When a firm is announcing that it is acquiring another firm, and when shares of both firms are traded on the market, share prices of the firms would move in different directions, depending on the views of the market regarding value transfer. What is the best interpretation when the price of acquirer's stock dropped by 20 percent, resulting in the loss of $40 million in market capitalization, while the price of target company's stock jumped by 40 percent, resulting in a gain of $20 million in market capitalization. 1. Value destruction and transfer of wealth from acquirer to target 2. Value destruction and transfer of wealth from target to acquirer 3. No change in value nor transfer of wealth 4. Value creation and transfer of wealth from acquirer to target 5. Value creation and transfer of wealth from target to acquirer Choose all that are appropriate. 1. If two firms are in the same industry, the firm with a higher P/E ratio is expected to have more growth opportunities. 2. The value of a firm can be calculated from the firm's balance sheet by subtracting the sum of all liability items from the sum of all the assets items. 3. An assumption of discount rate of 10 percent and 3 percent growth would be broadly consistent with a multiple of enterprise value to free cash flow of 13.0. 4. The cost of debt of a firm can be calculated by multiplying the firm's current ratio by the firm's credit rating and add the risk-free rate. 5. One way to calculate the cost of equity of a firm is to take the risk-free rate and add the market risk premium adjusted by the firm's beta. Choose one appropriate statement. Choose the statement that is not an appropriate reason for an acquisition to fail 1. Diversification benefits that is said to create value for their shareholders is illusory. 2. The acquiring and target companies have different costs of capital 3. Synergies are not realized 4. The acquiring company overpays for the target company 5. Cultural clashes lead to inefficiencies Choose the most appropriate statement regarding financing options for firms. 1. Convertible bonds and convertible shares are hybrids of stocks and bonds. 2. Money raised through share issues need not be repaid. 3. Debt is a form of liability that has a variable rate of return. 4. Cost of funds raised through a bond issue is higher than the cost of funds raised through a share issue. 5. Companies must always pay dividends to reward shareholders. Choose all that are appropriate statements regarding the effects of signaling in the stock market. 1. The announcement of increased profits cause an increase in the stock price. 2. The stock price of a firm reporting earnings that are only a few cents below their previous estimates often go down by substantial amounts. 3. The announcement of share buyback leads to an increase in the share price. 4. The announcement of a tender offer causes an increase in the stock price of the target company. 5. The issue of equity often cause a company's stock price to decrease. Choose all that are appropriate. 1. Private equity provides equity or debt financing to private companies outside the public capital markets. 2. Most equity research analysts are employed by (and receive their paychecks from) industrial companies. 3. When a firm is planning an IPO, the buy-side will help the firm sell the shares. 4. Low-ranking analysts could make outlandish and contrary predictions, hoping that a lucky break will propel them to the top of the rankings 5. Analusetseare often afraid to recommend "sell" for a comnanv's stock hecauce that companv Investment funds typically open only to sophisticated investors with relatively light regulations compared to those of mutual funds, allowing them to employ leverage and take on concentrated and short positions A security with the following characteristics is called [ An asset representing an ownership interest in the business, sometimes subdivided into different classes. The owners of this asset usually have certain rights, including the right to share proportionately in the profits of the business and the right to elect directors and vote on proposals on certain important business decisions. Which of the following is an example of a good incentive? 1. Analysts are afraid to recommend "sell" for a company's stock because that company may not do business with their employer in the future. 2. Investors want to make money so they invest in companies that are doing well. 3. Pension funds invest in high-quality companies because they want to take care of their retirees. 4. CEOs take large risks with their companies, because a good part of their annual compensation is tied to the share price. 5. An investment manager has an incentive to imitate the strategies adopted by other managers, because the consequence of being wrong would be less severe. When a firm is announcing that it is acquiring another firm, and when shares of both firms are traded on the market, share prices of the firms would move in different directions, depending on the views of the market regarding value transfer. What is the best interpretation when the price of acquirer's stock dropped by 20 percent, resulting in the loss of $40 million in market capitalization, while the price of target company's stock jumped by 40 percent, resulting in a gain of $20 million in market capitalization. 1. Value destruction and transfer of wealth from acquirer to target 2. Value destruction and transfer of wealth from target to acquirer 3. No change in value nor transfer of wealth 4. Value creation and transfer of wealth from acquirer to target 5. Value creation and transfer of wealth from target to acquirer Choose all that are appropriate. 1. If two firms are in the same industry, the firm with a higher P/E ratio is expected to have more growth opportunities. 2. The value of a firm can be calculated from the firm's balance sheet by subtracting the sum of all liability items from the sum of all the assets items. 3. An assumption of discount rate of 10 percent and 3 percent growth would be broadly consistent with a multiple of enterprise value to free cash flow of 13.0. 4. The cost of debt of a firm can be calculated by multiplying the firm's current ratio by the firm's credit rating and add the risk-free rate. 5. One way to calculate the cost of equity of a firm is to take the risk-free rate and add the market risk premium adjusted by the firm's beta. Choose one appropriate statement. Choose the statement that is not an appropriate reason for an acquisition to fail 1. Diversification benefits that is said to create value for their shareholders is illusory. 2. The acquiring and target companies have different costs of capital 3. Synergies are not realized 4. The acquiring company overpays for the target company 5. Cultural clashes lead to inefficiencies Choose the most appropriate statement regarding financing options for firms. 1. Convertible bonds and convertible shares are hybrids of stocks and bonds. 2. Money raised through share issues need not be repaid. 3. Debt is a form of liability that has a variable rate of return. 4. Cost of funds raised through a bond issue is higher than the cost of funds raised through a share issue. 5. Companies must always pay dividends to reward shareholders. Choose all that are appropriate statements regarding the effects of signaling in the stock market. 1. The announcement of increased profits cause an increase in the stock price. 2. The stock price of a firm reporting earnings that are only a few cents below their previous estimates often go down by substantial amounts. 3. The announcement of share buyback leads to an increase in the share price. 4. The announcement of a tender offer causes an increase in the stock price of the target company. 5. The issue of equity often cause a company's stock price to decrease. Choose all that are appropriate. 1. Private equity provides equity or debt financing to private companies outside the public capital markets. 2. Most equity research analysts are employed by (and receive their paychecks from) industrial companies. 3. When a firm is planning an IPO, the buy-side will help the firm sell the shares. 4. Low-ranking analysts could make outlandish and contrary predictions, hoping that a lucky break will propel them to the top of the rankings 5. Analusetseare often afraid to recommend "sell" for a comnanv's stock hecauce that companv Investment funds typically open only to sophisticated investors with relatively light regulations compared to those of mutual funds, allowing them to employ leverage and take on concentrated and short positions A security with the following characteristics is called [ An asset representing an ownership interest in the business, sometimes subdivided into different classes. The owners of this asset usually have certain rights, including the right to share proportionately in the profits of the business and the right to elect directors and vote on proposals on certain important business decisions. Which of the following is an example of a good incentive? 1. Analysts are afraid to recommend "sell" for a company's stock because that company may not do business with their employer in the future. 2. Investors want to make money so they invest in companies that are doing well. 3. Pension funds invest in high-quality companies because they want to take care of their retirees. 4. CEOs take large risks with their companies, because a good part of their annual compensation is tied to the share price. 5. An investment manager has an incentive to imitate the strategies adopted by other managers, because the consequence of being wrong would be less severe