Question 1

Debt may be beneficial for the following reasons except:&#10;A)because it reduces free cash flows&#10;B)because of its disciplinary effect on managers&#10;C)because the interest payments benefit shareholders&#10;D)because interest has to be paid to avoid bankruptcy

Accepted Answer

Interest payments on debt benefit the creditors or lenders rather than the shareholders directly. Shareholders might benefit indirectly through more efficient use of capital or tax advantages, but the interest payments themselves go to the lenders.

Question 2

Corporate governance can be defined as&#10;A)the government-imposed rules and regulations affecting corporate management.&#10;B)the general framework in which company management is selected and monitored.&#10;C)the rules and regulations adopted by boards of directors specifying how to manage companies.&#10;D)the economic, legal, and institutional framework in which corporate control and cash flow.

Accepted Answer

D

Question 3

The main weakness of the 'public corporation' is&#10;A)too many shareholders, which makes it difficult to make corporate decision.&#10;B)relatively high corporate income tax rates.&#10;C)conflicts of interest between managers and shareholders.&#10;D)conflicts of interests between shareholders and bondholders.

Accepted Answer

The main weakness of a public corporation is conflicts of interest between managers and shareholders. This is because managers may prioritize their own interests over those of the shareholders, potentially leading to poor decision-making and negative impacts on the company's financial performance. Too many shareholders (A), high corporate tax rates (B), and conflicts of interests between shareholders and bondholders (D) are potential challenges for any corporation but are not specific weaknesses of a public corporation.

Question 4

Agency problems may be alleviated by:&#10;A)incentive contracts&#10;B)debt&#10;C)market for corporate control&#10;D)all of these

Accepted Answer

All three options - incentive contracts, debt, and market for corporate control - can be effective in addressing agency problems. Incentive contracts align the interests of managers and shareholders by tying executive compensation to company performance. Debt financing can impose discipline on management by creating financial obligations and reducing the ability of managers to pursue risky or wasteful projects. The market for corporate control enables shareholders to sell their stakes in poorly performing companies or acquire control of other companies, which can incentivize managers to perform better to avoid losing control of their company. Therefore, all three options can be effective in addressing agency problems.

Question 5

The central issue of corporate governance is&#10;A)how to protect creditors from managers and controlling shareholders.&#10;B)how to protect outside investors from the controlling insiders.&#10;C)how to alleviate the conflicts of interest between managers and shareholders.&#10;D)how to alleviate the conflicts of interest between shareholders and bondholders.

Accepted Answer

Corporate governance is concerned with ensuring that companies are run in an ethical, responsible, and sustainable manner that creates long-term value for all stakeholders, both inside and outside the company. One of the central issues of corporate governance is how to protect outside investors from the controlling insiders, who may have their own interests at heart rather than the interests of the company as a whole. This can involve ensuring transparency and accountability in financial reporting, establishing independent boards to oversee management, and ensuring that all stakeholders have a say in the decision-making process. Protecting creditors (option A), alleviating conflicts between managers and shareholders (option C), and alleviating conflicts between shareholders and bondholders (option D) are all important issues in corporate governance, but they are not the central issue. The central issue is how to ensure that outside investors are protected from insiders who may have conflicting interests.

Question 6

There would be agency problems only if&#10;A)Complete contracts could be written&#10;B)If managers and shareholders would know all future contingencies&#10;C)Complete contracts cannot be written&#10;D)In the absence of conflicts of interest

Accepted Answer

Agency problems arise when complete contracts cannot be written, which means that there is some information asymmetry or uncertainty between the principal (shareholders) and the agent (managers). If complete contracts could be written, there would be no agency problems as all contingencies would be covered. Option A and B are not the best choices as they do not capture the essence of agency problems. Option D is incorrect as conflicts of interest between shareholders and managers are the root cause of agency problems.

Question 7

Private benefits of corporate control&#10;A)are cash flows from owning equity&#10;B)are equally shared by all investors&#10;C)are not equally shared by all investors&#10;D)do not exist

Accepted Answer

Private benefits of corporate control are not equally shared by all investors, as they are typically specific to certain shareholders who have greater control and influence over the company's decisions. For example, if a shareholder owns a large percentage of voting shares, they may be able to make decisions that benefit their own interests over those of other shareholders. This can lead to unequal distribution of benefits and potentially conflicts of interest.

Question 8

find that&#10;A)the entrenchment effect dominates the alignment effect&#10;B)the alignment effect dominates the entrenchment effect&#10;C)the entrenchment effect dominates the alignment effect over the range of managerial ownership between 5 percent and 25 percent&#10;D)the alignment effect dominates the entrenchment effect over the range of managerial ownership between 5 percent and 25 percent

Accepted Answer

The entrenchment effect is more pronounced than the alignment effect when managerial ownership is between 5% and 25%, indicating that managers may prioritize their own interests over shareholders' interests within this ownership range.

Question 9

Which of the following statements is correct?&#10;A)When professional managers have large equity positions of their own in a company with diffused ownership, they have both the power and a motive to engage in self-dealings.&#10;B)When professional managers have small equity positions of their own in a company with concentrated ownership, they have both the power and a motive to engage in self-dealings.&#10;C)When professional managers have small equity positions of their own in a company with diffused ownership, they have both the power and a motive to engage in self-dealings.&#10;D)When professional managers have large equity positions of their own in a company with concentrated ownership, they have both the power and a motive to engage in self-dealings.

