The document discusses corporate valuation, value-based management, and corporate governance. It defines the two types of assets a company owns as operating assets and nonoperating assets. It then discusses how to calculate the value of operations using discounted cash flow models under different growth assumptions. It also covers how value-based management links corporate decisions to changes in shareholder value. Finally, it discusses mechanisms of corporate governance like takeover provisions, board composition, and executive compensation plans.
El total de idóneos para ejercer las diversas ingenierías y arquitecturas es de 19 mil 174 profesionales. Los más cotizados son los ingenieros civiles.
What If Microsoft sold diapers!? MS Diapers!Shivam Singh
As part of the Techno-Management Fest Avishkar of NIT Allahabad, the final round of the flagship Marketing event presented us with a situation to sell Diapers made by Microsoft! :P
El total de idóneos para ejercer las diversas ingenierías y arquitecturas es de 19 mil 174 profesionales. Los más cotizados son los ingenieros civiles.
What If Microsoft sold diapers!? MS Diapers!Shivam Singh
As part of the Techno-Management Fest Avishkar of NIT Allahabad, the final round of the flagship Marketing event presented us with a situation to sell Diapers made by Microsoft! :P
Mini Case1615Chapter 8 Mini CaseSituationYour employer, a mid-si.docxARIV4
Mini Case1/6/15Chapter 8 Mini CaseSituationYour employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporary heavy workloads. Your employer is also considering the purchase of a Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements report marketable securities of $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weighted average cost of capital (WACC) is 11%. Answer the following questions.a. Describe briefly the legal rights and privileges of common stockholders.Features of Common Stock1. Common Stock represents ownership. 2. Ownership implies control. 3. Stockholders elect directors. 4. Directors hire management who attempt to maximize stock price.Classified StockClassified Stock carries special provisions. For example, shares could be classified as founders' shares which come with voting rights but dividend restrictions.b. What is free cash flow (FCF)? What is the weighted average cost of capital? What is the free cash flow valuation model? c. Use a pie chart to illustrate the sources that comprise a hypothetical company’s total value. Using another pie chart, show the claims on a company’s value. How is equity a residual claim? Data for chartsColumn110Mkt. Sec.1Claims on ValuePref. Stk.1Debt37d. Suppose the free cash flow at Time 1 is expected to grow at a constant rate of gL forever. If gL < WACC, what is a formula for the present value of expected free cash flows when discounted at the WACC? If the most recent free cash flow is expected to grow at a constant rate of gL forever (and gL < WACC), what is a formula for the present value of expected free cash flows when discounted at the WACC? If constant growth begins at Time 1:If constant growth begins at Time 0:e. Use B&M’s data and the free cash flow valuation model to answer the following questions.INPUT DATA SECTION: Data used for valuation (in millions)Free cash flow$24.0WACC11%Growth5%Short-term investments $100.0Debt$200.0Preferred stock$50.0Number of shares of stock10.0 (1) What is its estimated value of operations?Vop =FCF1 =FCF0 (1+gL)(WACC-gL)(WACC-gL)Vop =$25.20.06Vop =$420.00 (2) What is its estimated total corporate value? Value of Operation$420.0Plus Value of Non-operating Assets$100.0Total Corporate Value$520.0 (3) What is its estimated intrinsic value of equity?Debt holders have the first claim on corporate value. Preferred stockholders have the next claim and the remaining is left to common stockholders.Total Corporate Value$520.0Minus Value of Debt$200.0Minus Value of Preferred Stock$50.0Intrinsic Value of Equity$270.0 (4) What ...
Understanding Basics of Financial StatementsAnkita6745
Understanding the basic concepts and term used in the Financial Statements.Understanding the ratios used for analyzing the Financial Statements.Discussing factors that drive corporate valuations.
Weatherford International public limited company (hereinafter re.docxcelenarouzie
Weatherford International public limited company (hereinafter referred as to Weatherford or WFT) is a multinational oilfield company with headquarters in Baar, Switzerland. The company operates in virtually every oil and natural gas exploration and production region of the world. It operates in 100 counties and reviews its performance on geographic bases. WFT is a provider of the equipment and services to oil and natural gas exploration and production industry. According to the company’s 10-K report, it invests heavily in research and development in order to improve efficiency, productivity, quality of products and services, and its primary strategies are innovation, invention, integration, development, and commercialization.
Company’s risk factors. Among the macroeconomic and industry specific factors, the company lists the following financial risk factors that affect its profitability:
· Litigation: securities class action, settlements of violations, investigations by SEC and DOJ with regard to the failure to maintain effective internal controls over financial reporting, and shareholder suits.
