Financial Engineering
Final Exam
Course Introduction
Financial Engineering is an interdisciplinary field that applies mathematical techniques, financial theory, engineering methods, and programming skills to solve complex problems in finance. In this course, students will explore topics such as derivatives pricing, risk management, portfolio optimization, and quantitative modeling, using tools from statistics, economics, and computer science. The curriculum emphasizes the practical application of financial models and computational algorithms to structure new financial products, manage financial risk, and optimize investment strategies, preparing students for careers in investment banking, asset management, and financial technology.
Recommended Textbook
Principles of Corporate Finance 12th Edition by Richard Brealey
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Which of the following is an important function of financial markets?
A)Providing financing
B)Providing financing and liquidity
C)Providing financing, providing liquidity, reducing risk, and providing information
D)Providing information
Answer: C
Q2) Explain why "maximization of shareholders' wealth" is the appropriate ultimate long-term goal of the firm.
Answer: Under perfect market conditions, everyone can borrow or lend at the same interest rate. This implies that differences in consumption patterns can be adjusted in the financial markets. Given this, all investors will agree that they are better off if the firm maximizes their current wealth (i.e., maximizing shareholders' wealth).
Q3) A firm's total asset value belongs entirely to the shareholders.
A)True
B)False
Answer: False
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3
Chapter 2: How to Calculate Present Values
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Sample Questions
Q1) You would like to have enough money saved to receive a $50,000 per year perpetuity after retirement.How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start on the day of your retirement.The annual interest rate is 8 percent.)
A)$1,000,000
B)$675,000
C)$625,000
D)$500,000
Answer: B
Q2) The present value of $121,000 expected one year from today at an interest rate (discount rate) of 10 percent per year is
A)$121,000.
B)$100,000.
C)$110,000.
D)$108,900.
Answer: C
Q3) Define the term perpetuity.
Answer: A perpetuity is defined as a sequence of equal cash flows occurring each period forever.
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4
Chapter 3: Valuing Bonds
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Sample Questions
Q1) A five-year bond with a 10 percent coupon rate and $1,000 face value is selling for $1,123.Calculate the yield to maturity on the bond assuming annual interest payments.
A)10.0 percent
B)8.9 percent
C)7.0 percent
D)5.0 percent
Answer: C
Q2) If a bond's volatility is 10.00 percent and the interest rate goes down by 0.75 percent (points), then the price of the bond
A)decreases by 10.00 percent.
B)decreases by 7.50 percent.
C)increases by 7.50 percent.
D)increases by 0.75 percent.
Answer: C
Q3) Briefly explain the expectations theory.
Answer: The expectations theory states that, in equilibrium, a series of investments in short-term bonds must offer the same expected return as an equivalent investment in single long-maturity bonds.
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Chapter 4: The Value of Common Stocks
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Sample Questions
Q1) The New York Stock Exchange is the only stock market in the United States.
A)True
B)False
Q2) A stock's price is based on the expected present value, at the market capitalization rate, of all the stock's future earnings.
A)True
B)False
Q3) An investor who uses a market order instructs her brokerage firm to buy a given quantity of shares at the best available price.
A)True
B)False
Q4) One can estimate the expected rate of return or the cost of equity capital as
A)Dividend yield - expected rate of growth in dividends.
B)Dividend yield + expected rate of growth in dividends.
C)Dividend yield/expected rate of growth in dividends.
D)(dividend yield) × (expected rate of growth in dividends).
Q5) Most exchange traded funds are not actively managed.
A)True
B)False
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Chapter 5: Net Present Value and Other Investment Criteria
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Q1) You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C that have NPVs of + $70, -$40 and + $100, respectively.How would you go about making the decision about whether to accept or reject the project?
A)Accept project X as it has a positive NPV.
B)Reject project X.
C)Break up the project into its components: Accept A and C, but reject B.
D)Break up the project into its components: Accept C.
Q2) If the sign of the cash flows for a project changes two times, then the project likely has
A)one IRR.
B)two IRRs.
C)three IRRs.
D)four IRRs.
Q3) Present values have the value additivity property.
A)True B)False
Q4) The discounted payback method will never accept a negative-NPV project.
A)True B)False
Page 7
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Chapter 6: Making Investment Decisions With the Net
Present Value Rule
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Sample Questions
Q1) If the nominal interest rate is 7.5 percent and the inflation rate is 4.0 percent, what is the real interest rate?
