If a country must make a net payment to foreigners because of a balance-of-paymentsFINC400 Testbank
Updated: Jul 30, 2022
63. The world's largest debtor nation and creditor nation, respectively, are A. Japan and the U.S. B. The U.S. and Japan. C. The U.S. and Canada. D. Great Britain and Mexico.
B
64. International reserve assets include "foreign exchanges". These are A. Special Drawing Rights (SDRs) at the IMF. B. reserve positions in the International Monetary Fund (IMF). C. foreign currency held by a country's central bank. D. none of the above
C
65. The "one word that haunts the dollar" is A. (Central bank) diversification. B. Reunification (Korean). C. Euro. D. (Current account) deficit.
A
66. Among IMF member countries, the dollar's dominant position in the world's reserve holdings may decline to a certain extent as the euro becomes a "known quantity" and its external value becomes more stable. In fact, the euro's share has increased A. from zero percent in 1999 to 25.8 percent in 2006. B. from 13.5 percent in 1999 to 25.8 percent in 2006. C. from 13.5 percent in 1999 to 52.8 percent in 2006. D. none of the above
B
67. The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity for a country with a pure flexible exchange rate regime A. BCA + BKA + BRA = 0 B. BCA = -BKA C. BCA + BKA = -BRA D. BRA = -BCA
B
Assume that the balance-of-payments accounts for a country are recorded correctly. Balance on the current account = BCA = $130 billion Balance on the capital account = BKA = -$86 billion Balance on the reserves account = BRA = ? Eun - Chapter 03 68. The balance on the reserves account (BRA), under the pure flexible exchange regime is A. -$44 billion. B. $44 billion. C. $216 billion. D. none of the above
D
69. When the balance-of-payments accounts are recorded correctly, the combined balance of the current account, the capital account, and the reserves account must be A. equal in magnitude to the country's national debt. B. zero. C. equal in magnitude to the Trade Deficit or Surplus. D. none of the above
B
70. If the central banks of the world chose to diversify their foreign-exchange reserves away from the dollar and into the euro, A. this would have the result of a strengthening of the value of the dollar. B. this have the result of a weakening in the value of the dollar. C. this would not have much impact, as the information would be lost in the day-to-day volatility of exchange rates.
B
71. The U.S. Trade Deficit A. is a capital account surplus. B. is a current account deficit. C. is both a capital account surplus and a current account deficit. D. none of the above
C
72. The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Direct investment involves A. acquisitions of controlling interests in foreign businesses. B. investments in foreign stocks and bonds that do not involve acquisitions of control. C. bank deposits, currency investment, trade credit, and the like. D. all of the above
A
73. The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. "Other" investment involves A. acquisitions of controlling interests in foreign businesses. B. investments in foreign stocks and bonds that do not involve acquisitions of control. C. bank deposits, currency investment, trade credit, and the like. D. all of the above
C
74. If a country must make a net payment to foreigners because of a balance-of-payments deficit, the country should A. either increase its official reserve assets or borrow anew from foreigners. B. either run down its official reserve assets or borrow anew from foreigners. C. either run down its official reserve assets or lend more foreigners. D. none of the above
B
For question in this section, the notation is Y = GNP = national income C = consumption I = private investment G = government spending X = exports M = imports 75. Which of the following is a true statement? A. BCA X - M B. BKA X - M C. BKA - BCA X - M D. BKA M - X
A
76. There is an intimate relationship between a country's BCA and how the country finances its domestic investment and pays for government expenditures. Given this, which of the following is a true statement? A. If (S - I) < 0, it implies that a country's domestic savings is insufficient to finance domestic investment. B. If (T - G) < 0, it implies that a country's tax revenue is insufficient to finance government spending. C. both a and b are true D. none of the above
C
77. In a public company with diffused ownership, the board of directors is entrusted with A. monitoring the auditors and safeguarding the interests of shareholders. B. monitoring the shareholders and safeguarding the interests of management. C. monitoring the management and safeguarding the interests of shareholders. D. none of the above
C
78. The key strengths of the public corporation is/are A. their capacity to allow efficient risk sharing among many investors. B. their capacity to raise large amounts of funds at relatively low cost. C. their capacity to consolidate decision-making. D. all of the above
D
79. In the United States, managers are bound by the "duty of loyalty" to serve the shareholders. A. This is an ethical, not legal, obligation. B. This is a legal obligation. C. This is only a moral obligation; there are no penalties.
