Fundamentals of Multinational Finance, 5e (Moffett et al.)
Chapter 4 Financial Goals and Corporate Governance
Multiple Choice and True/False Questions
4.1 Who Owns the Business?
1) The authors suggest that the most likely progression of ownership goes from
A) 100% privately held, to 80% privately held, to 40% privately held, to 0% privately held.
B) 0% privately held, to 40% privately held, to 80% privately held, to 100% privately held.
C) privately held firms stay private, and publicly traded firms stay public.
D) none of the above.
2) Which of the following do NOT enhance control of publicly traded firms by select groups of
shareholders?
A) dual classes of stock with differential voting rights
B) simultaneous election of members of the board of directors
C) interlocking directorates
D) takeover safeguards
3) According to an article in the French newspaper Le Figaro, French firms that are mostly
privately held are out-performed by firms that are more widely held public firms. Note: In this
context performance is measured by return to the owners.
4) It may be (is probably the case) that family owned businesses the world over out-perform their
publicly traded brethren. Which of these factors is attributed to family owned firm dominance
over public firms?
A) a focus on the long-term
B) they stick to their core business
C) fewer agency problems (manager-owner conflicts)
D) all of the above
5) Anglo-American equity markets are characterized by widespread ownership of shares. In
other parts of the world ownership is often dominated by consortiums of controlling
shareholders. Which of the following is NOT an example of a common consortium of controlling
shareholders?
A) Japanese keiretsus
B) South Korean chaebols
C) U.S. labor unions
D) All of the above are common controlling consortiums.
6) During the IPO, typically only a small portion of the company is initially sold to the public
(10-20%). This results in the company still being controlled by
A) government.
B) small number of private investors.
C) family.
D) All of the above can be in control of the company.
7) A business that is owned and managed by same entity is
A) family business that sold majority ownership through IPO.
B) increasing the likelihood of agency problems.
C) decreasing the likelihood of agency problems.
D) has to offer ownership shares to professionally hired managers.
4.2 The Goal of Management
1) The shareholder wealth maximization model assumes as a universal truth that the market is
efficient.
2) What are frequently taught as universal truths in a finance classroom may in fact just be
cultural norms.
3) During the 1990s, rapidly increasing stock prices exposed a flaw in the shareholder wealth
maximization model, the seeking of short-term value maximization. Such behavior by
management is characterized by all but which of the following?
A) a focus on quarterly earnings
B) overly generous use of stock options to motivate management
C) improper reporting of earnings by management
D) All of the above may be characteristics of short-term value maximization.
4) Warren Buffett and his investment firm Berkshire Hathaway is an outstanding example of
impatient capital investing.
5) The stakeholder capitalism model is characterized by the desire of controlling shareholders to
maximize long-term return to equity just as in the shareholder wealth maximization model of
corporate governance. However, stakeholder capitalism controlling shareholders are more
constrained by which of the following groups than in the shareholder wealth maximization
model?
A) banks
B) governments
C) other powerful stakeholders
D) all of the above
6) Under the stakeholder capitalism model of corporate governance it is assumed that the long-
term or “loyal” stockholders should influence corporate strategy more than the transient portfolio
investor.
7) Under the shareholder wealth maximization model of corporate governance it is assumed that
the long-term or “loyal” stockholders should influence corporate strategy more than the transient
portfolio investor.
8) Which of the following is a common operational financial objective for MNEs?
A) maximization of consolidated after-tax income
B) maximization of interest expense
C) minimization of revenues from other countries
D) minimization of total assets held in foreign locations
9) Which of the following is a common operational financial objective for MNEs?
A) maximization of interest expense
B) minimization of the firm’s effective global tax burden
C) minimization of revenues from other countries
D) minimization of total assets held in foreign locations
10) Which of the following is a common operational financial objective for MNEs?
A) maximization of interest expense
B) minimization of revenues from other countries
C) correct positioning of the firm’s income, cash flow, and available funds as to country and
currency
D) minimization of total assets held in foreign locations
11) Anglo-American is defined to mean
A) North, Central, and South America.
B) the United States, Canada, and Western Europe.
C) the United States, United Kingdom, Canada, Australia and New Zealand.
D) the United States, France, Britain, and Germany.
12) In finance, an efficient market is one in which
A) prices are assumed to be correct.
B) prices adjust quickly and accurately to new information.
C) prices are the best allocators of capital in the macro economy.
D) all of the above
13) Systematic risk can be defined as
A) the total risk to the firm.
B) the risk of the individual security.
C) the added risk that a firm’s shares bring to a diversified portfolio.
D) the risk that can be systematically diversified away.
14) Unsystematic risk can be defined as
A) the total risk to the firm.
B) the risk of a well-diversified portfolio.
C) the added risk that a firm’s shares bring to a diversified portfolio.
D) beta.
