Deck 13: Corporate Governance

Question 1

Which one of the following statements is TRUE?

A) An example of an agency cost is when an outside investor is only willing to pay less for stock because she thinks the original owner will consume too many perquisites.
B) An example of an agency cost is when the board of directors pays a dividend to shareholders.
C) An example of an agency cost is when an attorney hires an expert witness for a trial.
D) The commission required by the Federal Housing Agency for a small business loan is an example of an agency cost.
E) An example of an agency cost is the salary of the agent hired to work for the principal.
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Answer 1

A

Question 2

Which one of the following statements is TRUE?

A) An agency relationship is when a principal hires an agent to perform a service and gives them decision-making authority.
B) An agency relationship is when a principal works for an agent.
C) In an agency relationship, the agent delegates authority to the principal.
D) An example of an agency relationship is when the CEO nominates a slate of candidates to be on the board of directors.
E) An example of an agency relationship is when a supervisor hires a forklift operator.
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Answer 2

A

Question 3

Which of the following is NOT normally regarded as being a barrier to hostile takeovers?

A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.

Answer 3

E

Question 4

A poison pill is also known as a corporate restructuring.

Question 5

Which one of the following statements is TRUE?

A) An agency relationship is when someone hires someone else to perform a service and gives them decision-making authority.
B) An agency relationship is when an agent hires a principal to perform a service.
C) An agency relationship is when a principal works for an agent.
D) In an agency relationship, the agent delegates authority to the principal.
E) An example of an agency relationship is when the CEO nominates a slate of candidates to be on the board of directors.

Question 6

Which one of the following statements is TRUE?

A) An example of an agency relationship is when a private individual hires a lawyer to prepare her defense in a lawsuit.
B) An example of an agency relationship is when a supervisor hires a forklift operator.
C) The supervisor-employee relation between a production line supervisor and a production line operator is an example of an agency relationship.
D) An agency cost is the wage required to pay someone who is hired to perform a service.
E) An example of an agency cost is when the board of directors pays a dividend to shareholders.

Question 7

Which one of the following statements is TRUE?

A) An agency cost is the reduction in firm value due to agency conflicts.
B) An agency cost is the wage required to pay someone who is hired to perform a service.
C) An example of an agency cost is when the board of directors pays a dividend to shareholders.
D) An example of an agency cost is when an attorney hires an expert witness for a trial.
E) The commission required by the Federal Housing Agency for a small business loan is an example of an agency cost.

Question 8

Which one of the following statements is TRUE?

A) Asset switching occurs when a company borrows money for a safe investment but uses it for a
Risky investment.
B) An example of an agency cost is when the board of directors pays a dividend to shareholders.
C) An example of an agency cost is when an attorney hires an expert witness for a trial.
D) The commission required by the Federal Housing Agency for a small business loan is an example of
An agency cost.
E) An example of an agency cost is the salary of the agent hired to work for the principal.

Question 9

Which one of the following statements is TRUE?

A) When lenders protect themselves from the risk of asset switching, the borrowing firms will be limited in the projects they can profitably undertake.
B) An agency relationship is when a principal works for an agent.
C) In an agency relationship, the agent delegates authority to the principal.
D) Firms borrowing money have greater flexibility to use that money when there are debt covenants.
E) When lenders protect themselves from the risk of asset switching by raising the interest rate, the firm's WACC can decrease.

Question 10

Which one of the following statements is TRUE?

A) In an agency relationship, the principal delegates decision-making authority to the agent.
B) In an agency relationship, the agent delegates authority to the principal.
C) An example of an agency relationship is when the CEO nominates a slate of candidates to be on the board of directors.
D) An example of an agency relationship is when a supervisor hires a forklift operator.
E) The supervisor-employee relation between a production line supervisor and a production line operator is an example of an agency relationship.

Question 11

Which one of the following statements is TRUE?