B
80. A complete contract between shareholders and managers A. would specify exactly what the manager will do under each of all possible future contingencies. B. would be an expensive contract to write and a very expensive contract to monitor. C. would eliminate any conflicts of interest (and managerial discretion). D. all of the above
D
81. The agency problem refers to the possible conflicts of interest between A. self-interested managers as principals and shareholders of the firm who are the agents. B. altruistic managers as agents and shareholders of the firm who are the principals. C. self-interested managers as agents and shareholders of the firm who are the principals. D. dutiful managers as principals and shareholders of the firm who are the agents.
C
82. Suppose in order to defraud the shareholders, a manager sets up an independent company that he owns sells the main company's output to this company. He would be tempted to set the transfer price A. below market prices. B. above market prices. C. at the market price. D. in accordance with GAAP.
A
83. In high-growth industries where companies' internally generated funds fall short of profitable investment opportunities, A. managers are less likely to waste funds in unprofitable projects. B. managers are more likely to waste funds in unprofitable projects.
A
84. In the graph at right, X, Y, and Z represent A. entrenchment, alignment, entrenchment. B. alignment, entrenchment, alignment. C. misalignment and alignment. D. agency costs of debt and equity.
A
85. It is important for society as a whole to solve the agency problem, since the agency problem A. leads to waste of scarce resources. B. hampers capital market functions. C. retards economic growth. D. all of the above
D
86. In the United Kingdom, the majority of public companies A. voluntarily abide by the Code of Best Practice on corporate governance. B. are compelled by law to abide by the Code of Best Practice on corporate governance. C. do not abide by the Code of Best Practice on corporate governance.
A
87. In the United States A. boards of directors are legally responsible for representing the interests of the shareholders. B. due to the diffused ownership structure of the public company, management often gets to choose board members who are likely to be friendly to management. C. there is a correlation between underperforming firms and boards of directors who are not fully independent. D. all of the above are true, in the United States.
D
88. Suppose you are the CEO of company A, and you serve on the board of company B, while the CEO of B is on your board. A. This is a potential conflict of interest for both parties. B. This is normal and even a desirable situation since it allows for efficient information sharing between the firms. C. There is a potential conflict for the shareholders of the two firms. D. All of the above are true.
A
89. The board of directors may grant stock options to managers in order to A. save executive compensation costs. B. use as a substitute for bonus. C. align the interest of managers with that of shareholders. D. none of the above
C
90. Concentrated ownership of a public company A. is normal in the United States, following the well-publicized scandals of recent years. B. is relatively rare in the United States and common in many other parts of the world. C. leads to a free-rider problem with the minority shareholders relying on the majority shareholders to assume an undue burden in monitoring the management. D. is the norm in Great Britain.
B
91. The goal of a greater accounting transparency A. is to impose more rules and harsher penalties for their violation. B. is to reduce the information asymmetry between corporate insiders and the public. C. is to discourage managerial self-dealings. D. answers b and c
D
92. In the United States and the United Kingdom, hostile takeovers A. are illegal. B. can serve as a drastic corporate governance mechanism of the last resort. C. reinforce the notion that managers can take their control of the company for granted. D. require management approval.
B
93. After a hostile takeover A. the existing management team is usually fired. B. the existing management team is usually retained at a higher wage. C. the target company usually mounts a takeover defense.
A
94. Suppose the managers of a company have driven the stock price down because they have spent the investors' money on lavish perquisites like golf club memberships. A. This situation may prompt a corporate raider to buy up the shares of the firm in a hostile takeover. B. If the hostile takeover is successful, the managers will probably lose their jobs in the ensuing restructuring. C. If the restructuring is successful, the corporate raider can sell his shares at a profit. D. All of the above
D
95. A pyramidal ownership structure is one in which A. a shareholder controls a holding company that owns a controlling block of another company, which in turn owns controlling interests in yet another company, and so on. B. equity cross-holdings among a group of companies, such as keiretsu and chaebols can be used to concentrate and leverage voting rights to acquire control. C. a combination of these schemes may also be used to leverage control in a pyramidal ownership structure.
