A) an agency relationship is when someone hires someone else to perform a service and gives them decision-making authority.
B) an agency relationship is when an agent hires a principal to perform a service.
C) an agency relationship is when a principal works for an agent.
D) in an agency relationship, the agent delegates authority to the principal.
E) an example of an agency relationship is when the ceo nominates a slate of candidates to be on the board of directors.
G) None of the above
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A) this will result in a decrease in the value of the debt because the company is riskier.
B) this will result in a decrease in the value of the equity because the company is riskier.
C) this will result in a lawsuit from the stockholders because it is bait and switch.
D) this will cause bondholders to convert their bonds to stock.
E) dividends will go up to compensate shareholders for their increased risk.
G) A) and C)
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A) targeted share repurchases.
B) shareholder rights provisions.
C) restricted voting rights.
D) poison pills.
E) abnormally high executive compensation.
G) None of the above
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A) frequently, large boards of directors are less effective than small boards of directors.
B) since outside directors have no other connection with the firm, they are indebted to the ceo for putting them on the board.
C) the more members of a board of directors, the better its function.
D) a company has an interlocking board of directors if the ceo also serves as the chairman of the board of directors.
E) a company whose board members are elected in staggered terms is said to be an interlocking board of directors.
G) B) and C)
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A) a corporate executive health club is an example of a nonpecuniary benefit.
B) when lenders protect themselves from the risk of asset switching by raising the interest rate, the firm's wacc can decrease.
C) a lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.
D) a supplier substituting a lower-quality raw material without approval is an example of asset switching.
E) an agency problem occurs when an owner/manager sells stock to an outside investor and the owner/manager fears the outside investor will consume too many perquisites.
G) A) and D)
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A) an example of asset switching is when a company borrows for a new manufacturing facility but then uses it to repurchase its own stock.
B) an example of an agency cost is when an attorney hires an expert witness for a trial.
C) the commission required by the federal housing agency for a small business loan is an example of an agency cost.
D) an example of an agency cost is the salary of the agent hired to work for the principal.
E) creditors have a claim on a firm's earning stream through the dividend payments they receive.
G) B) and D)
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A) one tool of corporate governance is the use of accounting control systems.
B) an example of asset switching is an option to exchange one piece of real estate for another.
C) one tool of corporate governance is the location of the company headquarters.
D) an example of an agency relationship is when a supervisor hires a forklift operator.
E) one tool of corporate governance is a company's tax avoidance strategy.
G) B) and E)
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A) lenders will protect themselves from the risk of asset switching by writing debt covenants into loans.
B) lenders can't legally prevent a firm from engaging in asset switching.
C) firms borrowing money have greater flexibility to use that money when there are debt covenants.
D) when lenders protect themselves from the risk of asset switching by charging a higher interest rate, the firm's wacc can decrease.
E) a lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.
G) All of the above
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A) an agency problem occurs when an owner/manager sells stock to an outsider but continues to consume perquisites.
B) firms borrowing money have greater flexibility to use that money when there are debt covenants.
C) when lenders protect themselves from the risk of asset switching by raising the interest rate, the firm's wacc can decrease.
D) a lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.
E) a supplier substituting a lower-quality raw material without approval is an example of asset switching.
G) A) and B)
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A) when an owner/manager sells stock to an outsider, that outsider now bears some of the costs of the owner/manager's perquisite consumption.
B) lenders can't legally prevent a firm from engaging in asset switching.
C) firms borrowing money have greater flexibility to use that money when there are debt covenants.
D) when lenders protect themselves from the risk of asset switching, the firm's wacc can decrease.
E) a lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.
G) B) and C)
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A) management is said to be entrenched when senior managers are unlikely to be fired.
B) a company's matching contribution to a retirement plan is a nonpecuniary benefit.
C) company sponsorship of a local charity is an example of a nonpecuniary benefit.
D) a manager/shareholder agency conflict arises when shareholders sell their stock even though management says the stock is undervalued.
E) a manager/shareholder agency conflict arises when the board of directors pays a larger dividend than the firm's earnings could support.
G) None of the above
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A) a manager/shareholder agency conflict arises when the manager's actions aren't in the company's best interest.
B) an agency problem occurs when an owner/manager sells stock to an outside investor and the owner/manager fears the outside investor will consume too many perquisites.
C) an agency conflict between inside owners/managers and outside owners occurs when the outside owners sell their shares to someone else.
D) a quarter-end bonus is an example of a nonpecuniary benefit.
E) a company's matching contribution to a retirement plan is a nonpecuniary benefit.
G) A) and E)
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A) the board has a majority of outsiders who have experience and aren't too busy.
B) ceo is the chairman of the board.
C) the board is as large as is possible.
D) board members are paid at a rate higher than their peers and their payment is mostly cash.
E) the board has a majority of insiders from company management on it who bring first-hand knowledge of how the company operates.
G) B) and D)
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B) False
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A) an inside director is a board member who also holds a managerial position in the company.
B) in a classified board, it is easier for dissidents to gain representation since fewer seats are up for election each year.
C) inside directors are more concerned with shareholders' interests since they are more closely concerned with firm operations.
D) since outside directors have no other connection with the firm, they are indebted to the ceo for putting them on the board.
E) company sponsorship of a local charity is an example of a nonpecuniary benefit.
G) A) and C)
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A) a manager avoiding a positive npv but risky project is an example of a manager-shareholder conflict.
B) management is said to be entrenched when the company is doing badly and is "stuck in a rut."
C) a quarter-end bonus is an example of a nonpecuniary benefit.
D) a company's matching contribution to a retirement plan is a nonpecuniary benefit.
E) company sponsorship of a local charity is an example of a nonpecuniary benefit.
G) A) and B)
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A) inside directors are likely to side with the ceo since they are employees.
B) in a classified board, it is easier for dissidents to gain representation since fewer seats are up for election each year.
C) inside directors are more concerned with shareholders' interests since they are more closely concerned with firm operations.
D) since outside directors have no other connection with the firm, they are indebted to the ceo for putting them on the board.
E) the more members of a board of directors, the better its function.
G) B) and D)
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A) if a company has a classified board, fewer board seats are filled each year.
B) one tool of corporate governance is choosing a good investment banker.
C) a classified board is one in which the board members serve anonymously.
D) a classified board is one in which an announcement requesting applications for board members appears in the newspaper.
E) in a classified board, it is easier for dissidents to gain representation since fewer seats are up for election each year.
G) A) and C)
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A) shareholders benefit when the company is acquired because they usually receive a higher price for their shares
B) anti-takeover charter provisions are good for shareholders because they prevent a raider from stealing the company for a below-market price.
C) shareholders want to prevent takeovers because they don't want the company purchased out from under them.
D) a shareholder rights provision encourages takeovers because shareholders have the right to approve the takeover if the terms are good.
E) a classified board is one in which the board members serve anonymously.
G) A) and B)
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A) it is harder for dissidents to gain board seats if a company's board is classified.
B) a classified board is one in which an announcement requesting applications for board members appears in the newspaper.
C) in a classified board, it is easier for dissidents to gain representation since fewer seats are up for election each year.
D) inside directors are more concerned with shareholders' interests since they are more closely concerned with firm operations.
E) management is said to be entrenched when the senior managers are consuming excessive perquisites.
G) A) and B)
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