Question 1

Which of the following mechanisms is used to motivate managers to act in the interests of shareholders?

Accepted Answer

A)   Bond covenants.
B)   The threat of a takeover.
C)   Executive stock options.
D)   Statements a and b are correct.
E)   Statements b and c are correct.F) A) and B)
G) A) and C)

Question 2

Which of the following actions are likely to reduce agency conflicts between stockholders and managers?

Accepted Answer

A)   Paying managers a large fixed salary.
B)   Increasing the threat of corporate takeover.
C)   Placing restrictive covenants in debt agreements.
D)   All of the statements above are correct.
E)   Statements b and c are correct.F) All of the above
G) D) and E)

Question 3

A hostile takeover is a method of seizing control of a company and involves an action taken against the opposition of incumbent management. However, this action is typically motivated by a desire to control the firm's assets and is rarely motivated by a low share price.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following factors would be most likely to lead to an increase in interest rates in the economy?

Accepted Answer

A)   Households reduce their consumption and increase their savings.
B)   The Federal Reserve decides to try to stimulate the economy.
C)   There is a decrease in expected inflation.
D)   The economy falls into a recession.
E)   Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs.F) All of the above
G) A) and E)

Question 5

The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is most correct?

Accepted Answer

A)   Agency conflicts between stockholders and managers are not really a problem when outsiders (i.e., non-managers)  own shares in a corporation.
B)   Managers may operate in stockholders' best interests, or managers may operate in their own personal best interests. As long as managers stay within the law, there are no effective controls that stockholders can implement to control managerial decision making.
C)   The agency conflicts between bondholders and stockholders can be reduced with the use of bond covenants.
D)   An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person.
E)   All of the statements above are false.F) C) and D)
G) A) and B)

Question 7

Which of the following actions are likely to reduce the agency problem between stockholders and managers?

Accepted Answer

A)   Congress passes a law that severely restricts hostile takeovers.
B)   A manager receives a lower salary but receives additional shares of the company's stock.
C)   The board of directors has become more vigilant in its oversight of the company's management.
D)   Statements b and c are correct.
E)   All of the statements above are correct.F) A) and C)
G) B) and E)

Question 8

Which of the following statements is most correct?

Accepted Answer

A)   Free cash flows are called "free" because the cost of capital for these cash flows is zero.
B)   Stock is valuable only because it generates cash flows for the investor.
C)   Managers can affect firm value by changing the riskiness of its cash flows.
D)   (a)  and (b)  are correct.
E)   (b)  and (c)  are correct.F) C) and D)
G) A) and B)

Question 9

Which of the following is an example of a moral hazard?

Accepted Answer

A)   A CEO is awarded $100,000 worth of executive stock options, which he exercises two years later for $1,000,000.
B)   A company borrows $1,000,000 for investment in equipment, but uses the money instead to repurchase stock.
C)   A company declares bankruptcy, but instead of being liquidated, it is reorganized and one set of bondholders who are owed $10 million accept $3 million in payment for the debt.
D)   A CEO orders the headquarters moved just so he can have a nicer office.
E)   A group of institutional stockholders votes to oust management.F) D) and E)
G) A) and B)

Question 10

A moral hazard problem arises when:

Accepted Answer

A)   An agent takes unobserved actions on his own behalf.
B)   A principal hires another individual to perform some service.
C)   Firms borrow money from bondholders.
D)   Stockholders have to incur costs to make managers act to maximize stock price.
E)   Managers are granted performance shares.F) A) and B)
G) A) and E)

Question 11

Which of the following statements is most correct?

Accepted Answer

A)   A market is transparent when trading is inexpensive.
B)   A market is transparent when accurate information is available to all market participants.
C)   A transparent market has few regulations.
D)   A transparent market has many opportunities for trading on insider information.
E)   A market is transparent when everyone knows who the person is that they are trading with.F) A) and B)
G) A) and E)

Exam 1: An Overview of Financial Management

Which of the following factors would be most likely to lead to an increase in interest rates in the economy?

Correct Answer
verified

The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society.

Correct Answer
verified

Which of the following actions are likely to reduce agency conflicts between stockholders and managers?

Correct Answer
verified

A moral hazard problem arises when:

Correct Answer
verified

A hostile takeover is a method of seizing control of a company and involves an action taken against the opposition of incumbent management. However, this action is typically motivated by a desire to control the firm's assets and is rarely motivated by a low share price.

Correct Answer
verified

Which of the following statements is most correct?

Correct Answer
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Which of the following is an example of a moral hazard?

Correct Answer
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Which of the following actions are likely to reduce the agency problem between stockholders and managers?

Correct Answer
verified

Which of the following mechanisms is used to motivate managers to act in the interests of shareholders?

Correct Answer
verified

Which of the following statements is most correct?

Correct Answer
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Which of the following statements is most correct?

Correct Answer
verified

Exam 1: An Overview of Financial Management

Which of the following factors would be most likely to lead to an increase in interest rates in the economy?

Correct AnswerverifiedShow Answer

The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society.

Correct AnswerverifiedShow Answer

Which of the following actions are likely to reduce agency conflicts between stockholders and managers?

Correct AnswerverifiedShow Answer

A moral hazard problem arises when:

Correct AnswerverifiedShow Answer

A hostile takeover is a method of seizing control of a company and involves an action taken against the opposition of incumbent management. However, this action is typically motivated by a desire to control the firm's assets and is rarely motivated by a low share price.

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Which of the following is an example of a moral hazard?

Correct AnswerverifiedShow Answer

Which of the following actions are likely to reduce the agency problem between stockholders and managers?

Correct AnswerverifiedShow Answer

Which of the following mechanisms is used to motivate managers to act in the interests of shareholders?

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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