C
96. Financial development can contribute to economic growth in what way(s)? A. Financial development enhances savings. B. Financial development channels savings toward real investments in productive capacities. C. Financial development enhances the efficiency of investment allocation through the monitoring and signaling functions of capital markets. D. All of the above
D
97. The Sarbanes-Oxley Act of 2002 A. applies to all U.S. firms. B. applies to listed companies. C. applies to issuers whose securities are traded on an over-the-counter bulletin board. D. all of the above
B
98. The cost of compliance with the Sarbanes-Oxley Act A. is a small amount, since most firms were playing by rules to begin with. B. disproportionately affects small firms. C. is paid for with tax credits for firms found to be in compliance. D. all of the above
B
99. The major components of the Sarbanes-Oxley Act are: A. accounting regulation—The creation of a public accounting oversight board charged with overseeing the auditing of public companies, and restricting the consulting services that auditors can provide to clients. B. audit committee—The company should appoint independent "financial experts" to its audit committee. C. internal control assessment—Public companies and their auditors should assess the effectiveness of internal control of financial record keeping and fraud prevention. D. executive responsibility—Chief executive and finance officers (CEO and CFO) must sign off on the company's quarterly and annual financial statements. If fraud causes an overstatement of earnings, these officers must return any bonuses. E. all of the above
E
100. Since the passage of the Sarbanes-Oxley Act, A. some foreign firms choose to list their shares on the London Stock Exchange and other European exchanges, instead of U.S. exchanges, to avoid the costly compliance. B. the pace of foreign firms listing their shares in the U.S. has increased. C. the firms have passed this increased cost on to their customers.
A
13 The separation of the company's ownership and control, a) is especially prevalent in such countries as the United States and the United Kingdom, where corporate ownership is highly diffused. b) is especially prevalent in such countries as the Italy and Mexico, where corporate ownership is highly concentrated. c) is a rational response to the agency problem. d) none of the above
A
14 In the United States, managers are legally bound by the "duty of loyalty" to a) the board of directors. b) to the shareholders. c) to the bondholders. d) to the government.
B
15 Outside the United States and the United Kingdom, a) concentrated ownership of the company is more the exception than the rule. b) diffused ownership of the company is more the exception than the rule. c) partnerships are more important than corporations. d) none of the above
B
16 Why is it rational to make shareholders "weak" by giving control to the managers of the firm? a) This may be rational when shareholders may be neither qualified nor interested in making business decisions. b) This may be rational since many shareholders find it easier to sell their shares in an underperforming firm than to monitor the management. c) This may be rational to the extent that managers are answerable to the board of directors. d) All of the above are explanations for the separation of ownership and control.
D
17 The investors supply funds to the company but are not involved in the company's daily decision making. As a result, many public companies come to have a) strong shareholders and weak managers. b) strong managers and weak shareholders. c) strong managers and strong shareholders. d) weak managers and weak shareholders.
B
18 The agency problem refers to the possible conflicts of interest between a) self-interested managers as principals and shareholders of the firm who are the agents. b) altruistic managers as agents and shareholders of the firm who are the principals. c) self-interested managers as agents and shareholders of the firm who are the principals. d) dutiful managers as principals and shareholders of the firm who are the agents.
C
19 Self-interested managers may be tempted to a) indulge in expensive perquisites at company expense. b) adopt antitakeover measures for their company to ensure their personal job security. c) waste company funds by undertaking unprofitable projects that benefit themselves but not shareholders. d) all of the above are potential abuses that self-interested managers may be tempted to visit upon shareholders.
D
20 In the U.S., the chief role of the board of directors is a) to hire the management team. b) to decide on the annual capital budget. c) to design an effective incentive compatible compensation scheme for themselves. d) none of the above
A
21 In the United Kingdom, the majority of public companies a) voluntarily abide by the Code of Best Practice on corporate governance. b) are compelled by law to abide by the Code of Best Practice on corporate governance. c) do not abide by the Code of Best Practice on corporate governance.
A
22 In Germany the corporate board is a) legally charged with representing the interests of shareholders exclusively. b) legally charged with looking after the interests of stakeholders (e.g., workers, creditors, etc.) in general, not just shareholders. c) legally charged as a supervisory board only. d) legally charged as a management board only.
B
23 In the United States a) boards of directors are legally responsible for representing the interests of the shareholders. b) due to the diffused ownership structure of the public company, management often gets to choose board members who are likely to be friendly to management. c) there is a correlation between underperforming firms and boards of directors who are not fully independent. d) all of the above are true, in the United States.
