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Multiple Choice Quiz
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1
When a corporation has large shareholders in control
A)There is the possibility that the large shareholders control the managers and incentivise them to expropriate wealth from small outside shareholders.
B)There are no agency costs.
C)The shareholders are usually obese.
D)All of the above may be correct.
2
Many companies have provided managers with executive stock options
A)These are a form of incentive contracts.
B)These can serve as a mechanism of aligning the interests of shareholders and managers.
C)These options can offer managers an incentive to run the company in such as way that enhances shareholder wealth as well as their own.
D)All of the above
3
Free cash flow
A)Represents a firm’s internally generated funds in excess of the amount needed to undertake all profitable investment projects.
B)Tends to be highest in mature industries with low future growth prospects.
C)Represents a temptation to managers.
D)All of the above
4
In the United States, shareholders elect
A)The board of directors
B)The President Shareholder
C)The management of the firm.
D)None of the above
5
Borrowing and the subsequent obligation to make interest payments on time
A)Can serve to create free cash flow.
B)Serve as an example of the agency costs of debt.
C)Can serve to ameliorate the agency costs of equity, up to a point.
D)None of the above.
6
Suppose a U.S. company continually performs poorly and all of its internal governance mechanism fail to correct the problem.
A)Over time this situation may prompt an outsider (corporate raider) to mount a takeover bid.
B)A hostile takeover bid can serve as a drastic governance mechanism of the last resort.
C)The market for corporate control may discipline managers.
D)All of the above
7
Studies report that foreign firms listed in the United States are valued more than those from the same countries that are not listed in the United States.
A)It can be argued that this result holds because firms listed in the United States can take better advantage of growth opportunities and that controlling shareholders cannot extract as many private benefits.
B)The result is that foreign firms in mature industries with limited growth opportunities are therefore most likely to seek U.S. listings
C)This is because of a reduction in exchange rate uncertainty.
D)all of the above
8
Poor investor protection results in
A)Concentrated ownership, underdeveloped capital markets, and slower economic growth.
B)Greater judicial activism.
C)Higher stock returns.
D)None of the above.
9
Companies domiciled in countries with weak investor protection
A)May need to have concentrated ownership as a substitute for legal protection.
B)Can enjoy higher free cash flow in the long term.
C)May experience a higher rate of economic growth that otherwise-identical firms domiciled in countries with strong investor protection.
D)All of the above.
10
The greatest advantage of the corporate form of business organization
A)It is an efficient risk sharing mechanism that allows corporations to raise large amounts of capital.
B)Is the potential for abuse of power that resides in the chief executives office.
C)Is the benefit (to governments) of double taxation.
D)None of the above





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