Question 1

A board of directors is said to be captured when:

Accepted Answer

A) a majority of the directors are independent directors. 
B) a majority of the directors are outside directors. 
C) its monitoring duties have been compromised by connections or perceived loyalties to management. 
D) when the CEO also serves as chairman of the board of directors. 
A) a majority of the directors are independent directors. 
B) a majority of the directors are outside directors. 
C) its monitoring duties have been compromised by connections or perceived loyalties to management. 
D) when the CEO also serves as chairman of the board of directors.

Question 2

Which of the following statements regarding the granting of stock options is FALSE?

Accepted Answer

A) New SEC rules require firms to report option grants within two days of the grant date,which may help prevent further abuses. 
B) Studies have found evidence that the practice of timing the release of information to maximize the value of CEO stock options is widespread. 
C) Managers have an incentive to manipulate the release of financial forecasts so that good news comes out before options are granted and bad news is delayed until after the options are granted. 
D) The factor contributing most to the climb in CEO total compensation for the 1990s was the sharp increase in the value of stock and options granted each year. 
A) New SEC rules require firms to report option grants within two days of the grant date,which may help prevent further abuses. 
B) Studies have found evidence that the practice of timing the release of information to maximize the value of CEO stock options is widespread. 
C) Managers have an incentive to manipulate the release of financial forecasts so that good news comes out before options are granted and bad news is delayed until after the options are granted. 
D) The factor contributing most to the climb in CEO total compensation for the 1990s was the sharp increase in the value of stock and options granted each year.

Question 3

Corporate governance is best defined as:

Accepted Answer

A) the system of laws and regulations that control corporations. 
B) the system of controls,regulations,and incentives designed to prevent fraud and minimize conflicts of interest in a corporation. 
C) the system that determines who controls and runs a corporation. 
D) the system that minimizes agency costs between bondholders and stockholders. 
A) the system of laws and regulations that control corporations. 
B) the system of controls,regulations,and incentives designed to prevent fraud and minimize conflicts of interest in a corporation. 
C) the system that determines who controls and runs a corporation. 
D) the system that minimizes agency costs between bondholders and stockholders.

Question 4

Agency costs are best defined as:

Accepted Answer

A) the costs imposed on a corporation through the laws and regulations that control corporations. 
B) the costs a corporation incurs as the result of fraud. 
C) the costs that arise when there are conflicts of interest between a firm's stakeholders. 
D) the costs associated with compensating managers when ownership and control are separated in a firm. 
A) the costs imposed on a corporation through the laws and regulations that control corporations. 
B) the costs a corporation incurs as the result of fraud. 
C) the costs that arise when there are conflicts of interest between a firm's stakeholders. 
D) the costs associated with compensating managers when ownership and control are separated in a firm.

Question 5

Describe the "stakeholder" model of corporate governance.

Accepted Answer

The agency costs and the ways to control

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) An active takeover market is part of the system through which the threat of dismissal is maintained. 
B) When internal governance systems such as ownership,compensation,board oversight,and shareholder activism fail,the one remaining way to remove poorly performing managers is by mounting a hostile takeover. 
C) Because hostile takeovers and internal governance systems are substitute mechanisms,researchers have found that boards are less likely to fire managers for poor performance during active takeover markets than they are during lulls in takeover activity. 
D) The effectiveness of the corporate governance structure of a firm depends on how well protected its managers are from removal in a hostile takeover. 
A) An active takeover market is part of the system through which the threat of dismissal is maintained. 
B) When internal governance systems such as ownership,compensation,board oversight,and shareholder activism fail,the one remaining way to remove poorly performing managers is by mounting a hostile takeover. 
C) Because hostile takeovers and internal governance systems are substitute mechanisms,researchers have found that boards are less likely to fire managers for poor performance during active takeover markets than they are during lulls in takeover activity. 
D) The effectiveness of the corporate governance structure of a firm depends on how well protected its managers are from removal in a hostile takeover.

