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theory of corporate finance
Questions and Answers of
Theory Of Corporate Finance
What limits are there to writing a corporate charter that eliminates future agency conflicts?
When are the incentives to control agency conflict strongest?Why? Can you give a numerical example?
Reconsider the example in which you have to waste $10 million in order to get $30 million in loot. External shareholders receive 41.7% of the firmin exchange for $25 million in funding.Would it be in
What are the main control rights of debt and equity?
When one firm acquires another, what form of payment do the shareholders of the target firm usually receive?
Is there a moral dilemma when it comes to golden parachutes? Do long-standing workers who lose their jobs also deserve and receive golden parachutes?
Is a golden parachute always/never in the interest of shareholders? Explain.
What has been the most effective antitakeover device? Explain how it works, and why it works so well. What does a raider have to do to take over a company that has deployed this device?
On average, do acquiring or target shareholders gain more from the acquisition? On average, does acquiring or target management gain more from an acquisition?
What sources of value in an acquisition are strongest in leveraged buyouts? Is this different from ordinary acquisitions?
What are the main sources of value generation in most mergers and acquisitions? Are all of them in the interest of society as a whole?
Research Cerberus Capital’s portfolio companies on the Web. When did Cerberus take these companies over? Did interest rates seem to have had an effect on Cerberus’s takeover activities?
Search the financial websites to determine what the biggest three acquisitions in the last 12 months were. Can you describe each deal in a page or less?Where does the value come from?
Look up the debt ratings for Goldman Sachs.Is all its debt ranked identically?
A firm wants to raise $500 million. Compare the costs of issuing $500 million in convertible equity versus those of issuing $250 million in speculative-grade debt and $250 million in seasoned equity.
Do competitive bids for underwriting services end up cheaper or more expensive than non competitive bids?Which one is more prevalent and why?
What is the main institutional difference between equity issues by regulated utilities firms and equity issues by nonregulated ordinary firms?Which of these two types of firms seems to raise capital
How are the interests of investment banks different from those of their clients (investors and firms)?
In the context of all takeovers, are hostile takeovers rare?
Look at the Thomson Financial League tables on theWeb (http://www.thomsonreuters.com/products_services/financial/league_tables).Who are the top debt underwriters, top equity underwriters, and top M&A
How are underwriting and M&A linked? Do investment banks have to have both?
Is it appropriate to call Goldman Sachs principally an investment bank?Why?
In relative terms, how important is the American market in equity underwriting compared to the European market?
How do client assets under management and Tier 1 capital translate into market value? That is, are U.S. and U.K. banks relatively more valuable than their foreign competitors?
Describe the functions of M&A advisory services.
Look up five recent IPOs. (Google is your friend.) How many book runners and underwriters can you identify?
What are the most important services and functions of underwriters today?
How important is the guarantee of securities placement success that underwriters provide their clients?
The mean M&A advising commission is about 1% (0.9% for acquirer, 1.1% for target). The median is about 0.6% (0.5% for the acquirer, 0.8% for the target). The differences across tiers and between
The typical acquirer is about three to four times as large as the target.
The two main methods of payments in acquisitions are cash offers and stock offers.
With a few legal exceptions, shareholder proposals are not binding. (If they were binding, they would fall under the management authority of the board of directors, who therefore would have the power
It is very costly to execute a proxy and takeover contest. A typical takeover premium may be as high as 20%—worthwhile only if the current management commits the most egregious breach of
Even though hostile takeovers are rare, they matter greatly. They are the fallback position if “friendly”negotiations fail. A hostile offer is the (quiet) gorilla in the backroom that can always
The list of resistance measures in takeovers can be found in Section 23.3B: greenmail, golden parachutes, acquisitions, scorched earth strategies, poison pills, new share issues, fair value
Firms may want to acquire other firms either because it is in the interest of the firm (creating value), or because it is in the interest of managers (and advising bankers).
Yes, even if the net value gain is positive, if the acquirer overpays, the acquirer’s shareholders can lose.
Sources of value in M&A are synergies, reduction of competition, acquisition of expertise, elimination of poor management, shutdown efficiencies, expropriation, tax benefits, and improved corporate
Yes and no. Clearly, the firm could operate more productively by replacing these workers. However, it could be that these fired workers had implicit promises that they did not have to be as
Look at Figure 23.4. The $100 million seasoned equity offering would cost about 5% in spread. The $100 million speculative-grade debt offering would cost about 1.5%. The total underwriter spread
Firms often just use the same underwriter that they have used in the past. Firms also switch underwriters when they “outgrow” their previous underwriters. In this case, industry expertise and
Hostile takeovers are not just a U.S. phenomenon, but have also appeared outside the United States. In fact, the biggest two hostile takeovers ever (Mannesmann and ABN-Amro) were foreign target
Figure 23.2 shows that M&A activity rose gradually in the 1980s, starting from scratch and ending just below 4,000 transactions per year. Over the next 10 years, the number roughly tripled and the
There is more capital at risk, which in turn means that the underwriter has to put more of its reputation on the line and work harder to place the securities. In the extreme, if the debt is risk
It seems rather competitive to me.
