Question 1

Which of the following is NOT true concerning application of the conservation of value principle to acquisitions?

Accepted Answer

A) An acquisition will create value if it increases cash flows sufficiently by reducing costs. 
B) An acquisition will create value if it increases cash flows sufficiently by increasing revenue growth. 
C) An acquisition will create value if it increases cash flows sufficiently by improving the use of fixed or working capital. 
D) An acquisition will create value if it grows revenues. 
A) An acquisition will create value if it increases cash flows sufficiently by reducing costs. 
B) An acquisition will create value if it increases cash flows sufficiently by increasing revenue growth. 
C) An acquisition will create value if it increases cash flows sufficiently by improving the use of fixed or working capital. 
D) An acquisition will create value if it grows revenues. D

Question 2

Multiple expansion is one way that firms can create value through acquisitions.

Accepted Answer

A) True 
 B)False  False

Question 3

The primary way that financial engineering can create value is by lowering firm taxes.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following most accurately describes the conclusion of Franco Modigliani and Merton Miller as it relates to the conservation of value principle?

Accepted Answer

A) Managers can create value by adjusting the capital structure of a firm,which is congruous with the conservation of value principle. 
B) Managers cannot create value by adjusting the capital structure of a firm,which is congruous with the conservation of value principle. 
C) Managers can create value by adjusting the capital structure of a firm,which is a violation of the conservation of value principle. 
D) Managers cannot create value by adjusting the capital structure of a firm,which is a violation of the conservation of value principle. 
A) Managers can create value by adjusting the capital structure of a firm,which is congruous with the conservation of value principle. 
B) Managers cannot create value by adjusting the capital structure of a firm,which is congruous with the conservation of value principle. 
C) Managers can create value by adjusting the capital structure of a firm,which is a violation of the conservation of value principle. 
D) Managers cannot create value by adjusting the capital structure of a firm,which is a violation of the conservation of value principle.

Question 5

There are no exceptions to the principle of conservation of value.

Accepted Answer

A) True 
 B)False

Question 6

Investors demand returns for nondiversifiable risks only.

Accepted Answer

A) True 
 B)False

Question 7

Changes in accounting techniques that decrease reported profits will necessarily decrease the value of a firm.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is true concerning the practice of repurchasing shares when the managers correctly determine that the price of the stock is low?

Accepted Answer

A) The practice does not benefit either the stockholders who do not sell or those who do sell. 
B) The practice benefits the stockholders who do sell more than those who do not sell. 
C) The practice benefits stockholders who do not sell and those who do sell equally. 
D) The practice benefits the stockholders who do not sell more than those who do sell. 
A) The practice does not benefit either the stockholders who do not sell or those who do sell. 
B) The practice benefits the stockholders who do sell more than those who do not sell. 
C) The practice benefits stockholders who do not sell and those who do sell equally. 
D) The practice benefits the stockholders who do not sell more than those who do sell.

Question 9

Managers should hedge risks in their core business,as this helps eliminate some risk to investors without any reduction in returns.

Accepted Answer

A) True 
 B)False

Question 10

Financial engineering includes the use of derivatives,structured debt,securitization,and off-balance-sheet financing.In some cases financial engineering can create value.

Accepted Answer

A) True 
 B)False

Question 11

Diversifiable or firm-specific risks,such as the ability to retain talented management and rising input costs,affect a company's cost of capital.

Accepted Answer

A) True 
 B)False

Question 12

A company cannot create value through sale-leaseback transactions.

Accepted Answer

A) True 
 B)False

Question 13

If one uses free cash flows to value a firm,then value may be created through a lower cost of capital.

Accepted Answer

A) True 
 B)False

Question 14

Studies of share repurchases have shown that companies are very good at timing share repurchases.

Accepted Answer

A) True 
 B)False

Question 15

Since diversifiable risks are not priced into the cost of capital,executives can ignore such risks.

Accepted Answer

A) True 
 B)False

Question 16

Because interest expense is tax deductible,share repurchases can have the beneficial effect of increasing earnings per share,which will definitely lead to a share price increase.

Accepted Answer

A) True 
 B)False

Question 17

The conservation of value principle states that anything that does not increase cash flows does not increase value.

Accepted Answer

A) True 
 B)False

Question 18

Firms should engage in share repurchases only if they do not have available investments with sufficiently high ROIC.

Accepted Answer

A) True 
 B)False

Question 19

Managers should hedge cash flow risk whenever possible.

Accepted Answer

A) True 
 B)False

Question 20

Risk enters valuation both through a company's cost of capital and through its cash flows.

Accepted Answer

A) True 
 B)False

Exam 3: Conservation of Value and the Role of Risk

Which of the following is NOT true concerning application of the conservation of value principle to acquisitions?

Multiple expansion is one way that firms can create value through acquisitions.

The primary way that financial engineering can create value is by lowering firm taxes.

Which of the following most accurately describes the conclusion of Franco Modigliani and Merton Miller as it relates to the conservation of value principle?

There are no exceptions to the principle of conservation of value.

Investors demand returns for nondiversifiable risks only.

Changes in accounting techniques that decrease reported profits will necessarily decrease the value of a firm.

Which of the following is true concerning the practice of repurchasing shares when the managers correctly determine that the price of the stock is low?

Managers should hedge risks in their core business,as this helps eliminate some risk to investors without any reduction in returns.

Financial engineering includes the use of derivatives,structured debt,securitization,and off-balance-sheet financing.In some cases financial engineering can create value.

Diversifiable or firm-specific risks,such as the ability to retain talented management and rising input costs,affect a company's cost of capital.

A company cannot create value through sale-leaseback transactions.

If one uses free cash flows to value a firm,then value may be created through a lower cost of capital.

Studies of share repurchases have shown that companies are very good at timing share repurchases.

Since diversifiable risks are not priced into the cost of capital,executives can ignore such risks.

Because interest expense is tax deductible,share repurchases can have the beneficial effect of increasing earnings per share,which will definitely lead to a share price increase.

The conservation of value principle states that anything that does not increase cash flows does not increase value.

Firms should engage in share repurchases only if they do not have available investments with sufficiently high ROIC.

Managers should hedge cash flow risk whenever possible.

Risk enters valuation both through a company's cost of capital and through its cash flows.

Why Value Value

Fundamental Principles of Value Creation

The Alchemy of Stock Market Performance

The Stock Market Is Smarter Than You Think

Return on Invested Capital

Growth

Frameworks for Valuation

Reorganizing the Financial Statements

Analyzing Performance

Forecasting Performance

Estimating Continuing Value

Estimating the Cost of Capital

Moving From Enterprise Value to Value Per Share

Analyzing the Results

Using Multiples

Valuation by Parts

Taxes

Non-operating Items, Provisions, and Reserves

Leases and Retirement Obligations

Alternative Ways to Measure Return on Capital

Inflation

Cross-Border Valuation

Case Study: Heineken

Corporate Portfolio Strategy

Performance Management

Mergers and Acquisitions

Divestitures

Capital Structure, Dividends, and Share Repurchases

Investor Communications

Emerging Markets

Valuing High-Growth Companies

Cyclical Companies

Banks

Flexibility

Filters