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Q:
When bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Q:
Verizons management argued that the final purchase price from the perspective of Verizon shareholders was not $8.45 billion but rather $7.05. This was so, they argued, because MCI was paying the difference of $1.4 billion from their excess cash balances as a special dividend to MCI shareholders. Why is this misleading?
Q:
When bonds become more widely traded, and as a consequence the market becomes more liquid, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Q:
Should the antitrust regulators approve the Verizon/MCI merger? Explain your answer.
Q:
When stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Q:
Do you believe that the potential severance payments that could be paid to Capellas were excessive? Explain your answer. What are the arguments for and against such severance plans for senior executives?
Q:
When prices in the stock market become more uncertain, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Q:
In your opinion, did the MCI board act in the best interests of their shareholders? Of all their stakeholders? Be specific.
Q:
How did the actions of certain shareholders affect the bidding process? Be specific.
Q:
When bond prices become less volatile, the demand for bonds ________ and the interest rate ________.
A) increases; rises
B) increases; falls
C) decreases; falls
D) decreases; rises
Q:
When bond prices become more volatile, the demand for bonds ________ and the interest rate ________.
A) increases; rises
B) increases; falls
C) decreases; falls
D) decreases; rises
Q:
What specific takeover defenses did MCI employ? Be specific.
Q:
What takeover tactics were employed or threatened to be employed by Verizon? By Qwest? Be specific.
Q:
When the expected inflation rate decreases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
Q:
Who are the winners and losers in the Verizon/MCI merger? Be specific.
Q:
When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
Q:
What alternative strategies could Verizon, Qwest, and MCI have pursued? Was the decision to acquire MCI the best alternative for Verizon? Explain your answer.
Q:
A decrease in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets.
A) reduce; financial
B) reduce; real
C) raise; financial
D) raise; real
Q:
Discuss how changing industry conditions have encouraged consolidation within the telecommunications industry?
Q:
An increase in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets, and shift the ________ curve to the left.
A) reduce; financial; demand
B) reduce; real; demand
C) raise; financial; supply
D) raise; real; supply
Q:
When people begin to expect a large run up in stock prices, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Q:
Was Arcelors board and management acting to protect their own positions (i.e., the management entrenchment hypothesis) or in the best interests of the shareholders (i.e., the shareholder interests hypothesis)? Explain your answer.
Q:
When people begin to expect a large stock market decline, the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; falls
B) right; rises
C) left; falls
D) left; rises
Q:
Using the information in this case study, discuss the arguments for and against encouraging hostile corporate takeovers
Q:
Identify the takeover defenses employed by Arcelor? Explain why each was used.
Q:
Lower expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________
A) increase; left.
B) increase; right.
C) decrease; left.
D) decrease; right.
Q:
Identify the takeover tactics employed by Mittal. Explain why each was used.
Q:
Higher expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
Q:
Xon Enterprises is attempting to take over Rayon Group. Rayons shareholders have the right to buy additional
shares at below market price if Xon (considered by Rayons board to be a hostile bidder) buys more than 15 percent of Rayons outstanding shares. What term applies to this antitakeover measure?
a. Share repellent plan
b. Golden parachute plan
c. Pac Man defense
d. Poison pill
e. Greenmail provision
Q:
During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________.
A) falls; right
B) falls; left
C) rises; right
D) rises; left
Q:
In a recession when income and wealth are falling, the demand for bonds ________ and the demand curve shifts to the ________.
A) falls; right
B) falls; left
C) rises; right
D) rises; left
Q:
Some of Acme Inc.s shareholders are very dissatisfied with the performance of the firms current management team and want to gain control of the board. To do so, these shareholders offer their own slate of candidates for open spaces on the firms board of directors. Lacking the necessary votes to elect these candidates, they are contacting other shareholders and asking them to vote for their slate of candidates. The firms existing management and board is asking shareholders to vote for the candidates they have proposed to fill vacant seats on the board. Which of the following terms best describes this scenario?
a. Leveraged buyout
b Proxy contest
c. Merger
d. Divestiture
e. None of the above
Q:
Diversification benefits an investor by
A) increasing wealth.
B) increasing expected return.
