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Chapter 10: Corporate Governance
28. 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.
ANSWER:
a
29. 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.
ANSWER:
a
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.
ANSWER:
a
31. 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.
ANSWER:
a
32. 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.
ANSWER:
a
33. 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.
ANSWER:
a
34. 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.
ANSWER:
a
35. 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.
ANSWER:
a
36. 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.
ANSWER:
a
37. 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.
ANSWER:
a
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38. 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.
ANSWER:
a
39. 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
Chapter 10: Corporate Governance
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Page 21
on the board
ANSWER:
a
40. 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.
ANSWER:
a
41. Which one of the following statements is TRUE?
a.
Frequently, large boards of directors are less effective than small boards of directors.
Chapter 10: Corporate Governance
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.
ANSWER:
a
42. 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.
ANSWER:
a
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.
ANSWER:
a
44. 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.
ANSWER:
a
45. 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.
ANSWER:
a
46. 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.
ANSWER:
a
47. 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.
ANSWER:
a
48. 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.
ANSWER:
a
49. 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.
ANSWER:
a
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.
ANSWER:
a
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51. 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.
ANSWER:
a
