Question 1 The primary goal of a publicly-owned firm interested in serving its s

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Question 1

The primary goal of a publicly-owned firm interested in serving its stockholders should be to

            a.         Maximize expected net income.

            b.         Maximize the stock price per share.

            c.          Maximize expected EPS.

            d.         Minimize the chances of losses.

            e.         Maximize expected total corporate profit.

Question 2

Which of the following statements is most correct?

            a.         Compensating managers with stock can reduce the agency problem between stockholders and managers.

            b.         Restrictions are included in credit agreements to protect bondholders from the agency problem that exists between bondholders and stockholders.

            c.          The threat of a takeover can reduce the agency problem between bondholders and stockholders.

            d.         Statements a and b are correct.

            e.         All of the statements above are correct.

Question 3

Which of the following actions are likely to reduce the agency problem between stockholders and managers?

            a.         Congress passes a law that severely restricts hostile takeovers.

            b.         A manager receives a lower salary but receives additional shares of the company's stock.

            c.          The board of directors has become more vigilant in its oversight of the company's management.

            d.         Statements b and c are correct.

            e.         All of the statements above are correct.

Question 4

Which of the following actions are likely to reduce agency conflicts between stockholders and managers?

            a.         Paying managers a large fixed salary.

            b.         Increasing the threat of corporate takeover.

            c.          Placing restrictive covenants in debt agreements.

            d.         All of the statements above are correct.

            e.         Statements b and c are correct.

Question 5

Which of the following statements is most correct?

            a.         A firm's fundamental value is its market value.

            b.         A firm's fundamental value is the present value of its future free cash flows.

            c.          A firm's market price is usually greater than its fundamental value.

            d.         A firm's fundamental value is usually greater than its market price.

            e.         A firm's fundamental value is its book value.

Question 6

Which of the following statements is most correct?

            a.         A market is transparent when trading is inexpensive.

            b.         A market is transparent when accurate information is available to all market participants.

            c.          A transparent market has few regulations.

            d.         A transparent market has many opportunities for trading on insider information.

            e.         A market is transparent when everyone knows who the person is that they are trading with.

Question 7

Which of the following statements is most correct?

            a.         Sarbanes-Oxley requires the Securities Exchange Commission to audit public companies' financial statements.

            b.         Sarbanes-Oxley made it illegal for company executives to trade on insider information.

            c.          Sarbanes-Oxley requires the Chairman of the Board of Directors to sign and certify the company's financial statements.

            d.         Sarbanes-Oxley requires the CEO sign and certify the company's financial statements.

            e.         Sarbanes-Oxley requires company executives to disclose their fraudulent activities "in a timely and accurate manner."

Explanation / Answer

Question 1: d.Maximize the stock price per share.

Reason: Only when share price goes up, the company value, and investors will increase.

Question 2: d.Statements a and b are correct.

Reason: Compensating managers and Restrictions in credit agreement will help improve good relationships with shareholders.

Question 3: d.Statements b and c are correct..

Reason: A manager naturally wants to maximize his profit, this has not necessarily to be in the best interest of the stockholders. When they are being paid in stocks, their interest matches with those of the stockholders.

The board too partly consists of shareholders, becoming more vigilant they will have a greater impact on the managers.

Question 4: b.Increasing the threat of corporate takeover.

Reason: As with a increasing threat of a company takeover the managers, will try to act in the stockholders best interest in order to show that they do their job good.

Question 5 : b. A firm's fundamental value is the present value of its future free cash flows.

Reason: Only by knowing present value of the firm, the future free cash flow can be predicted

Question 6: b. A market is transparent when accurate information is available to all market participants.

Reason: Only when exact and precise information is available, it will help the investor to judge the company.

Question 7: d. Sarbanes-Oxley requires the CEO sign and certify the company's financial statements.

Reason: Only after CEO of a company signs the document, certification of financial statements can be done.

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