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) It is important to keep in mind that good governance is value enhancing and so,in principle,is something investors in the firm should strive for. 
B) Corporate governance is a system of checks and balances that trades off costs and benefits. 
C) Because good governance is based upon a basic set of principles,like those detailed in the Cadbury Commission's findings,one should expect all firms to display similar governance structures. 
D) The costs and benefits of a corporate governance system also depends on cultural norms. 
A) It is important to keep in mind that good governance is value enhancing and so,in principle,is something investors in the firm should strive for. 
B) Corporate governance is a system of checks and balances that trades off costs and benefits. 
C) Because good governance is based upon a basic set of principles,like those detailed in the Cadbury Commission's findings,one should expect all firms to display similar governance structures. 
D) The costs and benefits of a corporate governance system also depends on cultural norms.

Question 8

Which of the following is NOT a direct action that can be taken by shareholders?

Accepted Answer

A) Submitting shareholder resolutions directing the board to take specific actions 
B) Withholding votes for candidates to the board of directors 
C) Initiating a proxy contest 
D) Voting to remove the management team 
A) Submitting shareholder resolutions directing the board to take specific actions 
B) Withholding votes for candidates to the board of directors 
C) Initiating a proxy contest 
D) Voting to remove the management team

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) The shareholders as a group elect a board of directors to monitor managers.The directors themselves,however,have the same conflict of interest-monitoring is costly and in many cases directors do not get significantly greater benefits than other shareholders from monitoring the managers closely. 
B) In principle,the board of directors hires the executive team,sets its compensation,approves major investments and acquisitions,and dismisses executives if necessary. 
C) In the United States,the board of directors has a clear fiduciary duty to protect the interests of both the owners of the firm (the shareholders)and the interests of other stakeholders in the firm (such as the employees). 
D) When the ownership of a corporation is widely held,no one shareholder has an incentive to bear the cost of monitoring,because she bears the full cost of monitoring but the benefit is divided among all shareholders. 
A) The shareholders as a group elect a board of directors to monitor managers.The directors themselves,however,have the same conflict of interest-monitoring is costly and in many cases directors do not get significantly greater benefits than other shareholders from monitoring the managers closely. 
B) In principle,the board of directors hires the executive team,sets its compensation,approves major investments and acquisitions,and dismisses executives if necessary. 
C) In the United States,the board of directors has a clear fiduciary duty to protect the interests of both the owners of the firm (the shareholders)and the interests of other stakeholders in the firm (such as the employees). 
D) When the ownership of a corporation is widely held,no one shareholder has an incentive to bear the cost of monitoring,because she bears the full cost of monitoring but the benefit is divided among all shareholders.

Question 10

Which of the following is/are NOT corporate monitors?

Accepted Answer

A) Security analysts 
B) Lenders 
C) Securities and Exchange Commission 
D) All of the above are corporate monitors. 
A) Security analysts 
B) Lenders 
C) Securities and Exchange Commission 
D) All of the above are corporate monitors.

Question 11

Describe the main requirements of the Sarbanes-Oxley Act of 2002.

Accepted Answer

1.Strict limits on the amount of non-aud

Question 12

The Sarbanes-Oxley Act requires all of the following,EXCEPT:

Accepted Answer

A) that audit partners rotate every five years to limit the likelihood that auditing relationships become too cozy over long periods of time. 
B) strict limits on the amount of non-audit fees (consulting or otherwise)that an accounting firm can earn from the same firm that it audits. 
C) that senior management and the boards of public companies be comfortable enough with the process through which funds are allocated and controlled,and outcomes monitored throughout the firm,to be willing to attest to their effectiveness and validity. 
D) the auditor must personally attest to the accuracy of the financial statements presented to shareholders and sign a statement to that effect. 
A) that audit partners rotate every five years to limit the likelihood that auditing relationships become too cozy over long periods of time. 
B) strict limits on the amount of non-audit fees (consulting or otherwise)that an accounting firm can earn from the same firm that it audits. 
C) that senior management and the boards of public companies be comfortable enough with the process through which funds are allocated and controlled,and outcomes monitored throughout the firm,to be willing to attest to their effectiveness and validity. 
D) the auditor must personally attest to the accuracy of the financial statements presented to shareholders and sign a statement to that effect.

