150 Questions
What is the purpose of corporate governance?
To ensure transparency, accountability, and ethical decision-making to protect and enhance the value of the company for its stakeholders
Which provision was introduced by the Sarbanes Oxley Act to enhance regulatory governance?
Auditing oversight board
What does the G index measure in corporate governance?
The number of provisions adopted by a company that limit shareholder rights
According to the text, which portfolio outperformed the other based on the G index?
The democracy portfolio (firms with weakest rights)
What does the E index focus on in corporate governance?
Staggered boards, limitations of shareholder bylaw amendments, poison pills, golden parachutes, supermajority provisions mergers, and for charter amendments
What happens when dual classifications increase in corporate governance?
Agency costs increase
What is the purpose of a No shop agreement in the context of bidding?
To prohibit the target from soliciting competing bids
Under what conditions is a 30-day waiting period required before a transaction can be closed?
When pre-merger notification is required
What triggers a delay in acquisitions by non-Canadians?
When the responsible minister declares the investment is of net benefit to Canada
What defines the Size of parties’ test under the antitrust provisions?
Aggregate assets (book value)/gross revenues of sales Canada > $400 million
What is the purpose of a Break/termination fees agreement in the context of bidding?
To penalize the target if the negotiation is terminated
When is a merger subject to pre-merger notification provisions?
When the merger would result in the bidder owning > 20% (35%) of the public (private) target firm
What is the formula to calculate Interest Coverage Ratio using EBITDA?
$\frac{EBITDA}{Interest Expense}$
Which agency provides credit ratings crucial for companies seeking debt financing?
Moody’s
What does Enterprise Value Multiples like EV/EBITDA or EV/EBIT ratios represent?
Overall Company Value Multiples
What is one of the cons of market-based valuation?
Potential market skewing
What liquidity discounts are recommended for privately held firms?
20-30%
What is the approach used to value a company by discounting firm free cash flows?
Discounted Cash Flow Analysis
What is the median CEO compensation at 300 large U.S. companies in 2013?
$11.4 million
Which step of Comparable Company Analysis (CCA) involves spreading key statistics, ratios, and trading multiples to assess size, financial data, profitability, growth profile, return on investment, and credit profile?
The third step
What does the widening gap between insider voting rights and cash flow rights lead to?
Higher CEO compensation
What is the principal-agent problem primarily a result of?
Conflicts between shareholders/employees and management
What is the relationship between CEO compensation and firm value according to the text?
Negatively related
What is the purpose of providing shares or stock options, improving monitoring, weakening provisions, and ensuring CEOs are not compensated for 'luck'?
To limit CEO incentives and abilities
How is equity value calculated?
By subtracting the debt from the enterprise value and adjusting for cash, preferred stock, and non-controlling interest
What is the formula for calculating net working capital (NWC)?
NWC = Current assets - Current liabilities
When is the EBITDA Multiple Approach commonly used?
For tying cash flow analysis to recent market transactions and for IPOs, LBOs, and equity valuation
What is the purpose of unlevering beta?
To neutralize the effects of different capital structures when calculating the weighted average cost of capital (WACC) for a private company
What factors can guide future growth and reinvestment?
Historical growth, analyst forecasts, and fundamental growth rates
What are the disclosure requirements for mergers in Canada?
Announcing the merger once a definitive agreement has been signed and prompt disclosure of any material change
What does the G index measure in corporate governance?
Shareholder rights provisions adopted by a company
What is the purpose of the Sarbanes Oxley Act's provision on auditor independence?
To ensure the presence of independent directors on the audit committee
What is the primary focus of the E index in corporate governance?
Provisions related to mergers and charter amendments
What is the impact of dual classifications on agency costs in corporate governance?
They increase agency costs
What is the main purpose of corporate governance?
To ensure transparency, accountability, and ethical decision-making
What did the study find about the performance of the democracy portfolio compared to the dictatorship portfolio based on the G index?
The democracy portfolio outperformed the dictatorship one by 8.5% per year
What is the formula to calculate the Interest Coverage Ratio using EBITDA?
$\frac{EBITDA}{Interest Expense}$
What are the recommended liquidity discounts for privately held firms?