C) reducing risk.
D) increasing liquidity.
Q:
Studies show that which of the following combinations of corporate defenses can be most effective in discouraging
hostile takeovers?
a. Poison pills and staggered boards
b. Poison pills and golden parachutes
c. Golden parachutes and staggered boards
d. Standstill agreements and White Knights
e. Poison Pills and tender offers
Q:
The higher the standard deviation of returns on an asset, the ________ the asset's ________.
A) greater; risk
B) smaller; risk
C) greater; expected return
D) smaller; expected return
Q:
Which of the following government agencies can discipline firms with inappropriate governance practices?
a. Securities and Exchange Commission
b. Federal Trade Commission
c. The Department of Justice
d. A & C only
e. A, B, & C
Q:
Over the years, the U.S. Congress has transferred some of the enforcement of securities laws to organizations other than the SEC such as
a. Public stock exchanges
b. Financial Accounting Standards Board
c. Public Accounting Oversight Board
d. State regulatory agencies
e. All of the above
Q:
The demand for an asset rises if ________ falls.
A) risk relative to other assets
B) expected return relative to other assets
C) liquidity relative to other assets
D) wealth
Q:
Factors that determine the demand for an asset include changes in the
A) wealth of investors.
B) liquidity of bonds relative to alternative assets.
C) expected returns on bonds relative to alternative assets.
D) risk of bonds relative to alternative assets.
E) all of the above.
Q:
Which of the following statements best describes the business judgment rule?
a. Board members are expected to conduct themselves in a manner that could reasonably be seen as being in the best interests of the shareholders.
b. Board members are always expected to make good decisions.
c. The courts are expected to second guess decisions made by corporate boards.
d. Directors and managers are always expected to make good decisions.
e. Board decisions should be subject to constant scrutiny by the courts.
Q:
Which of the following are the basic principles on which the market model is based?
a. Management incentives should be aligned with those of shareholders and other major stakeholders
b. Transparency of financial statements
c. Equity ownership should be widely dispersed
d. A & B only
e. A, B, and C only
Q:
When the demand for bonds ________ or the supply of bonds ________, bond prices fall.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Q:
The control model of corporate governance is applicable under all of the following conditions except for
a. Capital markets are illiquid
b. Board members are largely insiders
c. Ownership and control overlap
d. Equity ownership is widely dispersed
e. A, B, & D only
Q:
What is the purpose of discounting cash flows?
Q:
The control market is applicable when which of the following conditions are true?a. Capital markets are illiquidb. Equity ownership is heavily concentratedc. Board members are largely insidersd. Ownership and control overlape. All of the above
Q:
Describe how Treasury Inflation Protection Securities (TIPS) work and how they help policymakers estimate expected inflation.
Q:
The market governance model is applicable when which of the following conditions are true?
a. Capital markets are liquid
b. Equity ownership is widely dispersed
c. Ownership and control are separate
d. Board members are largely independent
e. All of the above
Q:
What is the distinction between the nominal interest rate and the real interest rate? Which is a better indicator of incentives to borrow and lend? Why?
Q:
Which of the following are commonly considered alternative models of corporate governance?
a. Market model
b. Control model
c. Takeover model
d. A & B only
e. A & C only
Q:
How does reinvestment risk differ from interest-rate risk?
Q:
Which of the following factors influences corporate governance practices?
a. Securities legislation
b. Government regulatory agencies
c. The threat of a hostile takeover
d. Institutional activism
e. All of the above
Q:
Why may a bond's rate of return differ from its yield to maturity?
Q:
Which of the following is true about supervoting stock?
a. Is a commonly used takeover tactic.
b. Is generally encouraged by the SEC
c. May have 10 to 100 times of the voting rights of other classes of stock
d. Is issued to acquiring firms if they agree not to purchase a controlling interest in the target firm
e. Is a widely used takeover defense
Q:
What is interest-rate risk and how is it measured?
Q:
Which is true of the following? A white knight
a. Is a group of dissident shareholders which side with the bidding firm
b. Is a group of the target firms current shareholders which side with management
c. Is a third party that is willing to acquire the target firm at the same price as the bidder but usually removes the targets management
d. Is a firm which is viewed by management as a more appropriate suitor than the bidder
e. Is a firm that is willing to acquire only a large block of stock in the target firm
Q:
Why are long-term bonds more risky than short-term bonds?