Accepted Answer

When professional managers have small equity positions of their own in a company with diffused ownership, they have both the power and a motive to engage in self-dealings. This is because with diffused ownership, there are many shareholders who do not have a large stake in the company and therefore may not have the resources or interest to monitor the behavior of the professional managers. Additionally, with a small equity position, the professional managers may feel the need to engage in self-dealings in order to increase their own personal wealth.

Question 10

Weak investor protection is associated with all of the following except:&#10;A)valuable stock markets&#10;B)sharp market declines during a financial crisis&#10;C)lower stock market capitalization&#10;D)fewer publicly traded companies

Accepted Answer

Weak investor protection is typically associated with lower stock market capitalization, fewer publicly traded companies, and sharp market declines during a financial crisis. However, it is not typically associated with valuable stock markets. Strong investor protections are generally viewed as a necessary ingredient for a healthy and robust stock market.

Question 11

Dominant investors may acquire control through all of the following except:&#10;A)interfirm cross-holdings&#10;B)intrafirm cross-holdings&#10;C)shares with superior voting rights&#10;D)pyramidal ownership structure

Accepted Answer

The answer of Dominant investors may acquire control through all...

Question 12

Concentrated corporate ownership is most prevalent in&#10;A)Japan.&#10;B)the United Kingdom.&#10;C)the United States.&#10;D)Australia.

Accepted Answer

The answer of Concentrated corporate ownership is most prevalent in&#10;A)Japan.&#10;B)the...

Question 13

English common law countries tend to provide a stronger protection of shareholder rights than French civil law countries because&#10;A)the former countries tend to be more democratic than the latter.&#10;B)the former countries tend to protect property rights better than the latter.&#10;C)the former countries tend to have more separation of power than the latter.&#10;D)All of these.

Accepted Answer

The answer of English common law countries tend to provide...

Question 14

Corporate governance reform requires all except:&#10;A)increasing the decision making power of managers&#10;B)strengthening the independence of boards of directors with more outsiders&#10;C)enhancing the transparency and disclosure standard of financial statements&#10;D)energizing the regulatory and monitoring functions of securities commissions

Accepted Answer

The answer of Corporate governance reform requires all except:&#10;A)increasing the...

Question 15

Suppose Mr.Lee and his relatives hold 30% of shares outstanding of Samsung Life,which in turn holds 20% of Samsung Electronics.What is the cash flow right of the Lee family in Samsung Electronics?&#10;A)50%.&#10;B)10%&#10;C)20%&#10;D)6%

Accepted Answer

The answer of Suppose Mr.Lee and his relatives hold 30%...

Question 16

Private benefits of corporate control will tend to be higher in&#10;A)in French civil law countries than in English common law countries.&#10;B)in English common law countries than in French civil law countries.&#10;C)in French civil law countries than in Scandinavian civil law countries.&#10;D)In English common law countries than in German civil law countries.

Accepted Answer

The answer of Private benefits of corporate control will tend...

Question 17

Free cash flows refer to&#10;A)a firm's cash reserve in excess of tax obligation.&#10;B)a firm's funds in excess of what's needed for undertaking all profitable projects.&#10;C)a firm's cash reserve in excess of interest and tax payments.&#10;D)a firm's income tax refund that is due to interest payments on borrowing.

Accepted Answer

The answer of Free cash flows refer to&#10;A)a firm's cash...

Question 18

Sarbanes-Oxley Act of 2002 stipulates that&#10;A)a public accounting oversight board be created.&#10;B)the company should appoint independent financial experts to its audit committee.&#10;C)CEO and CFO sign off the company's financial statements.&#10;D)all of these.

Accepted Answer

The answer of Sarbanes-Oxley Act of 2002 stipulates that&#10;A)a public...

Question 19

The board of directors may grant stock options to managers in order to&#10;A)save executive compensation costs.&#10;B)use as a substitute for bonus.&#10;C)align the interest of managers with that of shareholders.&#10;D)none of these.

Accepted Answer

The answer of The board of directors may grant stock...

Question 20

Managers may inappropriately use the residual control rights&#10;A)To pay themselves exorbitant perquisites&#10;B)To divert assets through transfer pricing&#10;C)To take on unprofitable projects&#10;D)To invest in positive NPV projects

Accepted Answer

The answer of Managers may inappropriately use the residual control...

Question 21

How can listing overseas benefit the corporate governance of a public company?

Accepted Answer

The answer of How can listing overseas benefit the corporate...

Question 22

Explain the agency problem and how it can be remedied.

Accepted Answer

The answer of Explain the agency problem and how it...

Question 23

How are investors protected under English common law?&#10; What are the implications?

Accepted Answer

The answer of How are investors protected under English common...

Question 24

Discuss the major advantage and key weakness of a public corporation.

Accepted Answer

The answer of Discuss the major advantage and key weakness...

Question 25

Discuss the concept of &#34;private benefits of corporate control&#34;.

Accepted Answer

The answer of Discuss the concept of &#34;private benefits of...

Deck 21: International Tax Environment and Transfer Pricing