A) Lenders will protect themselves from the risk of asset switching by writing debt covenants into loans.
B) Lenders can't legally prevent a firm from engaging in asset switching.
C) Firms borrowing money have greater flexibility to use that money when there are debt covenants.
D) When lenders protect themselves from the risk of asset switching by charging a higher interest rate, the firm's WACC can decrease.
E) A lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.

Question 12

Which one of the following statements is TRUE?

A) An example of an agency relationship is when the board of directors hires a CEO to run a company.
B) An example of an agency relationship is when the CEO nominates a slate of candidates to be on the board of directors.
C) An example of an agency relationship is when a supervisor hires a forklift operator.
D) The supervisor-employee relation between a production line supervisor and a production line operator is an example of an agency relationship.
E) An agency cost is the wage required to pay someone who is hired to perform a service.

Question 13

Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2) the rules that cover the CEO's ability to remove members of the board.

Question 14

Which one of the following statements is TRUE?

A) Lenders will protect themselves from asset switching by charging a higher interest rate.
B) Creditors have a claim on a firm's earning stream through the dividend payments they receive.
C) An example of asset switching is an option to exchange one piece of real estate for another.
D) Lenders can't legally prevent a firm from engaging in asset switching.
E) Firms borrowing money have greater flexibility to use that money when there are debt covenants.

Question 15

Which one of the following statements is TRUE?

A) An example of asset switching is when a company borrows for a new manufacturing facility but then uses it
To repurchase its own stock.
B) An example of an agency cost is when an attorney hires an expert witness for a trial.
C) The commission required by the Federal Housing Agency for a small business loan is an example of
An agency cost.
D) An example of an agency cost is the salary of the agent hired to work for the principal.
E) Creditors have a claim on a firm's earning stream through the dividend payments they receive.

Question 16

Which of the following is NOT normally regarded as being a good reason to establish an ESOP?

A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.

Question 17

ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.

Question 18

Which one of the following statements is TRUE?

A) When lenders protect themselves from the risk of asset switching, the firm's WACC can increase.
B) An example of an agency cost is when the board of directors pays a dividend to shareholders.
C) An example of an agency cost is when an attorney hires an expert witness for a trial.
D) An example of asset switching is an option to exchange one piece of real estate for another.
E) Lenders can't legally prevent a firm from engaging in asset switching.

Question 19

Which one of the following statements is TRUE?

A) An example of asset switching is borrowing money to buy equipment but instead taking it to Las Vegas to gamble with it.
B) The commission required by the Federal Housing Agency for a small business loan is an example of an agency cost.
C) An example of an agency cost is the salary of the agent hired to work for the principal.
D) Creditors have a claim on a firm's earning stream through the dividend payments they receive.
E) An example of asset switching is an option to exchange one piece of real estate for another.

Question 20

The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market, these options will necessarily be worthless.

Question 21

Which one of the following statements is TRUE?

A) One tool of corporate governance is how the company's charter affects the likelihood of a takeover.
B) One tool of corporate governance is stock repurchases.
C) One tool of corporate governance is a company's tax avoidance strategy.
D) One tool of corporate governance is choosing a good investment banker.
E) Creditors have a claim on a firm's earning stream through the dividend payments they receive.

Question 22

Which one of the following statements is TRUE?

A) One tool of corporate governance is the use of accounting control systems.
B) An example of asset switching is an option to exchange one piece of real estate for another.
C) One tool of corporate governance is the location of the company headquarters.
D) An example of an agency relationship is when a supervisor hires a forklift operator.
E) One tool of corporate governance is a company's tax avoidance strategy.

Question 23

Which one of the following statements is TRUE?

A) If a company has a classified board, fewer board seats are filled each year.
B) One tool of corporate governance is choosing a good investment banker.
C) A classified board is one in which the board members serve anonymously.
D) A classified board is one in which an announcement requesting applications for board members appears in the newspaper.
E) In a classified board, it is easier for dissidents to gain representation since fewer seats are up for election each year.

Question 24

Which one of the following statements is TRUE?

