Fundamentals of Financial Management: Concise 11th Edition by Eugene F. Brigham test bank

 
d. 
Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.

 
e. 
Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.

 
ANSWER:  
d


 
47. Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?
 
a. 
Pay managers large cash salaries and give them no stock options.

 
b. 
Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.

 
c. 
Beef up the restrictive covenants in the firm's debt agreements.

 
d. 
Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock.

 
e. 
For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

 
ANSWER:  
b


 
48. Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?
 
a. 
Congress passes a law that severely restricts hostile takeovers.

 
b. 
A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock.

 
c. 
The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period.

 
d. 
The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company.

 
e. 
The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.

 
ANSWER:  
e


 
49. Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?
 
a. 
Decrease the use of restrictive covenants in bond agreements.

 
b. 
Take actions that reduce the possibility of a hostile takeover.

 
c. 
Elect a board of directors that allows managers greater freedom of action.

 
d. 
Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

 
e. 
Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

 
ANSWER:  
d


 
50. Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?
 
a. 
The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced.

 
b. 
The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover.

 
c. 
The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%.

 
d. 
The firm's founder, who is also president and chairman of the board, sells 90% of her shares.

 
e. 
The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval.

 
ANSWER:  
c


 
51. Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?
 
a. 
Compensating managers with stock options.

 
b. 
Financing risky projects with additional debt.

 
c. 
The threat of hostile takeovers.

 
d. 
The use of covenants in bond agreements that limit the firm’s use of additional debt and constrain managers’ actions.