20-30%
What is the purpose of Precedent Transactions Analysis, or Deal Comps?
To provide actual acquisition multiples and premiums paid for similar companies
What does the Gordon Growth Model Approach use for discounting both FCF and TV?
Mid-year convention
What is the key factor in valuing a company using Discounted Cash Flow Analysis?
Terminal value representing more than 50% of EV
What are the key trading multiples mentioned in the text?
EV/EBITDA ratio and P/E ratio
Which provision dictates that acquisitions by non-Canadians are delayed until the responsible minister declares the investment is of net benefit to Canada?
Antitrust
What triggers a 30-day waiting period before a transaction can be closed under pre-merger notification provisions in Canada?
Mergers exceeding certain thresholds
What is the purpose of a No shop agreement in the context of bidding?
To prohibit the target from soliciting competing bids
What is the threshold for Size of parties’ test under the antitrust provisions for pre-merger notification in Canada?
$400 million
What is the penalty range for Break/termination fees agreement if the negotiation is terminated?
2-5% of target equity value
Under what conditions does a merger trigger the Equity interest test for pre-merger notification in Canada?
If the merger would result in the bidder owning 20% of the public target firm
What is the main reason for the widening gap between insider voting rights and cash flow rights, according to the text?
To increase CEO compensation and the likelihood of value-destroying M&As
What is the negative relationship between CEO compensation and firm value, according to the text?
Shareholders lose $100 for every dollar paid to CEOs
What was the median CEO compensation at 300 large U.S. companies in 2013, according to the text?
$11.4 million
What are the solutions mentioned in the text to limit CEO incentives and abilities?
Providing shares or stock options, improving monitoring, weakening provisions, and ensuring CEOs are not compensated for 'luck'
What is the economic rationale behind Comparable Company Analysis (CCA), according to the text?
Based on the law of one price
What does the third step of Comparable Company Analysis (CCA) involve, according to the text?
Spreading key statistics, ratios, and trading multiples to assess size, financial data, profitability, growth profile, return on investment, and credit profile
What is the purpose of unlevering beta?
To remove the impact of debt on beta to calculate the asset beta
What are the disclosure requirements for mergers in Canada?
Announcing the merger once a definitive agreement has been signed and prompt disclosure of any material change
What is the purpose of a Break/termination fees agreement in the context of bidding?
To compensate the target company if the deal falls through due to regulatory issues
What happens when dual classifications increase in corporate governance?
It may lead to conflicts of interest and lack of transparency
What is the approach used to value a company by discounting firm free cash flows?
Discounted Cash Flow (DCF) approach
What is the formula for calculating net working capital (NWC)?
$NWC = Current Assets - Current Liabilities$
What does the G index measure in corporate governance?
The extent to which a company limits shareholder rights
What is the purpose of the E index in corporate governance?
To focus on specific provisions related to shareholder rights and company control
What is the primary purpose of the Sarbanes Oxley Act's provision on auditor independence?
To have independent directors on the audit committee
What is the impact of dual classifications on agency costs in corporate governance?
They increase agency costs by allowing management to pursue personal goals
What did the study find about the performance of the democracy portfolio compared to the dictatorship portfolio based on the G index?
The democracy portfolio outperformed the dictatorship portfolio by 8.5% per year
What is the purpose of the Sarbanes Oxley Act's provision on personal loans to executives/directors?
To limit potential conflicts of interest and unethical conduct
What is the threshold for the Size of parties’ test under the antitrust provisions for pre-merger notification in Canada?
Aggregate assets (book value)/gross revenues of sales Canada > $400 million
What triggers a 30-day waiting period before a transaction can be closed under pre-merger notification provisions in Canada?
When the pre-merger notification is required
What is the purpose of a No shop agreement in the context of bidding?
Prohibits target from soliciting competing bids
When is a merger subject to pre-merger notification provisions?
When the Size of parties’ test threshold is exceeded
What provision dictates that acquisitions by non-Canadians are delayed until the responsible minister declares the investment is of net benefit to Canada?
Antitrust provisions
What does the Equity interest test for pre-merger notification in Canada involve?
Merger would result in bidder owning > 20% (35%) of the public (private) target firm
How is net working capital (NWC) calculated?
