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CHAPTER 15 CORPORATE VALUATION, VALUE-BASED MANAGEMENT, AND CORPORATE GOVERNANCE (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: Corporate valuation model Answer: b Diff: E 1 . The corporate valuation model cannot be used for a company that doesn’t pay dividends. a. True b. False Free cash flows and valuation Answer: a Diff: E 2 . Free cash flows should be discounted at the weighted average cost of capital to find the value of a company’s operations. a. True b. False Value-based management Answer: b Diff: E 3 . Value-based management focuses on sales growth, profitability, capital requirements, the weighted average cost of capital, and dividend growth. a. True b. False Corporate governance Answer: b Diff: E 4 . Two important issues in corporate governance are the rules that affect the threat of a CEO’s removal and the rules that allow a CEO to fire members of the board of directors. a. True b. False Medium: Corporate governance Answer: b Diff: M 5 . A poison pill is also known as a targeted share repurchase. a. True b. False Chapter 15 - Page 1
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ESOP Answer: a Diff: M 6 . An ESOP can be used to improve worker productivity and to prevent hostile takeovers. a. True b. False Return on invested capital and MVA Answer: b Diff: M 7 . If a company’s expected return on invested capital is less than its cost of equity, then the company has a negative market value added (MVA). a. True b. False Stock options Answer: b Diff: M 8 . The CEO of D’Amico Motors has been granted some stock options with typical provisions. If the stock of D’Amico Motors underperforms the market, the stock options will be worthless. a. True b. False Multiple Choice: Conceptual Easy: Corporate governance Answer: a Diff: M 9 . Which of the following is not a barrier to a hostile takeover? a. Nonpecuniary benefits. b. Targeted share repurchases. c. Shareholder rights provision. d. Restricted voting rights. e. Poison pill. ESOP Answer: c Diff: M 10 . Which of the following is not a possible reason to establish an ESOP? a. To increase worker productivity.
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