T or F: CEO turnover is higher in competitive industries than in those with less
ID: 2732448 • Letter: T
Question
T or F: CEO turnover is higher in competitive industries than in those with less competition?
T or F: Two firms, although they operate different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same amount of debt
T or F: The ‘poison pill’ is a set of provisions that give the shareholders of the acquiring firm the right to buy a specified number of shares in the target firm’s stock at a very low price
T or F: Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. Such conflicts should be resolved in favor of the project with the higher positive NPV.
T or F: Corporate governance can be defined as the set of laws, rules, and procedures that influence a company’s operations and the decisions its managers make.
T or F: Debt is less risky than preferred stock, therefore, the pre-tax cost of debt is always lower than the pre-tax cost of preferred stock ?. In the trade-off theory of leverage, firms trade off the benefits of debt financing (favorable corporate tax treatment) against higher interest rates and bankruptcy costs
Explanation / Answer
This is because the degree of competition has an impact on corporate governance.
When the competition is fierce , a company cannot continue with a poorly performing CEO. Hence ,a competitive company will change the CEO of the organization.
Two firms can have same profits but different outstanding number of shares, in that case EPS will vary.
Hence , EPS =Net profit-Preferred dividend/Outstanding number of shares. It does not depict the debt amount of two businesses are same.
Poison pill is a strategy to avoid hostile takeover of the firm by another firm. It is technique whereby the shares of the target company are made to look unattractive so that the acquiring company repels from acquiring a company .The right to buy shares at a discounted price is offered to the existing shareholders of the target company so that investors earn profits and share capital becomes diluted .This is known as Flip in poison pill.
Another strategy is flip out poison pill wherein after the merger, the shareholders of the target company are given the right to buy the shares of the acquiring company at a very minimal rate like 2 for 1.
In conflicting situations wherein NPV is higher for one project and IRR higher for other, the project with higher NPV is chosen and it is resolved in favor of NPV.
Corporate governance defines the rules and regulations for guiding the decision decision making process of the corporations.
Debt capital has a lowest cost ,it provides a tax shield .
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