· Impairments of the company’s goodwill, long-lived assets, and intangible assets.
· Gain/loss on sale of the non-core businesses and closure of the operating facilities.
· Foreign currency translation risk.
· Company’s credit rating.
· Fluctuation of the effective tax rate.
· Reduction of benefits as a result of the “redomestication” to Ireland.
Ratio analysis.
Liquidity Analysis
2015
2014
2013
2012
Current Ratio
1.38
1.97
1.54
1.58
Cash Ratio
0.12
0.12
0.08
0.05
Cash to Debt Coverage
0.18
0.20
0.22
0.25
Working Capital
$1,533,000
$3,917,000
$3,075,000
$3,319,000
Cash conversion cycle
243.10
180.77
207.77
210.31
Operating cycle
385.78
322.09
378.82
353.22
Form the liquidity ratios it is noticeable that the company’s working capital has decreased in the recent year by 61% and there is insufficient amount of cash coming form the operating activities. The company has a sufficient amount of current assets to cover its maturing obligations. However, only 12% of its total assets consists of cash. It should be noted that WFT’s cash position declined over the last four years, this could be due to the increase in operating cycles, it now takes longer for the company to convert its inventory into cash. This implies, that the need in short-term financing of the operations might arise. Activity ratios can help to clarify the picture.
Activity Ratios
2015
2014
2013
2012
AR turnover
3.76X
4.37X
3.98X
4.17X
Days Sales Outstanding
97.06
83.61
91.79
87.50
Inventory turnover
1.26X
1.53X
1.27X
1.37X
Days Inventory on Hands
288.71
238.48
287.03
265.72
AP turnover
2.56X
2.58X
2.13X
2.55X
Number of Days in AP
142.68
141.32
171.05
142.91
The decrease in the turnover ratios is obvious. These ratios affect the operation cycle. It is noticeable that in 2015 it took over 97 days for Weatherford to collect its revenue from the customers. The 10-K report states, that the compan.
Mini Case1615Chapter 8 Mini CaseSituationYour employer, a mid-si.docxARIV4
Mini Case1/6/15Chapter 8 Mini CaseSituationYour employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporary heavy workloads. Your employer is also considering the purchase of a Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements report marketable securities of $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weighted average cost of capital (WACC) is 11%. Answer the following questions.a. Describe briefly the legal rights and privileges of common stockholders.Features of Common Stock1. Common Stock represents ownership. 2. Ownership implies control. 3. Stockholders elect directors. 4. Directors hire management who attempt to maximize stock price.Classified StockClassified Stock carries special provisions. For example, shares could be classified as founders' shares which come with voting rights but dividend restrictions.b. What is free cash flow (FCF)? What is the weighted average cost of capital? What is the free cash flow valuation model? c. Use a pie chart to illustrate the sources that comprise a hypothetical company’s total value. Using another pie chart, show the claims on a company’s value. How is equity a residual claim? Data for chartsColumn110Mkt. Sec.1Claims on ValuePref. Stk.1Debt37d. Suppose the free cash flow at Time 1 is expected to grow at a constant rate of gL forever. If gL < WACC, what is a formula for the present value of expected free cash flows when discounted at the WACC? If the most recent free cash flow is expected to grow at a constant rate of gL forever (and gL < WACC), what is a formula for the present value of expected free cash flows when discounted at the WACC? If constant growth begins at Time 1:If constant growth begins at Time 0:e. Use B&M’s data and the free cash flow valuation model to answer the following questions.INPUT DATA SECTION: Data used for valuation (in millions)Free cash flow$24.0WACC11%Growth5%Short-term investments $100.0Debt$200.0Preferred stock$50.0Number of shares of stock10.0 (1) What is its estimated value of operations?Vop =FCF1 =FCF0 (1+gL)(WACC-gL)(WACC-gL)Vop =$25.20.06Vop =$420.00 (2) What is its estimated total corporate value? Value of Operation$420.0Plus Value of Non-operating Assets$100.0Total Corporate Value$520.0 (3) What is its estimated intrinsic value of equity?Debt holders have the first claim on corporate value. Preferred stockholders have the next claim and the remaining is left to common stockholders.Total Corporate Value$520.0Minus Value of Debt$200.0Minus Value of Preferred Stock$50.0Intrinsic Value of Equity$270.0 (4) What ...
Understanding Basics of Financial StatementsAnkita6745
Understanding the basic concepts and term used in the Financial Statements.Understanding the ratios used for analyzing the Financial Statements.Discussing factors that drive corporate valuations.