Question 13

The Sarbanes-Oxley Act:

Accepted Answer

A) prohibits insiders with a fiduciary duty to their shareholders from trading on material non-public information in that stock. 
B) prohibits anyone with nonpublic information about a pending or ongoing tender offer from trading on that information. 
C) overhauls incentive and independence in the auditing process. 
D) requires corporations to consider all stakeholders in corporate governance decisions. 
A) prohibits insiders with a fiduciary duty to their shareholders from trading on material non-public information in that stock. 
B) prohibits anyone with nonpublic information about a pending or ongoing tender offer from trading on that information. 
C) overhauls incentive and independence in the auditing process. 
D) requires corporations to consider all stakeholders in corporate governance decisions.

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) In addition to the evidence that board independence matters for major activities such as firing CEOs and making corporate acquisitions,researchers have found a strong connection between board structure and firm performance. 
B) Theoretical and empirical research support the notion that the longer a CEO has served,especially when that person is also chairman of the board,the more likely the board is to become captured. 
C) Most firms that have just gone public,either as young companies or as older firms returning to public status after a leveraged buyout (LBO),choose to start with smaller boards. 
D) Boards tend to grow over time as members are added for various reasons.For example,boards are often expanded by one or two seats after an acquisition to accommodate the target CEO and perhaps one other target director. 
A) In addition to the evidence that board independence matters for major activities such as firing CEOs and making corporate acquisitions,researchers have found a strong connection between board structure and firm performance. 
B) Theoretical and empirical research support the notion that the longer a CEO has served,especially when that person is also chairman of the board,the more likely the board is to become captured. 
C) Most firms that have just gone public,either as young companies or as older firms returning to public status after a leveraged buyout (LBO),choose to start with smaller boards. 
D) Boards tend to grow over time as members are added for various reasons.For example,boards are often expanded by one or two seats after an acquisition to accommodate the target CEO and perhaps one other target director.

Question 15

Insider trading is BEST described as:

Accepted Answer

A) when a member of the management team possesses privileged information. 
B) when a member of the management team makes a trade based upon public information. 
C) when any investor makes a trade based upon public information. 
D) when any investor makes a trade based upon privileged information. 
A) when a member of the management team possesses privileged information. 
B) when a member of the management team makes a trade based upon public information. 
C) when any investor makes a trade based upon public information. 
D) when any investor makes a trade based upon privileged information.

Question 16

Which of the following statements regarding corporate governance is FALSE?

Accepted Answer

A) In many other countries,the central conflict is between what are called "controlling shareholders" and "minority shareholders." 
B) Controlling shareholders can make decisions that benefit them disproportionately relative to the minority shareholders,such as employing family members rather than the most talented managers or establishing contracts favorable to other family-controlled firms. 
C) As recent events and corporate scandals have shown,investor protection in the United States is generally seen as substandard when compared to the developed economies in the world. 
D) Much of the focus in the United States is on the agency conflict between shareholders,who own the majority of a firm but are a dispersed group,and managers,who own little of the firm and must be monitored. 
A) In many other countries,the central conflict is between what are called "controlling shareholders" and "minority shareholders." 
B) Controlling shareholders can make decisions that benefit them disproportionately relative to the minority shareholders,such as employing family members rather than the most talented managers or establishing contracts favorable to other family-controlled firms. 
C) As recent events and corporate scandals have shown,investor protection in the United States is generally seen as substandard when compared to the developed economies in the world. 
D) Much of the focus in the United States is on the agency conflict between shareholders,who own the majority of a firm but are a dispersed group,and managers,who own little of the firm and must be monitored.

Question 17

Which of the following statements regarding compensation policies is FALSE?

Accepted Answer

A) Increasing the pay-for-performance sensitivity comes with the added benefit of reducing managers' risk. 
B) Stock and option grants give managers a direct incentive to increase the stock price to make their stock or options as valuable as possible. 
C) By tying compensation to performance,the shareholders effectively give the manager an ownership stake in the firm. 
D) During the 1990s,most companies adopted compensation policies that more directly gave managers an ownership stake by including grants of stock or stock options to executives. 
A) Increasing the pay-for-performance sensitivity comes with the added benefit of reducing managers' risk. 
B) Stock and option grants give managers a direct incentive to increase the stock price to make their stock or options as valuable as possible. 
C) By tying compensation to performance,the shareholders effectively give the manager an ownership stake in the firm. 
D) During the 1990s,most companies adopted compensation policies that more directly gave managers an ownership stake by including grants of stock or stock options to executives.

Question 18

Which of the following statements regarding the backdating of options is FALSE?

