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1.4   LO4: Learn about the Structure and Governance of Corporations 1)

Question : 1.4   LO4: Learn about the Structure and Governance of Corporations 1) : 1907268

1.4   LO4: Learn about the Structure and Governance of Corporations

1) Agency costs are fees paid by the management of a corporation to compensate any investor that feels it has suffered a loss due to the agency problem.

2) Which of the following are agency costs?

I.Forgoing an investment opportunity which would add to the market value of the owner's equity

II.Paying a dividend to each of the existing shareholders

III.Purchasing new equipment which increases the value of each share of stock

IV.Hiring outside auditors to verify the accuracy of the company financial statements

A) I and III only

B) I and IV only

C) II and III only

D) II and IV only

E) I, II, and IV only

3) What is the principal-agent problem?

A) When the principal misrepresents the agent to the board

B) When an agent does not maximize the utility of the principal

C) The cost of training new agents

D) When an agent misrepresents the principal to the board

4) Agency costs pose the biggest problem for

A) insiders.

B) shareholders.

C) directors.

D) agents.

E) executives.

5) In a broad sense, every business asset is ultimately owned by

A) individuals.

B) the federal government.

C) foreign governments.

D) trust funds.

E) none of the above

6) Which of the following statements is true?

A) The presence of asymmetric information in financial markets increases the likelihood that these markets are efficient.

B) Accounting profits are always more important to shareholders than cash flows.

C) Managers should choose investment projects that maximize shareholder wealth.

D) The study of finance only benefits students who aspire to careers in business.

E) Investors should not be compensated with a higher return for owning risky securities since they should know better than to buy stock in a firm that has uncertain prospects.

7) Which of the following is an advantage of a partnership?

A) No license, charter, or agreement legally required

B) Joint liability for company debts

C) Least regulated form of business

D) Ownership is easy to transfer

E) Can raise money using capital markets (debt and equity)

8) The top of the organizational chart of organizations is:

A) CEO

B) Board of Directors

C) V.P. of Finance

D) Shareholders

E) Executive Chairman

9) Which of the following is the best way to prevent an agency problem between shareholders and managers?

A) Maintain a proportional relationship between a manager's bonus and the number of employees in the firm.

B) Compensate managers to a significant degree with shares of stock in their firm.

C) Reward managers if they keep costs below the budgeted amount.

D) Pay managers a bonus if their division exceeds its targeted market share.

E) Pay managers a bonus if their division exceeds its quarterly sales target.

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