Reading 31: Corporate Governance- LOS g～ Q1-4

corporate, management, valuation, strategic, liability

LOS g: Discuss the valuation implications of corporate governance.

Q1. Entering into a merger that would provide benefits for management, but ultimately would destroy shareholder value is an example of:

A) liability risk.

B) strategic policy risk.

C) asset risk.

Q2. Studies support the conclusion that companies with effective corporate governance systems have been shown to have higher measures of profitability and generate higher returns than companies with weak corporate governance systems. Which of the following is the most critical activity that an analyst can engage in to assess the strength of a corporate governance system at a firm?

A) Note whether financial transactions between a company and its senior management are approved by the board of directors.

B) Evaluate the quality and quantity of financial information provided to investors.

C) Determine whether a corporate code of ethics and statement of governance policies is easily accessible for investors and stakeholders.

Q3. Dan Berger, an analyst for Romulus Capital Management Inc. (RCMI), is talking with a colleague, Amy Woods, about the benefits of including corporate governance assessments in the firm’s valuation models. Berger makes the following statements:

Statement 1: Although the results are inconclusive in emerging markets, companies in developed countries that have strong corporate governance systems have provided shareholders with higher returns than companies with weak governance system.

Statement 2: A weak corporate governance system can cause a company to go bankrupt.

In regard to Berger’s statements, Woods should:

A) agree with both Statements.

B) disagree with Statement 1, but agree with Statement 2.

C) agree with Statement 1, but disagree with Statement 2.

Q4. Which of the following is NOT a risk arising from having an ineffective corporate governance system?

A) Management may use company assets for personal or inappropriate purposes.

B) Management may enter into off-balance sheet obligations that reduce the value of a company.

C) An otherwise profitable company may not have cash on hand to pay its bondholders.