Operating leverage exists when: small percentage changes in revenue produce large percentage changes in profit. management buys enough of the company’s shares of stock to take control of the corporation. the organization makes purchases on credit instead of paying cash. the organization avoids all fixed costs in its operations

Operating leverage exists when: small percentage changes in revenue produce large percentage changes in profit. management buys enough of the company’s shares of stock to take control of the corporation. the organization makes purchases on credit instead of paying cash. the organization avoids all fixed costs in its operations

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter10: Corporate Governance

Section: Chapter Questions

Problem 3MC

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Which one of the following actions by a financial manager creates an agency problem? Lowering selling prices that will result in increased firm value Agreeing to expand the company at the expense of stockholders' value Borrowing money when doing so creates value for the firm Agreeing to pay management bonuses based on the market value of the firm's stock
What is one of the ways that accounting is used to direct and control the manager of a corporation? a.Threatening to tell shareholders a mangers income if a manager makes a ‘poor financial’ decision. b.Linking of a mangers performance to a bonus that depends on accounting profit. c.Making decisions based on the accounting information regardless of managerial input. d.Using income smoothing to assure a manager that they can invest in a low risk investment.
A company’s dividend policy can also be affected by factors internal to the organization and by the external (macroeconomic) environment in which the business operates. In the table that follows, identify which factors, in general, tend to favor high or low dividend payout ratios. Factor Favors a High Payout Favors a Low Payout A company has a large retained earnings balance on its balance sheet but has very little cash and almost no other liquid assets. A company has an established credit line that it can access when it needs an external source of funding. A closely held firm has a majority of its shareholders in high marginal tax brackets. Each factor higher or lower payout Having the ability to accelerate or delay projects makes it easier or harder for a firm to adhere to a stable dividend policy. If management is concerned with keeping control of the company, it will be likely to retain more or less earnings than…
Is there a good argument against giving long-term shareholders more say in running a corporation? Briefly explain. A. Giving long-term shareholders more influence would give the board of directors too much power. B. Long-term shareholders may place more emphasis on costs rather than generating revenue. OC. Giving long-term shareholders more say could limit the ability of other investors to discipline corporate managers who fail to use profit-maximizing strategies. D. It could be argued that giving long-term shareholders more say could attract too many outside investors.
Cash-rich firms often make questionable acquisitions, rather than pay out the cash to shareholders. This: Is because diversification is too costly for individuals. Is because diversification eliminates inefficiencies. Is an example of the bootstrap game Is an example of an agency problem
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A company's Degree of Financial Leverage (DFL) is primarily influenced by decisions about: Automation Increasing or decreasing sales volume Issuing bonds versus common shares The addition of fixed costs to operations
Which of the following is/are true regarding payout policy to shareholders? A. Most of the time that firms announce an increase in dividends, the market reacts negatively, as this is an admission that the firm has few good investment opportunities going forward. B. Large, mature firms should return a lot of cash to shareholders because there aren’t enough good investment opportunities out there for them. C. Flexibility is one key reason why we have seen much more use of share repurchases to return cash to shareholders in the last 3 decades. D. The primary value driver for the firm is how cash is paid out, not cash generation. E. (A) and (B) F. (B) and (C) G. (C) and (D)
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Agency costs are an integral part of agency relationships. they are a key concern in the shareholder/management relationship in that agency cost results in a reduction in the value of the company because of the administration costs in establishing agencies 2. shareholders view a company that operates as an agent to another company as being more risky,and therefore they are willing to pay less for shares in a company 3. agency costs result in a reduction in the value of the company because management pursues its own interest 4. establishment of agency relationships require extensive legal and contractual agreements, which can be very costly