Deck 2: Financial Goals and Corporate Governance

Question 1

Under the stakeholder capitalism model of corporate governance it is assumed that the long-term or "loyal" stockholders should influence corporate strategy more than the transient portfolio investor.

Answer 1

True

Question 2

The stakeholder capitalism model is characterized by the desire of controlling shareholders to maximize long-term return to equity just as in the shareholder wealth maximization model of corporate governance. However, stakeholder capitalism controlling shareholders are more constrained by which of the following groups than in the shareholder wealth maximization model?

A) banks
B) governments
C) other powerful stakeholders
D) all of the above

Answer 2

all of the above

Question 3

Warren Buffett and his investment firm Berkshire Hathaway is an outstanding example of impatient capital investing.

Answer 3

False

Question 4

Which of the following is a common operational financial objective for MNEs?

A) maximization of interest expense
B) minimization of revenues from other countries
C) correct positioning of the firm's income, cash flow, and available funds as to country and currency
D) minimization of total assets held in foreign locations

Question 5

Under the shareholder wealth maximization model of corporate governance it is assumed that the long-term or "loyal" stockholders should influence corporate strategy more than the transient portfolio investor.

Question 6

Anglo-American equity markets are characterized by widespread ownership of shares. In other parts of the world ownership is often dominated by consortiums of controlling shareholders. Which of the following is NOT an example of a common consortium of controlling shareholders?

A) Japanese keiretsus
B) South Korean chaebols
C) U.S. labor unions
D) all of the above are common controlling consortiums

Question 7

Which of the following is a common operational financial objective for MNEs?

A) maximization of consolidated after-tax income
B) maximization of interest expense
C) minimization of revenues from other countries
D) minimization of total assets held in foreign locations

Question 8

In the Anglo-American model of corporate governance, the primary goal of management is to

A) maximize the wealth of all stakeholders.
B) maximize shareholder wealth.
C) minimize costs.
D) minimize risk.

Question 9

During the 1990s, rapidly increasing stock prices exposed a flaw in the shareholder wealth maximization model, the seeking of short-term value maximization. Such behavior by management is characterized by all but which of the following?

A) a focus on quarterly earnings
B) overly generous use of stock options to motivate management
C) improper reporting of earnings by management
D) All of the above may be characteristics of short-term value maximization.

Question 10

Anglo-American is defined to mean

A) North, Central, and South America.
B) the United States, Canada, and Western Europe.
C) the United States, United Kingdom, Canada, Australia and New Zealand.
D) the United States, France, Britain, and Germany.

Question 11

Accountants and lawyers have found the costs to corporations to meet Sarbanes-Oxley regulatory requirements to be disappointingly small and less than anticipated when the legislation was enacted in 2002.

Question 12

It may be (is probably the case) that family owned businesses the world over out-perform their publicly traded brethren. Which of these factors is attributed to family owned firm dominance over public firms?

A) a focus on the long-term
B) they stick to their core business
C) fewer agency problems (manager-owner conflicts)
D) all of the above

Question 13

Which of the following is a common operational financial objective for MNEs?

A) maximization of interest expense
B) minimization of the firm's effective global tax burden
C) minimization of revenues from other countries
D) minimization of total assets held in foreign locations

Question 14

In recent years there has been an increasing focus on the wealth maximization model of corporate governance and a move away from the stakeholder capitalism model among MNEs.

Question 15

In finance, an efficient market is one in which

A) prices are assumed to be correct.
B) prices adjust quickly and accurately to new information.
C) prices are the best allocators of capital in the macro economy.
D) all of the above.

Question 16

Unsystematic risk can be defined as

A) the total risk to the firm.
B) the risk of the individual security.
C) the added risk that a firm's shares bring to a diversified portfolio.
D) the risk that can be systematically diversified away.

Question 17

Which of the following is the "signature" clause of the Sarbanes -Oxley Act?

A) CEOs and CFOs of publicly-traded firms must vouch for the veracity of the firm's financial statements.
B) Corporate board audit and compensation committee members must come from outside directors.
C) Companies may not make loans to their officers and directors.
D) Companies must test their internal financial controls against fraud.

Question 18

The study of how shareholders can motivate management to accept the prescriptions of the shareholder wealth maximization model is ________.

A) Sharpe/Treynor theory
B) agency theory
C) management theory
D) corporate board control theory

Question 19

According to an article in the French newspaper Le Figaro, French firms that are mostly privately held are out-performed by firms that are more widely held public firms. Note: In this context performance is measured by return to the owners.

Question 20

Systematic risk can be defined as

A) the total risk to the firm.
B) the risk of the individual security.
C) the added risk that a firm's shares bring to a diversified portfolio.
D) the risk that can be systematically diversified away.

Question 21

Corporate wealth maximization, also known as the stakeholder capitalism model, holds that total risk (operational and financial) is more important than just systematic risk.

Question 22

Typically, Licensing is considered to be a greater foreign investment than a Greenfield investment.

Question 23

Which of the following is a reason why managers act to maximize shareholder wealth in Anglo-American markets?

A) the use of stock options to align the goals of shareholders and managers
B) the market for corporate control that allows for outside takeover of the firm
C) performance based compensation for executive management
D) all of the above

Question 24

Which of the following is generally NOT considered to be a viable operational goal for a firm?