15) “Maximize corporate wealth”
A) is the primary objective of the European/Japanese model of management.
B) as a management objective treats shareholders on a par with other corporate stakeholders such
as creditors, labor, and local community.
C) has a broader definition than just financial wealth.
D) all of the above
16) Corporate wealth maximization, also known as the stakeholder capitalism model, holds that
total risk (operational and financial) is more important than just systematic risk.
17) The Stakeholder Capitalism Model
A) clearly places shareholders as the primary stakeholder.
B) combines the interests and inputs of shareholders, creditors, management, employees, and
society.
C) has financial profit as its goal and is often termed impatient capital.
D) is the Anglo-American model of corporate governance.
18) The Shareholder Wealth Maximization Model
A) combines the interests and inputs of shareholders, creditors, management, employees, and
society.
B) is being usurped by the Corporate Wealth Maximization Model as those types of MNEs
dominate their global industry segments.
C) clearly places shareholders as the primary stakeholder.
D) is the dominant form of corporate management in the European-Japanese governance system.
19) Systematic risk can be eliminated through portfolio diversification.
20) Which of the following is generally NOT considered to be a viable operational goal for a
firm?
A) maintaining a strong local currency
B) maximization of after-tax income
C) minimization of the firm’s effective global tax burden
D) correct positioning of the firm’s income, cash flows and available funds as to country and
currency
21) If share price falls from $15 to $12 per share, and pays a dividend of $1 per share, what was
the rate of return to shareholders?
A) 13.33%
B) -13.33%
C) 16.67%
D) -16.67%
22) Benny Simpson is considering an investment in Pontoon Industries Inc. He anticipates a
dividend of $0.50 next year and an increase in the stock price from the current price of $18.25
per share to $20 per share. If he plans to hold the stock for one year, should Mr Simpson buy the
stock if he requires an annual return of 12% on similar-risk investments?
A) no, because his anticipated return of 2.74% is exceeded his required return of 12%
B) no, because his anticipated return of 9.59% is exceeded his required return of 12%
C) yes because his anticipated return of 12.33% exceeds his required return of 12%
D) There is not enough information to answer this question.
23) Mary Chalmers, who lives in Minnesota, purchased 100 shares of Delton Cables, a
diversified machinery company headquartered in Germany. She purchased the stock in January
of 2011 for €62.50 per share when the exchange rate was at $1.330/€. Today, the stock is trading
for €68.00 per share and the exchange rate is $1.48/€. If Mary sells her shares today, what is the
total return on her investment?
A) 11.28%
B) 20.08%
C) 8.80%
D) 26.41%
24) Mary Chalmers, who lives in Minnesota, purchased 100 shares of Delton Cables, a
diversified machinery company headquartered in Germany. She purchased the stock in January
of 2011 for €62.50 per share when the exchange rate was at $1.330/€. Today, the stock is trading
for €68.00 per share and the exchange rate is $1.48/€. If Mary sells her shares today, what is the
return on her investment due to changes in the exchange rate?
A) 11.28%
B) 20.08%
C) 8.80%
D) 26.41%
25) Mary Chalmers, who lives in Minnesota, purchased 100 shares of Delton Cables, a
diversified machinery company headquartered in Germany. She purchased the stock in January
of 2011 for €62.50 per share when the exchange rate was at $1.330/€. Today, the stock is trading
for €68.00 per share and the exchange rate is $1.48/€. If Mary sells her shares today, what is the
return on her investment due to price appreciation of the stock?
A) 11.28%
B) 20.08%
C) 8.80%
D) 26.41%
26) Privatization is a term used to describe
A) firms that are purchased by the government.
B) government operations that are purchased by corporations and other investors.
C) firms that do not use publicly available debt.
D) non-public meetings held by members of interlocking directorates.
27) According to a 2010 McKinsey survey, family businesses tend to use more debt than a
benchmark group of comparable publicly traded peer companies.
28) According to a 2010 McKinsey survey, family businesses have a lower cost of debt financing
than comparable publicly traded firms.
29) According to a 2010 McKinsey survey, ________ of all companies in the S&P 500 index
may be defined as family businesses, meaning that a family owns a significant share and can
influence important decisions, particularly the election of the CEO and chairman.
A) 33%
B) 25%
C) 15%
D) 10%
30) According to a 2010 McKinsey survey, family-influenced businesses tend to underperform
the public sector in each of five major markets worldwide.
31) According to Credit Suisse there are three catalysts that boost better performance of Stocks
with Significant Family Influence (SSFI)
A) long term management focus, better alignment between management and shareholder
interests, stronger focus on the core business of the firm.
B) owners being managers at the same time, diversification of business units, focus on quarterly
earnings performance.
C) shareholders focus, family interests incorporated in the corporate governance, stakeholders
representation in the Board.
D) SSFI do not have better performance than corporations with 100% float.