A)4.0 percent
B)9.5 percent
C)3.4 percent
D)11.5 percent
Q2) The current market value of a previously purchased machine proposed for use in a project is an example of a(n)
A)sunk cost.
B)opportunity cost.
C)fixed cost.
D)inventoriable cost.
Q3) Costs incurred as a result of past irrevocable decisions and irrelevant to future decisions are called
A)opportunity costs.
B)sunk costs.
C)incremental costs.
D)marginal costs.
Q4) Define the term cash flow for a project.
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Chapter 7: Introduction to Risk and Return
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Sample Questions
Q1) The beta of a well-diversified portfolio is equal to the value weighted average beta of the securities included in the portfolio.
A)True
B)False
Q2) The covariance between YOHO stock and the S&P 500 is 0.05.The standard deviation of the stock market is 20 percent.What is the beta of YOHO?
A)0.00
B)1.00
C)1.25
D)1.42
Q3) For the most part, stock returns tend to move together.Thus, pairs of stocks tend to have both positive covariances and correlations.
A)True
B)False
Q4) Briefly explain how diversification reduces risk.
Q5) What is the beta of a portfolio with a large number of randomly selected stocks?
Q6) Briefly explain how the beta of a stock is estimated.
Q7) Briefly explain what the beta of a stock means.
Page 9
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Chapter 8: Portfolio Theory and the Capital Asset Pricing Model
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Sample Questions
Q1) Florida Company (FC) and Minnesota Company (MC) are both service companies.Their stock returns for the past three years were as follows: FC: -5 percent, 15 percent, 20 percent; MC: 8 percent, 8 percent, 20 percent. Calculate the variances of returns for FC and MC.(Ignore the correction for the loss of a degree of freedom set out in the text.)
A)FC: 100.00; MC: 256.00
B)FC: 350.00; MC: 96.00
C)FC: 116.67; MC: 32.00
D)FC: 48.00; MC: 175.00
Q2) If the covariance of Stock A with Stock B is -100, what is the covariance of Stock B with Stock A?
A)+100
B)-100
C)1/100
D)Additional information is needed.
Q3) The correlation between the return on a risk-free asset and the return on any common stock will equal zero.
A)True
B)False
Q4) Briefly explain the term security market line.
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Chapter 9: Risk and the Cost of Capital
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Sample Questions
Q1) Which of the following types of projects have the lowest unique risk?
A)Speculative ventures
B)New products
C)Expansions of existing business
D)Cost improvements
Q2) Company A's historical returns for the past three years were 6 percent, 15 percent, and 15 percent.Similarly, the market portfolio's returns were 10 percent, 10 percent, and 16 percent.Calculate the beta for Stock
A)1.75
B)1.00
C)0.57
D)0.75
Q3) A higher standard error of a beta estimate indicates both a less-reliable estimate and a larger confidence interval.
A)True
B)False
Q4) Briefly explain, when using the CAPM, which value should be used for the risk-free interest rate.
Q5) Why do firms with large cash-flow betas also have high asset betas?
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Chapter 10: Project Analysis
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Q1) Briefly discuss the usefulness of Monte Carlo simulation in project analysis.
Q2) Postaudits are conducted before the start of projects.
A)True
B)False
Q3) Explain the usefulness of decision trees in project analysis.
Q4) A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0).You expect the project to produce sales revenue of $120,000 per year for three years.You estimate manufacturing costs at 60 percent of revenues.(Assume all revenues and costs occur at year-end [i.e., t = 1, t = 2, and t = 3]).The equipment depreciates using straight-line depreciation over three years.At the end of the project, the firm can sell the equipment for $10,000 and also recover the investment in net working capital.The corporate tax rate is 30 percent and the cost of capital is 15 percent.Calculate the NPV of the project.
A)$3,840
B)$8,443
C)$-2,735
D)$7,342
Q5) Briefly discuss various real options associated with capital budgeting projects.
Q6) Define the term abandonment value.
Page 12
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Chapter 11: Investment Strategy and Economic Rents
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Sample Questions
Q1) If an asset is worth more to others than it is to you, you should generally attempt to buy it from them.
A)True
B)False
Q2) The manufacture of folic acid is a competitive business.A new plant costs $100,000 and lasts for three years.The cash flow from the plant is as follows: year 1: +$43,300; year 2: +$43,300; and year 3: +$58,300.(Assume no taxes.) If the salvage value of the plant at the end of year 1 is $80,000, should you scrap the plant at the end of year 1?
