Question 1

CEO compensation is generally highest in

Accepted Answer

A) the United States. 
B) India. 
C) the UK. 
D) Germany. 
A) the United States. 
B) India. 
C) the UK. 
D) Germany. A

Question 2

The following are agency problems in capital budgeting except

Accepted Answer

A) empire building. 
B) entrenching investments. 
C) avoiding risks. 
D) accepting all positive NPV projects. 
A) empire building. 
B) entrenching investments. 
C) avoiding risks. 
D) accepting all positive NPV projects. D

Question 3

Generally, firms should attempt to base mangers' compensation on

Accepted Answer

A) the number of years of managerial experience. 
B) the number of hours they work. 
C) verifiable results. 
D) perks consumed. 
A) the number of years of managerial experience. 
B) the number of hours they work. 
C) verifiable results. 
D) perks consumed. C

Question 4

EVA = income earned - (cost of capital)× (investment).

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is NOT an advantage to calculating and reporting economic depreciation?

Accepted Answer

A) Most firms can easily calculate economic depreciation. 
B) Economic depreciation is generally more realistic than accounting depreciation. 
C) Economic depreciation enables a firm to understand the true value of its assets. 
D) All of the options are advantages to calculating and reporting economic depreciation. 
A) Most firms can easily calculate economic depreciation. 
B) Economic depreciation is generally more realistic than accounting depreciation. 
C) Economic depreciation enables a firm to understand the true value of its assets. 
D) All of the options are advantages to calculating and reporting economic depreciation.

Question 6

The free-rider problem, when referring to monitoring of the firms' performance, often results in

Accepted Answer

A) ineffective monitoring by the shareholders. 
B) monitoring being delegated by shareholders to boards of directors. 
C) no monitoring by a large number of small individual investors. 
D) ineffective monitoring by the shareholders, monitoring being delegated by shareholders to boards of directors, and no monitoring by a large number of small individual investors. 
A) ineffective monitoring by the shareholders. 
B) monitoring being delegated by shareholders to boards of directors. 
C) no monitoring by a large number of small individual investors. 
D) ineffective monitoring by the shareholders, monitoring being delegated by shareholders to boards of directors, and no monitoring by a large number of small individual investors.

Question 7

In large public companies, monitoring is the primary responsibility of the

Accepted Answer

A) shareholders only. 
B) board of directors only. 
C) shareholders, board of directors, and independent accountants. 
D) shareholders, board of directors, independent accountants, and lenders. 
A) shareholders only. 
B) board of directors only. 
C) shareholders, board of directors, and independent accountants. 
D) shareholders, board of directors, independent accountants, and lenders.

Question 8

Which of the following capital expenditures may not appear in a firm's capital budget?

Accepted Answer

A) Investment in a new factory only 
B) Investment in a new machine only 
C) Investment in training employees only 
D) Investment in a new factory and in a new machine 
A) Investment in a new factory only 
B) Investment in a new machine only 
C) Investment in training employees only 
D) Investment in a new factory and in a new machine

Question 9

If a company is underperforming, small shareholders will generally start a proxy contest.

Accepted Answer

A) True 
 B)False

Question 10

EVA = (ROI - r)(capital invested).

Accepted Answer

A) True 
 B)False

Question 11

An advantage of stock-based performance compensation for managers is that such managers must bear macroeconomic risks.

Accepted Answer

A) True 
 B)False

Question 12

It is easy to apply EVA to R&D programs and start-up ventures.

Accepted Answer

A) True 
 B)False

Question 13

The following are agency problems associated with capital budgeting:

Accepted Answer

A) reduced effort, perks or private benefits, and avoiding risks. 
B) reduced effort, perks or private benefits, and entrenching investments. 
C) reduced effort, perks or private benefits, empire building, and entrenching investments. 
D) reduced effort, perks or private benefits, empire building, entrenching investments, and avoiding risks. 
A) reduced effort, perks or private benefits, and avoiding risks. 
B) reduced effort, perks or private benefits, and entrenching investments. 
C) reduced effort, perks or private benefits, empire building, and entrenching investments. 
D) reduced effort, perks or private benefits, empire building, entrenching investments, and avoiding risks.