D
24 In the United States, it is not uncommon for the same person to serve as both CEO and chairman of the board. a) This situation must not have much conflict of interest since it is common. b) This situation has a built-in conflict of interest. c) This is only legal if that individual owns a controlling number of shares in the firm d) None of the above
B
25 Concentrated ownership of a public company a) can be an effective way to alleviate the agency problem between shareholders and managers. b) is the norm in Great Britain. c) tends to be an ineffective way to alleviate conflicts of interest between groups of shareholders. d) none of the above
A
26 While debt can reduce agency costs between shareholders and management, a) excessive debt may also induce the risk-averse managers to forgo profitable but risky investment projects, causing an underinvestment problem. b) with debt financing companies can misuse debt to finance corporate empire building. c) both a) and b) d) none of the above
C
27 In the United States and the United Kingdom, hostile takeovers a) are illegal. b) can serve as a drastic corporate governance mechanism of the last resort. c) reinforce the notion that managers can take their control of the company for granted. d) require management approval.
B
28 English common law countries tend to provide a stronger protection of shareholder rights than French civil law countries because a) the former countries tend to be more democratic than the latter. b) the former countries tend to protect property rights better than the latter. c) the former countries tend to have more separation of power than the latter. d) all of the above
B
29 Many companies issue shares with differential voting rights, deviating from the one-share one-vote principle. a) By accumulating superior voting shares, investors can acquire cash flow rights exceeding control rights. b) The price of the voting shares is usually twice the price of the voting shares. c) By accumulating superior voting shares, investors can acquire control rights exceeding cash flow rights. d) None of the above
C
30 A pyramidal ownership structure is one in which a) a shareholder controls a holding company that owns a controlling block of another company, which in turn owns controlling interests in yet another company, and so on. b) equity cross-holdings among a group of companies, such as keiretsu and chaebols can be used to concentrate and leverage voting rights to acquire control. c) a combination of these schemes may also be used to leverage control in a pyramidal ownership structure
C
31 One of the objectives of corporate governance reform is to, a) introduce expensive and burdensome accounting reforms. b) strengthen the protection of outside investors from expropriation by managers and controlling insiders. c) provide taxpayer financing for corporate raiders to strengthen the discipline of the marketplace. d) none of the above
B
32 The Sarbanes-Oxley Act of 2002 stipulates that a) a public accounting oversight board be created. b) the company should appoint independent financial experts to its audit committee. c) CEO and CFO sign off the company's financial statements. d) all of the above
D
33 The Sarbanes-Oxley Act of 2002 a) applies to all U.S. firms b) applies to listed companies c) applies to issuers whose securities are traded on an over-the-counter bulletin board. d) all of the above
B
34 The Sarbanes-Oxley Act of 2002 a) has had the consequence that many foreign firms have de-listed in the U.S. exchanges and listed their shares on the London Stock Exchange and other European exchanges. b) has increased the pace of foreign firms listing their shares in the U.S. c) a) and b) are both true d) all of the above
A
35 Since the passage of the Sarbanes-Oxley Act, a) some foreign firms choose to list their shares on the London Stock Exchange and other European exchanges, instead of U.S. exchanges, to avoid the costly compliance. b) the pace of foreign firms listing their shares in the U.S. has increased. c) the firms have passed this increased cost on to their customers.
A
36 The major components of the Sarbanes-Oxley Act include all of the following except a) accounting regulation—The creation of a public accounting oversight board charged with overseeing the auditing of public companies, and restricting the consulting services that auditors can provide to clients. b) audit committee—the company should appoint independent "financial experts" to its audit committee. c) shareholder voting rights reform—"one share one vote" is now the law of the land. d) executive responsibility—CEOs and CFOs must sign off on the company's financial statements.
C
37 The Cadbury Code of Best Practice a) is the U.N. equivalent of the Sarbanes-Oxley Act. b) is voluntary, but firms that fail to comply must explain why they choose not to comply. c) has the force of law, like the Sarbanes-Oxley Act. d) none of the above
B
38 The Cadbury Code has not been legislated into law, and compliance with the code is voluntary. a) However, the London Stock Exchange (LSE) currently requires that each listed company show whether the company is in compliance with the code and explain why if it is not. b) This "comply or explain" approach has apparently persuaded many companies to comply rather than explain. c) Currently, 90 percent of all LSE-listed companies have adopted the Cadbury Code. d) All of the above
D
39 Even though the compliance the Cadbury Code of Best Practice is voluntary, a) the Cadbury Code has made a significant impact on the internal governance mechanisms of U.K. companies. b) the job security of U.K. chief executives has become more sensitive to the company performance, strengthening managerial accountability and weakening its entrenchment. c) joint CEO/COB (chief executive officer and chairman of the board) positions declined. d) all of the above
D
40 The key requirements of the Cadbury Code of Best Practice state that a) boards of directors should include at least three outside directors. b) the positions of CEO and chairman of the board should not reside in the same individual. c) compliance is mandatory for public corporations, optional for listed non-public corporations. d) both a) and b)
D
rectors
43) In the United States, it is not uncommon for the same person to serve as both CEO and
chairman of the board.