Weatherford International public limited company (hereinafter re.docxcelenarouzie
Weatherford International public limited company (hereinafter referred as to Weatherford or WFT) is a multinational oilfield company with headquarters in Baar, Switzerland. The company operates in virtually every oil and natural gas exploration and production region of the world. It operates in 100 counties and reviews its performance on geographic bases. WFT is a provider of the equipment and services to oil and natural gas exploration and production industry. According to the company’s 10-K report, it invests heavily in research and development in order to improve efficiency, productivity, quality of products and services, and its primary strategies are innovation, invention, integration, development, and commercialization.
Company’s risk factors. Among the macroeconomic and industry specific factors, the company lists the following financial risk factors that affect its profitability:
· Litigation: securities class action, settlements of violations, investigations by SEC and DOJ with regard to the failure to maintain effective internal controls over financial reporting, and shareholder suits.
· Impairments of the company’s goodwill, long-lived assets, and intangible assets.
· Gain/loss on sale of the non-core businesses and closure of the operating facilities.
· Foreign currency translation risk.
· Company’s credit rating.
· Fluctuation of the effective tax rate.
· Reduction of benefits as a result of the “redomestication” to Ireland.
Ratio analysis.
Liquidity Analysis
2015
2014
2013
2012
Current Ratio
1.38
1.97
1.54
1.58
Cash Ratio
0.12
0.12
0.08
0.05
Cash to Debt Coverage
0.18
0.20
0.22
0.25
Working Capital
$1,533,000
$3,917,000
$3,075,000
$3,319,000
Cash conversion cycle
243.10
180.77
207.77
210.31
Operating cycle
385.78
322.09
378.82
353.22
Form the liquidity ratios it is noticeable that the company’s working capital has decreased in the recent year by 61% and there is insufficient amount of cash coming form the operating activities. The company has a sufficient amount of current assets to cover its maturing obligations. However, only 12% of its total assets consists of cash. It should be noted that WFT’s cash position declined over the last four years, this could be due to the increase in operating cycles, it now takes longer for the company to convert its inventory into cash. This implies, that the need in short-term financing of the operations might arise. Activity ratios can help to clarify the picture.
Activity Ratios
2015
2014
2013
2012
AR turnover
3.76X
4.37X
3.98X
4.17X
Days Sales Outstanding
97.06
83.61
91.79
87.50
Inventory turnover
1.26X
1.53X
1.27X
1.37X
Days Inventory on Hands
288.71
238.48
287.03
265.72
AP turnover
2.56X
2.58X
2.13X
2.55X
Number of Days in AP
142.68
141.32
171.05
142.91
The decrease in the turnover ratios is obvious. These ratios affect the operation cycle. It is noticeable that in 2015 it took over 97 days for Weatherford to collect its revenue from the customers. The 10-K report states, that the compan.
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just what'sapp this number below. I sold about 3000 pi coins to him and he paid me immediately.
+12349014282
The Rise of Generative AI in Finance: Reshaping the Industry with Synthetic DataChampak Jhagmag
In this presentation, we will explore the rise of generative AI in finance and its potential to reshape the industry. We will discuss how generative AI can be used to develop new products, combat fraud, and revolutionize risk management. Finally, we will address some of the ethical considerations and challenges associated with this powerful technology.
how to sell pi coins in South Korea profitably.DOT TECH
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What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
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how to sell pi coins in Hungary (simple guide)DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
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BONKMILLON Unleashes Its Bonkers Potential on Solana.pdfcoingabbar
Introducing BONKMILLON - The Most Bonkers Meme Coin Yet
Let's be real for a second – the world of meme coins can feel like a bit of a circus at times. Every other day, there's a new token promising to take you "to the moon" or offering some groundbreaking utility that'll change the game forever. But how many of them actually deliver on that hype?
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
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2. 15 - 2
Corporate Valuation:
List the two types of assets that a
company owns.
Operating asset: baik yang nyata atau tidak yang
ada atau akan ada yang terlibat dalam kegiatan operasi
perusahaan
asset in place: tangible, n intangible
(patent, reputation).
growth option (opportunity to expand based on
knowledge, experience dll). sekarang atau yang ada besok.
Financial, or nonoperating, assets
3. 15 - 3
Assets-in-Place
Assets-in-place are tangible, such as
buildings, machines, inventory.
Usually they are expected to grow.
They generate free cash flows.
The PV of their expected future free
cash flows, discounted at the WACC,
is the value of operations.
