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# 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 regulationâ€”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 committeeâ€”The company should appoint independent "financial experts" to its audit committee. C. internal control assessmentâ€”Public companies and their auditors should assess the effectiveness of internal control of financial record keeping and fraud prevention. D. executive responsibilityâ€”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 regulationâ€”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 committeeâ€”the company should appoint independent "financial experts" to its audit committee. c) shareholder voting rights reformâ€”"one share one vote" is now the law of the land. d) executive responsibilityâ€”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

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

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

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

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

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

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.

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.

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

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.

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

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

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

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

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.

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.

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

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.

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.

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

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.

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

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.

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

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

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.

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

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.

Topic: Ownership and Control Pattern

71) In countries with concentrated ownership, 71)

A) hostile takeovers are quite rare. B) hostile takeovers are quite common.

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

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

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.

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

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.

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

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

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

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

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.

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

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

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.

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

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

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

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

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

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

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.