Corporate Finance Final

What are the relevant parties involved in a lease?

The lessor, who owns the asset. The lessee, who has the right to use the asset and in return must make periodic payments to the lessor.

What are the features of an operating lease?

Known as "rent to use," where the life of the lease is usually less than the economic life of the asset. It is usually not fully amortized. The lessor usually needs to maintain and insure the asset. The lessee has a cancellation option.

What are the features of a capital (financial) lease?

Known as "rent to own," providing an alternative method of financing to a purchase. It is fully amortized. The lessor does not provide maintenance or service. The lessee usually has a right to renew the lease at expiration. Cannot be cancelled.

What is the accounting rule change in 2019 regarding the operating lease?

Before 2019, operating leases were not disclosed on the balance sheet, only in footnotes. After 2019, operating leases are required to be disclosed on the balance sheet.

What are the three basic forms of acquisitions?

Merger or consolidation, acquisition of stock, and acquisition of assets

What are the three classifications of acquisition types based on industry?

Horizontal (same industry), Vertical (different stages of production), and Conglomerate (unrelated firms)[cite: 585, 586, 588].

What is synergy in the context of M&A?

The extra value created by a merger, where the value of the combined firm after the merger is greater than the sum of the two firms premerger[cite: 614].

What are the main sources of synergy?

Revenue enhancement, cost reductions, tax gains, and reduced capital requirements[cite: 623, 628, 639, 642].

How do you estimate synergy ex-ante and ex-post?

Ex-ante is estimated from the discounted cash flow model using estimated incremental cash flows[cite: 650]. Ex-post is estimated by examining the change of shareholder value before and after the deal announcement[cite: 653].

What are the two financial side effects of M&A that are not good motivations for a merger?

Earnings growth (an accounting illusion if there are no real synergies) and diversification (investors can diversify at a lower cost on their own)[cite: 770, 772, 773, 775, 776].

What tactics can acquirers use in a hostile takeover?

Tender offers (bypassing management to buy shares from the open market) and proxy contests or fights (trying to gain board seats through corporate voting)[cite: 785, 786].

What defensive tactics can target firms use before a hostile takeover bid is made?

Classified board (staggered elections), supermajority voting requirements, golden parachutes, and poison pills (shareholder rights plans)

What defensive tactics can target firms use after a hostile takeover bid is made?

Standstill agreements, targeted repurchase (greenmail), white knights, white squires, leveraged recapitalizations, and asset restructurings[cite: 821, 823, 824, 825, 834, 835].

What are the typical reactions of acquiring firm and target firm shareholders to an M&A announcement?

Target firm shareholders benefit and receive premiums. Acquiring firm shareholders experience gains or losses that are on average close to zero or very negative.

What does it mean for a firm to go private?

A private group (usually composed of existing management) buys the publicly traded firm from the shareholders and takes it private.

What is a leveraged buyout (LBO)?

It is a going private transaction that is financed with a lot of debt[cite: 908].

What is a divestiture and what are its three types?

A divestiture is the opposite of an M&A where a company sells a piece of itself. The three types are sale, spin-off, and equity carve-out.

What accounts are typically included in current assets and current liabilities?

Current assets include cash, marketable securities, accounts receivable, and inventory. Current liabilities include accounts payable, accrued wages and taxes, and short-term notes payable.

What activities will increase cash (sources of cash)?

Increasing long-term debt, equity, or current liabilities; or decreasing fixed assets or current assets other than cash.

What activities will decrease cash (uses of cash)?

Decreasing long-term debt, equity, or current liabilities; or increasing fixed assets or current assets other than cash.

What are the two types of costs of holding current assets?

Carrying costs (costs that rise with increases in the level of investment in current assets, like storage and opportunity costs) and shortage costs (costs that fall with increases in the level of investment in current assets, like order costs and stock-out costs).

How do a flexible policy and a restrictive policy compare regarding the size and financing of current assets?

A flexible policy maintains a high ratio of current assets to sales and relies more on long-term financing. A restrictive policy maintains a low ratio of current assets to sales and relies more on short-term financing.

How do the BAT model and the Miller-Orr model compare, and what are the differences in their assumptions?

Both are used to determine the optimal cash balance. The BAT model assumes steady, predictable, and certain cash outflows. The Miller-Orr model assumes daily net cash flows are normally distributed, uncertain, and unpredictable, using upper and lower control limits to trigger cash transfers.

What is a warrant?

A security that gives the holder the right, but not the obligation, to purchase shares of common stock directly from the issuing company at a fixed price over a specified period.

How is a warrant similar to a call option?

Both give the holder the right, but not the obligation, to buy the underlying asset at a specified exercise price on or before a specified expiration date.

How is a warrant different from a call option?

Warrants are issued directly by the company, meaning when they are exercised, the company issues brand new shares, which dilutes the value of existing shares. Call options are contracts between individual investors and do not create new shares or cause dilution.

What is a convertible bond?

A corporate bond that can be exchanged, at the bondholder's discretion, for a specified number of shares of the issuing company's common stock.

Why do companies issue warrants and convertibles?

They are often used as "sweeteners" to lower the interest rate required on a debt issue, to match cash flows (acting as deferred equity financing), and to mitigate agency costs by aligning the interests of bondholders and shareholders.

What is corporate governance?

The system of internal controls and procedures by which individual companies are managed, providing a framework that defines the rights, roles, and responsibilities of management, board members, controlling stakeholders, and minority stakeholders.

Who are a company's primary stakeholder groups?

Shareholders, creditors, managers/executives, employees, board of directors, customers, suppliers, and governments/regulators.

What is a principal-agent relationship in corporate governance?

A relationship where one group (the principal, such as shareholders) hires another group (the agent, such as managers) to act on their behalf, which can lead to conflicts if their incentives are not aligned.

What are common conflicts of interest between stakeholder groups?

Managers vs. shareholders (managers may prioritize personal compensation or job security over maximizing shareholder value) and shareholders vs. creditors (shareholders may prefer riskier projects for higher potential returns, while creditors prefer lower risk to ensure debt repayment).

How can principal-agent conflicts of interest be mitigated?

Through strong corporate governance mechanisms, such as aligning management compensation with long-term company performance (e.g., using stock options), maintaining a strong and independent board of directors, and enforcing strict financial transparency.

What is the typical composition of a board of directors?

It typically consists of a mix of executive directors (internal managers) and non-executive directors (external members), with a strong preference for a majority of independent directors to ensure objective oversight.

What are the typical committees within a board of directors?

The Audit Committee (oversees financial reporting and internal controls), the Compensation or Remuneration Committee (sets executive pay), and the Nominations/Governance Committee (identifies new board candidates and oversees corporate governance policies).

What are the risks of poor corporate governance?

Weak internal controls, poor decision-making, accounting fraud, default on debt, legal/regulatory issues, and ultimately a lower market valuation.

What are the benefits of effective corporate governance and stakeholder management?

Improved operational efficiency, better financial performance, a lower cost of capital (due to lower risk for investors), and improved relationships with employees, creditors, and the public.

What factors are relevant to corporate governance analysis?

Board composition and independence, executive compensation structure, shareholder voting rights (e.g., checking for unequal dual-class shares), anti-takeover provisions, and the company's historical handling of stakeholder conflicts.