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Reading 31 Introduction to Corporate Governance and Other ESG Considerations – Quiz 2

CFA Level 1 – Corporate Finance Reading 31 Introduction to Corporate Governance and Other ESG Considerations Reading 31 Introduction to Corporate Governance and Other ESG Considerations – Quiz 2

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Question 1 of 20
1. Question
Which of the following is not correct about say on pay?
- A. Say on pay vote are mandatory on the board of directors.
- B. Some practitioners criticize say on pay policies on the basis that shareholders are not involved in strategic decisions and hence they are not well-suited to decide remuneration.
- C. Say on pay policies have been effective in mitigating one of the most significant agency problems.
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Question 2 of 20
2. Question
In some countries, during bankruptcy proceedings, creditors are represented by:
- A. Credit committees
- B. Trustee
- C. Government
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Question 3 of 20
3. Question
Who most likely make sure that the covenants are not violated, and that potential default risk has not increased?
- A. Trustee
- B. Each debtholder must scrutinize the issuer’s financial information individually
- C. Credit committee
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Question 4 of 20
4. Question
Which of the following is least likely a means of protecting employees’ rights?
- A. Representation on board of directors
- B. Code of ethics and business conduct
- C. Unionization
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Question 5 of 20
5. Question
Which of the following is correct about the composition of a board of directors?
- A. All non-executive directors are independent directors.
- B. CEO-duality is not a concern in two-tier board of directors.
- C. For effective strategy implementation, there is a growing trend towards CEO also acting as the chairperson.
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Question 6 of 20
6. Question
Defining who is an independent director is the role of:
- A. Nomination committee
- B. Governance committee.
- C. Remuneration committee
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Question 7 of 20
7. Question
Rules adopted by the London Stock Exchange and the New York Stock Exchange require audit and compensation committee to be composed of:
- A. Independent directors only
- B. Non-executive directors only with majority being independent
- C. Non-executive directors only with the chairperson being an independent director
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Question 8 of 20
8. Question
Remuneration of a company’s external auditor is proposed by:
- A. Remuneration committee
- B. Nomination committee
- C. Audit committee
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Question 9 of 20
9. Question
An annual evaluation of the board of directors, its structure and activities is undertaken by the:
- A. Governance committee
- B. Nomination committee
- C. Remuneration committee
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Question 10 of 20
10. Question
Which of the following is correct about committees reporting to the board of directors?
- A. Investment committee critically reviews new investments, but divestments are reviewed directly by the board.
- B. Risk committee is a committee required by law is most jurisdictions.
- C. Some companies choose to combine two or more committees into one.
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Question 11 of 20
11. Question
A takeover mechanism in which a shareholder sells its shares to the group attempting to gain control of a company is called:
- A. Proxy sale
- B. Tender offer
- C. Hostile takeover
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Question 12 of 20
12. Question
Which of the following is not correct about shareholder activism?
- A. Hedge funds are best placed to engage in shareholder activism.
- B. Many jurisdictions restrict or bar use of shareholder derivative lawsuits.
- C. All activist shareholders aim at increasing shareholder value.
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Question 13 of 20
13. Question
Which of the following is an anti-takeover strategy which dilutes the voting rights of shareholders?
- A. Staggered board
- B. Poison pill
- C. Both
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Question 14 of 20
14. Question
Which of the following is not an anti-takeover tool?
- A. Staggered board
- B. Shareholders rights plan
- C. Proxy contest
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Question 15 of 20
15. Question
Risk of loss of employment status due to takeover threat:
- A. Cause management to focus on shareholder wealth maximization.
- B. May motivate them to use anti-takeover measures which may be counterproductive for shareholders.
- C. Both a & b.
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Question 16 of 20
16. Question
Which legal system offers superior protection to shareholders and creditors?
- A. Civil law system
- B. Common law system
- C. Both provide equal protection
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Question 17 of 20
17. Question
Which of the following is correct about the role of media in stakeholder management and corporate governance?
- A. Senior management’s concern over reputational risk can increase the cost of monitoring management activities.
- B. Social media has disrupted advantages that companies had in disseminating information using its resources and relationship with traditional media organizations.
- C. Media enables a company to lobby against increased regulation in the aftermath of financial crises.
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Question 18 of 20
18. Question
Effective corporate governance structure can least likely:
- A. Reduce a company’s cost of debt.
- B. Avoid cost of poor investments
- C. Help a company avoid a hostile takeover
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Question 19 of 20
19. Question
Existence of information asymmetries would least likely:
- A. Allow management to take too little or too much risk.
- B. Increase a company’s cost of debt
- C. Provide competitive advantage to a company
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Question 20 of 20
20. Question
A corporate governance action which can mitigate default risk is:
- A. Reduction in information asymmetry
- B. Stringent covenants
- C. Appointment of a trustee
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Study Session 12: Corporate Finance (1)

