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Exam 2 Practice

# Exam 2 Practice - Exam II 1 Why might(non-insider...

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Exam II 1)______ Why might (non-insider) stockholders benefit from the awarding of long-term stock options to managers? a) Options encourage managers to seek lower risk projects b) Options make managers more willing to accept higher risk projects c) Managers delay the release of good news around their option award date. d) The firm is more likely to be the target of a successful takeover. e) The board is more willing to fire poorly-performing managers if they have long-term stock options. 2)______ Which of the following changes would generally decrease a firm’s agency costs? 3)_____ The Economic Value Added (EVA) for a project of average risk can best be defined as: 4) ______ An analyst is using Monte Carlo simulation modeling to perform risk-analysis. She obtains a random number in cell Q1 , using the EXCEL function “=rand()”. A Z-score is obtained in cell R1 using the formula “=normsinv(Q1)”. Revenues are normally distributed, with a mean of \$100,000 and a standard deviation of \$20,000. The correct formula to obtain simulated revenues is: 5)_____You wish to obtain data on the compensation of current P&G executives, stockholder proposals submitted for a vote, and the occupations of P&G’s current board of directors. The best place to find this information in P&G’s: a) Annual report d) Proxy statement b) Articles of Incorporation e) Edgar Statement c) Constitution 1

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Data for Questions 6-8 You are performing a sensitivity analysis for a project to replace your GADGET machine early, in order to save manufacturing costs. The cost of the new machine is \$ 10 million , and the firm pays no taxes. The project’s discount rate is 12%. The PVIFA’s are the present value interest factor of an annuity. 4.5638 = PVIFA (12%,7=n) 5.6502 = PVIFA (12%,10=n) 6.4235 = PVIFA (12%,13=n) WACC = 12% Manufacturing cost of old machine = \$10 per unit Risk Analysis Table: pessimistic expected optimistic Sales (in units) 300,000 500,000 700,000 Manufacturing cost (per unit: new machine) \$8 \$6 \$5 Life of project (years) 7 10 13
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