Chapter 13: Corporate Governance
1. 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.
a. True
b. False
2. A poison pill is also known as a corporate restructuring.
a. True
b. False
3. 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.
a. True
b. False
Chapter 13: Corporate Governance
4. 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.
5. ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent
hostile takeovers.
a. True
b. False
6. 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.
Chapter 13: Corporate Governance
7. 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.
8. 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.
Chapter 13: Corporate Governance
9. 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.
10. 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.
Chapter 13: Corporate Governance
11. 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.
12. 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.
Chapter 13: Corporate Governance
13. 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.
14. 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.
Chapter 13: Corporate Governance
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.
16. 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.
Chapter 13: Corporate Governance
17. 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.
18. 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.
19. 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.
Chapter 13: Corporate Governance
e. Lenders can’t legally prevent a firm from engaging in asset switching.
20. 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.
21. 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.
Chapter 13: Corporate Governance
22. 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.
23. 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.
Chapter 13: Corporate Governance
24. 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.
25. 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.
Chapter 13: Corporate Governance
26. 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.
27. 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.