A)Yes
B)No
C)More information is needed.
D)I don't know.
Q3) Why are economic rents important to a manager?
Q4) Long-lasting competitive advantages include
A)patents only.
B)brand names only.
C)patents and brand names.
D)patents, brand names, and economies of scale.
Q5) What is the total net present value (NPV) of an expansion plan?
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Chapter 12: Agency Problems Compensation and Performance Measurement
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Sample Questions
Q1) Since monitoring is not perfect, compensation plans should primarily provide managers incentives to
A)put a lot of thought into their work.
B)work long hours.
C)take actions that make stakeholders happy.
D)maximize the value of the firm to the shareholders.
Q2) Which of the following capital expenditures may not appear in a firm's capital budget?
A)Investment in a new factory only
B)Investment in a new machine only
C)Investment in training employees only
D)Investment in a new factory and in a new machine
Q3) The term economic value added (EVA) is trademarked by
A)Brealey-Myers.
B)Brealey-Myers-Allen.
C)Ross-Westerfield.
D)Stern-Stewart.
Q4) EVA = income earned - (cost of capital) × (investment).
A)True
B)False
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Chapter 13: Efficient Markets and Behavioral Finance
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Sample Questions
Q1) The study of behavioral finance has best helped explain which of the following investor behaviors?
A)Investors are often unable to short-sell unfavorable stocks.
B)Investors often create undiversified portfolios.
C)Investors tend to sell their losing stocks and retain stocks that have capital gains.
D)Investors are generally too slow to update their beliefs in the face of new evidence.
Q2) The weak form of efficient market theory implies that technical analysis is valuable. A)True
B)False
Q3) If the efficient market hypothesis holds, investors should expect
A)to receive a fair price for their security.
B)to earn a normal rate of return on their investments.
C)to be able to pick stocks that will outperform the market.
D)to receive a fair price for their security and to earn a normal rate of return on their investments.
Q4) List the three forms of market efficiency and explain the bases for them.
Q5) What are puzzles and anomalies?
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Chapter 14: An Overview of Corporate Financing
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Sample Questions
Q1) The following functions, provided by financial intermediaries, enable the smooth functioning of the economy:
A)processing of payments.
B)processing of payments and borrowing and lending.
C)processing of payments, borrowing and lending, and pooling risks.
D)pooling risks.
Q2) Indicate the major sources of finance available to corporations.
Q3) If you own 1,000 shares of common stock of a firm and there are five directors being elected, what is the maximum number of votes you can cast for a particular director under cumulative voting?
A)5,000
B)1,000
C)200
D)5
Q4) In the United Sates, who holds the smallest portion of corporate equities?
A)Households
B)Pension funds
C)Mutual funds
D)Insurance companies
Q5) Why do firms rely heavily on internal funds?
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Chapter 15: How Corporations Issue Securities
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Sample Questions
Q1) A new public equity issue from a company with public equity previously outstanding is called a(an)
A)initial public offering (IPO).
B)American depository receipt (ADR).
C)seasoned equity offering (SEO).
D)private placement.
Q2) When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds, and so forth, it is called a(an)
A)rights offering.
B)general art offering.
C)private placement.
D)unseasoned issue.
Q3) Most public issues must be registered with the SEC, and the company may not sell securities until the SEC has approved its registration statement.
A)True
B)False
Q4) Briefly explain the term initial public offering (IPO).
Q5) Explain the term winner's curse.
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Chapter 16: Payout Policy
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Q1) The following statements are true of dividend reinvestment plans (DRIPs):
A)They are offered by the companies to their shareholders.
B)They are offered by the companies to their shareholders and the dividends are taxable as ordinary income.
C)They are offered by the companies to their shareholders; generally, new shares are issued at a discount; and the dividends are taxable as ordinary income.
D)The dividends are taxable as ordinary income.
Q2) Dividend policy changes are decided and announced by
A)the managers of a firm.
B)the government.
C)the board of directors.
D)the managers of a firm and the government.
Q3) If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date?
A)Fall by more than the amount of the dividend
B)Fall exactly by the amount of the dividend
C)Fall by less than the amount of the dividend
D)The result cannot be predicted.
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Chapter 17: Does Debt Policy Matter
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Sample Questions
Q1) A firm's asset beta equals the weighted average of the betas on its debt and equity, given the assumption of no taxes.