Q:
Which of the following is true? A hostile takeover attempt
a. Is generally found to be illegal
b. Is one that is resisted by the targets management
c. Results in lower returns to the target firms shareholders than a friendly attempt
d. Usually successful
e. Supported by the target firms board and its management
Q:
How is a bond's current yield calculated? Why is current yield a more accurate approximation of yield to maturity for a long-term bond than for a short-term bond?
Q:
Which of the following is true about so-called shark repellants?
a. They are put in place to strengthen the board
b. They include poison pills
c. Often consist of the right to issue greenmail
d. Involve White Knights
e. Involve corporate restructuring
Q:
What concept is used to value a bond?
Q:
The following takeover defenses are generally put in place by a firm after a takeover attempt is
underway.
a. Staggered board
b. Standstill agreement
c. Supermajority provision
d. Fair price provision
e. Reincorporation
Q:
Describe the cash flows received from owning a coupon bond.
Q:
The following takeover defenses are generally put in place by a firm before a takeover attempt is
initiated.
a. Standstill agreements
b. Poison pills
c. Recapitalization
d. Corporate restructuring
e. Greenmail
Q:
All of the following are true of poison pills except for
a. They are a new class of security
b. Generally prevent takeover attempts from being successful
c. Enable target shareholders to buy additional shares in the new company if an unwanted shareholders ownership exceeds a specific percentage of the targets stock
d. Delays the completion of a takeover attempt
e. May be removed by the targets board if an attractive bid is received from a so-called white knight.
Q:
Distinguish between coupon rate, yield to maturity, and current yield.
Q:
Bonds with a maturity that is longer than the holding period have no interest-rate risk.
Q:
All of the following are common takeover defenses except for
a. Poison pills
b. Litigation
c. Tender offers
d. Staggered boards
e. Golden parachutes
Q:
Changes in interest rates make investments in long-term bonds risky.
Q:
Which of the following are common takeover tactics?
a. Bear hugs
b. Open market purchases
c. Tender offers
d. Litigation
e. All of the above
Q:
The current yield goes up as the price of a bond falls.
Q:
All of the following are true of tender offers except for
a. Tender offers consist only of offers of cash for target stock
b. Are generally considered an expensive takeover tactic
c. Are extended for a specific period of time
d. Are sometimes over subscribed
e. Must be filed with the SEC
Q:
The real interest rate is equal to the nominal rate minus inflation.
Q:
Purchasing the target firms stock in the open market is a commonly used tactic to achieve all of
the following except for
a. Acquiring a controlling interest in the target firm without making such actions public knowledge.
b. Lowering the average cost of acquiring the target firms shares
c. Recovering the cost of an unsuccessful takeover attempt
d. Obtaining additional voting rights in the target firm
e. Strengthening the effectiveness of proxy contests
Q:
Interest-rate risk is the uncertainty that an investor faces because the interest rate at which a bond's future coupon payments can be invested is unknown.
Q:
All of the following are true of a proxy contest except for
a. Are usually successful
b. Are sometimes designed to replace members of the board
c. Are sometimes designed to have certain takeover defenses removed
d. May enable effective control of a firm without owning 51% of the voting stock
e. Are often costly
Q:
All else being equal, the greater the interest rate the greater the duration is.
Q:
Which of the following factors often affects hostile takeover bids?
a. The takeover premium
b. The composition of the board of the target firm
c. The composition of the ownership of the targets stock
d. The targets bylaws
e. All of the above
Q:
Increasing duration implies that interest-rate risk has increased.
Q:
According to the management entrenchment theory,
a. Management resistance to takeover attempts is an attempt to increase the proposed purchase price premium
b. Management resistance to takeover attempts is an attempt to extend their longevity with the target firm
c. Shareholders tend to benefit when management resists takeover attempts
d. Management attempts to maximize shareholder value
e. Describes the primary reason takeover targets resist takeover bids
Q:
A long-term bond's price is less affected by interest rate movements than a short-term bond's price.