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Banking
Q:
A discount loan by the Fed to a bank causes 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:
A higher P/E ratio for a firm may be justified if its earnings are expected to grow significantly faster than firms future earnings. True or False
Q:
If the Federal Reserve wants to lower the monetary base and the money supply, it will
A) increase bank reserves.
B) lower the discount rate.
C) sell government securities.
D) lower reserve requirements.
Q:
If the Federal Reserve wants to expand reserves in the banking system, it will
A) purchase government securities.
B) raise the discount rate.
C) sell government securities.
D) raise reserve requirements.
Q:
The enterprise to EBITDA method of valuation can be compared more readily among firms exhibiting different levels of leverage than for other measures of earnings, since the numerator represents the total value of the firm and the denominator measures earnings before interest. True or False
Q:
An open market sale of securities by the Fed will
A) decrease liabilities of the Fed and not affect assets of the banking system.
B) decrease assets of the nonbank public and decrease assets of the Fed.
C) increase liabilities of the banking system and increase assets of the Fed.
D) have no effect on assets of the nonbank public but increase liabilities of the Fed.
E) decrease assets of the banking system and increase assets of the Fed.
Q:
The enterprise value to EBITDA method is useful because more firms are likely to have negative earnings than negative EBITDA. True or False
Q:
An open market purchase of securities by the Fed will
A) increase assets of the nonbank public and increase assets of the banking system.
B) decrease assets of the nonbank public and increase assets of the Fed.
C) decrease assets of the banking system and increase assets of the Fed.
D) have no effect on assets of the nonbank public but increase assets of the Fed.
E) increase assets of the banking system and decrease assets of the Fed.
Q:
In constructing the enterprise value, the market value of the firms common equity value is added to the market value of the firms long-term debt and the market value of preferred stock. True or False
Q:
The monetary base consists of
A) currency in circulation and reserves.
B) government securities held by the Fed and discount loans.
C) government securities held by the Fed and currency in circulation.
D) discount loans and reserves.
Q:
The enterprise value to EBITDA multiple relates the total book value of the firm from the perspective of the liability side of the balance sheet (i.e., long-term debt plus preferred and common equity), excluding cash, to EBITDA. True or False
Q:
Analysts have increasingly used the relationship between enterprise value to earnings before interest and taxes, depreciation, and amortization to value firms. True or False
Q:
Assets on the Fed's balance sheet include
A) government securities and currency in circulation.
B) discount loans and reserves.
C) government securities and discount loans.
D) currency in circulation and reserves.
Q:
Disadvantages of the comparable industry method of valuation include the presumption that industry multiples are actually comparable and that analysts earnings projections are unbiased. True or False
Q:
Critics of the current system of Fed independence contend that the president has too much control over monetary policy on a day-to-day basis.
Q:
The comparable companies method and recent transactions methods of valuation are conceptually similar. True or False
Q:
The FOMC issues directives to the trading desk at the New York Fed.
Q:
Federal Reserve monetary policy decisions must be approved by the Secretary of the Treasury before they may be implemented.
Q:
Studies show that rival firms share prices will rise in response to the announced acquisition of a competitor, regardless of whether the proposed acquisition is ultimately successful or unsuccessful. True or False
Q:
The analyst should be careful not to mechanically add an acquisition premium to the target firms estimated value based on the comparable companies method if there is evidence that the market values of these comparable firms already reflect the effects of acquisition activity elsewhere in the industry. True or False
Q:
Monetary policy is set by the Board of Governors.
Q:
The Board of Governors sets reserve requirements.
Q:
Market-based valuation methods are less prone to manipulation than discounted cash flow methods because they require a more detailed statement of assumptions. True or False
Q:
Each member of the seven-member Board is appointed by the president and confirmed by the Senate to serve 14-year terms.
Q:
Like the recent transactions method, comparable company valuation estimates do not require the addition of a purchase price premium. True or False
Q:
The value of the comparable companies method may vary widely depending upon when it is calculated in the business cycle. True or False
Q:
All nationally chartered banks are required to be members of the Fed.
Q:
The comparable companies transactions valuation method is generally considered the most accurate of all the valuation methods. True or False
Q:
The FOMC is an element of the Federal Reserve System.