A)True
B)False
Q2) Modigliani and Miller Proposition II states that the rate of return required by shareholders increases steadily as the firm's debt-equity ratio increases.
A)True B)False
Q3) For a levered firm,
A)as earnings before interest and taxes (EBIT) increases, earnings per share (EPS) increases by the same percentage.
B)as EBIT increases, EPS increases by a larger percentage.
C)as EBIT increases, EPS decreases by the same percentage.
D)as EBIT increases, EPS decreases by a larger percentage.
Q4) The firm's asset beta is usually higher than the firm's equity beta. A)True B)False
Q5) Briefly explain how changes in the debt-equity ratio change the firm's equity beta.
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Chapter 18: How Much Should a Corporation Borrow
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Q1) Suppose that a company can direct $1 to either debt interest or capital gains for equity investors.If there were no personal taxes on capital gains, which of the following investors would not care how the money was channeled? (The marginal corporate tax rate is 35 percent.)
A)Investors paying personal tax of 17.5 percent
B)Investors paying personal tax of 35 percent
C)Investors paying personal tax of 53 percent
D)Tax-exempt personal investors
Q2) In Miller's model, when the quantity (1 - T<sub>C</sub>)(1 - Tp<sub>E</sub>) = (1Tp), then
A)the firm should hold no debt.
B)the value of the levered firm is greater than the value of the unlevered firm.
C)the tax shield on debt is exactly offset by higher personal taxes paid on interest income.
D)the firm should be financed by 100 percent equity.
Q3) Financial distress occurs when promises to creditors are not honored or honored with great difficulty.
A)True
B)False
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Chapter 19: Financing and Valuation
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Q1) The MM formula for the adjusted cost of capital takes into consideration only the effect of the interest tax shield on permanent debt.
A)True
B)False
Q2) The APV method can be used for valuing entire businesses.
A)True
B)False
Q3) To calculate the total value of the firm (V), one should rely on the A)market values of debt and equity.
B)market value of debt and the book value of equity.
C)book values of debt and the market value of equity.
D)book values of debt and equity.
Q4) APV = NPV(base-case assuming all equity financing) - NPV(financing decisions caused by project financing).
A)True
B)False
Q5) Discuss why WACC is used most often by managers to make capital budgeting decisions.
Q6) Briefly explain how WACC can be used for valuing a business.
Page 21
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Chapter 20: Understanding Options
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Q1) Define the term put option.
Q2) All else equal, as the underlying stock price increases, A)the call price decreases.
B)the call price increases.
C)there is no effect on call price.
D)the call price can either increase, decrease, or remain the same.
Q3) All else equal, as the underlying stock price increases,
A)the put price increases.
B)the put price decreases.
C)there is no effect on put price.
D)the put price can either increase, decrease, or remain the same.
Q4) In June 2017, an investor buys a put option on Genentech stock with an exercise price of $75 and expiring in January 2019.If the stock price in July 2017 is $80, then this option is
A)in-the-money.
B)out-of-the-money.
C)a LEAPS option.
D)out-of-the-money and a LEAPS option.
Q5) Explain the difference between a European option and an American option.
Page 22
Q6) Briefly explain what is meant by put-call parity.
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Chapter 21: Valuing Options
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Q1) Suppose VS's stock price is currently $20.A six-month call option on VS's stock with an exercise price of $15 has a value of $7.14.What is the price of an equivalent put option?
The six-month risk-free interest rate is 5 percent per six-month period.
A)$1.43
B)$9.43
C)$8
D)$12
Q2) Briefly explain why a call option is always riskier than a simple investment in the underlying stock.
Q3) For a European option, Value of put = (value of call) - share price + PV (exercise price).
A)True
B)False
Q4) The term [N(d2) × PV(EX)] in the Black-Scholes model represents the
A)call option delta.
B)bank loan.
C)put option delta.
D)present value of a bank loan.
Q5) Briefly explain put-call parity.
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Chapter 22: Real Options
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Q1) Production facilities that are flexible, in terms of the potential to use different combinations of raw material inputs, are most valuable when
A)the product's demand is highly volatile.
B)the product's price is highly volatile.
C)raw material prices are highly volatile.
D)labor costs are highly volatile.
Q2) A firm has a three-year real option to invest in a project that has a present value of $500 million with an exercise price (in year 3) of $800 million.Calculate the value of the option given that N(d1) = 0.3 and N(d2) = 0.15.Assume that the risk-free interest rate is 6 percent per year.
