FIN 302- Exam #2

FIN 302- Exam #2 - 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? a) Decrease in debt/asset ratio b) Decrease in the dividend payout ratio (dividends / net income) c) An increase in the proportion of stock held by atomistic shareholders d) The firm replaces five directors with two directorships each, with new directors who average six directorships each. e) In fact, none of the above would decrease a firm’s agency costs 3)_____ The Economic Value Added (EVA) for a project of average risk can best be defined as: a) The project’s internal rate of return b) The project’s internal rate of return less the firm’s WACC c) The standard deviation of the project’s cash flows divided by the project’s expected NPV d) The PV of the project’s inflows less the PV of the compensation of the employees involved in the project. e) The NPV of the project. 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: a) =(Q1*100000) + 20000 b) =(R1 * 100000) + 20000 c) =(100000*R1)+(20000*Q1) d) =100000 + (20000 * Q1) e) =100000 + (20000 * R1) Note: cell Q1 is the random number and cell R1 is the cell with the Z-score computed using the random number from cell Q1. 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 a) Annual report d) Proxy statement 1
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b) Articles of Incorporation e) Edgar Statement c) Constitution I know some of you chose answer “e” because of the abbreviation used on Edgar. I generally would not have offered this answer choice that some have said was “tricky.” However, in class, we talked about how the abbreviation used on EDGAR is not representative of the name of the document. (In fact, I recall discussing that I am not sure why EDGAR uses the DEF 14A notation for a proxy statement.) 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
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This note was uploaded on 11/15/2011 for the course FIN 302 taught by Professor Kellybrunarski during the Spring '11 term at Miami University.

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FIN 302- Exam #2 - Exam II 1)_ Why might (non-insider)...

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