Question 1

The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options. If D'Amico's stock underperforms the market, these options will necessarily be worthless.

Accepted Answer

Executive stock options may still have value even if the company's stock underperforms the market, depending on the specific provisions and terms of the options.

Question 2

A poison pill is also known as a corporate restructuring.

Accepted Answer

A poison pill is a defense mechanism used by a corporation to prevent a hostile takeover, typically through the issuance of new shares or other financial instruments that dilute the value of the company's existing shares. It is not the same as a corporate restructuring, which involves significant changes to a company's organizational structure, operations or management.

Question 3

ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.

Accepted Answer

ESOPs (Employee Stock Ownership Plans) were indeed created in the 1950s as a way to give workers a stake in the company and increase their motivation and productivity. However, over time, ESOPs have also been used as a way to prevent hostile takeovers, as they make it more difficult for an outside entity to buy up a controlling number of shares.

Question 4

Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2) the rules that cover the CEO's ability to remove members of the board.

Accepted Answer

The answer of Two important issues in corporate governance are...

Question 5

Which of the following is NOT normally regarded as being a barrier to hostile takeovers?&#10;A) Targeted share repurchases.&#10;B) Shareholder rights provisions.&#10;C) Restricted voting rights.&#10;D) Poison pills.&#10;E) Abnormally high executive compensation.

Accepted Answer

Abnormally high executive compensation is not normally regarded as a barrier to hostile takeovers. In fact, it may serve as an incentive for potential acquirers, as they could potentially reallocate funds from excessive executive compensation to other aspects of the business. Targeted share repurchases, shareholder rights provisions, restricted voting rights, and poison pills are all commonly used as defensive measures against hostile takeovers.

Question 6

Which of the following is NOT normally regarded as being a good reason to establish an ESOP?&#10;A) To enable the firm to borrow at a below-market interest rate.&#10;B) To make it easier to grant stock options to employees.&#10;C) To help prevent a hostile takeover.&#10;D) To help retain valued employees.&#10;E) To increase worker productivity.

Accepted Answer

Granting stock options to employees can be achieved through various means and does not necessarily require the establishment of an Employee Stock Ownership Plan (ESOP). ESOPs are primarily used for purposes such as borrowing at favorable rates, preventing hostile takeovers, retaining employees, and boosting productivity, rather than just facilitating stock options.

Deck 13: Corporate Valuation, Value-Based Management and Corporate Governance