43)
A) This situation has a built-in conflict of interest.
B) This situation must not have much conflict of interest since it is common.
C) This is only legal if that individual owns a controlling number of shares in the firm.
D) none of the options
Answer: A
Topic: Board of Directors
44) Suppose you are the CEO of company A, and you serve on the board of company B,
while the CEO of B is on your board.
44)
A) This is a potential conflict of interest for both parties.
B) There is a potential conflict for the shareholders of the two firms.
C) This is normal and even a desirable situation since it allows for efficient
information sharing between the firms.
D) all of the options
Answer: A
Topic: Board of Directors
45) In the United States, it is well documented that 45)
A) as public firms improve their corporate governance, the stock price goes up.
B) public scrutiny can help improve corporate governance.
C) boards dominated by their chief executives are prone to trouble.
D) all of the options
Answer: D
Topic: International Finance in Practice: When Boards Are All in the Family
46) The board of directors may grant stock options to managers. These are 46)
A) put options. B) call options.
C) both of the options D) none of the options
Answer: B
Topic: Incentive Contracts
11
47) If an incentive contract specifies certain accounting performance, 47)
A) managers will be unable to manipulate the GAAP, so shareholders can be confident
of having their wealth maximized.
B) managers will set aside the accounting goal if it conflicts with the goal of
maximizing shareholder wealth.
C) that accounting number will likely be the focus of managers.
D) none of the options
Answer: C
Topic: Incentive Contracts
48) The board of directors may grant stock options to managers 48)
A) to align the interest of managers with that of shareholders.
B) to use as a substitute for bonus.
C) to save executive compensation costs.
D) none of the options
Answer: A
Topic: Incentive Contracts
49) When designing an incentive contract, 49)
A) senior executives can be trusted to not abuse incentive contracts by artificially
manipulating accounting numbers since the auditors should look in to that.
B) the presence of any incentive is enough, whether it is accounting based or
stock-price based.
C) it is important for the board of directors to set up an independent compensation
committee that can carefully design the contract and diligently monitor manager's
actions.
D) the board of directors should always give the managers a "heads I win, tails you
lose" type of option.
Answer: C
Topic: Incentive Contracts
50) Concentrated ownership of a public company 50)
A) is relatively rare in the United States and common in many other parts of the world.
B) is the norm in Great Britain.
C) is normal in the United States, following the well-publicized scandals of recent
years.
D) leads to a free-rider problem with the minority shareholders relying on the majority
shareholders to assume an undue burden in monitoring the management.
Answer: A
Topic: Concentrated Ownership
12
51) Concentrated ownership of a public company 51)
A) is the norm in Great Britain.
B) tends to be an ineffective way to alleviate conflicts of interest between groups of
shareholders.
C) can be an effective way to alleviate the agency problem between shareholders and
managers.
D) none of the options
Answer: C
Topic: Concentrated Ownership
52) The goal of greater accounting transparency 52)
A) is to reduce the information asymmetry between corporate insiders and the public,
as well as discourage managerial self-dealings.
B) is to discourage managerial self-dealings.
C) is to reduce the information asymmetry between corporate insiders and the public.
D) is to impose more rules and harsher penalties for their violation.
Answer: A
Topic: Accounting Transparency
53) Accounting transparency 53)
A) can only be achieved when managers commit to serving on their own audit
committee.
B) promises to reduce the information asymmetry between corporate insiders and the
public.
C) occurs when the accounting department has translucent cubicles for their workers.
D) none of the options
Answer: B
Topic: Accounting Transparency
54) While debt can reduce agency costs between shareholders and management, 54)
A) this only happens at extreme levels of debt.
B) debt can create its own agency costs.
C) this does not work for firms in mature industries with large cash reserves.
D) none of the options
Answer: B
Topic: Debt
13
55) While debt can reduce agency costs between shareholders and management, 55)
A) excessive debt may also induce the risk-averse managers to forgo profitable but
risky investment projects, causing an underinvestment problem. Additionally, with
debt financing, companies can misuse debt to finance corporate empire building.