A) A manager avoiding a positive NPV but risky project is an example of a manager-shareholder conflict.
B) Management is said to be entrenched when the company is doing badly and is "stuck in a rut."
C) A quarter-end bonus is an example of a nonpecuniary benefit.
D) A company's matching contribution to a retirement plan is a nonpecuniary benefit.
E) Company sponsorship of a local charity is an example of a nonpecuniary benefit.

Question 25

Which one of the following statements is TRUE?

A) When an owner/manager sells stock to an outsider, that outsider now bears some of the costs of the owner/manager's perquisite consumption.
B) Lenders can't legally prevent a firm from engaging in asset switching.
C) Firms borrowing money have greater flexibility to use that money when there are debt covenants.
D) When lenders protect themselves from the risk of asset switching, the firm's WACC can decrease.
E) A lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.

Question 26

Which one of the following statements is TRUE?

A) One tool of corporate governance is the threat of removing current management.
B) The commission required by the Federal Housing Agency for a small business loan is an example of an agency cost.
C) One tool of corporate governance is the choice of how much dividends to pay.
D) Corporate governance is when an officer of a corporation is elected to public office.
E) One tool of corporate governance is the location of the company headquarters.

Question 27

Which one of the following statements is TRUE?

A) A corporate executive health club is an example of a nonpecuniary benefit.
B) When lenders protect themselves from the risk of asset switching by raising the interest rate, the firm's WACC can decrease.
C) A lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.
D) A supplier substituting a lower-quality raw material without approval is an example of asset switching.
E) An agency problem occurs when an owner/manager sells stock to an outside investor and the owner/manager fears the outside investor will consume too many perquisites.
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Question 28

Which one of the following statements is TRUE?

A) Personal use of the corporate jet is an example of a nonpecuniary benefit.
B) A supplier substituting a lower-quality raw material without approval is an example of asset switching.
C) An agency problem occurs when an owner/manager sells stock to an outside investor and the owner/manager fears the outside investor will consume too many perquisites.
D) An agency conflict between inside owners/managers and outside owners occurs when the outside owners sell their shares to someone else.
E) A quarter-end bonus is an example of a nonpecuniary benefit.

Question 29

Which one of the following statements is TRUE?

A) An outside director is a board member who has no other affiliation with the company.
B) A classified board is one in which an announcement requesting applications for board members appears in the newspaper.
C) In a classified board, it is easier for dissidents to gain representation since fewer seats are up for election each year.
D) Inside directors are more concerned with shareholders' interests since they are more closely concerned with firm operations.
E) Since outside directors have no other connection with the firm, they are indebted to the CEO for putting them on the board

Question 30

Which one of the following statements is TRUE?

A) Management is said to be entrenched when senior managers are unlikely to be fired.
B) A company's matching contribution to a retirement plan is a nonpecuniary benefit.
C) Company sponsorship of a local charity is an example of a nonpecuniary benefit.
D) A manager/shareholder agency conflict arises when shareholders sell their stock even though management says the stock is undervalued.
E) A manager/shareholder agency conflict arises when the board of directors pays a larger dividend than the firm's earnings could support.

Question 31

Which one of the following statements is TRUE?

A) An inside director is a board member who also holds a managerial position in the company.
B) In a classified board, it is easier for dissidents to gain representation since fewer seats are up for election each year.
C) Inside directors are more concerned with shareholders' interests since they are more closely concerned with firm operations.
D) Since outside directors have no other connection with the firm, they are indebted to the CEO for putting them on the board.
E) Company sponsorship of a local charity is an example of a nonpecuniary benefit.

Question 32

Which one of the following statements is TRUE?

A) Inside directors are likely to side with the CEO since they are employees.
B) In a classified board, it is easier for dissidents to gain representation since fewer seats are up for election each year.
C) Inside directors are more concerned with shareholders' interests since they are more closely concerned with firm operations.
D) Since outside directors have no other connection with the firm, they are indebted to the CEO for putting them on the board.
E) The more members of a board of directors, the better its function.

Question 33

Which one of the following statements is TRUE?

