E) is worthless today.
22) Although derivatives can be used as speculative instruments, businesses most often use them to
A) attract customers.
B) appease stockholders.
C) offset debt.
D) hedge risks.
E) enhance their balance sheets.
23) Financial assets permit all of the following except
A) consumption timing.
B) allocation of risk.
C) separation of ownership and control.
D) elimination of risk.
24) The ____________ refers to the potential conflict between management and shareholders.
A) agency problem
B) diversification problem
C) liquidity problem
D) solvency problem
E) regulatory problem
25) A disadvantage of using stock options to compensate managers is that
A) it encourages managers to undertake projects that will increase stock price.
B) it encourages managers to engage in empire building.
C) it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects.
D) All of the above.
26) Which of the following are mechanisms that have evolved to mitigate potential agency problems? I) Using the firm's stock options for compensationII) Hiring bickering family members as corporate spiesIII) Boards of directors forcing out underperforming managementIV) Security analysts monitoring the firm closelyV) Takeover threats
A) II and V
B) I, III, and IV
C) I, III, IV, and V
D) III, IV, and V
E) I, III, and V
27) Corporate shareholders are best protected from incompetent management decisions by
A) the ability to engage in proxy fights.
B) management's control of pecuniary rewards.
C) the ability to call shareholder meetings.
D) the threat of takeover by other firms.
E) one-share/one-vote election rules.
28) Theoretically, takeovers should result in