Question 1

The empirical evidence shows that the link between the value created by the acquisition of another company and earnings per share (EPS):&#10;A)Is strong and positive.&#10;B)Does not exist.&#10;C)Is weak and negative.&#10;D)Is strong and negative.

Accepted Answer

The empirical evidence suggests that there is no link between the value created by the acquisition of another company and earnings per share (EPS). Therefore, choice B is the correct answer.

Question 2

Paying attention to which of the following tends to lead to a company doing well in the stock market?
I.Growth.
II.Price-to-earnings ratio.
III.Earnings per share.
IV.Return on invested capital.

A)I and II only.
B)II and III only.
C)I and IV only.
D)II,III,and IV only.

C

Accepted Answer

Explaination:The two sources of value creation are growth and return on invested capital.

Question 3

Explain the challenge competition plays in creating value in the long run and what this means for the firm that wishes to create value in the long run.

Accepted Answer

Competition tends to erode competitive advantages and,with them,returns on invested capital.Therefore,companies must continually seek and exploit new sources of competitive advantage if they are to create long-term value.To that end,managers must resist short-term pressure to take actions that create illusory value quickly at the expense of the real thing in the long term.

Question 4

Which of the following have been found to occur in companies that adopt long-term value-creation policies?
I.Higher customer satisfaction.
II.Higher number of acquisitions.
III.Better treatment of former employees.
IV.A higher level of corporate responsibility.

A)I and II only.
B)I,III,and IV only.
C)II and III only.
D)III and IV only.

Accepted Answer

Companies that adopt long-term value-creation policies have been found to prioritize customer satisfaction, treat former employees better, and exhibit a higher level of corporate responsibility. There is no evidence to suggest that these companies engage in a higher number of acquisitions. Therefore, options (A) and (C) are not correct.

Question 5

Which one of the following actions would help a company create long-term value?&#10;A)Focus on keeping costs at a minimum.&#10;B)Find the optimal debt-to-equity ratio.&#10;C)Seek and exploit new sources of competitive advantage.&#10;D)Monitor and follow macroeconomic trends.

Accepted Answer

Seeking and exploiting new sources of competitive advantage would help the company create long-term value by staying ahead of competitors and maintaining a strong position in the market. The other options, focusing on cost reduction, finding the optimal debt-to-equity ratio, and monitoring macroeconomic trends, may provide short-term benefits but do not necessarily guarantee long-term value creation.

Question 6

Under which condition will a fast-growing firm create value?&#10;A)It will create value in any circumstance.&#10;B)If the return on invested capital (ROIC )is greater than the cost of obtaining funds.&#10;C)If the return on invested capital (ROIc)is less than the cost of obtaining funds.&#10;D)If the firm increases market share.

Accepted Answer

A fast-growing firm will create value only if the return on invested capital (ROIC) is greater than the cost of obtaining funds. This means that the firm is generating profits that exceed the cost of financing the growth, which adds value to the firm. Options A and D are incorrect because creating value depends on profitability, not just growth. Option C is incorrect because if ROIC is lower than the cost of obtaining funds, then the firm is destroying value.

Question 7

Data from Europe and the United States found that the correlation between value creation and employment in the company has been:&#10;A)Positive.&#10;B)Negative.&#10;C)Essentially zero.

Accepted Answer

The correlation between value creation and employment in companies is generally positive, as companies that create more value tend to grow and hire more employees.

Question 8

The conservation of value corollary of the value-creation principle says that:&#10;A)Reducing costs is the first step in creating value.&#10;B)Return on invested capital must increase over time to create value.&#10;C)Anything that does not increase cash flows does not create value.&#10;D)Acquisitions always create more value than divestitures.

Accepted Answer

The conservation of value corollary states that anything that does not increase cash flows does not create value. This means that value is conserved only when there is a positive cash flow generation. Therefore, reducing costs may not necessarily create value unless it leads to increased cash flows. Return on invested capital increasing over time may create value, but it is not the only factor. Acquisitions and divestitures may or may not create value, depending on the specific circumstances.

Question 9

The faster companies can increase their revenues and deploy more capital at attractive rates of return,the more value they create.

Accepted Answer

This statement is true because increasing revenue and deploying capital at attractive rates of return means the company is generating more profits, which leads to increased value for shareholders. The faster they can do this, the more value they create.

Question 10

Which of the following were fundamental flaws in the decisions made by participants in the securitized mortgage market that contributed to its boom through 2007?
I.Leverage creates value.
II.Lower costs create value.
III.Diversification creates value.
IV.Lower cost of capital creates value.

A)I and II only.
B)I and III only.
C)II and III only.
D)III and IV only.

Accepted Answer

Leverage and diversification were two fundamental flaws in the decisions made by participants in the securitized mortgage market that contributed to its boom through 2007. In particular, the belief that leverage creates value led to excessive borrowing and speculation, while the belief that diversification creates value led to the bundling of risky mortgages into complex financial products that were difficult to value and understand. Lower costs and a lower cost of capital were not necessarily flawed decisions in themselves, but they were often used to justify these riskier strategies.

Question 11

Relative to its ability to create value,managers tend to neglect changing capital structure.

Accepted Answer

The answer of Relative to its ability to create value,managers...

Question 12

Aggressive use of leverage is the theme that links most major financial crises.

Accepted Answer

The answer of Aggressive use of leverage is the theme...

Question 13

Which of the following was most responsible for the Internet boom and bust?&#10;A)The Y2K bug.&#10;B)Increased foreign competition.&#10;C)A misapplication of the principle of leverage.&#10;D)A single-minded focus on growth at any cost.

Accepted Answer

The answer of Which of the following was most responsible...

Deck 1: Why Value Value