Question 1

Which of the following statements is most correct?
A) One of the ways in which firms can mitigate or reduce agency problems between bondholders and stockholders is by increasing the amount of debt in the capital structure.
B) The threat of takeover is one way in which the agency problem between stockholders and managers can be alleviated.
C) Managerial compensation can be structured to reduce agency problems between stockholders and managers.
D) Statements b and c are correct.
E) All of the statements above are correct.

Accepted Answer

Statement B is correct as the threat of takeover forces managers to act in the interest of shareholders to avoid being taken over. Statement C is correct as managers' compensation can be structured in a way that aligns their interests with those of shareholders. Statement A is incorrect as increasing debt can lead to negative consequences such as financial distress costs and bankruptcy risk, and may not necessarily reduce agency problems. Therefore, the best choice is D as statements B and C are correct.

Question 2

Which of the following statements is most correct?
A) A market is transparent when trading is inexpensive.
B) A market is transparent when accurate information is available to all market participants.
C) A transparent market has few regulations.
D) A transparent market has many opportunities for trading on insider information.
E) A market is transparent when everyone knows who the person is that they are trading with.

Accepted Answer

Transparency in a market refers to the degree to which accurate and reliable information is available to all market participants. This allows for fair and efficient trading, as all parties are able to make informed decisions based on the same information. It is not related to the cost of trading, the level of regulation, insider trading opportunities, or knowledge of trading partners.

Question 3

Which of the following is an example of a moral hazard?
A) A CEO is awarded $100,000 worth of executive stock options, which he exercises two years later for $1,000,000.
B) A company borrows $1,000,000 for investment in equipment, but uses the money instead to repurchase stock.
C) A company declares bankruptcy, but instead of being liquidated, it is reorganized and one set of bondholders who are owed $10 million accept $3 million in payment for the debt.
D) A CEO orders the headquarters moved just so he can have a nicer office.
E) A group of institutional stockholders votes to oust management.

Accepted Answer

The answer of Which of the following is an example...

Question 4

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?
A) Households start saving a larger percentage of their income.
B) The economy moves from a boom to a recession.
C) The level of inflation begins to decline.
D) Corporations step up their expansion plans and thus increase their demand for capital.
E) The Federal Reserve uses monetary policy in an attempt to stimulate the economy.

Accepted Answer

When corporations increase their demand for capital to finance expansion plans, they borrow more, leading to higher demand for loans. This increased demand can lead to higher interest rates on all debt securities as lenders raise rates to allocate the limited supply of loanable funds.

Question 5

Which of the following statements is most correct?
A) Agency conflicts between stockholders and managers are not really a problem when outsiders (i.e., non-managers) own shares in a corporation.
B) Managers may operate in stockholders' best interests, or managers may operate in their own personal best interests. As long as managers stay within the law, there are no effective controls that stockholders can implement to control managerial decision making.
C) The agency conflicts between bondholders and stockholders can be reduced with the use of bond covenants.
D) An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person.
E) All of the statements above are false.

Accepted Answer

Bond covenants can help reduce agency conflicts between bondholders and stockholders. These covenants specify certain actions or limitations that the firm must abide by in order to protect the bondholders' interests. For example, bond covenants can limit the amount of debt the company can take on, require the maintenance of certain financial ratios, or restrict the payment of dividends. This helps to align the interests of bondholders and stockholders and reduce potential conflicts. The other statements are either incorrect or incomplete.

Question 6

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?
A) Prices and interest rates would both rise.
B) Prices would rise and interest rates would decline.
C) Prices and interest rates would both decline.
D) There would be no changes in either prices or interest rates.
E) Prices would decline and interest rates would rise.

Accepted Answer

The issuance of new bonds by the U.S. Treasury would increase the supply of bonds in the market, which would lead to a decline in bond prices, as investors would demand a higher yield to hold these bonds. This increase in yield would lead to a rise in interest rates. Therefore, the correct choice is E: Prices would decline and interest rates would rise.

Question 7

Which of the following statements is most correct?
A) Sarbanes-Oxley requires the Securities Exchange Commission to audit public companies' financial statements.
B) Sarbanes-Oxley made it illegal for company executives to trade on insider information.
C) Sarbanes-Oxley requires the Chairman of the Board of Directors to sign and certify the company's financial statements.
D) Sarbanes-Oxley requires the CEO sign and certify the company's financial statements.
E) Sarbanes-Oxley requires company executives to disclose their fraudulent activities "in a timely and accurate manner."

Accepted Answer

Sarbanes-Oxley Act requires the CEO and CFO to sign and certify the accuracy of the company's financial statements.

Question 8

Which of the following statements is most correct?
A) Sarbanes-Oxley established a new Federal agency, the Public Company Auditing Board, to audit public companies' financial statements.
B) Sarbanes-Oxley prohibited investment banks from allowing their analysts to make recommendations on stocks the investment banks do business with.
C) Sarbanes-Oxley requires that either the CEO or CFO hand-deliver the annual and quarterly financial statements to the SEC.
D) Sarbanes-Oxley requires that auditors maintain extensive records to document that their consulting and auditing services for a given company are not conflicting.
E) Sarbanes-Oxley prohibits auditors from providing consulting services to the companies they audit.

Accepted Answer

Sarbanes-Oxley prohibits auditors from providing certain consulting services to the companies they audit to prevent conflicts of interest and ensure the independence of the audit.

Question 9

Which of the following factors would be most likely to lead to an increase in interest rates in the economy?
A) Households reduce their consumption and increase their savings.
B) The Federal Reserve decides to try to stimulate the economy.
C) There is a decrease in expected inflation.
D) The economy falls into a recession.
E) Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs.

Accepted Answer

The answer of Which of the following factors would be...

Question 10

Which of the following statements is most correct?
A) EVA is a measure of the value added to customers.
B) EVA is a measure of the value added to management.
C) EVA is a measure of the firm's true profitability.
D) EVA is a measure of management compensation.
E) EVA is a measure of stock price.

Accepted Answer

EVA (Economic Value Added) is a financial metric used to evaluate a firm's financial performance. It is calculated by subtracting the cost of capital from the net operating profit after tax (NOPAT). EVA is considered a measure of a company's true profitability as it takes into account both the capital invested in the business and the return generated by that capital. Therefore, option C is the correct answer.

Question 11

A moral hazard problem arises when:
A) An agent takes unobserved actions on his own behalf.
B) A principal hires another individual to perform some service.
C) Firms borrow money from bondholders.
D) Stockholders have to incur costs to make managers act to maximize stock price.
E) Managers are granted performance shares.

Accepted Answer

Moral hazard occurs when an agent takes unobserved actions on their own behalf, taking risks that the principal did not intend or plan for. This can happen when the agent is protected from the negative consequences of their actions, such as through insurance or bailouts.

Quiz 1: An Overview of Financial Management

Which of the following statements is most correct?

Which of the following statements is most correct?

Which of the following is an example of a moral hazard?

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?

Which of the following statements is most correct?

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?

Which of the following statements is most correct?

Which of the following statements is most correct?

Which of the following factors would be most likely to lead to an increase in interest rates in the economy?

Which of the following statements is most correct?

A moral hazard problem arises when: