Corporate Finance & Governance Flashcards
7 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Corporate Finance & Governance flashcards as text
Which of the following best describes the concept of economic value added (EVA)?
Answer: After-tax operating profit minus a charge for the capital employed
EVA = NOPAT − (WACC × Invested Capital); it measures the value created above and beyond the required return on invested capital.
A company issues new equity to fund a project with positive NPV. Which of the following best describes the impact on existing shareholders?
Answer: Existing shareholders may be diluted in ownership percentage but gain from value creation
Dilution reduces ownership percentage, but if the project's NPV is positive, the value created benefits all shareholders including existing ones, though new shares dilute proportional claims.
Which governance mechanism is primarily designed to align managerial interests with those of shareholders?
Answer: Executive stock option compensation plans
Executive stock options and equity-based compensation align managerial interests with shareholders by making managers direct beneficiaries of stock price appreciation.
The modified internal rate of return (MIRR) addresses which key weakness of the traditional IRR method?
Answer: It assumes reinvestment of cash flows at the cost of capital rather than the IRR
MIRR assumes interim cash flows are reinvested at the firm's WACC (a more realistic assumption) rather than at the often-inflated IRR, resolving the reinvestment rate assumption flaw.
Which of the following is a characteristic of a dual-class share structure?
Answer: One class of shares carries superior voting rights, allowing founders to retain control
Dual-class structures create two classes of common stock with different voting rights, typically allowing founders or insiders to maintain voting control while still raising public equity.
A company with high operating leverage will exhibit which of the following characteristics?
Answer: Greater sensitivity of EBIT to changes in revenue
High operating leverage means a larger proportion of fixed costs, causing EBIT to fluctuate more dramatically with changes in revenue (magnified both gains and losses).
In a cross-border acquisition, which of the following is a primary motivation related to corporate governance arbitrage?
Answer: Targeting firms in weaker governance jurisdictions to extract value at the expense of minority shareholders
Governance arbitrage occurs when acquirers target firms in jurisdictions with weaker investor protections, enabling exploitation of minority shareholders through information asymmetry and control.