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- Which of the following statements is FALSE? In the shareholder/debtor relationship, the: a. Debtor is the principal, because they have delegated authority to management b. Shareholder and debtor interests are increasingly aligned as the company takes on more debt. c. Interests of the firm’s management tend to be aligned more closely with those of the firm’s shareholders d. Shareholders have an incentive to take on risky projects because they get to keep residual earnings of the firm a. Interests of the firm’s management tend to be aligned more closely with those of the firm’s shareholders b. Shareholders have an incentive to take on risky projects because they get to keep residual earnings of the firm c. Debtor is the principal, because they have delegated authority to management d. Shareholder and debtor interests are increasingly aligned as the company takes on more debt.Which of the following statements is true? a. Restrictive covenants in debt agreements are an effective way to reduce agency conflicts between stockholders and managers. b. Managers generally welcome hostile takeovers since they often increase the company’s stock price. None of the choices is correct. c. One advantage of organizing your business as a corporation is that your shareholders are not subject to limited liability. d. An effective ethics program can enhance corporate value by producing a number of positive benefits like building shareholder confidence.Which of the following methods would be most likely to decrease the agency problems by helping motivate managers to act in the best interests of shareholders? 1. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. 2. Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock. 3. Decrease the use of restrictive covenants in bond agreements. 4. Take actions that reduce the possibility of a hostile takeover. 5. Elect a board of directors that allows managers greater freedom of action.
- Which of the following is incorrect: Options: a) The Market for Corporate Control is an important external mechanism for encouraging corporate managers to act in their shareholders’ best interests b) GMU Dean Emeritus Henry G. Manne developed the theoretical concept of “Market for Corporate Control” c) The Market for Corporate Control was enacted into law by the Williams Act d) The Market for Corporate Control protects rationally ignorant shareholders e) None of the aboveWhich of the following statements is CORRECT? 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 capital structure. The threat of takeover generally increases potential conflicts between stockholders and managers. Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. The threat of takeovers tends to reduce potential conflicts between stockholders and managers. The creation of the Securities and Exchange Commission (SEC) eliminated conflicts between managers and stockholders.The Principal-Agent Problem arises A) because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest. B) because of the separation of ownership and control in a corporation. C) Both A and B D) None of the above
- Which of the following does not help align managerial and shareholder incentives? Question options: a) Market for Corporate Control b) Product Market Competition c) Antitrust Law d) Corporate Law e) Markets for DirectorsWhat is the possible agency conflict between inside owner/managers and outside shareholders? What are some possible agency conflicts between borrowers and lenders? How is it possible for an employee stock option to be valuable even if the firm’s stock price fails to meet shareholders’ expectations?With respect to the shareholder/manager relationship, which of the following statements is FALSE? a. The managerial salary package should include an incentive component b. Executive stock options do not have expiration dates and are held in perpetuity c. Executive stock options tend to be issued out-of-money d. Performance shares can be used to align manager/shareholder interests
- It is an axiom that may be characterized by managers making decisions that conflict with the best interest of the shareholders. a. the risk-return trade-off b. the agency problems c. the curse of competitive markets d. stockholders versus managersWhich of the following statements is CORRECT? a. Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment. b. Corporations and partnerships have an advantage over proprietorships because a proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited. c. Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers. d. A good goal for a firm's management is the maximization of expected EPS. e. For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price.Which of the following is true? 1. Shareholder activism requires the investors to exercise their voting rights. 2. Agency problem arises if the management does not hold the majority share in the firm (i.e., more than 50%). 3. Stock options and performance plans are examples of external market forces. 4. Agency costs are borne by all the stakeholders, including the shareholders.