By adding current assets and subtracting current liabilities
What is the purpose of unlevering beta?
To neutralize the effects of different capital structures when calculating the weighted average cost of capital (WACC) for a private company
What does the EBITDA Multiple Approach tie cash flow analysis to?
Recent market transactions
What is the formula for calculating equity value?
Enterprise value - debt + cash - preferred stock - non-controlling interest
What is the primary purpose of WACC assumptions and problems?
To address inconsistencies between the constant discount rate and projected changes to capital structure
What regulatory framework governs mergers in Canada?
Competition bureau, securities regulators in each province/territory, and stock exchanges
What is the formula for calculating the Interest Coverage Ratio using EBITDA?
$\frac{EBITDA}{Interest , Expense}$
What is the main reason for applying liquidity discounts and control premiums in valuation?
To reflect the lower liquidity and lack of control in privately held firms
What is the two-step approach involved in Discounted Cash Flow Analysis?
Discounting firm free cash flows and terminal value separately
What does Precedent Transactions Analysis provide for valuation?
Actual acquisition multiples and premiums paid for similar companies
What is the purpose of using means and medians of relevant multiples in valuation?
To account for potential market skewing
What is the recommended adjustment involved in calendarization of financial data?
Adjusting for recent events and non-recurring items
What is the median CEO compensation at 300 large U.S. companies in 2013?
Roughly $11.4 million
What is the negative relationship between CEO compensation and firm value, according to the text?
Shareholders lose $100 for every dollar paid to CEOs
What is the primary focus of the third step of Comparable Company Analysis (CCA), according to the text?
Determining valuation multiples
What triggers a 30-day waiting period before a transaction can be closed under pre-merger notification provisions in Canada?
The acquisition is of net benefit to Canada
What does Comparable Company Analysis (CCA) involve, according to the text?
All of the above
What is the impact of the widening gap between insider voting rights and cash flow rights, according to the text?
Higher likelihood of value-destroying M&As
What is the primary focus of the G index in corporate governance?
Measuring the level of shareholder rights provisions adopted by a company
What is the main purpose of the E index in corporate governance?
Evaluating specific provisions related to shareholder rights and protection
What impact do dual classifications have on agency costs in corporate governance?
They increase agency costs
What is the primary result of the Sarbanes Oxley Act's provision on auditor independence?
Enhancing the independence of directors on audit committees
What did the study find about the performance of the democracy portfolio compared to the dictatorship portfolio based on the G index?
The democracy portfolio outperformed the dictatorship portfolio by 8.5% per year
What triggers the 30-day waiting period before a transaction can be closed under pre-merger notification provisions in Canada?
Meeting certain financial thresholds
What is the penalty range for Break/termination fees agreement if the negotiation is terminated?
3-5% of target equity value
What triggers a 30-day waiting period before a transaction can be closed under pre-merger notification provisions in Canada?
Size of parties’ test
What defines the Size of parties’ test under the antitrust provisions?
Aggregate assets (book value)/gross revenues of sales Canada > $400 million
What is the impact of dual classifications on agency costs in corporate governance?
Increases agency costs
What is the impact of the widening gap between insider voting rights and cash flow rights, according to the text?
Increased agency costs
What regulatory framework governs mergers in Canada?
Competition Act
What is the formula to calculate Enterprise Value using EBITDA and the formula to calculate Enterprise Value using EBIT?
$Enterprise Value = EBITDA * Multiple$ and $Enterprise Value = EBIT * Multiple$
When using the Gordon Growth Model Approach, what is the correct method for discounting both Free Cash Flow (FCF) and Terminal Value (TV)?
Use the mid-year convention for discounting both FCF and TV
What are the recommended Liquidity Discounts for privately held firms?
20-30%
What does the Precedent Transactions Analysis provide, and what are its potential drawbacks?
Provides actual acquisition multiples and premiums paid; may have skewed multiples and time lag issues
What is the primary advantage of Market-based valuation, and what is a potential disadvantage?
Advantage: Relativity; Disadvantage: Potential market skewing
What is the purpose of Credit Ratings provided by agencies like Moody’s, S&P, and Fitch?