B) with debt financing, companies can misuse debt to finance corporate empire
building.
C) excessive debt may also induce the risk-averse managers to forgo profitable but
risky investment projects, causing an underinvestment problem.
D) none of the options
Answer: A
Topic: Debt
56) For firms with free cash flows, 56)
A) equity dividends can be a stronger mechanism than bonds for credibly bonding
managers to release cash flows to investors.
B) preferred stock dividends can be a stronger mechanism than bonds for credibly
bonding managers to release cash flows to investors.
C) debt can be a stronger mechanism than stocks for credibly bonding managers to
release cash flows to investors.
D) none of the options
Answer: C
Topic: Debt
57) Debt can reduce agency costs between shareholders and management, but 57)
A) only if the firm is totally up to its eyeballs in debt.
B) excessive debt can create its own agency conflicts.
C) only to the extent that the firm can commit all of its free cash flow.
D) debt is best used as a corporate governance mechanism by young companies with
limited cash reserves.
Answer: B
Topic: Debt
58) Companies domiciled in countries with weak investor protection can reduce agency costs
between shareholders and management
58)
A) by having a press conference and promising to be nice to their investors.
B) by moving to a better county.
C) by listing their stocks in countries with strong investor protection.
D) by voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act.
Answer: C
Topic: Overseas Stock Listings
14
59) Benetton, an Italian clothier, is listed on the New York Stock Exchange. 59)
A) This may make investors both in Italy and abroad more willing to provide capital
and to increase the value of the pre-existing shares.
B) This decision provides their shareholders with a higher degree of protection than is
available in Italy.
C) This decision can be a signal of the company's commitment to shareholder rights.
D) all of the options
Answer: D
Topic: Overseas Stock Listings
60) In the United States and the United Kingdom, hostile takeovers 60)
A) can serve as a drastic corporate governance mechanism of the last resort.
B) are illegal.
C) require management approval.
D) reinforce the notion that managers can take their control of the company for granted.
Answer: A
Topic: Market for Corporate Control
61) In many countries, hostile takeovers are relatively rare. This is so partly because of 61)
A) concentrated ownership in these countries.
B) cultural values and political environments disapproving hostile corporate takeovers.
C) concentrated ownership in these countries, as well as cultural values and political
environments disapproving hostile corporate takeovers.
D) the language barrier.
Answer: C
Topic: Market for Corporate Control
62) After a hostile takeover, 62)
A) the target company usually mounts a takeover defense.
B) the existing management team is usually retained at a higher wage.
C) the existing management team is usually fired.
D) none of the options
Answer: C
Topic: Market for Corporate Control
63) In a hostile takeover attempt, the bidder typically 63)
A) seeks to merge with the target company with an exchange of shares.
B) makes a tender offer to the target shareholders at a price substantially less than the
prevailing share price.
C) makes a tender offer to the target shareholders at a price substantially exceeding the
prevailing share price.
D) makes a tender offer to the target shareholders at the prevailing share price.
Answer: C
Topic: Market for Corporate Control
15
64) Suppose the managers of a company have driven the stock price down because they have
spent the investors' money on lavish perquisites like golf club memberships.
64)
A) If the restructuring is successful, the corporate raider can sell his shares at a profit.
B) This situation may prompt a corporate raider to buy up the shares of the firm in a
hostile takeover.
C) If the hostile takeover is successful, the managers will probably lose their jobs in the
ensuing restructuring.
D) all of the options
Answer: D
Topic: Market for Corporate Control
65) Private benefits of corporate control will tend to be higher in 65)
A) French civil law countries than in English common law countries.
B) English common law countries than in French civil law countries.
C) English common law countries than in German civil law countries.
D) French civil law countries than in Scandinavian civil law countries.
Answer: A
Topic: Law and Corporate Governance
66) English common law countries tend to provide a stronger protection of shareholder rights
than French civil law countries because
66)
A) the former countries tend to have more separation of power than the latter.
B) the former countries tend to protect property rights better than the latter.
C) the former countries tend to be more democratic than the latter.
D) all of the options
Answer: B
Topic: Law and Corporate Governance
67) Many companies issue shares with differential voting rights, deviating from the
one-share one-vote principle.
67)
A) By accumulating superior voting shares, investors can acquire control rights
exceeding cash flow rights.
B) By accumulating superior voting shares, investors can acquire cash flow rights
exceeding control rights.
