SOLVED

31) Which of the following companies is most committed to the shareholder value approach? A) Company A, when it decides to expand from a microchip manufacturer to an on-line internet company. B) Company B, a bank that acts on opportunities to buy other distressed banks cheaply in order to grow its deposit base. C) Company C, an auto company that focuses on cost cutbacks and pension rollback to improve the bottom line. D) Company D, a software company that introduces to its mission statement shareholder values initiatives such as salary freezes. E) Company E, a shipping company that makes short term investments of free cash flows in oil and gas companies. 32) Social Games Ltd. has a business value of $50 million, capital invested of $32 million, and annually generates returns that exceed investors required returns by $4 million. What is the percentage required return demanded by investors? A) 8.0% B) 12.5% C) 18.0% D) 22.2% E) 64.0% 33) The Board of Directors of Hospitality Corp. is meeting to decide on the company’s fourth quarter dividend. For the first three quarters of the year dividends per share have been $0.30, $0.33, and $0.40. The company’s stated policy is to provide shareholders with a total annual return of 30%. Given that the share price started the year at $25.00 and end the year at $30.00, what size dividend should the Board declare? A) $0.52 B) $1.04 C) $1.47 D) $2.51 E) $5.02 34) What will EVA and MVA be if a business generates returns equal to the firm’s cost of capital? A) Both will be zero. B) EVA will exceed MVA. C) MVA will exceed EVA. D) EVA will be positive. E) MVA will be positive. 35) Which of the following is generally true about shareholder value analysis and economic value added? A) Shareholder value analysis provides a more useful reference for developing manager’s bonus rewards systems. B) Economic value added is more practical to use and generates the same results as shareholder value analysis. C) Shareholder value analysis does not require the development of entirely new systems in order to be implemented. D) Economic value added uses conventional financial statements and makes extensive adjustments in order to calculate value. E) Economic value added deducts the present value of future shareholder value analysis and the market value of debt to calculate value. 36) Air Ltd. has operating costs equal to 40% of sales. Air Ltd. is forecasting two scenarios. Scenario 1 is that operating costs will rise 10% but taxes will decrease 10%. Scenario 2 is that operating costs will decrease by 10% and taxes will increase 10%. Which scenario would have the biggest impact on free cash flow? A) Scenario 1, which will increase cash flows by 2.1%. B) Scenario 2, which will increase cash flows by 2.7%. C) Scenario 1, which will decrease cash flows by 2.1%. D) Scenario 2, which will decrease cash flows by 2.7%. E) Both scenarios will impact free cash flows equally. 37) What is the best way to measure changes in shareholder value? A) Consider the changes in the company’s balance sheet measured at fair value. B) Consider the changes in the company’s share price, dividend policy, and fair value of its bonds. C) Consider long term cash flows taking into account risk and the cost of sharehoders’ equity. D) Consider the problem that accounting policies may vary from company to company. E) Consider the problem that ratios based on profit do not take in to account all the costs of capital invested by the business. 38) What is the critical feedback loop to determine whether shareholder value has been created? A) Measure shareholder returns. B) Focus on maximizing shareholder returns. C) Determine an appropriate shareholder return measure. D) Recognize the importance of shareholders. E) Set appropriate objectives for shareholders. 39) Lavalle Design Systems Ltd. owns computer equipment that cost $10 million. It expects to use the equipment for 10 years and sell it for $100,000. Lavalle rents everything else. Lavalle generated sales of $10 million in the year just ended and has an operating profit margin of 30%. Lavalle faces a 20% tax rate. During the year working capital was reduced by $4 million and additional equipment worth $3 million was purchased at year end. What was Lavalle’s free cash flow for the year assuming straight line depreciation is used? A) ($3,610,000) B) $990,000 C) $2,390,000 D) $3,400,000 E) $4,390,000 40) Hard Drinks Ltd., a social software company, expects sales to be $20 million next year, $24 million the year after, $28 million in the following year, before settling down to $30 million thereafter. Operating profit margins are fixed at 20%. The corporate tax rate is 40%. Replacement capital asset investments will exceed depreciation by $1 million per year. Working capital will be reduced by $100,000 each year. New capital asset investment will be $500,000 each year. If Hard Drinks cost of capital is 10%, what is its total business value? A) ($39.8) B) $5.1 C) $18.6 D) $44.7