Question 1

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?

Accepted Answer

All of the mentioned characteristics, including a focus on quarterly earnings, overly generous use of stock options to motivate management, and improper reporting of earnings by the management, may be indicators of short-term value maximization behavior.

Question 2

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

Accepted Answer

Warren Buffett and Berkshire Hathaway are well known for their patient approach to investing, holding onto assets for long periods of time rather than seeking short-term gains. They famously avoid the "buy-and-flip" mentality and instead focus on companies with strong fundamentals and long-term growth potential. This approach is sometimes referred to as "patient capital" investing.

Question 3

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?

Accepted Answer

Japanese keiretsus and South Korean chaebols are examples of common consortiums of controlling shareholders, but U.S. labor unions are not typically considered a common controlling consortium in the equity markets.

Question 4

The shareholder wealth maximization model assumes as a universal truth that the market is efficient.

Accepted Answer

The shareholder wealth maximization model assumes that the market is efficient, meaning that all available information is already incorporated into stock prices, and thus maximizing shareholder wealth is achieved by making decisions that maximize the stock price. However, not everyone believes that the market is always efficient, and some argue that there are instances where the market can be driven by irrational behavior, resulting in market inefficiencies.

Question 5

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?

Accepted Answer

In stakeholder capitalism, controlling shareholders are more constrained by banks, governments, and other powerful stakeholders, as they must consider the interests of a broader range of parties beyond just shareholders.

Question 6

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.

Accepted Answer

The answer of Under the shareholder wealth maximization model of...

Question 7

During the IPO, typically only a small portion of the company is initially sold to the public (10-20%). This results in the company still being controlled by

Accepted Answer

The company can still be controlled by any of these entities (government, small number of private investors, or family) depending on its ownership structure prior to the IPO.

Question 8

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

Accepted Answer

The correct positioning of the firm's income, cash flow, and available funds as to country and currency is a common operational financial objective for MNEs. This involves managing the currency risk and ensuring that the firm has adequate access to funds in different countries to support its operations. Maximization of interest expense and minimization of revenues from other countries are not common objectives, and minimizing total assets held in foreign locations would not necessarily be beneficial for the MNE's operations.

Question 9

Systematic risk can be defined as

Accepted Answer

Systematic risk refers to the risk that is inherent in the entire market or a particular segment of the market. It cannot be diversified away by holding a diversified portfolio of securities. The added risk that a firm's shares bring to a diversified portfolio is known as systematic risk. Therefore, option C is the correct choice. Option A is incorrect because it refers to total risk, which includes both systematic and unsystematic risk. Option B is incorrect because it refers to the risk of an individual security, which is a part of unsystematic risk. Option D is incorrect because systematic risk cannot be diversified away.

Question 10

The authors suggest that the most likely progression of ownership goes from

Accepted Answer

The authors suggest that privately held firms tend to start with 100% private ownership and gradually decrease as they seek external funding or investors. Therefore, the most likely progression of ownership would be from 100% privately held to 80%, then 40%, and eventually 0%. Option B) is the opposite scenario and not supported by the authors, and option C) is not a progression but a statement of status quo.

Question 11

Which of the following do NOT enhance control of publicly traded firms by select groups of shareholders?

Accepted Answer

Simultaneous election of members of the board of directors does not enhance control by select groups, as it allows for a more democratic and broad-based election process, reducing the influence of any particular group.

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?

Accepted Answer

The dominance of family-owned firms over public firms is attributed to all of the factors mentioned - a focus on the long-term, sticking to their core business, and fewer agency problems between managers and owners. Family-owned firms are known to prioritize the long-term success and sustainability of the business over short-term gains, and they often have a strong connection to the core business and a deep knowledge of the industry. Moreover, they typically have a more streamlined decision-making process and less conflict between management and ownership, resulting in a more efficient operation.

Question 13

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.

Accepted Answer

Under the stakeholder capitalism model, long-term or "loyal" stockholders are considered to have a greater influence on corporate strategy than transient or short-term portfolio investors. This is because long-term shareholders are more likely to be invested in the company for reasons beyond just seeking short-term financial returns, such as a belief in the company's mission or commitment to sustainable business practices. Therefore, their interests are considered to be more aligned with the long-term success and sustainability of the company.

Question 14

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.

Accepted Answer

The answer of According to an article in the French...

Question 15

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

Accepted Answer

Minimization of the firm's effective global tax burden is a common operational financial objective for MNEs as it can help them reduce their tax liabilities and increase their profits. Maximization of interest expense would not be a desired objective as it would increase the cost of borrowing for the company. Minimization of revenues from other countries and minimization of total assets held in foreign locations would not be ideal objectives for MNEs as they aim to expand their operations globally and increase their market share.

Question 16

In finance, an efficient market is one in which

Accepted Answer

An efficient market is characterized by all of the given options: prices are assumed to reflect all available information and thus are considered correct (A), they adjust quickly to new information (B), and they are seen as effective in allocating capital within the economy (C).

Question 17

Anglo-American is defined to mean

Accepted Answer

Anglo-American traditionally refers to the countries that share English as their primary language and are influenced by British culture. These countries include the United States, United Kingdom, Canada, Australia, and New Zealand. Option A includes Central and South America, which are not typically considered part of the Anglo-American world. Option B includes Western Europe, which may share some cultural similarities with Anglo-American countries, but does not share the same primary language. Option D includes France and Germany, which are not typically considered part of the Anglo-American world.

Question 18

A business that is owned and managed by same entity is

Accepted Answer

When a business is owned and managed by the same entity, there is no separation of ownership and control, which decreases the likelihood of agency problems. Agency problems can arise when the interests of the owners (shareholders) and managers are not aligned, but when the same entity owns and manages the business, the interests are the same. Option A is incorrect as the business in question is not a family business that has gone public. Option B is incorrect as agency problems are less likely when there is no separation of ownership and control. Option D is incorrect as there is no requirement to offer ownership shares to professionally hired managers if the business is owned and managed by the same entity.

Question 19

What are frequently taught as universal truths in a finance classroom may in fact just be cultural norms.

Accepted Answer

Finance is not only influenced by economic and mathematical principles, but also by cultural contexts and societal norms. Therefore, what might be considered a universal truth in finance for one culture may not apply to another.

Question 20

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

Accepted Answer

Maximizing consolidated after-tax income is a common operational financial objective for MNEs as it is a measure of overall profitability and financial success. This involves managing revenues, expenses, and taxes efficiently across all countries of operation. The other options (B, C, and D) are not common financial objectives as maximizing interest expense would increase financial costs, minimizing revenues from other countries would limit growth potential, and minimizing total assets held in foreign locations would limit operational flexibility.

Quiz 4: Financial Goals and Corporate Governance

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?

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

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?

The shareholder wealth maximization model assumes as a universal truth that the market is efficient.

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.

During the IPO, typically only a small portion of the company is initially sold to the public (10-20%) . This results in the company still being controlled by

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

Systematic risk can be defined as

The authors suggest that the most likely progression of ownership goes from

Which of the following do NOT enhance control of publicly traded firms by select groups of shareholders?

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?

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.

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.

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

In finance, an efficient market is one in which

Anglo-American is defined to mean

A business that is owned and managed by same entity is

What are frequently taught as universal truths in a finance classroom may in fact just be cultural norms.

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