Exam 12: Agency Problems, Compensation, and Performance Measurement

A firm has an average investment of $1,000 during the year.During the same time,the firm generates after-tax earnings of $150. If the cost of capital is 10%,what is the net return on investment?

One calculates economic profit (EP)as follows:

CEO compensation is generally highest in (the):

Generally,firms with high levels of intangible assets tend to report (all else equal):

Which of the following capital expenditures may not appear in a firm's capital budget? i.investment in a new factory; II)investment in a new machine; III)investment in training employees

Top management,using computers,generally analyzes all capital budgeting projects before deciding on them.

Managers on a fixed salary often fall victim to the following temptations: i.reduced effort; II)needless spending on perks or private benefits; III)empire building; IV)entrenching investments; V)avoiding risks

Generally,firms should attempt to base mangers' compensation on:

A factory manager can improve EVA by: i.increasing earnings; II)increasing capital employed; III)reducing earnings; IV)reducing capital employed

What are some of the agency problems associated with capital budgeting?

EVA is used for: i.measuring performance within the firm; II)rewarding performance within the firm; III)improving performance within the firm

One should expect the free-rider problem to be less severe for firms having a higher percentage of intangible assets.

The ultimate responsibility for monitoring a firm rests with the: i.shareholders; II)board of directors; III)independent accountants; IV)lenders

The term economic value added (EVA)is copyrighted by:

The following capital expenditures are typically included in a firm's capital budget:

A firm has an average investment of $10,000 during the year.During the same period,the firm generates after-tax income of $1,000. If the cost of capital is 15%,what is the net return on the investment?

A firm has an average investment of $1,000 during the year.During the same time,the firm generates after-tax earnings of $150. Calculate the economic value added (EVA)for the firm.(The cost of capital is 10%.)

Stock option grants are generally a more appropriate form of compensation for lower-level managers than for higher-level managers.

In the U.S.,tax advantages exist to compensating good performance by large-firm CEOs with stock option grants rather than by simply increasing salaries.

An advantage of stock-based performance compensation for managers is that such managers must bear macroeconomic risks.