4. 15 - 4
Value of Operations
∑
∞
= +
=
1 )1(t
t
t
Op
WACC
FCF
V
5. 15 - 5
Nonoperating Assets
Marketable securities
Ownership of non-controlling
interest in another company
Value of nonoperating assets usually
is very close to figure that is
reported on balance sheets.
6. 15 - 6
Total Corporate Value
Total corporate value is sum of:
Value of operations
Value of nonoperating assets
7. 15 - 7
Claims on Corporate Value
Debtholders have first claim.
Preferred stockholders have the next
claim.
Any remaining value belongs to
stockholders.
8. 15 - 8
Applying the Corporate Valuation
Model
Forecast the financial statements, as
shown in Chapter 14.
Calculate the projected free cash flows.
Model can be applied to a company
that does not pay dividends, a privately
held company, or a division of a
company, since FCF can be calculated
for each of these situations.
9. 15 - 9
Data for Valuation
FCF0 = $20 million
WACC = 10%
g = 5%
Marketable securities = $100 million
Debt = $200 million
Preferred stock = $50 million
Book value of equity = $210 million
10. 15 - 10
Value of Operations:
Constant Growth
Suppose FCF grows at constant rate g.
( )
( )∑
∑
∞
=
∞
=
+
+
=
+
=
1t
t
t
0
1t
t
t
Op
WACC1
)g1(FCF
WACC1
FCF
V
11. 15 - 11
Constant Growth Formula
Notice that the term in parentheses
is less than one and gets smaller as t
gets larger. As t gets very large,
term approaches zero.
∑
∞
=
+
+
=
1t
t
0Op
WACC1
g1
FCFV
12. 15 - 12
Constant Growth Formula (Cont.)
The summation can be replaced by a
single formula:
( )
( )gWACC
)g1(FCF
gWACC
FCF
V
0
1
Op
−
+
=
−
=
13. 15 - 13
Find Value of Operations
( )
( )
420
05.010.0
)05.01(20
V
gWACC
)g1(FCF
V
Op
0
Op
=
−
+
=
−
+
=
14. 15 - 14
Value of Equity
Sources of Corporate Value
Value of operations = $420
Value of non-operating assets = $100
Claims on Corporate Value
Value of Debt = $200
Value of Preferred Stock = $50
Value of Equity = ?
15. 15 - 15
Value of Equity
Total corporate value = VOp + Mkt. Sec.
= $420 + $100
= $520 million
Value of equity = Total - Debt - Pref.
= $520 - $200 - $50
= $270 million
16. 15 - 16
Market Value Added (MVA)
MVA = Total corporate value of firm
minus total book value of firm
Total book value of firm = book value
of equity + book value of debt + book
value of preferred stock
MVA = $520 - ($210 + $200 + $50)
= $60 million
17. 15 - 17
Breakdown of Corporate Value
0
100
200
300
400
500
600
Sources
of Value
Claims
on Value
Market
vs. Book
MVA
Book equity
Equity (Market)
Preferred stock
Debt
Marketable
securities
Value of operations
18. 15 - 18
Expansion Plan: Nonconstant Growth
Finance expansion by borrowing $40
million and halting dividends.
Projected free cash flows (FCF):
Year 1 FCF = -$5 million.
Year 2 FCF = $10 million.
Year 3 FCF = $20 million
FCF grows at constant rate of 6%
after year 3. (More…)
19. 15 - 19
The weighted average cost of capital,
rc, is 10%.
The company has 10 million shares
of stock.
20. 15 - 20
Horizon Value
Free cash flows are forecast for
three years in this example, so the
forecast horizon is three years.
Growth in free cash flows is not
constant during the forecast,so we
can’t use the constant growth
formula to find the value of
operations at time 0.
21. 15 - 21
Horizon Value (Cont.)
Growth is constant after the horizon
(3 years), so we can modify the
constant growth formula to find the
value of all free cash flows beyond
the horizon, discounted back to the
horizon.
22. 15 - 22
Horizon Value Formula
Horizon value is also called terminal
value, or continuing value.
( )gWACC
)g1(FCF
VHV t
ttimeatOp
−
+
==
23. 15 - 23
Vop at 3
Find the value of operations by discounting
the free cash flows at the cost of capital.
0
-4.545
8.264
15.026
398.197
1 2 3 4rc=10%
416.942 = Vop
g = 6%
FCF= -5.00 10.00 20.00 21.2
$21.2
. .
$530.
10 0 06
=
−
=
0
24. 15 - 24
Find the price per share of common
stock.
Value of equity = Value of operations
- Value of debt
= $416.94 - $40
= $376.94 million.
