DBA Corporate Finance and Financial Management 2 — Questions and Answers
Question 1: In the context of US public companies, what does the Sarbanes-Oxley Act (SOX) primarily require?
- Mandatory profit-sharing with employees
- Enhanced financial disclosures and internal controls to prevent accounting fraud (Correct answer)
- Carbon emission reporting for manufacturers
- Minimum dividend payments to shareholders
Correct answer: Enhanced financial disclosures and internal controls to prevent accounting fraud
SOX (2002) was enacted after corporate scandals (Enron, WorldCom) to improve financial reporting accuracy and establish accountability for executives and auditors.
Question 2: What is 'working capital management' primarily concerned with?
- Long-term capital investment decisions
- Managing the relationship between current assets and current liabilities to ensure operational efficiency (Correct answer)
- Determining optimal dividend payout ratios
- Evaluating merger and acquisition targets
Correct answer: Managing the relationship between current assets and current liabilities to ensure operational efficiency
Working capital management optimizes the balance between current assets (inventory, receivables, cash) and current liabilities to maintain liquidity and operational efficiency.
Question 3: Which valuation method estimates a company's intrinsic value based on the present value of its expected future free cash flows?
- Price-to-earnings (P/E) multiple method
- Book value method
- Discounted Cash Flow (DCF) analysis (Correct answer)
- Liquidation value method
Correct answer: Discounted Cash Flow (DCF) analysis
DCF analysis discounts projected future free cash flows back to the present using an appropriate discount rate (usually WACC) to estimate intrinsic value.
Question 4: What does 'dividend irrelevance theory' (Modigliani-Miller) suggest?
- Companies should always pay high dividends
- In perfect capital markets, dividend policy does not affect firm value (Correct answer)
- Dividends should be eliminated to maximize reinvestment
- US law requires public companies to pay dividends
Correct answer: In perfect capital markets, dividend policy does not affect firm value
M&M's dividend irrelevance theorem argues that in perfect markets without taxes or transaction costs, investors are indifferent between dividends and capital gains.
Question 5: In mergers and acquisitions, what is 'goodwill' on the acquiring company's balance sheet?
- The reputation rating of the acquired company
- The premium paid above the fair market value of the acquired company's net identifiable assets (Correct answer)
- Cash reserves earmarked for employee bonuses
- The value of the combined company's brand
Correct answer: The premium paid above the fair market value of the acquired company's net identifiable assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired, reflecting intangibles like brand, customer relationships, and synergies.
Question 6: What is 'economic value added' (EVA) used to measure?
- Gross revenue generated per employee
- The value created above the required return on a company's capital (Correct answer)
- Total market capitalization growth
- Customer lifetime value
Correct answer: The value created above the required return on a company's capital
EVA measures the residual profit after deducting the cost of all capital employed, indicating whether management has created or destroyed value.
DBA Corporate Finance and Financial Management 2
In the context of US public companies, what does the Sarbanes-Oxley Act (SOX) primarily require?