Question 1

Which of the following statements is FALSE?

Accepted Answer

A)  The incentives come from owning stock in the company and from compensation that is sensitive to performance. 
B)  The role of the corporate governance system is to mitigate the conflict of interest that results from the combination of ownership and control without unduly burdening managers with the risk of the firm. 
C)  Punishment comes when a board fires a manager for poor performance or fraud, or when, upon failure of the board to act, shareholders or raiders launch control contests to replace the board and management. 
D)  The corporate governance system attempts to align interests by providing incentives for taking the right action and punishments for taking the wrong action. 
A)  The incentives come from owning stock in the company and from compensation that is sensitive to performance. 
B)  The role of the corporate governance system is to mitigate the conflict of interest that results from the combination of ownership and control without unduly burdening managers with the risk of the firm. 
C)  Punishment comes when a board fires a manager for poor performance or fraud, or when, upon failure of the board to act, shareholders or raiders launch control contests to replace the board and management. 
D)  The corporate governance system attempts to align interests by providing incentives for taking the right action and punishments for taking the wrong action.

Question 2

Which of the following is an example of an agency problem?

Accepted Answer

A)  managers not working as diligently if they are not the sole owner of the business 
B)  the board of directors firing an incompetent manager 
C)  the manager owning a great deal of stock in the company 
D)  a corporate raider attempting to purchase the company 
A)  managers not working as diligently if they are not the sole owner of the business 
B)  the board of directors firing an incompetent manager 
C)  the manager owning a great deal of stock in the company 
D)  a corporate raider attempting to purchase the company

Question 3

Having a founder and top executive also be a major shareholder ________.

Accepted Answer

A)  always results in agency conflicts that are bad for minority shareholders 
B)  can sometimes have benefits that outweigh the costs 
C)  is illegal in the U.S. and most other industrialized countries 
D)  is never beneficial to employees 
A)  always results in agency conflicts that are bad for minority shareholders 
B)  can sometimes have benefits that outweigh the costs 
C)  is illegal in the U.S. and most other industrialized countries 
D)  is never beneficial to employees

Question 4

Which of the following statements is FALSE?

Accepted Answer

A)  The conflict of interest between managers and investors derives from the separation of ownership and control in a corporation. 
B)  Any discussion of corporate structure-the system of controls, regulations, and incentives designed to prevent fraud-is a story of conflicts of interest and attempts to minimize them. 
C)  Once control and ownership are separated a conflict of interest arises between the owners and the people in control of a corporation. 
D)  The separation of ownership and control is perhaps the most important reason for the success of the corporate organizational form. Because any investor can hold an ownership stake in a corporation, investors are able to diversify and thus, with no costs, reduce their risk exposures. 
A)  The conflict of interest between managers and investors derives from the separation of ownership and control in a corporation. 
B)  Any discussion of corporate structure-the system of controls, regulations, and incentives designed to prevent fraud-is a story of conflicts of interest and attempts to minimize them. 
C)  Once control and ownership are separated a conflict of interest arises between the owners and the people in control of a corporation. 
D)  The separation of ownership and control is perhaps the most important reason for the success of the corporate organizational form. Because any investor can hold an ownership stake in a corporation, investors are able to diversify and thus, with no costs, reduce their risk exposures.

Question 5

What is the role of takeovers in corporate governance?

Accepted Answer

When internal governance systems such as

Question 6

What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?

Accepted Answer

Increasing the pay-for-performance sensi

Question 7

Directors who are not as directly connected to the firm but who have existing or potential business relationships with the firm are called ________.

Accepted Answer

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

Question 8

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 depend 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 depend on cultural norms.

Question 9

While the Sarbanes-Oxley Act (SOX) contains many provisions, the overall intent of the legislation was to improve the accuracy of information given to both boards and to shareholders. SOX attempted to achieve this goal in all of the following ways EXCEPT ________.

Accepted Answer

A)  overhauling incentives and independence in the auditing process 
B)  mandating the separation of the positions of CEO and Chairman of the Board 
C)  stiffening penalties for providing false information 
D)  forcing companies to validate their internal financial control processes 
A)  overhauling incentives and independence in the auditing process 
B)  mandating the separation of the positions of CEO and Chairman of the Board 
C)  stiffening penalties for providing false information 
D)  forcing companies to validate their internal financial control processes

Question 10

Which of the following statements is FALSE?

Accepted Answer

A)  The relationship between managerial ownership and firm value is unlikely to be the same for every firm, or even for different executives of the same firm. 
B)  Even with the risk benefits of separating ownership and control, there are still examples of corporations in which the top managers have substantial ownership interests. 
C)  Academic studies do not support the notion that greater managerial ownership is associated with fewer value-reducing actions by managers. 
D)  While increasing managerial ownership may reduce perquisite consumption, it also makes managers harder to fire-thus reducing the incentive effect of the threat of dismissal. 
A)  The relationship between managerial ownership and firm value is unlikely to be the same for every firm, or even for different executives of the same firm. 
B)  Even with the risk benefits of separating ownership and control, there are still examples of corporations in which the top managers have substantial ownership interests. 
C)  Academic studies do not support the notion that greater managerial ownership is associated with fewer value-reducing actions by managers. 
D)  While increasing managerial ownership may reduce perquisite consumption, it also makes managers harder to fire-thus reducing the incentive effect of the threat of dismissal.

