ________ when the federal funds rate is below the discount rate and ________ when the federal funds rate is above the discount rate. A) upward sloping; horizontal B) upward sloping; vertical C) vertical; horizontal D) vertical; downward sloping

Q: The number of billing errors as a percent of total invoices is a specific example of a macro value driver. True or False

Q: An open market purchase A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall. B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise. C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise. D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall.

Q: Macro value drivers are those factors which directly influence specific activities within the firm. True or False

Q: Bank reserves can be categorized as A) vault cash and deposits at the Fed. B) required reserves and excess reserves. C) borrowed reserves and nonborrowed reserves. D) all of the above.

Q: In the absence of earnings, other factors that drive the creation of value for a firm may be used for valuation purposes. True or False

Q: Holding everything else constant, if the federal funds rate falls, then the demand for A) excess reserves falls because they have a lower return. B) excess reserves rises because they have a lower cost. C) required reserves rises because the cost of borrowing from the Fed is relatively higher. D) required reserves rises because the cost of borrowing from the Fed is relatively lower. E) reserves will not change because the Fed sets the level of required reserves.

Q: The PEG ratio can be helpful in evaluating the potential market values of a number of different firms in the same industry in selecting which may be the most attractive acquisition target. True or False

Q: Holding everything else constant, if the federal funds rate rises, then the demand for A) excess reserves rises because they have a higher return. B) excess reserves falls because they have a higher cost. C) required reserves falls because the cost of borrowing from the Fed is relatively higher. D) required reserves rises because the cost of borrowing from the Fed is relatively lower. E) reserves will not change because the Fed sets the level of required reserves.

Q: Empirical evidence suggests that forecasts of earnings and other value indicators are better predictors of firm value than value indicators based on historical data. True or False

Q: Investors may be willing to pay considerably more for a stock whose PEG ratio is greater than one if they believe the increase in earnings will result in future financial returns that significantly exceed the firms cost of equity. True or False

Q: The discount rate is A) the interest rate on loans from the Fed to a bank. B) the price the Fed pays for government securities. C) the interest rate on loans of reserves from one bank to another. D) the price banks pay the Fed for government securities. E) the interest rate on loans from a bank to the federal government.

Q: It is critical for the analyst to remember that high growth rates by themselves are likely to increase multiples such as a firms price to earnings ratio even without any improvement in financial returns. True or False

Q: The federal funds rate is A) the interest rate on loans from the Fed to a bank. B) the price the Fed pays for government securities. C) the interest rate on loans of reserves from one bank to another. D) the price banks pay the Fed for government securities. E) the interest rate on loans from a bank to the federal government.

Q: Conceptually, firms with P/E ratios less than their projected growth rates may be considered undervalued; while those with P/E ratios greater than their projected growth rates may be viewed as overvalued. True or False

Q: When a bank repays a discount loan to the Fed, there is a(n) ________ in reserves in the banking system and a(n) ________ in the monetary base. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase

Q: The so-called PEG ratio is calculated by dividing the firms price-to-earning ratio by the expected growth rate in the firms share price. True or False