Question 1

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 2

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

Accepted Answer

Financial intermediaries, such as banks and credit unions, play a central role in bringing together savers and borrowers in a market economy. They collect deposits from individuals and businesses who have excess funds and lend those funds to borrowers who need them for investments or other purposes. This process facilitates the efficient allocation of capital in the economy, allowing businesses to borrow and invest in new projects and helping individuals to save for their future needs. Financial intermediaries also provide other important services, such as facilitating transactions through electronic payment systems and offering a range of financial products and services to meet the needs of their customers.

Question 3

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 they do not have direct control over day-to-day operations. The managers of the corporation, who are hired by the board of directors, are responsible for running the company on behalf of the shareholders. Therefore, choice B is the correct answer.

Question 4

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 board of directors for an extended period of time can lead to a close relationship between the director and the CEO, potentially blurring the lines of independence and increasing the principal-agent problem. This can create a situation where the director is more likely to act in the interest of the CEO and top management rather than in the best interest of shareholders.

Question 5

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 an inside director because he is the CEO of the company and a member of the board of directors. Inside directors are executives of the company who are also directors, while outside directors are not employed by the company but sit on its board. Independent directors are those who are not employed by the company and do not have any other significant business relationships with it. Unbiased is not a commonly used term to describe directors.

Question 6

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

Accepted Answer

Proprietorships and partnerships do not have the ability to issue stock through financial markets, as this is a capability reserved for corporations.

Question 7

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 on a company's board who are not part of the company's management team. They are brought on board to bring fresh perspectives, innovative ideas, and industry expertise to the company’s decision-making processes. In contrast, inside directors are board members who are also part of the management team of the company. Competitive directors and honorary directors are not recognized categories of board members.

Question 8

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 use either method A or C to raise $8 million through direct finance. Method A involves issuing bonds, which are a form of debt financing. Method C involves issuing stocks, which are a form of equity financing. Both methods involve raising funds directly from investors, rather than borrowing from a bank (method B). The choice between method A and C will depend on the company's preference for short-term debt obligations (bonds) or long-term ownership stake in the company (stocks). Therefore, the company can choose either A or C to raise the required $8 million.

Question 9

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

Accepted Answer

The direct finance market involves the buying and selling of securities, such as stocks and bonds, directly between issuers and investors without the involvement of intermediaries like banks. Options A, C, and D are all examples of securities that can be bought and sold in the direct finance market. Deposits from savers being accumulated and loans made to borrowers is an example of the indirect finance market, where financial intermediaries like banks facilitate the flow of funds between savers and borrowers.

Question 10

Who decides who controls a corporation?

Accepted Answer

The answer of Who decides who controls a corporation?...

Question 11

Raising funds through financial intermediaries is called

Accepted Answer

Raising funds through financial intermediaries is called indirect finance. In this case, financial intermediaries such as banks, credit unions, and insurance companies act as a bridge between savers and borrowers. The financial intermediary collects funds from savers and lends it to borrowers in the form of loans or other financial instruments, charging an interest or fee for their services. Indirect finance is commonly used by small businesses or individuals who may not have the resources or connections to raise funds through direct finance.

Question 12

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

Accepted Answer

Linking top manager salaries to the profits or the stock price of the company can align their interests with those of the shareholders and provide incentives for them to work towards maximizing the company's value. This can help mitigate the principal-agent problem. Threatening to liquidate the firm (A) can be counterproductive and may even reduce the value of the firm, while having a rotating CEO position (C) may not address the root cause of the problem. Forbidding managers from owning company stock (D) may not be an effective solution as managers may have other incentives to act in their self-interest.

Question 13

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

Accepted Answer

Members of management serving on the board of directors are not considered outside directors. Outside directors are individuals who are not employed by the company and are chosen for their expertise and experiences to provide an objective perspective to the board.

Question 14

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

Accepted Answer

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Question 15

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 (the principals) and the interests of top management (the agents) is known as the principal-agent problem. The agents may act in their own self-interest rather than in the best interest of the principals, which may lead to a reduced value of the company. This is a common issue in corporate governance and economics, and it is important for companies to have mechanisms in place to align the interests of both parties.

Question 16

Who selects the board of directors of a corporation?

Accepted Answer

The board of directors of a corporation is selected by the stockholders. Stockholders elect the board of directors to represent their interests in deciding the company's strategic direction, hiring and evaluating top management, setting executive compensation, and ensuring that the company is well-managed to deliver profitable returns on investment. The state where the corporation is chartered does not determine the board of directors, and neither do employees or managers, as they are not the ultimate owners of the company.

Question 17

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

Accepted Answer

The principal-agent problem arises when the interests of the managers (agents) differ from those of the shareholders (principals). This conflict of interest can lead to decisions that benefit the managers at the expense of the shareholders, increasing the risk of buying stock in the corporation. Corporate governance refers to the mechanisms in place to manage this conflict of interest and ensure that the interests of the shareholders are protected. Unlimited personal liability refers to the risk that owners or shareholders may be held personally liable for the debts or actions of the corporation. Employee-owned corporations may or may not increase the risk of buying stock, depending on the specific circumstances.

Question 18

Corporate managers and shareholders always have the same goals.

Accepted Answer

Corporate managers and shareholders may have different goals as managers may prioritize long-term growth and stability of the company, while shareholders may prioritize short-term profits and dividends.

Question 19

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, which will then use the funds from its depositors and investors to finance the construction project. This is in contrast to direct finance, where the borrower would obtain funds directly from investors or lenders without the intermediation of a financial institution. A stock market transaction or a bond market transaction would involve selling securities to investors to raise funds, which is not the case here.

Question 20

What is corporate governance?

Accepted Answer

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Quiz 8: Firms, the Stock Market, and Corporate Governance