Crucial for companies seeking debt financing in capital markets
How is net working capital (NWC) calculated?
By subtracting current assets from current liabilities
What is the purpose of unlevering beta in the context of calculating the weighted average cost of capital (WACC) for a private company?
To adjust for the effects of different capital structures
What is the primary purpose of the EBITDA Multiple Approach?
To link cash flow analysis to historical market transactions
What are the methods of acquisition in Canada?
Stock purchase and asset purchase
What are the pros of using the Weighted Average Cost of Capital (WACC) for valuation?
Being cash flow-based and market independent
What is the purpose of anti-takeover measures in Canada?
To favor auctions and actions from target shareholders
What is the negative relationship between CEO compensation and firm value, according to the text?
CEO compensation is negatively related to firm value, with shareholders losing $100 for every dollar paid to CEOs.
What is the median CEO compensation at 300 large U.S. companies in 2013, according to the text?
$11.4 million
What is the primary focus of the third step of Comparable Company Analysis (CCA), according to the text?
Spreading key statistics, ratios, and trading multiples to assess size, financial data, profitability, growth profile, return on investment, and credit profile
What is the economic rationale behind Comparable Company Analysis (CCA), according to the text?
It is based on the economic rationale of the law of one price.
What does the widening gap between insider voting rights and cash flow rights lead to, according to the text?
It leads to a greater likelihood of value-destroying M&As and higher CEO compensation.
What are the solutions mentioned in the text to limit CEO incentives and abilities?
Improving monitoring and ensuring CEOs are not compensated for 'luck'
What are RMBS secured by?
Non-insured mortgages on residential properties
What is the purpose of structuring Mortgage-backed Securities as tranches?
To participate in the cash flows derived from the underlying mortgages based on seniority
What is the function of a Rating Agency in the context of Mortgage-backed Securities?
To issue credit ratings to each tranche
What type of mortgages are NHA MBS secured by?
Insured mortgages on residential properties
What is the sequential distribution of cash flows from underlying mortgages known as?
Waterfall
What are CMBS secured by?
Mortgages on commercial real estate
Which metrics are used as the main financial decision-making tools in real estate investment?
Net Present Value (NPV) and Internal Rate Of Return (IRR)
What is the tax treatment of property income for co-ownership in real estate equity investment?
Taxed at the individual owners' level
What type of liability extends to the partners' other assets in an indirect partnership in real estate equity investment?
Unlimited liability for both general partners and limited partners
What is true about the ultimate decision makers in real estate equity investment?
Equity holders are the ultimate decision makers
What is a characteristic of property ownership in direct proprietorship in real estate equity investment?
Unlimited liability extending to owners' other assets
What is a distinguishing feature of limited partners in an indirect partnership for real estate equity investment?
Only at risk for their investments
What does development financing typically involve capital for?
Predevelopment, land acquisition, construction, stabilization, and take-out
Which of the following is a constraint on entitlements in real estate development?
Local governments' zoning and infrastructure requirements
What are the components of construction costs in real estate development?
Site preparation, actual building costs, and potential change orders
What is involved in the site work phase of real estate development?
Preparing the site, creating infrastructure, and managing unanticipated risks
What is the purpose of different construction contracts in real estate development?
They include fixed price, guaranteed maximum price, and cost plus options
What is the primary focus of REITs in real estate investment?
Primarily involved in real estate investment as special purpose legal entities
What percentage of the trust's revenue must come from rent or mortgage interest and capital gains from real properties in Canada to qualify as a REIT?
90%
What percentage of its properties' fair market value must be in Canada for a REIT to qualify?
75%
What percentage of their income do REITs typically distribute?
90%
What is the main factor attracting institutional investors to real estate investment?
Tax-exempt status
What is the minimum down payment requirement for the residential mortgage market in Canada?
$20%
What is the range of premiums for mortgage loan insurance for down payments less than 20% based on the amount of the mortgage loan?
$2.5%-4.50%
What is the primary difference between Real Estate Operating Companies (REOC) and Real Estate Investment Trusts (REIT)?
REOCs primarily invest in real estate projects and pay regular corporate taxes, while REITs have specific asset and income requirements and public trading.
What does Net Present Value (NPV) represent?
