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Finance 3040 (Chapter 1)

Company A pays its managers a fixed salary. Company B ties compensation to the performance of the stock. Which company’s compensation would most help mitigate conflicts of interest between managers and shareholders?
Company B
Company A pays its managers a fixed salary. Company B ties compensation to the performance of the stock. Other things equal, which company would experience the greatest variation in earnings?
Company A
Which of the following of compensation is most likely to align the interests of managers and shareholders?
A salary that is paid partly in the form of the company’s shares.
A well designed compensation package can help a firm achieve its goal of maximizing market value.
True
Agency problems can least be controlled by:
Electing senior managers to the board of directors
Agency problems can best be characterized by:
Differing incentives between managers and owners.
Which of the following is least likely to represent an agency problem?
Executive incentive compensation plans.
A manager’s compensation plan that offers financial incentives for increases in quarterly profitability may create agency problems in that:
Short-term, not long term profits become the focus.
A successful investment is one that increases the value of the firm.
True
The primary goal of any company should be to maximize current period profits.
False
Maximizing profits is the same as maximizing the value of the firm.
False
Corporate managers are expected to make corporate decisions that are in the best interest of:
the corporation’s shareholders.
The best criterion for success in a capital budgeting decision would be to:
Maximize the value added to the firm.
The overall goal of capital budgeting projects should be to:
increase the wealth of the firm’s shareholders.
The primary goal of corporate management should be to:
maximize the shareholder’s wealth.
Which of the following appears to be the most appropriate goal for corporate management?
Maximizing market value of the company’s shares.
How may a reduction in cash dividends be in the best interest of current shareholders?
Will have available cash to increase current investment and future profits.
Which one of the following is a financial asset?
A corporate bond
Which of the following statements best distinguishes the difference between real and financial assets?
Financial assets represent claims to income that is generated by real assets.
Which of the following is a real asset?
A patent.
An example of a firm’s financing decision would be:
issuing 10-year versus 20-year bonds.
Firms can alter their structure by:
issuing stock to repay debt.
Which one of these determines the minimum acceptable rate of return on a capital investment?
The available alternative investment opportunities.
Investment banks like Morgan Stanley or Goldman Sachs:
help companies sell their securities to investors.
A firm decides to pay for a small investment project through a $1 million increase in short-term bank loans. This is best described as an example of:
A Financing Decision

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