A)$30 million
B)$49.25 million
C)zero
D)$7.08 million
Q3) In real options, the required investment is considered the exercise price.
A)True
B)False
Q4) What are the four main types of real options?
Q5) How does an abandonment option increase the value of a project?
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Chapter 23: Credit Risk and the Value of Corporate Debt
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Q1) Which of the following rated bonds has the most risk?
A)Aaa
B)Aa
C)Baa
D)Ba
Q2) Beaver, McNichols, and Rhie have developed the following model to predict the chance of failing during the next year relative to the chance of not failing for firms: log(relative chance of failure) = -6.445 - 1.192 ROA + 2.307 (liabilities/assets)0.346(EBITDA/liabilities), using
A)multiple discriminant analyses.
B)real options analysis.
C)hazard analysis.
D)None of the options are correct.
Q3) It is extremely rare for a corporate bond to have a higher expected yield than a government bond.
A)True
B)False
Q4) Briefly explain how the option pricing model can be used for pricing risky debt.
Q5) What is a major drawback to value-at-risk calculations?
Q6) Briefly explain the term junk bonds.
Page 25
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Chapter 24: The Many Different Kinds of Debt
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Q1) The largest market for foreign bonds is
A)the United States.
B)Japan.
C)Switzerland.
D)Russia.
Q2) According to SEC Rule 144A, A)bonds issued through private placements can be bought and sold by institutional investors.
B)SEC registration is not needed for privately placed bonds.
C)SEC registration is required of all securities issued in the United States.
D)bonds issued through private placements can be bought and sold by institutional investors and SEC registration is not needed for privately placed bonds.
Q3) The Alfa Co.has a 12 percent bond outstanding on a $1,000 face value bond that pays interest on February 1 and July 1.Today is March 1 and you are planning to purchase one of these bonds.How much will you pay in accrued interest?
A)$10
B)$20
C)$30
D)$60
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Chapter 25: Leasing
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Q1) Briefly explain the term cross-border leases.
Q2) Your firm is considering leasing a new photocopier.The lease lasts for nine years.The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately.The copier would cost $8,100 to buy and would be depreciated using the straight-line method to zero salvage over nine years.The firm can borrow at a rate of 8 percent.The corporate tax rate is 30 percent.What is the NPV of the lease?
A)-$1,039.78
B)$6,610.22
C)$686
D)$360
Q3) Assume the initial financing provided by a lease is $500,000 and the present value of the cash outflow attributable to the lease is $525,000.Then the net value of the lease is
A)$25,000.
B)-$25,000.
C)$1,025,000.
D)$500,000.
Q4) Briefly describe a sale and lease-back arrangement.
Q5) What advantage does a sale-lease-back to a SPE have?
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Chapter 26: Managing Risk
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Q1) The spot price for home heating oil is $0.55 per gallon.The futures price for one year from now is $0.57.If the risk-free rate is 6 percent per year, what is the net convenience yield?
A)0.0411
B)0.0364
C)0.0236
D)0.0440
Q2) In bearing risk, what disadvantages do insurance companies face?
Q3) A derivative is a financial instrument whose value is determined by A)a regulatory body such as the FTC. B)the value of an underlying asset.
C)hedging a risk.
D)speculation.
Q4) Why are derivatives necessary for a thriving economy?
Q5) "Mark to market" means that, each day, any profits or losses are calculated and the trader's margin account is adjusted accordingly.
A)True
B)False
Q6) Briefly describe a swap contract.
Q7) Briefly explain the term derivative.
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Chapter 27: Managing Risk
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Q1) What is wrong with the following news report? "Today the dollar ended the trading session stronger."
Q2) Briefly explain the term transaction exposure.
Q3) Suppose that the G Company knows that in one month it must pay£7 million for goods that its U.S. subsidiary will receive in Britain. The current exchange rate is $1.99£. The risk that the corporate treasurer faces is that
A)the $US/pound exchange rate falls in a month's time (i.e., the pound weakens).
B)the $US/pound exchange rate rises in a month's time (i.e., the pound strengthens).
C)the $US/pound exchange rate does not change from its current position.
D)the pound exchange rate falls in a month's time (i.e., the pound strengthens).
Q4) The risk associated with unanticipated actions by the host country government or its courts towards a multinational firm is called
A)economic risk.
B)transaction risk.
C)political risk.
D)translation risk.
Q5) Briefly describe what happens in foreign exchange markets.
