Question 1

Which of the following is not an advantage to calculating and reporting economic depreciation?

Accepted Answer

A) Most firms can easily calculate economic depreciation. 
B) Economic depreciation is generally more realistic than accounting depreciation. 
C) Economic depreciation enables a firm to understand the true value of its assets. 
D) All of the options are advantages to calculating and reporting economic depreciation. 
A) Most firms can easily calculate economic depreciation. 
B) Economic depreciation is generally more realistic than accounting depreciation. 
C) Economic depreciation enables a firm to understand the true value of its assets. 
D) All of the options are advantages to calculating and reporting economic depreciation.

Question 2

Agency costs can be thought of as the loss in the value of a firm resulting from the following actions by managers:

Accepted Answer

A) reduced effort, perks or private benefits, and avoiding risks. 
B) reduced effort, perks or private benefits, and entrenching investments. 
C) reduced effort, perks or private benefits, empire building, and entrenching investments. 
D) reduced effort, perks or private benefits, empire building, entrenching investments, and avoiding risks. 
A) reduced effort, perks or private benefits, and avoiding risks. 
B) reduced effort, perks or private benefits, and entrenching investments. 
C) reduced effort, perks or private benefits, empire building, and entrenching investments. 
D) reduced effort, perks or private benefits, empire building, entrenching investments, and avoiding risks.

Question 3

EVA = income earned - (cost of capital) × (investment).

Accepted Answer

A) True 
 B)False

Question 4

Define the term economic value added (EVA).

Accepted Answer

Economic value added is define

Question 5

The ultimate responsibility for monitoring a firm rests with the

Accepted Answer

A) shareholders only. 
B) shareholders and board of directors. 
C) shareholders, board of directors, and independent accountants. 
D) shareholders, board of directors, independent accountants, and lenders. 
A) shareholders only. 
B) shareholders and board of directors. 
C) shareholders, board of directors, and independent accountants. 
D) shareholders, board of directors, independent accountants, and lenders.

Question 6

The following actions by managers are examples of overinvestment:

Accepted Answer

A) entrenching investments. 
B) empire building. 
C) entrenching investments and empire building. 
D) entrenching investments, empire building, and investing beyond the point where NPV falls to zero. 
A) entrenching investments. 
B) empire building. 
C) entrenching investments and empire building. 
D) entrenching investments, empire building, and investing beyond the point where NPV falls to zero.

Question 7

The term economic value added (EVA) is trademarked by

Accepted Answer

A) Brealey-Myers. 
B) Brealey-Myers-Allen. 
C) Ross-Westerfield. 
D) Stern-Stewart. 
A) Brealey-Myers. 
B) Brealey-Myers-Allen. 
C) Ross-Westerfield. 
D) Stern-Stewart.

Question 8

If a company is underperforming, small shareholders will generally start a proxy contest.

Accepted Answer

A) True 
 B)False

Question 9

A firm has an average investment of $10,000 during the year.During the same time, the firm generates after-tax income of $2,000.If the cost of capital is 15 percent, what is the net return on the investment?

Accepted Answer

A) 5 percent 
B) 20 percent 
C) 15 percent 
D) 10 percent 
A) 5 percent 
B) 20 percent 
C) 15 percent 
D) 10 percent

Question 10

Top management generally use spreadsheet programs to analyze all capital budgeting projects before deciding on them.

Accepted Answer

A) True 
 B)False

Question 11

Economic income = cash flow - economic depreciation.

Accepted Answer

A) True 
 B)False

Question 12

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 percent.)

Accepted Answer

A) $100 
B) $50 
C) $120 
D) $150 
A) $100 
B) $50 
C) $120 
D) $150

Question 13

A firm produces $65 million of net income on $2,030 million of assets.Given that investors expect a 5 percent return, what is the EVA?

Accepted Answer

A) -$65 million 
B) -$36.5 million 
C) $32.6 million 
D) $65.1 million 
A) -$65 million 
B) -$36.5 million 
C) $32.6 million 
D) $65.1 million

Question 14

Managers on a fixed salary often fall victim to the following temptations:

Accepted Answer

A) reduced effort, needless spending on perks or private benefits, and avoiding risks. 
B) reduced effort, needless spending on perks or private benefits, and entrenching investments. 
C) reduced effort, needless spending on perks or private benefits, empire building, and entrenching investments. 
D) reduced effort, needless spending on perks or private benefits, empire building, entrenching investments, and avoiding risks. 
A) reduced effort, needless spending on perks or private benefits, and avoiding risks. 
B) reduced effort, needless spending on perks or private benefits, and entrenching investments. 
C) reduced effort, needless spending on perks or private benefits, empire building, and entrenching investments. 
D) reduced effort, needless spending on perks or private benefits, empire building, entrenching investments, and avoiding risks.

Question 15

Boards of directors outside the United States have traditionally been friendlier towards their own managers.

Accepted Answer

A) True 
 B)False

Question 16

It is easy to apply EVA to R&D programs and start-up ventures.

Accepted Answer

A) True 
 B)False

Question 17

Monitoring is typically done by

Accepted Answer

A) shareholders only. 
B) shareholders and the board of directors. 
C) shareholders, the board of directors, and independent accountants. 
D) shareholders, the board of directors, independent accountants, and lenders. 
A) shareholders only. 
B) shareholders and the board of directors. 
C) shareholders, the board of directors, and independent accountants. 
D) shareholders, the board of directors, independent accountants, and lenders.

Question 18

Which of the following capital expenditures may not appear in a firm's capital budget?

Accepted Answer

A) Investment in a new factory only 
B) Investment in a new machine only 
C) Investment in training employees only 
D) Investment in a new factory and in a new machine 
A) Investment in a new factory only 
B) Investment in a new machine only 
C) Investment in training employees only 
D) Investment in a new factory and in a new machine

Question 19

Survey data show that managers admit to managing earnings.

Accepted Answer

A) True 
 B)False

Question 20

Generally, firms should attempt to base mangers' compensation on

Accepted Answer

A) the number of years of managerial experience. 
B) the number of hours they work. 
C) verifiable results. 
D) perks consumed. 
A) the number of years of managerial experience. 
B) the number of hours they work. 
C) verifiable results. 
D) perks consumed.

Exam 12: Agency Problems Compensation and Performance Measurement

Which of the following is not an advantage to calculating and reporting economic depreciation?

Agency costs can be thought of as the loss in the value of a firm resulting from the following actions by managers:

EVA = income earned - (cost of capital) × (investment).

Define the term economic value added (EVA).

The ultimate responsibility for monitoring a firm rests with the

The following actions by managers are examples of overinvestment:

The term economic value added (EVA) is trademarked by

If a company is underperforming, small shareholders will generally start a proxy contest.

A firm has an average investment of $10,000 during the year.During the same time, the firm generates after-tax income of $2,000.If the cost of capital is 15 percent, what is the net return on the investment?

Top management generally use spreadsheet programs to analyze all capital budgeting projects before deciding on them.

Economic income = cash flow - economic depreciation.

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 percent.)

A firm produces $65 million of net income on $2,030 million of assets.Given that investors expect a 5 percent return, what is the EVA?

Managers on a fixed salary often fall victim to the following temptations:

Boards of directors outside the United States have traditionally been friendlier towards their own managers.

It is easy to apply EVA to R&D programs and start-up ventures.

Monitoring is typically done by

Which of the following capital expenditures may not appear in a firm's capital budget?

Survey data show that managers admit to managing earnings.

Generally, firms should attempt to base mangers' compensation on

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment Strategy and Economic Rents

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing Risk

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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