Question 1

Which of the following statements is FALSE?

Accepted Answer

A)  Recently, shareholders have started organizing "no" votes. That is, when they are dissatisfied with a board, they simply refuse to vote to approve the slate of nominees for the board. 
B)  One early study of proxy contests found that the announcement of a contest increased firm stock price by 8% on average, even if the challenge was eventually unsuccessful and the incumbents won reelection. 
C)  Shareholders' only real role in governance is in electing the directors of the company. 
D)  Perhaps the most extreme form of direct action that disgruntled shareholders can take is to hold a proxy contest and introduce a rival slate of directors for election to the board. 
A)  Recently, shareholders have started organizing "no" votes. That is, when they are dissatisfied with a board, they simply refuse to vote to approve the slate of nominees for the board. 
B)  One early study of proxy contests found that the announcement of a contest increased firm stock price by 8% on average, even if the challenge was eventually unsuccessful and the incumbents won reelection. 
C)  Shareholders' only real role in governance is in electing the directors of the company. 
D)  Perhaps the most extreme form of direct action that disgruntled shareholders can take is to hold a proxy contest and introduce a rival slate of directors for election to the board. C

Question 2

Which of the following statements 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. A

Question 3

Which of the following statements is FALSE?

Accepted Answer

A)  When the CEO is also chairman of the board, the nominating letter offering a seat to a new director comes from her. This process merely serves to reinforce the sense that the outside directors owe their positions to the CEO and work for the CEO rather than for the shareholders. 
B)  Over time, most of the independent directors will have been nominated by the CEO. Even though they have no business ties to the firm, they are still likely to be friends or at least acquaintances of the CEO. 
C)  Researchers have found the surprisingly robust result that larger boards are associated with greater firm value and performance. 
D)  The CEO can be expected to stack the board with directors who are less likely to challenge her. 
A)  When the CEO is also chairman of the board, the nominating letter offering a seat to a new director comes from her. This process merely serves to reinforce the sense that the outside directors owe their positions to the CEO and work for the CEO rather than for the shareholders. 
B)  Over time, most of the independent directors will have been nominated by the CEO. Even though they have no business ties to the firm, they are still likely to be friends or at least acquaintances of the CEO. 
C)  Researchers have found the surprisingly robust result that larger boards are associated with greater firm value and performance. 
D)  The CEO can be expected to stack the board with directors who are less likely to challenge her. C

Question 4

Examples of cross-holdings include:
I. Japanese keiretsu
II. German Gruppe
III. Australian foundations
IV. Korean chaebol

Accepted Answer

A)  I, II, and IV 
B)  I, II, and III 
C)  I and IV 
D)  All of the above are examples of cross-holdings. 
A)  I, II, and IV 
B)  I, II, and III 
C)  I and IV 
D)  All of the above are examples of cross-holdings.

Question 5

Directors who are not employees, former employees, or family members of employees and who do not have existing or potential business relationships with the firm are called ________.

Accepted Answer

A)  monitoring directors 
B)  independent directors 
C)  gray directors 
D)  inside directors 
A)  monitoring directors 
B)  independent directors 
C)  gray directors 
D)  inside directors

Question 6

Which of the following statements regarding auditors is FALSE?

Accepted Answer

A)  The Sarbanes-Oxley Act called on the SEC to force companies to have audit committees that are dominated by outside directors and required that at least one outside director have a financial background. 
B)  Whether information is material has been defined in the courts as referring to whether the information would have been a significant factor in an investor's decision about the value of the security. 
C)  CEOs and CFOs must return bonuses or profits from the sale of stock or the exercise of options during any period covered by statements that are later restated. 
D)  The law is especially strict with regard to takeover announcements, prohibiting any insider with nonpublic information about a pending or ongoing tender offer from trading on that information or revealing it to someone who is likely to trade on it. 
A)  The Sarbanes-Oxley Act called on the SEC to force companies to have audit committees that are dominated by outside directors and required that at least one outside director have a financial background. 
B)  Whether information is material has been defined in the courts as referring to whether the information would have been a significant factor in an investor's decision about the value of the security. 
C)  CEOs and CFOs must return bonuses or profits from the sale of stock or the exercise of options during any period covered by statements that are later restated. 
D)  The law is especially strict with regard to takeover announcements, prohibiting any insider with nonpublic information about a pending or ongoing tender offer from trading on that information or revealing it to someone who is likely to trade on it.

Question 7

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 8

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

Accepted Answer

1. Strict limits on the amount of non-au

Question 9

Which of the following statements 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 10

Which of the following statements is FALSE?