Price per share = $376.94 /10 = $37.69.
25. 15 - 25
Value-Based Management (VBM)
VBM is the systematic application
of the corporate valuation model
to all corporate decisions and
strategic initiatives.
The objective of VBM is to
increase Market Value Added
(MVA)
26. 15 - 26
MVA and the Four Value Drivers
MVA is determined by four drivers:
Sales growth
Operating profitability
(OP=NOPAT/Sales)
Capital requirements
(CR=Operating capital / Sales)
Weighted average cost of capital
27. 15 - 27
MVA for a Constant Growth Firm
+
−
−
+
=
)g1(
CR
WACCOP
gWACC
)g1(Sales
MVA
t
t
28. 15 - 28
Insights from the Constant Growth
Model
The first bracket is the MVA of a firm
that gets to keep all of its sales
revenues (i.e., its operating profit
margin is 100%) and that never has
to make additional investments in
operating capital.
−
+
gWACC
)g1(Salest
29. 15 - 29
Insights (Cont.)
The second bracket is the operating
profit (as a %) the firm gets to keep,
less the return that investors require
for having tied up their capital in the
firm.
+
−
)g1(
CR
WACCOP
30. 15 - 30
Improvements in MVA due to the
Value Drivers
MVA will improve if:
WACC is reduced
operating profitability (OP)
increases
the capital requirement (CR)
decreases
31. 15 - 31
The Impact of Growth
The second term in brackets can be
either positive or negative,
depending on the relative size of
profitability, capital requirements,
and required return by investors.
+
−
)g1(
CR
WACCOP
32. 15 - 32
The Impact of Growth (Cont.)
If the second term in brackets is
negative, then growth decreases
MVA. In other words, profits are not
enough to offset the return on capital
required by investors.
If the second term in brackets is
positive, then growth increases MVA.
33. 15 - 33
Expected Return on Invested
Capital (EROIC)
The expected return on invested
capital is the NOPAT expected next
period divided by the amount of
capital that is currently invested:
t
1t
t
Capital
NOPAT
EROIC +
=
34. 15 - 34
MVA in Terms of Expected ROIC
[ ]
gWACC
WACCEROICCapital
MVA tt
t
−
−
=
If the spread between the expected
return, EROICt, and the required
return, WACC, is positive, then MVA
is positive and growth makes MVA
larger. The opposite is true if the
spread is negative.
35. 15 - 35
The Impact of Growth on MVA
A company has two divisions. Both
have current sales of $1,000, current
expected growth of 5%, and a WACC of
10%.
Division A has high profitability
(OP=6%) but high capital requirements
(CR=78%).
Division B has low profitability
(OP=4%) but low capital requirements
(CR=27%).
36. 15 - 36
What is the impact on MVA if growth
goes from 5% to 6%?
Division A Division B
OP 6% 6% 4% 4%
CR 78% 78% 27% 27%
Growth 5% 6% 5% 6%
MVA (300.0) (360.0) 300.0 385.0
Note: MVA is calculated using the
formula on slide 15-27.
38. 15 - 38
Analysis of Growth Strategies
The expected ROIC of Division A is less
than the WACC, so the division should
postpone growth efforts until it
improves EROIC by reducing capital
requirements (e.g., reducing inventory)
and/or improving profitability.
The expected ROIC of Division B is
greater than the WACC, so the division
should continue with its growth plans.
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Two Primary Mechanisms of
Corporate Governance
“Stick”
Provisions in the charter that
affect takeovers.
Composition of the board of
directors.
“Carrot: Compensation plans.
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Entrenched Management
Occurs when there is little chance
that poorly performing managers will
be replaced.
Two causes:
Anti-takeover provisions in the
charter
Weak board of directors
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How are entrenched managers
harmful to shareholders?
Management consumes perks:
Lavish offices and corporate jets
Excessively large staffs
Memberships at country clubs
Management accepts projects (or
acquisitions) to make firm larger,
even if MVA goes down.
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Board of Directors
Weak boards have many insiders
(i.e., those who also have another
position in the company) compared
with outsiders.
Interlocking boards are weaker (CEO
of company A sits on board of
company B, CEO of B sits on board
of A).
44. 15 - 44
Stock Options in Compensation
Plans
Gives owner of option the right to
buy a share of the company’s stock
at a specified price (called the
exercise price) even if the actual
stock price is higher.
Usually can’t exercise the option for
several years (called the vesting
period).
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Stock Options (Cont.)
Can’t exercise the option after a
certain number of years (called the
expiration, or maturity, date).