Exam 12: Agency Problems and Investment

A firm produces $124 million of net income on $1,600 million of assets. Through a six-sigma project, the firm is able to decrease the assets employed to $1,450 million. Given a 5 percent cost of capital, what is the increase in the EVA?

The following are agency problems associated with capital budgeting except

An example of an entrenching investment is a manager that expands the scope of his or her operation.

CEOs of U.S. companies receive the highest level of compensation in terms of long-term incentives and variable bonuses.

Stock option grants are generally a more appropriate form of compensation for lower-level managers than for higher-level managers.

Define the term economic income.

What are some of the agency problems associated with capital budgeting?

In the United States, tax advantages exist for compensating good performance by large-firm CEOs with stock option grants rather than by simply increasing salaries.

The term economic value added (EVA)is trademarked by

Define the term economic rate of return.

Agency problems in capital budgeting include reduced effort, perks, empire building, and entrenching investments.

Since monitoring is not perfect, compensation plans should primarily provide managers incentives to

Monitoring is typically done by

A firm has an average investment of $10,000 during the year. During the same time, the firm generates after-tax income of $2,000. If the cost of capital is 15 percent, what is the net return on the investment?

Generally, firms with high levels of intangible assets tend to report (all else equal)

A firm produces $65 million of net income on $2,030 million of assets. Given that investors expect a 5 percent return, what is the EVA?

The following actions by managers are examples of overinvestment:

In the principal-agent framework, the ultimate principals are I.managers; II.board of directors; III.shareholders; IV.governments

Which of the following is the most likely example of bias in a firm's accounting profitability measures?

The ultimate responsibility for monitoring a firm rests with the