Accepted Answer

A) Backdating refers to the practice of choosing the grant date of a stock option retroactively,so that the date of the grant would coincide with a date when the stock price was at its low for the quarter or for the year. 
B) Unless it is reported in a timely manner to the IRS and to shareholders,and reflected in the firm's financial statements,backdating is illegal. 
C) The use of backdating suggests that some executive stock option compensation may not truly have been earned as the result of good future performance of the firm. 
D) By backdating the option,the executive receives a stock option that is already out-of-the-money,with a strike price equal to the higher price on the supposed grant date. 
A) Backdating refers to the practice of choosing the grant date of a stock option retroactively,so that the date of the grant would coincide with a date when the stock price was at its low for the quarter or for the year. 
B) Unless it is reported in a timely manner to the IRS and to shareholders,and reflected in the firm's financial statements,backdating is illegal. 
C) The use of backdating suggests that some executive stock option compensation may not truly have been earned as the result of good future performance of the firm. 
D) By backdating the option,the executive receives a stock option that is already out-of-the-money,with a strike price equal to the higher price on the supposed grant date.

Question 19

Which of the following statements regarding auditors is FALSE?

Accepted Answer

A) Most auditors have a longstanding relationship with their audit clients;this extended relationship and the auditors' desire to keep the lucrative auditing fees makes auditors less willing to challenge management. 
B) Most accounting firms have developed large and extremely profitable consulting divisions.Obviously,if an audit team refuses to accommodate a request by a client's management,that client will be less likely to choose the accounting firm's consulting division for its next consulting contract. 
C) Auditing firms are supposed to ensure that a company's financial statements accurately reflect the financial state of the firm. 
D) In the post Sarbanes-Oxley world,accounting firms are no longer allowed to offer both audit and non-audit services to the same firm. 
A) Most auditors have a longstanding relationship with their audit clients;this extended relationship and the auditors' desire to keep the lucrative auditing fees makes auditors less willing to challenge management. 
B) Most accounting firms have developed large and extremely profitable consulting divisions.Obviously,if an audit team refuses to accommodate a request by a client's management,that client will be less likely to choose the accounting firm's consulting division for its next consulting contract. 
C) Auditing firms are supposed to ensure that a company's financial statements accurately reflect the financial state of the firm. 
D) In the post Sarbanes-Oxley world,accounting firms are no longer allowed to offer both audit and non-audit services to the same firm.

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) A board is said to be classified when its monitoring duties have been compromised by connections or perceived loyalties to management. 
B) Even the most active independent directors spend only one or two days per month on firm business,and many independent directors sit on multiple boards,further dividing their attention. 
C) On a board composed of insider,gray,and independent directors,the role of the independent director is really that of a watchdog. 
D) Because independent directors' personal wealth is likely to be less sensitive to performance than that of insider and gray directors,they have less incentive to closely monitor the firm. 
A) A board is said to be classified when its monitoring duties have been compromised by connections or perceived loyalties to management. 
B) Even the most active independent directors spend only one or two days per month on firm business,and many independent directors sit on multiple boards,further dividing their attention. 
C) On a board composed of insider,gray,and independent directors,the role of the independent director is really that of a watchdog. 
D) Because independent directors' personal wealth is likely to be less sensitive to performance than that of insider and gray directors,they have less incentive to closely monitor the firm.

Exam 29: Corporate Governance

A board of directors is said to be captured when:

Which of the following statements regarding the granting of stock options is FALSE?

Corporate governance is best defined as:

Agency costs are best defined as:

Describe the "stakeholder" model of corporate governance.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following is NOT a direct action that can be taken by shareholders?

Which of the following statements is FALSE?

Which of the following is/are NOT corporate monitors?

Describe the main requirements of the Sarbanes-Oxley Act of 2002.

The Sarbanes-Oxley Act requires all of the following,EXCEPT:

The Sarbanes-Oxley Act:

Which of the following statements is FALSE?

Insider trading is BEST described as:

Which of the following statements regarding corporate governance is FALSE?

Which of the following statements regarding compensation policies is FALSE?

Which of the following statements regarding the backdating of options is FALSE?

Which of the following statements regarding auditors is FALSE?

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Risk Management

International Corporate Finance

Filters