Q:
The comparable companies method is widely used in so-called fairness opinion letters. True or False
Q:
The Washington, D.C. Fed bank, with over 30 percent of the system's assets, is the most important Federal Reserve Bank.
Q:
The use of market-based valuation methods usually reflect actual demand and supply considerations at a moment in time. True or False
Q:
Rapid money supply growth and uncontrollable inflation were among the factors which motivated the creation of the Federal Reserve System.
Q:
If the P/E ratio for the comparable firm is equal to 10 and the after-tax earnings of the target firm are $2 million, the market value of the target firm would be $5 million. True or False
Q:
The unusual structure of the Federal Reserve System is best explained by Americans' fear of centralized power.
Q:
Relative valuation methods are often described as market-based, as they reflect the amounts investors are willing to pay for each dollar of earnings, cash flow, sales, or book value at a moment in time. True or False
Q:
In November 2007, the Fed announced major enhancements to its communication strategy. Which of the following was a part of the changes?
A) The forecast horizon for the FOMC's projections was extended from two calendar years to three.
B) The committee publishes FOMC projections four times a year instead of twice a year.
C) The release would include a narrative of the forces shaping the outlook and risks to that outlook.
D) All of the above were proposed changes.
Q:
The weighted average valuation approach involves the use of a number of different valuation methods, weighted by the relative importance the appraiser attributes to each method. True or False
Q:
Currently, there are ________ countries that are members of the European Monetary Union.
A) 10
B) 12
C) 15
D) 20
Q:
Asset oriented approaches to valuation involve the use of tangible book value, liquidation value, discounted cash flows, and break-up values. True or False
Q:
The ________ of the Board of Governors is the spokesperson for the Fed.
A) chairman
B) president
C) either of the above can be the spokesperson
D) neither of the above
Q:
Market-based valuation measures are meaningful only for firms with a stable earnings, cash flow, or sales history. True or False
Q:
The 12 Federal Reserve banks are involved in monetary policy in several ways:
A) their directors establish the discount rate.
B) they decide which banks can obtain discount loans from the Federal Reserve Bank.
C) their directors select one commercial banker from each bank's district to serve on the Federal Advisory Council.
D) all of the above.
Q:
Price-to-earnings ratios of comparable companies provide an excellent means of valuing the target firm at any point in the business cycle. True or False
Q:
The principal limitation to the comparable companies valuation approach is the difficulty in finding companies that are truly comparable to the target firm. True or False
Q:
The directors of a district bank are classified into three categories: A, B, and C. The three B directors are
A) professional bankers.
B) prominent leaders from industry, labor, agriculture, or the consumer sector.
C) elected by the board of governors to represent the public interest.
D) all of the above.
Q:
Book values are maligned as measures of value, because they represent historical rather than current market values. True or False
Q:
The three largest Federal Reserve banks in terms of assets are those of New York, Chicago, and
A) Atlanta.
B) Los Angeles.
C) Baltimore.
D) San Francisco.
Q:
The capitalization rate is equivalent to the discount rate when the firms revenues are not expected to grow. True or False
Q:
The Federal Advisory Council has ________ member(s) from each district.
A) one
B) two
C) three
D) can have any number of
Q:
Liquidation value provides an estimate of the minimum value of the target firm. True or False
Q:
The Board of Governors of the Federal Reserve System
A) appoint three directors to each Federal Reserve Bank.
B) elect six members to member commercial banks.
C) both of the above.
D) none of the above.
Q:
Cross-country evidence suggests that an increase in central bank independence results in a ________ inflation rate and ________ unemployment.
A) lower; higher
B) lower; no worse
C) higher; lower
D) higher; higher
Q:
Break-up value assumes that individual businesses can be sold quickly without any material loss of value. True or False
Q:
Suppose legislation requiring the Fed to keep the inflation rate between 1.5% and 2.5% per year is passed by Congress. This law restricts the Fed's
A) instrument independence.
B) goal independence.
C) both A and B of the above.
D) neither A nor B of the above.
Q:
Tangible book value is the value of shareholders equity less net fixed assets. True or False
Q:
Instrument independence means the central bank is free from
A) political pressure regarding how it uses the tools of monetary policy.