NPV is the sum of cash flow PV minus initial investment, compared to the discount rate or hurdle rate.
What does Internal Rate of Return (IRR) measure?
IRR measures annual growth rate and is compared to the hurdle rate, calculated on unlevered or levered basis.
What does development in real estate involve?
Development involves creating new properties, driven by specific user requirements or speculation, with development and construction costs.
What are examples of exit strategies in real estate investment?
Exit strategies include Right of First Offer, Right of First Refusal, Shotgun Clause, and Sale by Appraisal.
What is included in development costs for real estate projects?
Development costs include professional services, environmental studies, land acquisition, permits, and zoning.
Study Notes
Valuation Methods and Techniques
- Equity value is calculated by subtracting the debt from the enterprise value and adjusting for cash, preferred stock, and non-controlling interest
- Deferred income tax liability is adjusted by adding back any increase and subtracting any decrease in the account
- Net working capital (NWC) is calculated as the difference between current assets and current liabilities
- EBITDA Multiple Approach is useful for tying cash flow analysis to recent market transactions and is used for IPOs, LBOs, and equity valuation
- Unlevering beta is used to neutralize the effects of different capital structures when calculating the weighted average cost of capital (WACC) for a private company
- Future growth and reinvestment can be guided by historical growth, analyst forecasts, and fundamental growth rates
- WACC assumptions and problems include the constant discount rate being inconsistent with projected changes to capital structure
- Pros of WACC include being cash flow-based, market independent, self-sufficient, and flexible; cons include dependence on financial projections and sensitivity to assumptions
- Canadian regulatory framework includes competition bureau, securities regulators in each province/territory, and stock exchanges governing mergers
- Methods of acquisition in Canada include plan of arrangement and takeover bids, each with specific requirements and regulations
- Disclosure requirements for mergers in Canada include announcing the merger once a definitive agreement has been signed and prompt disclosure of any material change
- Anti-takeover measures in Canada include favoring auctions and actions from target shareholders, use of poison pills, and permitted deal protection measures for public targets
Valuation Methods and Techniques
- Equity value is calculated by subtracting the debt from the enterprise value and adjusting for cash, preferred stock, and non-controlling interest
- Deferred income tax liability is adjusted by adding back any increase and subtracting any decrease in the account
- Net working capital (NWC) is calculated as the difference between current assets and current liabilities
- EBITDA Multiple Approach is useful for tying cash flow analysis to recent market transactions and is used for IPOs, LBOs, and equity valuation
- Unlevering beta is used to neutralize the effects of different capital structures when calculating the weighted average cost of capital (WACC) for a private company
- Future growth and reinvestment can be guided by historical growth, analyst forecasts, and fundamental growth rates
- WACC assumptions and problems include the constant discount rate being inconsistent with projected changes to capital structure
- Pros of WACC include being cash flow-based, market independent, self-sufficient, and flexible; cons include dependence on financial projections and sensitivity to assumptions
- Canadian regulatory framework includes competition bureau, securities regulators in each province/territory, and stock exchanges governing mergers
- Methods of acquisition in Canada include plan of arrangement and takeover bids, each with specific requirements and regulations
- Disclosure requirements for mergers in Canada include announcing the merger once a definitive agreement has been signed and prompt disclosure of any material change
- Anti-takeover measures in Canada include favoring auctions and actions from target shareholders, use of poison pills, and permitted deal protection measures for public targets
Corporate Governance and Comparable Company Analysis (CCA) Summary
- Board of directors have fiduciary duties to monitor management and act in the shareholders' collective interests.
- Principal-agent problem arises from conflicts between shareholders/employees and management, leading to agency costs and potential harm to shareholder/employee interests.
- Shareholder wealth declines as the gap between insider voting rights and cash flow rights widens, leading to higher CEO compensation and a greater likelihood of value-destroying M&As.
- CEO compensation is negatively related to firm value, with shareholders losing $100 for every dollar paid to CEOs.
- Median CEO compensation at 300 large U.S. companies was approximately $11.4 million in 2013.
- Solutions to limit CEO incentives and abilities include providing shares or stock options, improving monitoring, weakening provisions, and ensuring CEOs are not compensated for "luck."
