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| 1 | |
In the principal-agent framework, the ultimate principals are: |
| | A) | Managers |
| | B) | Board of directors |
| | C) | Shareholders |
| | D) | Government |
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| 2 | |
Which of the following is an example of empire building? |
| | A) | The CEO plans a meeting at a luxury resort rather than in the office building. |
| | B) | The CEO acquires many smaller firms to make his company larger. |
| | C) | A manager expands the product line in which he is an expert rather than the one that is creating the most shareholder value. |
| | D) | The CEO favors a safe project, since she might lose if job if the risky project fails. |
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| 3 | |
Which of the following are symptoms of overinvestment? |
| | A) | Empire building |
| | B) | Entrenching investments |
| | C) | Perks |
| | D) | Both A and B |
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| 4 | |
In a large, public company, monitoring is delegated to the |
| | A) | CEO |
| | B) | Shareholders |
| | C) | Board of directors |
| | D) | All of the above |
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| 5 | |
Monitoring is done by |
| | A) | Shareholders |
| | B) | Board of directors |
| | C) | Lenders |
| | D) | All of the above |
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| 6 | |
The following are agency problems in capital budgeting except: |
| | A) | Reduced effort |
| | B) | Need for good information |
| | C) | Empire building |
| | D) | Perks |
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| 7 | |
A firm has an average investment of $1,000 during the year. During the same time the firm has an after tax earnings of $120. If the cost of capital is 10%, what is the net return on investment? |
| | A) | 10% |
| | B) | 12% |
| | C) | 2% |
| | D) | None of the above |
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| 8 | |
A firm has an average investment of $1,000 during the year. During the same time the firm has an after tax earnings of $120. If the cost of capital is 10%, what is the EVA? |
| | A) | $120 |
| | B) | $100 |
| | C) | $20 |
| | D) | None of the above |
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| 9 | |
A firm has an average investment of 10,000 during the year. During the same period, the firm has an after-tax income of $1600. If the cost of capital is 14%, what is the economic profit? |
| | A) | +200 |
| | B) | +1600 |
| | C) | +1400 |
| | D) | None of the above |
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| 10 | |
The following are disadvantages of using EVA as a measure of performance except: |
| | A) | EVA does not measure present value |
| | B) | EVA rewards taking project with quick paybacks and penalizes taking projects with longer payback periods |
| | C) | EVA is difficult to apply for start up ventures |
| | D) | EVA makes the cost of capital visible |
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| 11 | |
EVA is used for: |
| | A) | Measuring performance within the firm |
| | B) | Rewarding performance within the firm |
| | C) | Improving performance within the firm |
| | D) | All of the above |
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| 12 | |
Economic rate of return is defined as: |
| | A) | [(C1 + PV1 - PV0 )]/ ( PV0 ) |
| | B) | [(C1 - (PV1 - PV0 )]/ ( PV0 ) |
| | C) | [(C1 + PV1)] / ( PV0 ) |
| | D) | None of the above |
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| 13 | |
Stock options give the managers the right to buy their company shares in the future at a fixed exercise price. |
| | A) | True |
| | B) | False |
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| 14 | |
Biases in accounting measures of profitability typically wash out in the long run. |
| | A) | True |
| | B) | False |
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| 15 | |
Economic Income = cash flow + change in PV. |
| | A) | True |
| | B) | False |
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| 16 | |
Which of the following techniques can be used to manage earnings? |
| | A) | Decrease discretionary spending in R&D |
| | B) | Defer positive NPV projects |
| | C) | Reject positive NPV projects |
| | D) | All of the above |
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| 17 | |
Economic depreciation is |
| | A) | Booked as an expense for accounting purposes |
| | B) | The change in present value of an asset |
| | C) | Always positive |
| | D) | Both B and C |
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| 18 | |
Monitoring manager's efforts and compensation can reduce: |
| | A) | Capital Budgets |
| | B) | Economic profit |
| | C) | Agency Costs |
| | D) | EVA |
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| 19 | |
Your corporation has net earnings of 150 million. You have invested 1,500 million in the Indy stadium. What is your net return if your cost of capital is 9%? |
| | A) | 1% |
| | B) | 0% |
| | C) | -1% |
| | D) | 10% |
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| 20 | |
Compensation plans that are heavily weighted towards stock-option plans tempt managers to withhold bad news or manipulate earnings. |
| | A) | True |
| | B) | False |
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| 21 | |
Linking compensation accounting measures of performance can cause all of the following problems except: |
| | A) | Accounting profits are partly within management's control |
| | B) | Accounting earnings can be biased measures of true profitability |
| | C) | Growth in earnings does not mean shareholders are better off |
| | D) | Managers will be forced to bear market and/or industry risks |
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| 22 | |
Managers can improve EVA by increasing earnings and/or reducing capital employed |
| | A) | True |
| | B) | False |
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| 23 | |
Security analysts and portfolio managers cannot help constrain agency problems. |
| | A) | True |
| | B) | False |
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