B) political pressure regarding the goals it pursues.
C) both A and B of the above.
D) neither A nor B of the above.
Q:
The replacement cost approach to valuation of a target firm ignores value created by operating the assets in combination as a going concern. True or False
Q:
Critics of Fed independence argue
A) that it is undemocratic to have monetary policy controlled by an elite group responsible to no one.
B) that independence seemingly does little to guarantee good monetary policy.
C) that its independence may encourage the Fed to pursue a course of narrow self-interest rather than the public interest.
D) all of the above.
Q:
Valuations of target firms based on the comparable companies and recent transactions methods must be adjusted to reflect control premiums. True or False
Q:
If the tangible book value of a firm significantly exceeds its market value for an extended period of time, it can become an attractive takeover target. True or False
Q:
Critics of Fed independence argue
A) that it is undemocratic to have monetary policy controlled by an elite group responsible to no one.
B) that an independent Fed conducts monetary policy with a consistent inflationary bias.
C) that the Fed, since it does not face a binding budget constraint, spends too much of its earnings.
D) only A and B of the above.
Q:
Liquidation value is the projected sale value of a firms assets. True or False
Q:
Critics of the current system of Fed independence contend that
A) the current system is undemocratic.
B) voters have too much say about monetary policy.
C) the president has too much control over monetary policy on a day-to-day basis.
D) all of the above are true.
Q:
If the market leader in an industry has a $300 million market value and a 30% market share, the market is valuing each percentage point of market share at $10 million. If a target company in the same industry has a 20% market share, the market value of the target company is $200 million. True or False
Q:
Supporters of the current system of Fed independence believe that a less autonomous Fed would
A) adopt a long-run bias toward policymaking.
B) pursue overly expansionary monetary policies.
C) be more likely to create a political business cycle.
D) do only B and C of the above.
Q:
The comparable recent transactions method is usually considered less reliable than the comparable companies valuation method.
True or False
Q:
Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would
A) impart an inflationary bias to monetary policy.
B) force monetary authorities to sacrifice the long-run objective of price stability.
C) make the so-called political business cycle less pronounced.
D) do all of the above.
E) do only A and B of the above.
Q:
The comparable companies valuation method uses the discounted value of a firms free cash flow. True or False
Q:
Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would
A) impart an inflationary bias to monetary policy.
B) force monetary authorities to sacrifice the long-run objective of price stability.
C) make the so-called political business cycle even more pronounced.
D) do all of the above.
E) do only A and B of the above.
Q:
Did @Home overpay for Excite?
Q:
The case for Federal Reserve independence does not include the idea that
A) political pressure would impart an inflationary bias to monetary policy.
B) the principal-agent problem is perhaps worse for the Fed than for congressmen since the former does not answer to the voters on election day.
C) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level.
D) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced.
Q:
What are the limitations of the discounted cash flow method employed in this case?
Q:
The case for Federal Reserve independence does not include the idea that
A) political pressure would impart an inflationary bias to monetary policy.
B) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level.
C) policy is always performed better by an elite group such as the Fed.
D) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced.
Q:
What other assumptions might you consider in addition to those identified in the case study?
Q:
The case for Federal Reserve independence includes the idea that
A) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level.
B) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced.
C) the principal-agent problem is perhaps worse for the Fed than for congressmen since the former does not answer to the voters on election day.
D) only A and B of the above.
Q:
Use discounted cash flow (DCF) methods to determine if @Home overpaid for Excite.
Q:
The case for Federal Reserve independence includes the idea that
A) political pressure would impart an inflationary bias to monetary policy.
B) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level.
C) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced.
D) all of the above.
Q:
The incremental cash flows of a merger can relate to which of the following:
a. Working capital
b. Profits
c. Capital spending
d. Income taxes
e. All of the above
Q:
When evaluating an acquisition, you should do which of the following:
a. Ignore market values of assets and focus on book value
b. Ignore the timing of when the cash flows will be received
c. Ignore acquisition fees and transaction costs
d. Apply the discount rate that is relevant to the incremental cash flows
e. Ignore potential losses of management talent