Q6) Briefly explain the concept of purchasing power parity.
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Chapter 28: Financial Analysis
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Q1) Earnings before interest and taxes are calculated as
A)total revenues - costs.
B)total revenues - costs - depreciation.
C)total revenues - costs + depreciation - taxes.
D)total revenues - costs - depreciation - taxes.
Q2) Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200.Calculate the quick ratio.
A)1
B)2
C)1.2
D)0.4
Q3) Assume the following data: EBIT = 400; Net income = 100; Equity = 1,000.Calculate the ROE (return on equity).
A)10 percent
B)12 percent
C)7.5 percent
D)30 percent
Q4) Why is liquidity relevant?
Q5) What are the common ratios used to measure the liquidity of a firm?
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Chapter 29: Financial Planning
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Q1) Depreciation is not included as a source of cash because it is an expense.
A)True
B)False
Q2) A company has forecast sales in the first three months of the year as follows (figures in millions): January, $90; February, $20; March, $30.Seventy percent of sales are usually paid for in the month that they take place and 30 percent in the following month.Receivables at the end of December were $20 million.What are the forecasted collections on accounts receivable in March?
A)$27 million
B)$50 million
C)$23 million
D)$35 million
Q3) Which of the following assets is the least liquid?
A)Equipment and machinery
B)Finished goods inventory
C)Accounts receivable
D)Marketable securities
Q4) Briefly describe the cash cycle.
Q5) Briefly discuss some of the problems associated with the use of the percentage of sales model.
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Chapter 30: Working Capital Management
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Q1) The costs of holding inventory include
A)carrying cost.
B)carrying cost and order cost.
C)insurance cost.
D)carrying cost, order cost, and insurance cost.
Q2) Terry's Place is currently experiencing a bad debt ratio of 4 percent.Terry is convinced that, with looser credit controls, this ratio will increase to 8 percent; however, she expects sales to increase by 10 percent as a result.The cost of goods sold is 80 percent of the selling price.Per $100 of current sales, what is Terry's expected profit under the proposed credit standards?
A)$26
B)$15.40
C)$13.20
D)$25.60
Q3) Briefly describe the most widely used commercial credit instruments.
Q4) Concentration banking is used to slow down disbursements.
A)True
B)False
Q5) List some of the different money market instruments available for short-term investments.
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Chapter 31: Mergers
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Q1) The following data on a merger are given: \(\begin{array} { l c l l } & \text { Firm A } & \text { Firm B}&\text { Firm AB } \\
\text { Price per share } & \$ 100 & \$ 10 & \\
\text { Total eamings } & \$ 500 & \$ 300 & \\
\text { Shares outstanding } & 100 & 40 & \\
\text { Total value } & \$ 10,000 & \$ 400 & \$ 11,000 \end{array}\) Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.Calculate the NPV of the merger.
A)$200
B)$400
C)$600
D)$150
Q2) Name the agencies that have successfully blocked mergers on antitrust (antimonopoly) grounds.
Q3) The following are sensible motives for mergers except A)economies of scale.
B)complementary resources.
C)diversification.
D)eliminating inefficiencies.
Q4) Who are antitakeover defenses designed to protect?
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Chapter 32: Corporate Restructuring
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Q1) The following are important motives for privatization except A)revenue for the government.
B)increased efficiency.
C)share ownership.
D)economies of scale.
Q2) A spin-off is a(n)
A)new company.
B)independent company.
C)new company and an independent company.
D)new company, an independent company, and a company formed by detaching part of a parent firm's assets and operations.
Q3) What is a spin-off?
Q4) A spin-off is a new independent company created by selling some of a parent company's assets to new investors.
A)True
B)False
Q5) Briefly explain why private equity has an advantage, versus publicly owned firms, in creating value.
Q6) Briefly explain the difference between a spin-off and a carve-out.
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Chapter 33: Governance and Corporate Control Around the World
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Q1) The idea that a corporation should be run in the interests of the shareholders is embedded in the law in
A)the United States.
B)the United States and the UK.
C)France and Japan.
D)the UK and Japan.
Q2) The following are sources of financing for corporations:
A)households.
B)financial institutions.
C)other corporations.
D)households, financial institutions, and other corporations.
Q3) In which of the following countries do individual investors play the largest role in corporate governance?
A)The United States
B)The UK
C)Japan
D)Germany
Q4) Firms raise funds from financial markets and from financial institutions.
A)True
B)False
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