Accepted Answer

A)  The Cadbury Commission stiffened the criminal penalties for providing false information to shareholders. 
B)  The Exchange Acts of 1933 and 1934, among other things, established the Securities and Exchange Commission (SE
C)  and prohibited trading on private information gained as an insider of a firm. 
C)  Many of the problems at Enron, WorldCom, and elsewhere were kept hidden from boards and shareholders until it was too late. In the wake of these scandals, many people felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of a company. 
D)  While one study found that those firms that separated the position of CEO and chairman performed better, another found no relation between the independence of key board committees and firm performance in the post-Cadbury era. 
A)  The Cadbury Commission stiffened the criminal penalties for providing false information to shareholders. 
B)  The Exchange Acts of 1933 and 1934, among other things, established the Securities and Exchange Commission (SE
C)  and prohibited trading on private information gained as an insider of a firm. 
C)  Many of the problems at Enron, WorldCom, and elsewhere were kept hidden from boards and shareholders until it was too late. In the wake of these scandals, many people felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of a company. 
D)  While one study found that those firms that separated the position of CEO and chairman performed better, another found no relation between the independence of key board committees and firm performance in the post-Cadbury era.

Question 11

Tammy is a member of the Board of Directors of Moon Corporation. Her husband is the manager of a large division. What type of director is Tammy?

Accepted Answer

A)  inside director 
B)  outside director 
C)  gray director 
D)  resident director 
A)  inside director 
B)  outside director 
C)  gray director 
D)  resident director

Question 12

Which of the following are NOT ways in which individuals or families can gain control over firms, even when they don't own more than half the shares?

Accepted Answer

A)  dual class shares 
B)  pyramid structures 
C)  the stakeholder model 
D)  All of the above are ways in which individuals or families can gain control over firms, even when they don't own more than half the shares. 
A)  dual class shares 
B)  pyramid structures 
C)  the stakeholder model 
D)  All of the above are ways in which individuals or families can gain control over firms, even when they don't own more than half the shares.

Question 13

What is corporate governance?

Accepted Answer

Corporate governance is the sy

Question 14

Directors who are employees, former employees, or family members of employees are called ________.

Accepted Answer

A)  managing directors 
B)  independent directors 
C)  inside directors 
D)  gray directors 
A)  managing directors 
B)  independent directors 
C)  inside directors 
D)  gray directors

Question 15

The Sarbanes-Oxley Act requires all of the following EXCEPT ________.

Accepted Answer

A)  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)  senior management and the boards of public companies to 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 to sign a statement to that effect 
A)  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)  senior management and the boards of public companies to 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 to sign a statement to that effect

Question 16

Which of the following statements 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 17

How does a pyramid structure work?

Accepted Answer

In a pyramid structure, a family first c

Question 18

Billy, the CEO of Movin On Up Company, was granted stock options with an exercise price of $55.00 per share. The following are the week-ending stock prices that occurred during the quarter:
 
If Movin On Up engaged in the practice of backdating, which of the following is the most likely exercise price for Billy's options?

Accepted Answer

A)  $65.52 
B)  $67.50 
C)  $65.00 
D)  $56.82 
A)  $65.52 
B)  $67.50 
C)  $65.00 
D)  $56.82

Question 19

Which of the following statements is FALSE?

Accepted Answer

A)  The substantial use of stock and option grants in the 1990s greatly increased managers' pay-for-performance sensitivity. 
B)  The optimal level of sensitivity of managers' compensation to the performance of their firms depends on the managers' level of risk aversion, which is hard to measure. 
C)  While decreasing managers' risk exposure, increasing the sensitivity of managerial pay and wealth to firm performance does have some negative effects. 
D)  In the absence of monitoring, the other way the conflict of interest between managers and owners can be mitigated is by closely aligning their interests through the managers' compensation policy. 
A)  The substantial use of stock and option grants in the 1990s greatly increased managers' pay-for-performance sensitivity. 
B)  The optimal level of sensitivity of managers' compensation to the performance of their firms depends on the managers' level of risk aversion, which is hard to measure. 
C)  While decreasing managers' risk exposure, increasing the sensitivity of managerial pay and wealth to firm performance does have some negative effects. 
D)  In the absence of monitoring, the other way the conflict of interest between managers and owners can be mitigated is by closely aligning their interests through the managers' compensation policy.

Question 20

Describe the "stakeholder" model of corporate governance.

Accepted Answer

The agency costs and the ways to control

Exam 26: Corporate Governance

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Examples of cross-holdings include: I. Japanese keiretsu II. German Gruppe III. Australian foundations IV. Korean chaebol

Directors who are not employees, former employees, or family members of employees and who do not have existing or potential business relationships with the firm are called ________.

Which of the following statements regarding auditors is FALSE?

Which of the following statements is FALSE?

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Tammy is a member of the Board of Directors of Moon Corporation. Her husband is the manager of a large division. What type of director is Tammy?

Which of the following are NOT ways in which individuals or families can gain control over firms, even when they don't own more than half the shares?

What is corporate governance?

Directors who are employees, former employees, or family members of employees are called ________.

The Sarbanes-Oxley Act requires all of the following EXCEPT ________.

Which of the following statements is FALSE?

How does a pyramid structure work?

Which of the following statements is FALSE?

Describe the "stakeholder" model of corporate governance.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Filters