A) maintaining a strong local currency
B) maximization of after-tax income
C) minimization of the firm's effective global tax burden
D) correct positioning of the firm's income, cash flows and available funds as to country and currency

Question 25

The Corporate Wealth Maximization Model

A) clearly places shareholders as the primary stakeholder.
B) combines the interests and inputs of shareholders, creditors, management, employees, and society.
C) has financial profit as its goal and is often termed impatient capital.
D) is the Anglo-American model of corporate governance.

Question 26

Which of the following is an operational process that can destroy firm value?

A) interest rate fluctuations
B) competitive pressures
C) natural disasters
D) accounting irregularities

Question 27

Under the Shareholder Wealth Maximization Goal of Corporate Governance, poor firm performance is likely to be faced with all but which of the following?

A) sale of shares by disgruntled current shareholders
B) shareholder activism to attempt a change in current management
C) as a maximum threat, initiation of a corporate takeover
D) prison time for executive management

Question 28

Systematic risk can be eliminated through portfolio diversification.

Question 29

According to the authors, dual classes of voting stock are the norm in non-Anglo-American markets.

Question 30

Which of the following is not a form of direct foreign investment?

A) joint ventures
B) acquisitions of existing operations in a foreign country
C) franchising
D) international trade

Question 31

Non-Anglo-American markets are dominated by the "one-vote-one-share" rule.

Question 32

According to a recent Forrester survey, which of the following categories is the single most important cause of losses of stock value?

A) operational mistakes
B) business hazard
C) strategic mistakes
D) financial mistakes

Question 33

The goal of all international corporations is to maximize shareholder wealth.

Question 34

Privatization is a term used to describe

A) firms that are purchased by the government.
B) government operations that are purchased by corporations and other investors.
C) firms that do not use publicly available debt.
D) non-public meetings held by members of interlocking directorates.

Question 35

The primary operational goal for the firm is to

A) maximize after-tax profits in each country where the firm is operating.
B) minimize the total financial risk to the firm.
C) maximize the consolidated after-tax profits of the firm.
D) maximize the total risk to the firm.

Question 36

Which of the following was NOT identified by the authors as a knowledge asset?

A) customer care
B) foreign macroeconomic issues
C) brand value
D) management skill

Question 37

The Shareholder Wealth Maximization Model

A) combines the interests and inputs of shareholders, creditors, management, employees, and society.
B) is being usurped by the Corporate Wealth Maximization Model as those types of MNEs dominate their global industry segments.
C) clearly places shareholders as the primary stakeholder.
D) is the dominant form of corporate management in the European-Japanese governance system.

Question 38

The deliberation of the of the process demonstrated in the European-Japanese system of corporate governance has sometimes been termed ________.

A) socialism
B) impatient capital
C) patient capital
D) communism

Question 39

In recent years the trend has been for markets to increase focus on the shareholder wealth form of wealth maximization.

Question 40

"Maximize corporate wealth"

A) is the primary objective of the European/Japanese model of management.
B) as a management objective treats shareholders on a par with other corporate stakeholders such as creditors, labor, and local community.
C) has a broader definition than just financial wealth.
D) all of the above.

Question 41

The relationship among stakeholders used to determine and control the strategic direction and performance of an organization is termed ________.

A) corporate governance
B) Anglo-American activism
C) capital structure
D) working capital management

Question 42

MultiProducts, Inc. has two classes of common stock. Class A has 1 million shares with 10 votes per share. Class B has 2 million shares with 1 vote per share. If the dividends per share are equal for both class A and B stock, then Class A shareholders have ________ of the votes and ________ of the dividends.

A) 33.33%; 33.33%
B) 33.33%; 83.33%
C) 83.33%; 83.33%
D) 83.33%; 33.33%

Question 43

If share price falls from $15 to $12 per share, and pays a dividend of $1 per share, what was the rate of return to shareholders?

A) 13.33%
B) -13.33%
C) 16.67%
D) -16.67%

Question 44

According to recent research, family-owned firms in some highly-developed economies typically outperform publicly-owned firms.

Question 45

Which of the following is NOT an important concept when distinguishing between international and domestic financial management?

A) corporate governance
B) culture, history, and institutions
C) political risk
D) All of the above are important distinguishing concepts.

Question 46

With shareholder wealth maximization as the manager's goal, capital may be termed ________.

A) impatient
B) patient
C) borrowed
D) bought

Question 47

The Board of Directors

A) consists exclusively of the officers of the corporation.
B) is the legal body which is accountable for the governance of the corporation.
C) are not subject to the external forces of the marketplace.
D) is appointed by the Securities and Exchange Commission (SEC).

Question 48

Describe the management objectives of a firm governed by the shareholder wealth maximization model and one governed by the stakeholder wealth maximization model. Give an example of how these two models may lead to different decision-making by executive management.

Question 49

When discussing the structure of corporate governance, the authors distinguish between internal and external factors. ________ is an example of an internal factor, and ________ is an example of an external factor.

A) Equity markets; executive management
B) Debt markets; board of directors
C) Executive management; auditors
D) Auditors; regulators

Question 50

Compare and contrast the Shareholder Wealth Maximization model and the Stakeholder Capitalism model for purposes of managerial goals.

Question 51

The Sarbanes-Oxley Act (SOX) was passes in 2002 by the U.S. Congress to address corporate governance reform. SOX has not been without controversy to put it mildly. Identify and discuss several positive and negative impacts of SOX on corporations here and abroad.