- Comparable Company Analysis (CCA) is used to value companies, divisions, or assets, and is based on the economic rationale of the law of one price.
- CCA involves selecting a universe of comparable companies, locating necessary financial information, spreading key statistics and ratios, and determining valuation multiples.
- The first step of CCA involves studying the target, identifying companies with similar characteristics, and gathering financial information from sources such as SEC filings and equity research reports.
- The second step of CCA involves using historical and expected future financial performance data, including SEC filings, proxy statements, equity research, and financial information services.
- The third step of CCA includes spreading key statistics, ratios, and trading multiples to assess size, financial data, profitability, growth profile, return on investment, and credit profile.
- Key financial data used in CCA includes market valuation, sales, gross profit, EBITDA, EBIT, net income, profitability margins, growth rates, return on investment metrics, and credit profile indicators.
Corporate Governance and Comparable Company Analysis (CCA) Summary
- Board of directors have fiduciary duties to monitor management and act in the shareholders' collective interests.
- Principal-agent problem arises from conflicts between shareholders/employees and management, leading to agency costs and potential harm to shareholder/employee interests.
- Shareholder wealth declines as the gap between insider voting rights and cash flow rights widens, leading to higher CEO compensation and a greater likelihood of value-destroying M&As.
- CEO compensation is negatively related to firm value, with shareholders losing $100 for every dollar paid to CEOs.
- Median CEO compensation at 300 large U.S. companies was approximately $11.4 million in 2013.
- Solutions to limit CEO incentives and abilities include providing shares or stock options, improving monitoring, weakening provisions, and ensuring CEOs are not compensated for "luck."
- Comparable Company Analysis (CCA) is used to value companies, divisions, or assets, and is based on the economic rationale of the law of one price.
- CCA involves selecting a universe of comparable companies, locating necessary financial information, spreading key statistics and ratios, and determining valuation multiples.
- The first step of CCA involves studying the target, identifying companies with similar characteristics, and gathering financial information from sources such as SEC filings and equity research reports.
- The second step of CCA involves using historical and expected future financial performance data, including SEC filings, proxy statements, equity research, and financial information services.
- The third step of CCA includes spreading key statistics, ratios, and trading multiples to assess size, financial data, profitability, growth profile, return on investment, and credit profile.
- Key financial data used in CCA includes market valuation, sales, gross profit, EBITDA, EBIT, net income, profitability margins, growth rates, return on investment metrics, and credit profile indicators.
Real Estate Investment and Financing
- Corporations, owned by shareholders, with a BOD and management, pay corporate taxes and distribute income through dividends.
- Real Estate Operating Companies (REOC) are corporations primarily investing or operating real estate projects, paying regular corporate taxes.
- Real Estate Investment Trusts (REIT) are legal entities primarily investing in real estate, with specific asset and income requirements and public trading.
- Net Present Value (NPV) is the sum of cash flow PV minus initial investment, compared to the discount rate or hurdle rate.
- Internal Rate of Return (IRR) measures annual growth rate and is compared to the hurdle rate, calculated on unlevered or levered basis.
- Allocation of profit includes preferred returns, promote, and claw back for investors and partners.
- Exit strategies, such as Right of First Offer, Right of First Refusal, Shotgun Clause, and Sale by Appraisal, can ease investor exits.
- Capital structure includes secured debt, wrap-around, mezzanine debt, unsecured debt, and preferred equity.
- Additional sources of funds include Sale Leaseback, Ground Lease, Pad Sale, and Sale of rights.
- Development involves creating new properties, driven by specific user requirements or speculation, with development and construction costs.
- Development costs include professional services, environmental studies, land acquisition, permits, and zoning.
- Soft costs, part of development costs, start before construction and include professional services, studies, acquisition, permits, and zoning.
Test your knowledge of valuation methods and techniques, including equity value calculation, EBITDA multiple approach, WACC assumptions, Canadian regulatory framework for mergers, methods of acquisition in Canada, and anti-takeover measures. This quiz covers key concepts and considerations for financial valuation and mergers in the Canadian context.
Make Your Own Quizzes and Flashcards
Convert your notes into interactive study material.
Get started for free
