Question 1

Members of management serving on the board of directors of a corporation are referred to as outside directors.

Accepted Answer

Members of management who serve on the board of directors are referred to as inside directors. Outside directors do not have a direct connection to the management of the corporation and are appointed for their expertise, experience, and independence.

Question 2

Raising funds through financial intermediaries is called

Accepted Answer

Indirect finance refers to raising funds through financial intermediaries such as banks, mutual funds, or insurance companies. This is in contrast to direct finance where firms raise funds directly from investors through the issuance of securities. Corporate finance refers to the management of a company's finances, while dividend reinvestment is a strategy where investors reinvest their dividend income into additional shares of the company.

Question 3

How can a corporation's board of directors and its managers try to reduce the principal-agent problem?

Accepted Answer

The answer of How can a corporation's board of directors...

Question 4

What can be done to deal with the principal-agent problem?

Accepted Answer

Linking top manager salaries to the profits of the firm or the price of the firm's stock aligns the interests of the principal (shareholders) with the agent (managers), as managers will work to maximize profit and shareholder value to increase their own compensation. Threatening to liquidate the firm or forbidding managers from owning any company stock can lead to resentment and lack of motivation, while a rotating CEO position may not provide enough stability and continuity for the company.

Question 5

Which of the following does not take place in the direct finance market?

Accepted Answer

Direct finance market involves the sale of securities such as common and preferred stocks, and corporate bonds to savers. Option B refers to an indirect finance market where banks accumulate deposits from savers and make loans to borrowers.

Question 6

Some corporate governance experts believe that serving on a company's board of directors for an extended length of time diminishes that member's independence from the company's CEO. If this is true,it would tend to

Accepted Answer

Serving on a company's board of directors for an extended length of time can lead to a close relationship between the director and the CEO, which may reduce the director's ability to objectively monitor and challenge the CEO's decisions. This increases the principal-agent problem, as the CEO may prioritize their own interests over those of the company and its shareholders. Therefore, option B is the correct answer.

Question 7

In many corporations,there is "separation of ownership from control." What does this mean?

Accepted Answer

"Separation of ownership from control" means that the shareholders own the corporation, but the day-to-day operations are controlled by the managers. The board of directors acts as a bridge between the shareholders and managers, making strategic decisions and providing oversight. Therefore, choice B is the best choice.

Question 8

Economists refer to the conflict between the interests of shareholders and the interests of top management as

Accepted Answer

The conflict between the interests of shareholders and the interests of top management is known as a principal-agent problem. This arises when the interests of the principal (shareholders) and the agent (management) are not aligned, and the agent may act in their own self-interest rather than the best interest of the principal. Shareholders want to maximize returns, while management may prioritize other goals such as job security or personal financial gain. This creates a potential conflict of interest that can lead to agency costs and suboptimal decision making.

Question 9

Included on the board of directors of Microsoft are Reed hastings,the founder of Netflix,the president of Harvey Mudd college Maria M.Klawe,and the vice chairman of Bank of America Charles H.Noski.These three board members do not have a direct management role with Microsoft and are therefore referred to as

Accepted Answer

Outside directors are individuals who are not employees of a company but serve on the board of directors to provide an outside perspective and independent oversight. Reed Hastings, Maria M. Klawe, and Charles H. Noski are all outside directors of Microsoft. Therefore, option B is the best choice.  Inside directors, on the other hand, are individuals who serve as directors while being an employee of the company. Competitive directors are those who serve on the boards of companies that compete with the company they are advising. Honorary directors are those who are appointed to the board as a sign of respect but do not have any real responsibility or duties.

Question 10

A proprietorship or partnership can raise funds for expansion in all of the following ways except

Accepted Answer

Proprietorships and partnerships cannot issue stock through financial markets as they do not have shares that can be traded publicly. This is usually only possible for corporations.

Question 11

If Abercrombie & Fitch borrows $8 million from a bank to finance the construction of a new store,this is an example of

Accepted Answer

This is an example of indirect finance because Abercrombie & Fitch is borrowing from a bank and not directly from investors in the stock or bond markets.

Question 12

What is the central role of financial intermediaries in a market economy?

Accepted Answer

Financial intermediaries, such as banks and investment firms, play a crucial role in connecting savers and borrowers in a market economy. They accept deposits from people who have surplus funds and then lend those funds to businesses or individuals who need financing. This allows savers to earn interest on their savings and borrowers to obtain funding for their projects, ultimately promoting economic growth. The intermediaries also provide other financial services, such as insurance and investment opportunities.

Question 13

How does the principal-agent problem extend to managers and employees?

Accepted Answer

The answer of How does the principal-agent problem extend to...

Question 14

The existence of ________ increases the risk of buying stock in a corporation.

Accepted Answer

The principal-agent problem refers to the conflict of interest between the shareholders (principals) and managers (agents) of a corporation. This can lead to actions by managers that benefit themselves rather than the shareholders, which ultimately increases the risk of buying stock in the corporation.

Question 15

Corporate managers and shareholders always have the same goals.

Accepted Answer

While both corporate managers and shareholders want the company to succeed, their goals may not always align. Shareholders are primarily interested in maximizing profits and returns on their investment, while managers may have a long-term vision for the company that includes factors beyond immediate profitability, such as sustainability or employee satisfaction.

Question 16

Who selects the board of directors of a corporation?

Accepted Answer

The board of directors of a corporation is typically elected by the stockholders. Shareholders are generally given the opportunity to vote on candidates for the board at the annual meeting of the corporation, and the candidates who receive the most votes are elected to the board.

Question 17

Who decides who controls a corporation?

Accepted Answer

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Question 18

Abercrombie & Fitch wants to raise $8 million to finance the construction of a new store,and the company wishes to raise the funds through direct finance.Which of the following methods could it use?

Accepted Answer

Abercrombie & Fitch can raise $8 million through the sale of bonds or issuing stocks. Both of these methods involve direct finance, where the company receives funds directly from investors without intermediaries like banks. Borrowing $8 million from a bank, as in option B, would involve indirect finance, where the bank would act as an intermediary and lend the funds to the company. Therefore, options A and C are the best choices for Abercrombie & Fitch to raise $8 million through direct finance.

Question 19

What is corporate governance?

Accepted Answer

The answer of What is corporate governance?...

Question 20

Steve Ballmer is the Chief Executive Officer of Microsoft as well as a member of Microsoft's board of directors.Ballmer is therefore classified as an

Accepted Answer

Steve Ballmer is classified as an inside director because he is not only a member of the board of directors, but also the CEO of the company. This means that he is a director who is also an executive officer of the corporation.

Quiz 6: Firms, the Stock Market, and Corporate Governance