Question 14

Briefly explain how a plant manager can improve EVA (economic value added)?

Accepted Answer

Generally, EVA makes the cost

Question 15

Survey data show that managers admit to managing earnings.

Accepted Answer

A) True 
 B)False

Question 16

The following are advantages of using EVA as a performance measure except

Accepted Answer

A) EVA can substitute for explicit monitoring by top management. 
B) EVA makes the cost of capital visible to operating management, thereby reducing capital employed. 
C) EVA does not measure present values. 
D) EVA highlights business units that are underperforming their peers. 
A) EVA can substitute for explicit monitoring by top management. 
B) EVA makes the cost of capital visible to operating management, thereby reducing capital employed. 
C) EVA does not measure present values. 
D) EVA highlights business units that are underperforming their peers.

Question 17

A firm has an average investment of $100,000 during the year. During the same period, the firm generates an after-tax income of $16,000. If the cost of capital is 15 percent, what is the EVA?

Accepted Answer

A) +$16,000 
B) +$15,000 
C) +$1,000 
D) −$1,000 
A) +$16,000 
B) +$15,000 
C) +$1,000 
D) −$1,000

Question 18

One calculates economic value added (EVA)as follows:

Accepted Answer

A) EVA = income earned − (cost of debt)× (investment). 
B) EVA = income earned − (cost of equity)× (investment). 
C) EVA = income earned − (cost of capital)× (investment). 
D) EVA = income earned − (investment)× (cost of capital). 
A) EVA = income earned − (cost of debt)× (investment). 
B) EVA = income earned − (cost of equity)× (investment). 
C) EVA = income earned − (cost of capital)× (investment). 
D) EVA = income earned − (investment)× (cost of capital).

Question 19

Agency costs can be thought of as the loss in the value of a firm resulting from the following actions by managers:

Accepted Answer

A) reduced effort, perks or private benefits, and avoiding risks. 
B) reduced effort, perks or private benefits, and entrenching investments. 
C) reduced effort, perks or private benefits, empire building, and entrenching investments. 
D) reduced effort, perks or private benefits, empire building, entrenching investments, and avoiding risks. 
A) reduced effort, perks or private benefits, and avoiding risks. 
B) reduced effort, perks or private benefits, and entrenching investments. 
C) reduced effort, perks or private benefits, empire building, and entrenching investments. 
D) reduced effort, perks or private benefits, empire building, entrenching investments, and avoiding risks.

Question 20

All else equal, one would expect to see more earnings management at privately held corporations than at publicly traded corporations.

Accepted Answer

A) True 
 B)False

Exam 12: Agency Problems and Investment

CEO compensation is generally highest in

The following are agency problems in capital budgeting except

Generally, firms should attempt to base mangers' compensation on

EVA = income earned - (cost of capital)× (investment).

Which of the following is NOT an advantage to calculating and reporting economic depreciation?

The free-rider problem, when referring to monitoring of the firms' performance, often results in

In large public companies, monitoring is the primary responsibility of the

Which of the following capital expenditures may not appear in a firm's capital budget?

If a company is underperforming, small shareholders will generally start a proxy contest.

EVA = (ROI - r)(capital invested).

An advantage of stock-based performance compensation for managers is that such managers must bear macroeconomic risks.

It is easy to apply EVA to R&D programs and start-up ventures.

The following are agency problems associated with capital budgeting:

Briefly explain how a plant manager can improve EVA (economic value added)?

Survey data show that managers admit to managing earnings.

The following are advantages of using EVA as a performance measure except

A firm has an average investment of $100,000 during the year. During the same period, the firm generates an after-tax income of $16,000. If the cost of capital is 15 percent, what is the EVA?

One calculates economic value added (EVA)as follows:

Agency costs can be thought of as the loss in the value of a firm resulting from the following actions by managers:

All else equal, one would expect to see more earnings management at privately held corporations than at publicly traded corporations.

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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