Deck 2: Financial Goals and Corporate Governance

Question 1

Mary Chalmers ,who lives in Minnesota,purchased 100 shares of Delton Cables,a diversified machinery company headquartered in Germany.She purchased the stock in January of 2011 for €62.50 per share when the exchange rate was at $1.330/€.Today,the stock is trading for €68.00 per share and the exchange rate is $1.48/€.If Mary sells her shares today,what is the return on her investment due to changes in the exchange rate?

A)11.28%
B)20.08%
C)8.80%
D)26.41%

Answer 1

11.28%

Question 2

Mary Chalmers ,who lives in Minnesota,purchased 100 shares of Delton Cables,a diversified machinery company headquartered in Germany.She purchased the stock in January of 2011 for €62.50 per share when the exchange rate was at $1.330/€.Today,the stock is trading for €68.00 per share and the exchange rate is $1.48/€.If Mary sells her shares today,what is the total return on her investment?

A)11.28%
B)20.08%
C)8.80%
D)26.41%

Answer 2

20.08%

Question 3

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

Answer 3

True

Question 4

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 5

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 6

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 7

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

Question 8

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

A)dual classes of stock with differential voting rights
B)simultaneous election of members of the board of directors
C)interlocking directorates
D)takeover safeguards

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

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 11

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

Question 12

Mary Chalmers ,who lives in Minnesota,purchased 100 shares of Delton Cables,a diversified machinery company headquartered in Germany.She purchased the stock in January of 2011 for €62.50 per share when the exchange rate was at $1.330/€.Today,the stock is trading for €68.00 per share and the exchange rate is $1.48/€.If Mary sells her shares today,what is the return on her investment due to price appreciation of the stock?

A)11.28%
B)20.08%
C)8.80%
D)26.41%

Question 13

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

A)100% privately held, to 80% privately held, to 40% privately held, to 0% privately held.
B)0% privately held, to 40% privately held, to 80% privately held, to 100% privately held.
C)privately held firms stay private, and publicly traded firms stay public.
D)none of the above.

Question 14

Benny Simpson is considering an investment in Pontoon Industries Inc.He anticipates a dividend of $0.50 next year and an increase in the stock price from the current price of $18.25 per share to $20 per share.If he plans to hold the stock for one year,should Mr Simpson buy the stock if he requires an annual return of 12% on similar-risk investments?

A)no, because his anticipated return of 2.74% is exceeded his required return of 12%
B)no, because his anticipated return of 9.59% is exceeded his required return of 12%
C)yes because his anticipated return of 12.33% exceeds his required return of 12%
D)There is not enough information to answer this question.

Question 15

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 16

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 17

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

Question 18

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 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

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.

Question 21

Unsystematic risk can be defined as

A)the total risk to the firm.
B)the risk of a well-diversified portfolio.
C)the added risk that a firm's shares bring to a diversified portfolio.
D)beta.

Question 22

According to a 2010 McKinsey survey,family businesses tend to use more debt than a benchmark group of comparable publicly traded peer companies.

Question 23

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 24

According to a 2010 McKinsey survey,________ of all companies in the S&P 500 index may be defined as family businesses,meaning that a family owns a significant share and can influence important decisions,particularly the election of the CEO and chairman.

A)33%
B)25%
C)15%
D)10%

Question 25

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 26

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 27

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 28

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 29

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 30

The Stakeholder Capitalism 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 31

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 32

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 33

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 34

According to a 2010 McKinsey survey,family-influenced businesses tend to underperform the public sector in each of five major markets worldwide.

Question 35

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 36

"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 37

According to a 2010 McKinsey survey,family businesses have a lower cost of debt financing than comparable publicly traded firms.

Question 38

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 39

The deliberation 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 40

Systematic risk can be eliminated through portfolio diversification.

Question 41

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 42

Fissler AG,headquartered in Germany,records all of it sales worldwide in euros.Its USA division realized sales of €2,675,000 last year when the exchange rate was $1.33/€ and sales of €2,355,000 this year when the exchange rate was $1.48/€.What was the percent change in USD revenues for the USA division over the last year?

A)-13.99%
B)-11.96%
C)-2.03%
D)-20.89%

Question 43

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

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

Question 44

Fissler AG,headquartered in Germany,records all of it sales worldwide in euros.Its USA division realized sales of €2,675,000 last year when the exchange rate was $1.33/€ and sales of €2,355,000 this year when the exchange rate was $1.48/€.What was the percent change in euro revenues for Fissler for the USA division over the last year?

A)-13.99%
B)-11.96%
C)-2.03%
D)-20.89%

Question 45

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 46

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 47

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 48

Empirical studies of firms in Norway and Sweden show that firms with Anglo-American board members

A)have higher values than firms without such directors.
B)have lower values than firms without such directors.
C)offer poorer monitoring opportunities of firm management.
D)none of the above.

Question 49

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 50

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 51

Empirical studies of firms in Norway and Sweden show that as shareholder equity rights increased,the margin between ROA and cost of capital also increased.

Question 52

The authors reference empirical evidence that family-controlled firms all over the world may outperform publicly traded firms.What factors are cited as reasons for this occurring?

Question 53

The Sarbanes-Oxley Act (SOX)was passed 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.

Question 54

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