Question : [51].Which of the following actions would be most likely to : 1416303

 

^[51].Which of the following actions would be most likely to reduce potential conflicts between stockholders and bondholders?

 

a.Including restrictive covenants in the company’s bond indenture (which is the contract between the company and its bondholders).

b.Compensating managers with more stock options and less cash income.

c.The passage of laws that make it harder for hostile takeovers to succeed.

d.A government regulation that banned the use of convertible bonds.

e.The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more, rather than debt that matures in less than one year.

 

^[52].Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

 

a.Pay managers large cash salaries and give them no stock options.

b.Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.

c.Beef up the restrictive covenants in the firm’s debt agreements.

d.Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm’s stock.

e.For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

 

^[53].Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?

 

a.Congress passes a law that severely restricts hostile takeovers.

b.A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock.

c.The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period.

d.The company’s outside auditing firm is given a lucrative year-by-year consulting contract with the company.

e.The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.

 

^[54].Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

 

a.Decrease the use of restrictive covenants in bond agreements.

b.Take actions that reduce the possibility of a hostile takeover.

c.Elect a board of directors that allows managers greater freedom of action.

d.Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

e.Eliminate a requirement that members of the board of directors have a substantial investment in the firm’s stock.

 

^[55].Which of the following actions would be likely to encourage a firm’s managers to make decisions that are in the best interests of shareholders?

 

a.The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced.

b.The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover.

c.The percentage of the firm’s stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%.

d.The firm’s founder, who is also president and chairman of the board, sells 90% of her shares.

e.The firm’s board of directors gives the firm’s managers greater freedom to take whatever actions they think best without obtaining board approval.

 

^[56].Which of the following statements is CORRECT?

 

a.One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure.

b.The threat of takeover generally increases potential conflicts between stockholders and managers.

c.Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers.

d.The threat of takeovers tends to reduce potential conflicts between stockholders and managers.

e.The creation of the Securities and Exchange Commission (SEC) has eliminated conflicts between managers and stockholders.

 

^[57].Which of the following statements is CORRECT?

 

a.Corporations are taxed more favorably than sole proprietorships.

b.Corporations have unlimited liability.

c.Because of their size, large corporations face fewer regulations than smaller corporations and sole proprietorships.

d.Reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders’ interests.

e.Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.

 

^[58].Which of the following statements is CORRECT?

 

a.A good goal for a firm’s management is the maximization of expected EPS.

b.Most business in the U.S. is conducted by corporations, and corporations’ popularity results primarily from their favorable tax treatment.

c.Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers.

d.Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.

e.For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price.

 

^[59].Which of the following statements is CORRECT?

 

a.One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability.

b.Using restrictive covenants in debt agreements is an effective way to reduce conflicts between stockholders and managers.

c.Managers generally welcome hostile takeovers since the "raider" generally offers a price for the stock that is higher than the price before the takeover action started.

d.The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers.

e.The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers.

 

^[60].Which of the following statements is CORRECT?

 

a.Well designed bond covenants are useful for reducing potential conflicts between stockholders and managers.

b.The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail.

c.Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.

d.Takeovers are most likely to be attempted if the target firm’s stock price is above its intrinsic value.

e.The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.