Reading 31 Introduction to Corporate Governance and Other ESG Considerations

11 LOSs | 3 Quizzes

Describe corporate governance

Describe a company’s stakeholder groups and compare interests of stakeholder groups

Describe principal–agent and other relationships in corporate governance and the conflicts that may arise in these relationships

Describe stakeholder management

Describe mechanisms to manage stakeholder relationships and mitigate associated risks

Describe functions and responsibilities of a company’s board of directors and its committees

Describe market and non-market factors that can affect stakeholder relationships and corporate governance

Identify potential risks of poor corporate governance and stakeholder management and identify benefits from effective corporate governance and stakeholder management

Describe factors relevant to the analysis of corporate governance and stakeholder management

Describe environmental and social considerations in investment analysis

Describe how environmental, social, and governance factors may be used in investment analysis

Reading 32 Capital Budgeting

7 LOSs | 3 Quizzes

Describe the capital budgeting process and distinguish among the various categories of capital projects

Describe the basic principles of capital budgeting

Explain how the evaluation and selection of capital projects is affected by mutually exclusive projects, project sequencing, and capital rationing

Calculate and interpret net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, and profitability index (PI) of a single capital project

Explain the NPV profile, compare the NPV and IRR methods when evaluating independent and mutually exclusive projects, and describe the problems associated with each of the evaluation methods

Contrast the NPV decision rule to the IRR decision rule and identify problems associated with the IRR rule

Describe expected relations among an investment’s NPV, company value, and share price

Reading 33 Cost of Capital

12 LOSs | 3 Quizzes

Calculate and interpret the weighted average cost of capital (WACC) of a company

Describe how taxes affect the cost of capital from different capital sources

Describe the use of target capital structure in estimating WACC and how target capital structure weights may be determined

Explain how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget

Explain the marginal cost of capital’s role in determining the net present value of a project

Calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach

Calculate and interpret the cost of noncallable, nonconvertible preferred stock

Calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yieldplus risk-premium approach

Calculate and interpret the beta and cost of capital for a project

Describe uses of country risk premiums in estimating the cost of equity

Describe the marginal cost of capital schedule, explain why it may be upward sloping with respect to additional capital, and calculate and interpret its break-points

Explain and demonstrate the correct treatment of flotation costs

Study Session 11: Corporate Finance (2)

Reading 34 Measures of Leverage

5 LOSs | 2 Quizzes

Define and explain leverage, business risk, sales risk, operating risk, and financial risk and classify a risk

Calculate and interpret the degree of operating leverage, the degree of financial leverage, and the degree of total leverage

Analyze the effect of financial leverage on a company’s net income and return on equity

Calculate the breakeven quantity of sales and determine the company’s net income at various sales levels

Calculate and interpret the operating breakeven quantity of sales

Reading 35 Working Capital Management

7 LOSs | 3 Quizzes

Describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position;

Compare a company’s liquidity measures with those of peer companies

Evaluate working capital effectiveness of a company based on its operating and cash conversion cycles and compare the company’s effectiveness with that of peer companies

Describe how different types of cash flows affect a company’s net daily cash position

Calculate and interpret comparable yields on various securities, compare portfolio returns against a standard benchmark, and evaluate a company’s short-term investment policy guidelines

Evaluate a company’s management of accounts receivable, inventory, and accounts payable over time and compared to peer companies

Evaluate the choices of short-term funding available to a company and recommend a financing method

Corporate Finance – Exam

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