C) The price of the voting shares is usually twice the price of the voting shares.
D) none of the options
Answer: A
Topic: Law and Corporate Governance
16
68) Studies show that the quality of law enforcement, as measured by the rule of law index,
will tend to be
68)
A) highest in English common law countries.
B) highest in Scandinavian civil law countries and German civil law countries.
C) higher in English common law countries than in Scandinavian civil law countries.
D) higher in French civil law countries than in English common law countries.
Answer: B
Topic: Law and Corporate Governance
69) Suppose Mr. Lee and his relatives hold 30 percent of shares outstanding of Samsung
Life, which in turn holds 20 percent of Samsung Electronics. What is the cash flow right
of the Lee family in Samsung Electronics?
69)
A) 6 percent B) 50 percent C) 10 percent D) 20 percent
Answer: A
Topic: Ownership and Control Pattern
70) Concentrated corporate ownership is most prevalent in 70)
A) the U.S. B) the U.K. C) Italy. D) Australia.
Answer: C
Topic: Ownership and Control Pattern
71) In countries with concentrated ownership, 71)
A) hostile takeovers are quite rare. B) hostile takeovers are quite common.
Answer: A
Topic: Ownership and Control Pattern
72) A pyramidal ownership structure is one in which 72)
A) equity cross-holdings among a group of companies, such as keiretsu and chaebols,
can be used to concentrate and leverage voting rights to acquire control.
B) a combination of these schemes may also be used to leverage control in a pyramidal
ownership structure.
C) a shareholder controls a holding company that owns a controlling block of another
company, which in turn owns controlling interests in yet another company, and so
on.
D) none of the options
Answer: B
Topic: Ownership and Control Pattern
17
73) What is the difference between control rights and cash flow rights? 73)
A) Since all shareholders benefit only from pro-rata cash flows, control rights and cash
flow rights are the same thing.
B) Cash flow rights are more important than control rights since the only reason to
invest in anything is to generate cash.
C) Large investors may be able to derive private benefits from control, thus control
rights can exceed cash flow rights.
D) none of the options
Answer: C
Topic: Ownership and Control Pattern
74) The key to extracting private benefits of control that are not shared by other shareholders
on a pro rata basis is to
74)
A) buy a large block of nonvoting shares.
B) become a large shareholder and acquire control rights exceeding cash flow rights.
C) force the firm into bankruptcy.
D) sell your shares in a tender offer.
Answer: B
Topic: Private Benefits of Control
75) The voting premium, defined as the total vote value (value of a vote times the number of
votes) as a proportion of the firm's equity market value is only about 2 percent in the
United States and 36 percent in Mexico, suggesting that in Mexico,
75)
A) minority shareholders share in the private benefits of control.
B) dominant shareholders extract substantial private benefits of control.
C) dominant shareholders overpay and thus fail to extract substantial private benefits.
D) none of the options
Answer: B
Topic: Private Benefits of Control
76) Unless investors can derive significant private benefits of control, 76)
A) they will pay small premiums for voting shares over nonvoting shares.
B) they will pay moderate premiums for voting shares over nonvoting shares.
C) they will not pay substantial premiums for voting shares over nonvoting shares.
D) they will pay substantial premiums for voting shares over nonvoting shares.
Answer: C
Topic: Private Benefits of Control
18
77) The formula to compute the value of the "block premium" is 77)
A)
the exchange price after the control transaction - price per share paid for the control block
price per share paid for the control block
B)
Price per share paid for the control block - the exchange price after the control transaction
the exchange price after the announcement of the control transaction
C)
Price per share paid for the control block - the exchange price after the control transaction
price per share paid for the control block
D)
Price per share paid for the control block - the exchange price after the control transaction
the exchange price prior to the announcement of the control transaction
Answer: B
Topic: Private Benefits of Control
78) The value of private benefits of control may be measured using 78)
A) "block premium," the difference between the price per share paid for a control block
of shares versus the exchange price of regular shares.
B) the difference in value between non-voting shares and voting shares.
C) the difference in value between non-voting shares and voting shares or "block
premium," the difference between the price per share paid for a control block of
shares versus the exchange price of regular shares.
D) none of the options
Answer: C
Topic: Private Benefits of Control
79) Several studies document the empirical link between 79)
A) growth in GDP and concentrated ownership.
B) financial development and economic growth.
C) weak investor protection and GDP growth.