4.3 Corporate Governance
1) Which of the following is the “signature” clause of the Sarbanes-Oxley Act?
A) CEOs and CFOs of publicly-traded firms must vouch for the veracity of the firm’s financial
statements.
B) Corporate board audit and compensation committee members must come from outside
directors.
C) Companies may not make loans to their officers and directors.
D) Companies must test their internal financial controls against fraud.
2) Accountants and lawyers have found the costs to corporations to meet Sarbanes-Oxley
regulatory requirements to be disappointingly small and less than anticipated when the
legislation was enacted in 2002.
3) Under the Shareholder Wealth Maximization Goal of Corporate Governance, poor firm
performance is likely to be faced with all but which of the following?
A) sale of shares by disgruntled current shareholders
B) shareholder activism to attempt a change in current management
C) as a maximum threat, initiation of a corporate takeover
D) prison time for executive management
4) Which of the following is a reason why managers act to maximize shareholder wealth in
Anglo-American markets?
A) the use of stock options to align the goals of shareholders and managers
B) the market for corporate control that allows for outside takeover of the firm
C) performance based compensation for executive management
D) all of the above
5) The deliberation of the process demonstrated in the European-Japanese system of corporate
governance has sometimes been termed
A) socialism.
B) impatient capital.
C) patient capital.
D) communism.
6) With shareholder wealth maximization as the manager’s goal, capital may be termed
A) impatient.
B) patient.
C) borrowed.
D) bought.
7) Which of the following is NOT an important concept when distinguishing between
international and domestic financial management?
A) corporate governance
B) culture, history, and institutions
C) political risk
D) All of the above are important distinguishing concepts.
8) The Board of Directors
A) consists exclusively of the officers of the corporation.
B) is the legal body which is accountable for the governance of the corporation.
C) are not subject to the external forces of the marketplace.
D) is appointed by the Securities and Exchange Commission (SEC).
9) The relationship among stakeholders used to determine and control the strategic direction and
performance of an organization is termed
A) corporate governance.
B) Anglo-American activism.
C) capital structure.
D) working capital management.
10) When discussing the structure of corporate governance, the authors distinguish between
internal and external factors. ________ is an example of an internal factor, and ________ is an
example of an external factor.
A) Equity markets; executive management
B) Debt markets; board of directors
C) Executive management; auditors
D) Auditors; regulators
11) MultiProducts, Inc. has two classes of common stock. Class A has 1 million shares with 10
votes per share. Class B has 2 million shares with 1 vote per share. If the dividends per share are
equal for both class A and B stock, then Class A shareholders have ________ of the votes and
________ of the dividends.
A) 33.33%; 33.33%
B) 33.33%; 83.33%
C) 83.33%; 83.33%
D) 83.33%; 33.33%
14
12) Fissler AG, headquartered in Germany, records all of it sales worldwide in euros. Its USA
division realized sales of €2,675,000 last year when the exchange rate was $1.33/€ and sales of
€2,355,000 this year when the exchange rate was $1.48/€. What was the percent change in euro
revenues for Fissler for the USA division over the last year?
A) -13.99%
B) -11.96%
C) -2.03%
D) -20.89%
13) Fissler AG, headquartered in Germany, records all of it sales worldwide in euros. Its USA
division realized sales of €2,675,000 last year when the exchange rate was $1.33/€ and sales of
€2,355,000 this year when the exchange rate was $1.48/€. What was the percent change in USD
revenues for the USA division over the last year?
A) -13.99%
B) -11.96%
C) -2.03%
D) -20.89%
14) According to the authors, there is growing consensus that good corporate governance should
be consisted of
A) Board of Directors with reputable and experienced business individuals.
B) Independent Corporate Auditing.
C) Public Reporting and Disclosure of information.
D) All of the above
15) The principle of transparent disclosure of information is
A) regulatory compliance limited to domestic market operations.
B) serious impediment forcing companies to publish confidential and proprietary information.
C) universal set of global standards enforced by SEC.
D) helpful for current and potential investors to assess the investment outlook of the company.
Essay Questions
4.1 Who Owns the Business?
1) The authors reference empirical evidence that family-controlled firms all over the world may
outperform publicly traded firms. What factors are cited as reasons for this occurring?
4.2 The Goal of Management
1) Compare and contrast the Shareholder Wealth Maximization model and the Stakeholder
Capitalism model for purposes of managerial goals.
2) Describe the management objectives of a firm governed by the shareholder wealth
maximization model and one governed by the stakeholder wealth maximization model. Give an
example of how these two models may lead to different decision-making by executive
management.
4.3 Corporate Governance
1) The Sarbanes-Oxley Act (SOX) was passed in 2002 by the U.S. Congress to address corporate
governance reform. SOX has not been without controversy to put it mildly. Identify and discuss
several positive and negative impacts of SOX on corporations here and abroad.