Diff: 3 Type: MC
Topic: 1.1 The Three Types of Firms
19) Explain the benefits of incorporation.
Answer: 1. Limited liability
2. Unlimited life
3. Access to capital markets / availability of outside funding
4. Required transparency in financial information disclosure
Diff: 2 Type: ES
Topic: 1.1 The Three Types of Firms
1.2 Ownership Versus Control of Corporations
1) The person charged with running the corporation by instituting the rules and policies set by the board of directors is called:
A) the Chief Operating Officer
B) the Company President
C) the Chief Executive Officer
D) the Chief Financial Officer
Answer: C
Diff: 1 Type: MC
Topic: 1.2 Ownership Versus Control of Corporations
2) The Principal-Agent Problem arises:
A) because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest
B) because of the separation of ownership and control in a corporation
C) Both A and B
D) None of the above
Answer: C
Diff: 1 Type: MC
Topic: 1.2 Ownership Versus Control of Corporations
3) In a corporation, the ultimate decisions regarding business matters are made by:
A) the Board of Directors
B) debt holders
C) shareholders
D) investors
Answer: A
Diff: 1 Type: MC
Topic: 1.2 Ownership Versus Control of Corporations
4) One of the major reasons that corporations have a principal-agent problem is that:
A) management is less transparent
B) they have an inefficient and incompetent management team
C) direct control and ownership are often separate
D) there is a lack of communication between the owners and the management team
Answer: C
Diff: 2 Type: MC
Topic: 1.2 Ownership Versus Control of Corporations
5) The ultimate goal of financial management in corporations is:
A) to maximize annual profit
B) to maximize the benefit of the employees
C) to maximize the interest of the communities
D) to maximize shareholder wealth
Answer: D
Diff: 2 Type: MC
Topic: 1.2 Ownership Versus Control of Corporations
6) Corporate social responsibility can be described as:
A) tempering the absolute profit criteria to reflect the broader impact of its operations
B) operating in the best interest of shareholders and stakeholders dependant of corporate profits
C) dependence on laws and regulations to define the goals of the corporation
D) actively seeking to inform society about the corporation's strategic goal
Answer: A
Diff: 2 Type: MC
Topic: 1.2 Ownership Versus Control of Corporations
7) If shareholders are unhappy with a CEO's performance, they are most likely to:
A) buy more shares in an effort to gain control of the firm
B) file a shareholder resolution
C) replace the CEO through a grassroots shareholder uprising
D) sell their shares
Answer: D
Diff: 2 Type: MC
Topic: 1.2 Ownership Versus Control of Corporations
8) A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.
A) shareholder proposal
B) leveraged buyout
C) shareholder action
D) hostile takeover
Answer: D
Diff: 3 Type: MC
Topic: 1.2 Ownership Versus Control of Corporations
9) Which of the following statements is false?
A) In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders.
B) Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm (the debt holders) are entitled to seize the assets of the corporation in compensation for the default.
C) As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders.
D) If the corporation fails to satisfy debt holders' claims, equity holders may take control of the firm.
Answer: D
Explanation: If the corporation fails to satisfy debt holders' claims, debt holders may take control of the firm.