CH34 - CHAPTER 34 Control, Governance, and Financial...

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CHAPTER 34 Control, Governance, and Financial Architecture Answers to Practice Questions 1. a. In the U.S., the largest shareholders of corporations are financial institutions. However, since ownership is usually widely dispersed, effective control often rests with management. In many countries outside the U.S., families and governments often have large equity stakes. b. False. Top managers in Germany are more likely to balance the interests of all stakeholders (rather than just those of shareholders), but poor performance can still result in management turnover. c. True. Carve-out or spin-off of a division improves incentives for the division’s managers. If the businesses are independent, it is easier to measure the performance of the division’s managers. d. False. The limited life of a private-equity partnership reassures the limited partners that the cash flow will not be reinvested in a wasteful manner. It also tends to ensure that partnerships focus on opportunities to reorganize poorly performing businesses and to provide them with new management before selling them off. e. True. The remuneration package for the general partners typically includes a 20% carried interest. This is equivalent to a call option on the partnership’s value and, as is the case for all options, this option is more valuable when the value of the assets is highly variable. 2. In general, firms with narrow margins in highly competitive environments are not good candidates for LBO’s or MBO’s. These firms are often highly efficient and do not have excess assets or unnecessary capital expenditures. Further, the
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This note was uploaded on 10/19/2009 for the course FINANCE finance mb taught by Professor Myers during the Spring '09 term at NUCES - Lahore.

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CH34 - CHAPTER 34 Control, Governance, and Financial...

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