Finance 3040 (Chapter 1) – Flashcards
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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?
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Company B
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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?
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Company A
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Which of the following of compensation is most likely to align the interests of managers and shareholders?
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A salary that is paid partly in the form of the company's shares.
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A well designed compensation package can help a firm achieve its goal of maximizing market value.
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True
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Agency problems can least be controlled by:
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Electing senior managers to the board of directors
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Agency problems can best be characterized by:
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Differing incentives between managers and owners.
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Which of the following is least likely to represent an agency problem?
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Executive incentive compensation plans.
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A manager's compensation plan that offers financial incentives for increases in quarterly profitability may create agency problems in that:
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Short-term, not long term profits become the focus.
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A successful investment is one that increases the value of the firm.
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True
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The primary goal of any company should be to maximize current period profits.
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False
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Maximizing profits is the same as maximizing the value of the firm.
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False
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Corporate managers are expected to make corporate decisions that are in the best interest of:
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the corporation's shareholders.
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The best criterion for success in a capital budgeting decision would be to:
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Maximize the value added to the firm.
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The overall goal of capital budgeting projects should be to:
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increase the wealth of the firm's shareholders.
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The primary goal of corporate management should be to:
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maximize the shareholder's wealth.
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Which of the following appears to be the most appropriate goal for corporate management?
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Maximizing market value of the company's shares.
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How may a reduction in cash dividends be in the best interest of current shareholders?
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Will have available cash to increase current investment and future profits.
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Which one of the following is a financial asset?
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A corporate bond
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Which of the following statements best distinguishes the difference between real and financial assets?
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Financial assets represent claims to income that is generated by real assets.
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Which of the following is a real asset?
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A patent.
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An example of a firm's financing decision would be:
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issuing 10-year versus 20-year bonds.
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Firms can alter their structure by:
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issuing stock to repay debt.
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Which one of these determines the minimum acceptable rate of return on a capital investment?
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The available alternative investment opportunities.
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Investment banks like Morgan Stanley or Goldman Sachs:
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help companies sell their securities to investors.
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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:
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A Financing Decision