Question 11

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 12

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 nonaudit 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 nonaudit services to the same firm.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A)  If managers have large ownership stakes, then shareholders are more likely to use compensation policies or a stronger board to create the desired incentives. 
B)  If all else fails, the shareholders' last line of defense against expropriation by self-interested managers is direct action. 
C)  A shareholder resolution could direct the board to take a specific action, such as discontinue investing in a particular line of business or country, or remove a poison pill. 
D)  Any shareholder can submit a resolution that is put to a vote at the annual meeting. 
A)  If managers have large ownership stakes, then shareholders are more likely to use compensation policies or a stronger board to create the desired incentives. 
B)  If all else fails, the shareholders' last line of defense against expropriation by self-interested managers is direct action. 
C)  A shareholder resolution could direct the board to take a specific action, such as discontinue investing in a particular line of business or country, or remove a poison pill. 
D)  Any shareholder can submit a resolution that is put to a vote at the annual meeting.

Question 14

What is the difference between inside, gray, and outside directors?

Accepted Answer

Inside directors are employees, former e

Question 15

Billy, the CEO of Movin On Up Company, was granted stock options with an exercise price of $62.04 per share. The following are the week-ending stock prices that occurred during the quarter:
 
What is the most likely date on which the stock options were awarded?

Accepted Answer

A)  13-Sep-05 
B)  11-Oct-05 
C)  13-Dec-05 
D)  not enough information to answer the question 
A)  13-Sep-05 
B)  11-Oct-05 
C)  13-Dec-05 
D)  not enough information to answer the question

Question 16

Which of the following statements is FALSE?

Accepted Answer

A)  The United States is somewhat of an exception, in that it focuses solely on maximizing shareholder welfare. 
B)  A controlling family has many opportunities to expropriate minority shareholders in a pyramid structure. 
C)  One way for families to gain control over firms even when they do not own more than half the shares is to issue dual class shares-a scenario in which companies have more than one class of shares and one class has superior voting rights over the other class. 
D)  Researchers have claimed that the degree of investor protection was largely determined by the legal origin of the country-specifically, whether its legal system was based on British common law (less protection) or French, German, and Scandinavian civil law (more protection). 
A)  The United States is somewhat of an exception, in that it focuses solely on maximizing shareholder welfare. 
B)  A controlling family has many opportunities to expropriate minority shareholders in a pyramid structure. 
C)  One way for families to gain control over firms even when they do not own more than half the shares is to issue dual class shares-a scenario in which companies have more than one class of shares and one class has superior voting rights over the other class. 
D)  Researchers have claimed that the degree of investor protection was largely determined by the legal origin of the country-specifically, whether its legal system was based on British common law (less protection) or French, German, and Scandinavian civil law (more protection).

Question 17

Which of the following statements is FALSE?

Accepted Answer

A)  One study found that firms with fewer restrictions on shareholder power performed worse than firms with more restrictions during the 1990s. 
B)  Some large public pension funds, such as CalPERS (the California Public Employees Retirement System), take an activist role in corporate governance. 
C)  In 2004 with the Walt Disney Company, major shareholders were dissatisfied with the recent performance of Disney under long-time CEO and Chairman, Michael Eisner. They began an organized campaign to convince the majority of Disney shareholders to withhold their approval of the reelection of Eisner as director and chairman of the board. 
D)  Given the importance of shareholder action in corporate governance, researchers and large investors alike have become increasingly interested in measuring the balance of power between shareholders and managers in a firm. 
A)  One study found that firms with fewer restrictions on shareholder power performed worse than firms with more restrictions during the 1990s. 
B)  Some large public pension funds, such as CalPERS (the California Public Employees Retirement System), take an activist role in corporate governance. 
C)  In 2004 with the Walt Disney Company, major shareholders were dissatisfied with the recent performance of Disney under long-time CEO and Chairman, Michael Eisner. They began an organized campaign to convince the majority of Disney shareholders to withhold their approval of the reelection of Eisner as director and chairman of the board. 
D)  Given the importance of shareholder action in corporate governance, researchers and large investors alike have become increasingly interested in measuring the balance of power between shareholders and managers in a firm.

Question 18

Which of the following statements 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 19

Which of the following was not a finding of the Cadbury Commission?

Accepted Answer

A)  Audit and compensation committees should be made up entirely of independent directors or, at least, have a majority of them. 
B)  Auditors should be rotated, and there should be fuller disclosure of non-audit work. 
C)  The CEO should not be chairman of the board, and at the very least there should be a lead independent director with similar agenda-setting powers. 
D)  The CEO and the CFO should personally attest to the accuracy of the financial statements presented to shareholders. 
A)  Audit and compensation committees should be made up entirely of independent directors or, at least, have a majority of them. 
B)  Auditors should be rotated, and there should be fuller disclosure of non-audit work. 
C)  The CEO should not be chairman of the board, and at the very least there should be a lead independent director with similar agenda-setting powers. 
D)  The CEO and the CFO should personally attest to the accuracy of the financial statements presented to shareholders.

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 26: Corporate Governance

Which of the following statements is FALSE?

Which of the following is an example of an agency problem?

Having a founder and top executive also be a major shareholder ________.

Which of the following statements is FALSE?

What is the role of takeovers in corporate governance?

What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?

Directors who are not as directly connected to the firm but who have existing or potential business relationships with the firm are called ________.

Which of the following statements is FALSE?

While the Sarbanes-Oxley Act (SOX) contains many provisions, the overall intent of the legislation was to improve the accuracy of information given to both boards and to shareholders. SOX attempted to achieve this goal in all of the following ways EXCEPT ________.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements regarding auditors is FALSE?

Which of the following statements is FALSE?

What is the difference between inside, gray, and outside directors?

Billy, the CEO of Movin On Up Company, was granted stock options with an exercise price of $62.04 per share. The following are the week-ending stock prices that occurred during the quarter: What is the most likely date on which the stock options were awarded?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following was not a finding of the Cadbury Commission?

Which of the following statements is FALSE?

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

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