Test Bank Investor Communications Chapter 30

Chapter: Chapter 30: Investor Communications

Multiple Choice

1. In comparing growth versus value stocks, which of the following is NOT true?

a) Most stocks labeled as growth stocks have higher ROICs.

b) Most managers would like their firms to be growth stocks.

c) Growth stocks are usually stocks that have higher book and earnings multiples.

d) Most stocks labeled as growth stocks grow earnings and revenues faster than value stocks.

Response: []

2. Do managers respond to increases in transparency by other firms and/or increases in the demands for transparency from investors?

a) No, managers do not respond to either.

b) Yes, managers respond positively to both.

c) Managers respond only to demands from investors but not to increases in the transparency of other firms.

d) Managers respond only to increases in the transparency of other firms but not to demands from investors.

Response: []

3. Which of the following is NOT a way that managers of most companies could improve their communication to investors?

a) Increase their understanding of their investor base.

b) Respond more actively to analysts’ comments and the changing P/E ratio of the firm.

c) Tailor communications to the investors that matter most in determining share price.

d) Engage in a systematic analysis to determine if there really is a material discrepancy between their company’s intrinsic value and its market value.

Response: []

4. Which of the following is true with respect to earnings guidance?

a) There is usually a change in total returns to shareholders in the first year that managers begin to offer earnings guidance.

b) It has been proven that earnings guidance can increase liquidity.

c) Firms that engage in earnings guidance have higher multiples such as enterprise value/EBITA.

d) When a company begins to issue earnings guidance, it does not change the likelihood of higher or lower volatility in its share price relative to companies that do not issue earnings guidance.

Response: []

5. With respect to the type of information managers should reveal, which of the following is/are true?

I. Managers should provide specific point goals rather than ranges.

II. Multinational companies should discuss their targets using constant currency rates.

III. Managers across industries should strive to provide information on a common set of value drivers.

IV. Managers of conglomerates should reveal aggregate numbers rather than business-by-business numbers.

a) I and II only.

b) II and III only.

c) II only.

d) III and IV only.

Response: []

True/False

6. The objective of investor relations should be the alignment of share price and intrinsic value. It should not focus on trying to maximize the share price.

Response: []

7. Executives would do a better service to investors by providing guidance at the start of the financial year on the real short-, medium-, and long-term value drivers of their businesses, as opposed to guidance on earnings per share (EPS).

Response: []

8. In most industries, there is a fairly standardized level of transparency across firms.

Response: [In most industries, the level of disclosure and transparency is not very standardized, and management has some latitude to choose how transparent it wants to be.]

Multiple Choice

9. Which of the following are true about intrinsic investors?

I. They are sophisticated.

II. They want transparency about results.

III. They want management’s candid assessment of the company’s performance.

IV. Their role in determining stock prices is not important enough for management to accommodate their preferences.

a) I and II only.

b) I and III only.

c) I, II, and III only.

d) II, III, and IV only.

Response: [Intrinsic investors are sophisticated: they want transparency about results, management’s candid assessment of the company’s performance, and insightful guidance about the company’s targets and strategies. Their role in determining stock prices makes it worth management’s efforts to meet these needs in its investor communications and to avoid oversimplifying.]

Short Answer

10. Describe the basic goal of good investor communications.