Question 1

A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:

Accepted Answer

A firm that chooses to "go dark" does not need to file regular financial statements, disclosures, or reports with the SEC, which means the firm can provide less information to its shareholders than it did before. However, the firm is still obligated to provide audited financial statements upon request to certain parties (e.g. bondholders, creditors) and must continue to comply with other legal requirements, such as state-level reporting requirements. Therefore, option C is the best answer.

Question 2

Which form of business structure is most associated with agency problems?

Accepted Answer

Corporations are the most associated with agency problems because they have a separation between ownership and management. Shareholders elect the board of directors who then hire management to run the day-to-day operations of the company. This separation can create conflicts of interest and a lack of alignment between the goals of shareholders and management, leading to agency problems.

Question 3

Which one of the following is least likely to be an agency problem?

Accepted Answer

Agency problems typically arise when there's a conflict of interest between the management (agents) and the shareholders (principals). Increasing the market value of the firm's shares aligns with the interests of the shareholders, making it least likely to be considered an agency problem.

Question 4

Which one of the following statements is generally correct?

Accepted Answer

Auction markets match buy and sell orders, while dealer markets involve dealers acting as intermediaries between buyers and sellers. Private placements typically do not need to be registered with the SEC, and secondary markets can be auction, dealer, or hybrid markets. Dealer markets do not necessarily have a physical trading floor. The statement that dealers never own the securities traded is not entirely accurate, as dealers may choose to hold inventory of certain securities.

Question 5

Which one of the following actions by a financial manager is most apt to create an agency problem?

Accepted Answer

Option E is most likely to create an agency problem because it involves actions that benefit the manager in the short term (e.g., through bonuses tied to current profits) at the expense of the long-term value of the firm's equity, which is not in the best interest of the shareholders.

Question 6

The Sarbanes-Oxley Act of 2002 is a governmental response to:

Accepted Answer

The Sarbanes-Oxley Act of 2002 was enacted in response to the corporate accounting scandals of the early 2000s, such as Enron and WorldCom, which were driven by management greed and abuses. The act implemented strict corporate governance and accounting regulations to enhance transparency and accountability in publicly traded companies.

Question 7

Which of the following represent cash outflows from a corporation?
I.issuance of securities
II.payment of dividends
III.new loan proceeds
IV.payment of government taxes

Accepted Answer

Payment of dividends (II) and payment of government taxes (IV) represent cash outflows from a corporation, while issuance of securities (I) and new loan proceeds (III) represent cash inflows.

Question 8

Which one of the following is an unintended result of the Sarbanes-Oxley Act?

Accepted Answer

One unintended result of the Sarbanes-Oxley Act was that some corporations delisted from major exchanges due to the increased regulatory compliance costs associated with the act.

Question 9

Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002?
I.increased foreign stock exchange listings of U.S.stocks
II.decreased compliance costs
III.increased privatization of public corporations
IV.increased public disclosure by all corporations

Accepted Answer

The answer of Which of the following are results related...

Question 10

Public offerings of debt and equity must be registered with which one of the following?

Accepted Answer

Public offerings of debt and equity must be registered with the Securities and Exchange Commission (SEC) under the Securities Act of 1933. The SEC is responsible for protecting investors and ensuring that companies provide all material information related to the securities being offered. The other choices listed are not involved in the registration process for public offerings.

Question 11

Which one of the following is an agency cost?

Accepted Answer

Agency costs are expenses incurred to ensure that agents (managers) act in the best interest of the principals (shareholders). Hiring outside accountants to audit the company's financial statements is an example of an agency cost, as it is done to ensure that the company's financial reporting is accurate and trustworthy, aligning managers' actions with shareholders' interests.

Question 12

Which one of the following grants an individual the right to vote on behalf of a shareholder?

Accepted Answer

A proxy is a legal document that allows an individual (the proxy) to vote on behalf of a shareholder. The proxy can be appointed for a specific meeting or for a specific period of time. By-laws, indenture agreements, stock options, and stock audits do not grant the right to vote on behalf of a shareholder.