The average compensation of a Goldman Sachs employee was about $600,000. It was highly skewed, though, with many individuals earning double-digit million-dollar salaries. Given that Goldman also has
The Glass-Steagall Act of 1933 prevented retail banks from doing investment banking.When it was repealed in 1999, a number of financial institutions merged to become larger financial conglomerates.
The United States is still the biggest capital market for securities, but Europe and Asia are no longer far behind.When it comes to equity, they have even surpassed the United States on some measures.
See Table 23.1 for the top commercial banks worldwide. The so-called eyeball scientific method suggests that the typical bank in this list had around $50 billion in Tier 1 capital, $100 billion in
This is actually from Section 21.7: Most brokerage analysts’ recommendations are not to be trusted blindly, as evidenced by the fact that most recommendations are “buy.” Favorable
The three important functions of underwriters today are issue origination, issue placement, and reputation and signaling. There are also a host of less formal tasks (such as analyst coverage).
What is the typical commission forM&Aadvice that investment bankers earn? How does it differ across the tier of investment bank retained, and across acquirer and target?
How large is the typical acquirer relative to the typical target?
What are the two main payment methods in acquisition offers?
How is a shareholder proposal different from a proxy contest?
What are some of the reasons why the fear of proxy and takeover contests may not control all CEOs?
Is it true that if hostile takeovers are rare, they should not matter very much?
What can an executive do to resist a takeover?
Why do many firms like to acquire other firms?
Can an acquisition that is value increasing be a bad deal for the acquirer?
What are the main sources of value generated in most mergers & acquisitions?Are all of them in the interest of society as a whole?
If the firm fires workers that cost more than they are producing, is this always a sign of better governance that is in the interest of society?
A firm wants to raise $200 million. Compare the costs of issuing $20 million in seasoned equity versus those of issuing $100 million in speculative-grade debt and $100 million in seasoned
What factors are important when firms select underwriters?
Are hostile takeovers just a U.S. phenomenon?
Describe how global M&A activity changed over the last four decades.
Why is it more expensive to place equity than debt?
Is the underwriting very competitive or dominated by a small number of firms?
What was the approximate average compensation of a Goldman Sachs employee in 2007? What would you guess the average seasoned investment banker earned?
What was the Glass-Steagall Act?
Where are the biggest capital markets for placing securities? Roughly, how do they compare in size?
Can you name some of the leading global commercial banks from memory?Roughly how much Tier 1 capital, market value, and client assets do the top 25 banks have?
How good and unbiased are brokerage analysts’ buy recommendations?
What are the most important services and functions of underwriters today?
Are answers frommanagers “prescriptive” (i.e., giving good guidance as to what corporations should do)?
What do CFOs claim they care about when thinking about the best capital structure?
If our empirical knowledge about the deeper determinants of capital structure is modest, does this mean that capital structure theories are irrelevant?
What are the important deeper causes for firms’ capital structures?
How did most new equity shares for large S&P 100 firms enter the financial markets?
Is seasoned equity issuing net of repurchasing activity (excluding M&A activity) a major factor in determining the capital structure changes of U.S. firms? That is, does it explain well why some
Are value changes (stock returns) a major factor in determining the capital structure changes of U.S. firms—explaining why some firms have higher debt ratios and other firms have lower debt ratios?
Were Anglo-Saxon firms more indebted than their foreign counterparts in 1991?
How did book and market values of equity compare for firms of various sizes?
Roughly and on average, how much of very large and very small firms’ total liabilities were short term in nature?
Roughly and on average, how much of very large and very small firms’ total liabilities were financial debt?
What industries in 2003 were characterized by very high debt ratios? Which were characterized by very low debt ratios? Is it still the same today?
Did profitable firms have higher or lower indebtedness ratios than unprofitable firms?
Roughly and on average, what were the liabilities ratios of firms—large and small—on various measures?
What debt ratio characteristics did the largest firms in 2005 have? What firms had very high debt ratios?
What are your main choices for measuring leverage when you want to describe a firm’s capital structure?
Is the financial-debt-to-assets ratio a good measure of firm leverage? If yes, please compute it for IBM for 2005, using information from the preceding questions. If no, please explain why.
Why might you want to use the financialdebt-to-capital ratio rather than the broader total-liabilities-to-assets ratio?
What is “enterprise value”?What does it omit?
In 2005, IBM’s financials reported total assets of $105,748 million, total liabilities of $72,650 million, and financial debt of $22,641 million.Its market value of equity was $129,463 million.(a)
Is it inconsistent to use the market value of equity but the book value of liabilities? If they are inconsistent, would it make sense to use them as inputs in the same ratio?
Roughly and on average, what is the typical ratio of the market value over the book value for a large firm? For a small firm?
No, financial flexibility could be bad for shareholders. If managers have a lot of money lying around, they can often do as they please. They can build empires, avoid being fired if they make bad
It could be a waste of time if we got the theories wrong and missed the most important ones. However, it is more likely that our capital structure theories would still be useful. If firms do not
Theories of capital structuremay explain relatively little of firms’ capital structures for the following reasons:Our variables may be poor proxies, our theories may have guided us to the wrong
The important deep factors seem to be direct stock performance, equity issuance avoidance, peer similarity, corporate income taxes, accounting performance, M&A activity, financial distress, credit
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