Which of the following statements is true? * Restrictive covenants in debt agreements are an effective way to reduce agency conflicts between stockholders and managers. An effective ethics program can enhance corporate value by producing a number of positive benefits like building shareholder confidence. O None of the choices is correct. One advantage of organizing your business as a corporation is that your shareholders are not subject to limited liability. O Managers generally welcome hostile takeovers since they often increase the company's stock price.
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- 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 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 CORRECT? Select one: a. Conflict of interest between shareholders and managers is not possible. b. By definition, the agency problem can only take place in corporations but not in proprietorships and partnerships. c. Conflict of interest between shareholders and bondholders is not possible. d. Managers always work to maximize the long-run value, and therefore the price, of their company stocks. This is exactly what shareholders desire.
- 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 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.46. Which of the following situations are likely to reduce agency conflicts between stockholders and managers? Group of answer choices a. Paying managers large fixed salaries. b. Enacting laws that increase the likelihood of corporate takeovers. c. Placing restrictive covenants in debt agreements like avoiding risky projects. d. All of the statements are correct. e. Two of the statements are correct.
- Which 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.Management and shareholders favor debt financing over equity financing for all of the following reasons, except A. The present owners remain in control of the corporation B. The interest incurred in debt financing is a deductible expense in arriving at taxable income while dividends are not C. The charge for interest on the debt may be less than the amount of dividends that might be expected by shareholders D. The interest on debt is not required to be paid periodically when the enterprise results in unfavorable operations and financial positionWhich of the following is CORRECT? a. One advantage of operating a business as a corppration is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in partnership. b. Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk high return project rather than low risk low return. c. Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk low return projects rather than high risk high return project. d. One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor. e.…
- Which one of the following statements is TRUE? a. Creditors have a claim on a firm's earning stream through the dividend payments they receive. b. One tool of corporate governance is a company's tax avoidance strategy. c. One tool of corporate governance is stock repurchases. d. One tool of corporate governance is how the company's charter affects the likelihood of a takeover. e. One tool of corporate governance is choosing a good investment banker.Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders? a. Compensating managers with stock options. b. Abolishing the Security and Exchange Commission. c. The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions. d. Financing risky projects with additional debt. e. The threat of hostile takeovers.Which statement is FALSE regarding the difference between shareholders and bondholders? * Bondholders are mere creditors of the company to whom the company has to repay a certain amount. Shareholders are the real owners in the company. Shareholders have more rights (voting rights, priority at times of bankruptcy, payment preferences) than bondholders. Shareholders are more exposed to risks than bondholders.