A) A corporate golf club membership is an example of a nonpecuniary benefit
B) Firms borrowing money have greater flexibility to use that money when there are debt covenants.
C) When lenders protect themselves from the risk of asset switching by raising the interest rate, the firm's WACC can decrease.
D) A lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.
E) A supplier substituting a lower-quality raw material without approval is an example of asset switching.

Question 34

Which one of the following statements is TRUE?

A) Outside shareholders will pay less for stock if they think the original owners will consume perquisites.
B) Creditors have a claim on a firm's earning stream through the dividend payments they receive.
C) An example of asset switching is an option to exchange one piece of real estate for another.
D) An agency cost is the wage required to pay someone who is hired to perform a service.
E) An example of an agency cost is when an attorney hires an expert witness for a trial.

Question 35

Which one of the following statements is TRUE?

A) One tool of corporate governance is monitoring management.
B) One tool of corporate governance is the choice of how much dividends to pay.
C) A company's matching contribution to a retirement plan is a nonpecuniary benefit
D) One tool of corporate governance is stock repurchases.
E) Corporate governance is better when Directors are also employees of the company so they know the business very well.

Question 36

Which one of the following statements is TRUE?

A) A classified board is one in which the board members have staggered terms.
B) One tool of corporate governance is a company's tax avoidance strategy.
C) One tool of corporate governance is choosing a good investment banker.
D) A classified board is one in which the board members serve anonymously.
E) A classified board is one in which an announcement requesting applications for board members appears in the newspaper.

Question 37

Which one of the following statements is TRUE?

A) A manager not closing a factory that is losing money but which is in his hometown is an example of a manager-shareholder conflict.
B) Management is said to be entrenched when the senior managers are consuming excessive perquisites
C) A company's matching contribution to a retirement plan is a nonpecuniary benefit.
D) Company sponsorship of a local charity is an example of a nonpecuniary benefit.
E) A manager/shareholder agency conflict arises when shareholders sell their stock even though management says the stock is undervalued.

Question 38

Which one of the following statements is TRUE?

A) An agency problem occurs when an owner/manager sells stock to an outsider but continues to consume perquisites.
B) Firms borrowing money have greater flexibility to use that money when there are debt covenants.
C) When lenders protect themselves from the risk of asset switching by raising the interest rate, the firm's WACC can decrease.
D) A lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.
E) A supplier substituting a lower-quality raw material without approval is an example of asset switching.

Question 39

Which one of the following statements is TRUE?

A) It is harder for dissidents to gain board seats if a company's board is classified.
B) A classified board is one in which an announcement requesting applications for board members appears in the newspaper.
C) In a classified board, it is easier for dissidents to gain representation since fewer seats are up for election each year.
D) Inside directors are more concerned with shareholders' interests since they are more closely concerned with firm operations.
E) Management is said to be entrenched when the senior managers are consuming excessive perquisites.

Question 40

Which one of the following statements is TRUE?

A) A manager/shareholder agency conflict arises when the manager's actions aren't in the company's best interest.
B) An agency problem occurs when an owner/manager sells stock to an outside investor and the owner/manager fears the outside investor will consume too many perquisites.
C) An agency conflict between inside owners/managers and outside owners occurs when the outside owners sell their shares to someone else.
D) A quarter-end bonus is an example of a nonpecuniary benefit.
E) A company's matching contribution to a retirement plan is a nonpecuniary benefit.

Question 41

Which one of the following corporate board characteristics usually improves corporate governance?

A) The board has a majority of outsiders who have experience and aren't too busy.
B) CEO is the chairman of the board.
C) The board is as large as is possible.
D) Board members are paid at a rate higher than their peers and their payment is mostly cash.
E) The board has a majority of insiders from company management on it who bring first-hand knowledge of how the company operates.

Question 42

A company issues bonds saying that it will use the proceeds for a safe investment.Instead, it uses the proceeds for a risky investment.Which of the following statements is true about this situation.

A) This is an example of asset switching or bait and switch.
B) What the company does with the funds once it raises them isn't the business of the debtholders.
C) This will result in an increase in the value of the debt because the company is riskier.
D) All of the above.
E) None of the above.

