【正文】 1 十一 Corporate Finance: Corporate Investing and Financing Decisions 1. A: An Overview of Financial Management a: Discuss potential agency problems of stockholders versus 1) managers and 2) creditors. Question ID: 25907 Which of the following parties is least likely to benefit from risky strategies that increase risk and expected return for a pany? A. Creditors B. Chief executive officers C. Stockholders D. Chief financial officers Explanation: Correct answer: A Creditors bear the responsibility for bankruptcy in that they will not receive the principal back from their investment. If the project is a great success, creditors’ returns will not increase。 they will only receive the money loaned plus interest. On the other hand, stockholders could see the value of their shares rise many times over, while the reputation of the managers (and their bonuses) is likely to rapidly increase. Question ID: 17232 Which of the following statements is NOT a mechanism to reduce the agency problem and motivate managers? A. Poison pill. B. Threat of takeover. C. Managerial pensation. 2 D. Threat of firing. Explanation: Correct answer: A Question ID: 25905 Which of the following statements about agency problems is TRUE? A. As long as managers stay within the law, there are no effective controls that stockholders can implement to control managerial actions. B. Agency conflicts are mon. C. Bond covenants are used to motivate managers to act in the interests of shareholders. D. The agency conflict between bondholders and stockholders cannot exist if managers are attempting to maximize share price. Explanation: Correct answer: B Anytime there is a publicly held corporation and in any business that issued debt, there is the potential for agency problems. An agency relationship is created when decisionmaking authority is delegated to an agent without the agent being fully responsible for the decision that is made. Agency relationships occur in two mon corporate scenarios: 1) stockholders give responsibility to managers who do not receive the full costs and benefits of their performance, and 2) debtholders delegate authority to managers who act on the behalf of stockholders. There are several legal means to reduce agency problems. Bond covenants motivate mangers to act in the interests of bondholders. In the process of attempting to maximize share price, panies may take risks that put them at a risk of default, thereby putting bondholders at risk. b: Describe four mechanisms used to motivate managers to act in 3 stockholders39。 best interests. Question ID: 25909 If managers are granted the opportunity to buy additional firm shares at a predetermined price on or before a future date, they are said to be owners of: A. direct intervention. B. performance shares. C. takeover threats. D. executive stock options. Explanation: Correct answer: D Executive stock options typically have exercise prices set above the current stock price to give managers an incentive to take actions that will increase share price. Performance shares are typically shares of mon stock given in reward for effort, without a specified stock price being part of the consideration. Takeover and intervention threats are means to motivate a mismanaging manager. Question ID: 17267 With respect to the shareholder/manager relationship, which of the following statements is FALSE? A. Executive stock options tend to be issued outofthemoney. B. Performance shares can be used to align manager/shareholder interests. C. Executive stock options do not have expiration dates and are held in perpetuity. D. The managerial salary package should include an incentive ponent. 4 Explanation: Correct answer: C Question ID: 25908 Which of the following is NOT a method of aligning managers’ interests with the interests of shareholders? A. The threat of firing. B. Annual performance bonuses. C. Restrictive loan covenants. D. Direct intervention by shareholders. Explanation: Correct answer: C Restrictive loan covenants are techniques used by creditors to limit the risks taken by a business. While annual performance bonus can be a positive affirmation of managerial effort, shareholders can intervene and even fire a manager that has under performed expectations. SECTOR QUIZ: : An Overview of Financial Management Question ID: 26262 American Sprocket, Inc., a manufacturer of quality bicycles, is reviewing several new projects. Assuming that managerial time constraints limit the number of new projects to only one, which of the following would shareholders most likely prefer? Project A: Update the pany’s web site, including making it interactive. There will be increased costs, which are largely onetime expenses, plus subsequent maintenance costs. Revenues are expected to exceed expenses. Expected impacts: Change in earnings: +3% 5 Change in earnings variance: +1% Change in share price: +5% Project B: Update the color scheme of the firm’s most popular product. In addition to design expenses and new raw materials (paint amp。 decals), American Sprocket expects to run an advertising campaign hyping the 161。176。new161。177。 bikes. The new version will be sold for $15 more per unit. Expected impacts: Change in earnings: +10% Change in earnings variance: +15% Change in share price: +11% Project C: Replace the heavier alloys used with lighter pounds。 increasing the cost of the typical bicycle by $90. Although the new alloy is experimental and has unproven results in durability, American Sprocket would have the edge over its petition by having the lightest bikes in the industry. Expected impacts: Change i