Question 13

Which of the following are cash flows from a corporation into the financial markets?
I.repayment of long-term debt
II.payment of government taxes
III.payment of loan interest
IV.payment of quarterly dividend

Accepted Answer

I. Repayment of long-term debt involves the corporation paying off a loan to a financial institution, which is a cash flow out of the corporation. 
II. Payment of government taxes involves the corporation paying taxes to the government, which is a cash flow out of the corporation. 
III. Payment of loan interest involves the corporation paying interest on a loan to a financial institution, which is a cash flow out of the corporation. 
IV. Payment of quarterly dividend involves the corporation paying dividends to its shareholders, which is a cash flow out of the corporation. Therefore, the only correct options are I, III, and IV.

Question 14

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange.This transaction:

Accepted Answer

Selling shares of stock on the New York Stock Exchange involves trading on the secondary market, where investors buy and sell existing shares of publicly traded companies. The primary market is where new securities are issued and sold for the first time, typically through an initial public offering (IPO). A dealer market involves securities being traded between dealers, rather than on a centralized exchange like the NYSE. A proxy is a document that allows a shareholder to vote on company matters without being physically present. Finally, a private placement involves the sale of securities to a small group of select investors, rather than through a public exchange.

Question 15

Which of the following parties are considered stakeholders of a firm?
I.employee
II.long-term creditor
III.government
IV.common stockholder

Accepted Answer

The answer of Which of the following parties are considered...

Question 16

Which one of the following is a primary market transaction?

Accepted Answer

A primary market transaction is the sale of new securities by issuers to investors. Choice B is the only option that involves the sale of new stock to an individual investor, making it the primary market transaction.

Question 17

Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes.
I.compensation based on the value of the stock
II.stock option plans
III.threat of a company takeover
IV.threat of a proxy fight

Accepted Answer

Compensation based on the value of the stock (I) and stock option plans (II) align managers' financial interests with those of the stockholders, encouraging them to work towards increasing the stock value. The threat of a company takeover (III) and a proxy fight (IV) can motivate managers to perform well to avoid losing their positions, thus acting in the best interest of the stockholders.

Question 18

Which one of the following parties has ultimate control of a corporation?

Accepted Answer

The ultimate control of a corporation lies with the shareholders who elect the board of directors. The board of directors, in turn, appoints the chief executive officer and other top executives to manage the company's day-to-day operations. However, the shareholders can vote to remove the board of directors or change the company's bylaws if they are not satisfied with the company's performance.

Question 19

Which one of the following statements concerning stock exchanges is correct?

Accepted Answer

This statement is true. While NASDAQ is often associated with technology companies and smaller firms, there are also many large, well-known companies listed on the exchange, such as Microsoft and Intel. The other statements in the question are incorrect. The NASDAQ is not a broker market, but rather an electronic marketplace where buyers and sellers are matched through computer systems. The NYSE is not a dealer market, but rather an auction market where brokers and traders gather on the trading floor to buy and sell securities. While the NYSE does trade some debt securities, the majority of debt securities are traded on the over-the-counter market, rather than on a specific exchange. Finally, the exchange with the strictest listing requirements is generally seen to be the NYSE, not NASDAQ.

Question 20

Which one of the following is a means by which shareholders can replace company management?

Accepted Answer

A proxy fight is a process by which shareholders gather enough written authorizations, or proxies, that grant them the right to vote on company decisions, including the election of the board of directors or the removal of current managers. This allows shareholders to replace current management with new individuals who better represent their interests. Stock options are financial instruments that allow the holder to buy or sell shares at a predetermined price, while promotion is a career advancement within a company. The Sarbanes-Oxley Act is a law that regulates corporate financial reporting and auditing, but it does not directly facilitate the replacement of company management. Agency play refers to situations in which a company's management acts in their own interests rather than the interests of shareholders or other stakeholders.

Quiz 1: Introduction to Corporate Finance