D) none of the options
Answer: B
Topic: Capital Markets and Valuation
80) Financial development can contribute to economic growth in what way(s)? 80)
A) Financial development enhances savings.
B) Financial development enhances the efficiency of investment allocation through the
monitoring and signaling functions of capital markets.
C) Financial development channels savings toward real investments in productive
capacities.
D) all of the options
Answer: D
Topic: Capital Markets and Valuation
19
81) Comparing the U.S. with the German and Japanese corporate governance systems, 81)
A) the German and Japanese systems are "bank centered."
B) it seems fair to say that no country has a perfect system.
C) the U.S. system is "market centered."
D) all of the options.
Answer: D
Topic: Corporate Governance Reform
82) The objective of corporate governance reform should be what? 82)
A) Strengthen the protection of outside investors from expropriation by controlling
insiders.
B) Strengthen the protection of outside investors from expropriation by managers and
controlling insiders.
C) Strengthen the protection of outside investors from expropriation by managers.
D) none of the options
Answer: B
Topic: Objectives of Reform
83) One of the objectives of corporate governance reform is to, 83)
A) introduce expensive and burdensome accounting reforms.
B) provide taxpayer financing for corporate raiders to strengthen the discipline of the
marketplace.
C) strengthen the protection of outside investors from expropriation by managers and
controlling insiders.
D) none of the options
Answer: C
Topic: Objectives of Reform
84) In the U.S., corporate governance reform has included all of the following except 84)
A) enhancing the transparency and disclosure of financial statements.
B) requiring auditors to sit on the boards of directors.
C) energizing the regulatory and monitoring functions of the SEC.
D) strengthen the independence of boards of directors.
Answer: B
Topic: Objectives of Reform
85) The Sarbanes-Oxley Act of 2002 stipulates that 85)
A) the company should appoint independent financial experts to its audit committee.
B) both CEO and CFO sign off on the company's financial statements.
C) a public accounting oversight board be created.
D) all of the options
Answer: D
Topic: Sarbanes-Oxley Act
20
86) The Sarbanes-Oxley Act of 2002 86)
A) applies to listed companies.
B) applies to issuers whose securities are traded on an over-the-counter bulletin board.
C) applies to all U.S. firms.
D) all of the options
Answer: A
Topic: Sarbanes-Oxley Act
87) The Sarbanes-Oxley Act of 2002 87)
A) has had the consequence that many foreign firms have de-listed in the U.S.
exchanges and listed their shares on the London Stock Exchange and other
European exchanges.
B) has increased the pace of foreign firms listing their shares in the U.S. and has also
had the consequence that many foreign firms have de-listed in the U.S. exchanges
and listed their shares on the London Stock Exchange and other European
exchanges.
C) has increased the pace of foreign firms listing their shares in the U.S.
D) all of the options
Answer: A
Topic: Sarbanes-Oxley Act
88) The cost of compliance with the Sarbanes-Oxley Act 88)
A) is a small amount, since most firms were playing by rules to begin with.
B) is paid for with tax credits for firms found to be in compliance.
C) disproportionately affects small firms.
D) all of the options
Answer: C
Topic: Sarbanes-Oxley Act
89) One implication of the Sarbanes-Oxley Act is that companies must appoint independent
"financial experts" to their committees. Which of the major components is associated
with this objective?
89)
A) Accounting regulation B) Executive responsibility
C) Audit committee D) Internal control assessment
Answer: C
Topic: Sarbanes-Oxley Act
21
90) The major components of the Sarbanes-Oxley Act are 90)
A) executive responsibility: Chief executive and finance officers (CEO and CFO) must
sign off on the company's quarterly and annual financial statements. If fraud causes
an overstatement of earnings, these officers must return any bonuses.
B) audit committee: The company should appoint independent "financial experts" to its
audit committee.
C) accounting regulation: The creation of a public accounting oversight board charged
with overseeing the auditing of public companies, and restricting the consulting
services that auditors can provide to clients.
D) internal control assessment: Public companies and their auditors should assess the
effectiveness of internal control of financial record keeping and fraud prevention.
E) all of the options
Answer: E
Topic: Sarbanes-Oxley Act
91) The key requirements of the Sarbanes-Oxley Act state that 91)
A) the positions of CEO and chairman of the board should not reside in the same
individual.
B) boards of directors should include at least three outside directors.
C) compliance is mandatory for public corporations, optional for listed non-public
corporations.
D) none of the options.
Answer: D