Question 43

Which one of the following statements is TRUE?

A) A shareholder-friendly charter will make it easier for a company to be acquired.
B) A company whose board members are elected in staggered terms is said to be an interlocking board of directors.
C) A shareholder-friendly charter will make it easier for shareholders to meet with the CEO if they have concerns.
D) A targeted share repurchase can be used to encourage a hostile takeover.
E) An example of an agency cost is when the board of directors pays a dividend to shareholders.

Question 44

Which one of the following statements is TRUE?

A) A targeted share repurchase can be used to prevent a hostile takeover.
B) A targeted share repurchase can be used to increase the stock price if the company is undervalued.
C) Anti-takeover charter provisions are good for shareholders because they prevent a raider from stealing the company for a below-market price.
D) Shareholders want to prevent takeovers because they don't want the company purchased out from under them.
E) One tool of corporate governance is choosing a good investment banker.

Question 45

A company issues bonds saying that it will use the proceeds for a safe investment.Instead, it uses the proceeds for a risky investment.Which of the following statements is true about this situation.

A) This will result in a decrease in the value of the debt because the company is riskier.
B) This will result in a decrease in the value of the equity because the company is riskier.
C) This will result in a lawsuit from the stockholders because it is bait and switch.
D) This will cause bondholders to convert their bonds to stock.
E) Dividends will go up to compensate shareholders for their increased risk.

Question 46

Which one of the following statements is TRUE?

A) Companies with interlocking boards of directors have directors that serve on both boards.
B) The more members of a board of directors, the better its function.
C) A company has an interlocking board of directors if the CEO also serves as the chairman of the board of directors.
D) A company whose board members are elected in staggered terms is said to be an interlocking board of directors.
E) A shareholder-friendly charter will make it harder for a company to be acquired.

Question 47

Which one of the following statements is TRUE?

A) Shareholders benefit when the company is acquired because they usually receive a higher price for their shares
B) Anti-takeover charter provisions are good for shareholders because they prevent a raider from stealing the company for a below-market price.
C) Shareholders want to prevent takeovers because they don't want the company purchased out from under them.
D) A shareholder rights provision encourages takeovers because shareholders have the right to approve the takeover if the terms are good.
E) A classified board is one in which the board members serve anonymously.

Question 48

Which one of the following statements is TRUE?

A) A shareholder rights provision discourages takeovers because the acquiring company will suffer dilution.
B) A company has an interlocking board of directors if the CEO also serves as the chairman of the board of directors.
C) A company whose board members are elected in staggered terms is said to have an interlocking board of directors.
D) Shareholders want to prevent takeovers because they don't want the company purchased out from under them.
E) A classified board is one in which the board members serve anonymously.

Question 49

Which one of the following statements is TRUE?

A) Frequently, large boards of directors are less effective than small boards of directors.
B) Since outside directors have no other connection with the firm, they are indebted to the CEO for putting them on the board.
C) The more members of a board of directors, the better its function.
D) A company has an interlocking board of directors if the CEO also serves as the chairman of the board of directors.
E) A company whose board members are elected in staggered terms is said to be an interlocking board of directors.

Question 50

Which one of the following corporate board characteristics usually improves corporate governance?

A) CEO is not the chairman of the board.
B) The board has many outsiders who have lots of other important commitments.
C) The board is as large as is possible.
D) Board members are paid at a rate higher than their peers and their payment is mostly cash.
E) The board has a majority of insiders from company management on it who bring first-hand knowledge of how the company operates.

Question 51

Which one of the following statements is TRUE?

A) A targeted share repurchase is when the company purchases stock from one shareholder at a higher price than it offers to other shareholders.
B) An example of asset switching is an option to exchange one piece of real estate for another.
C) A shareholder-friendly charter will make it harder for a company to be acquired.
D) A targeted share repurchase can be used to encourage a hostile takeover.
E) Anti-takeover charter provisions are good for shareholders because they prevent a raider from stealing the company for a below-market price.