Hrm 531 Week 3 Quiz
Which of the following actions would be likely to reduce conflicts of interest between stockholders and managers?
Student Response 1.
Congress passes a law that severely restricts hostile takeovers.
2. A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock.
3. The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period.
4. The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company.
5. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather …show more content…
than cash.
2. Which of the following statements is CORRECT?
Student Response
1. One disadvantage of operating a business as a sole proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level. 2.
One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.
3.
It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.
4. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.
5. Corporations face fewer regulations than sole proprietorships.
3. Which of the following statements is CORRECT?
Student Response
1. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers.
2. Bond covenants are an effective way to resolve conflicts between shareholders and managers. 3.
One advantage to forming a corporation is that the owners of the firm have limited liability.
4. Because of their simplified organization, it is easier for sole proprietors and partnerships to raise large amounts of outside capital than it is for corporations.
5. Corporations face few regulations and more favorable tax treatment than do sole proprietorships and partnerships.
4. Which of the following statements is
CORRECT?
Student Response
1. In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner. 2.
Sole proprietorships and partnerships generally have a tax advantage over corporations.
3. Sole proprietorships are subject to more regulations than corporations.
4. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy.
5. Corporations of all types are subject to the corporate income tax.
5. Which of the following actions would be most likely to reduce conflicts of interest between stockholders and bondholders?
Student Response
1. The bankruptcy of Enron Corporation, and the fraud committed by some of its officers, was much discussed, but it did not lead to any important changes in business practices.
2. If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted. 3.
If someone deliberately understates costs and thereby causes reported profits to increase, then this can cause the price of the stock to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.
4. There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm.
5. Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business.
6. The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose, barring any new information coming out about the stock.
Student Response
1. False 2.
True
7. A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.
Student Response 1.
False
2. True
8. If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.
Student Response
1. True 2.
False
9. Globalization of business has been facilitated by improvements in telecommunications.
Student Response 1.
True
2. False
10. Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible. However, there can be conflicts between stockholders and bondholders.
Student Response
1. True 2.
False
Student Response 1.
Congress passes a law that severely restricts hostile takeovers.
2. A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock.
3. The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period.
4. The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company.
5. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather …show more content…
than cash.
2. Which of the following statements is CORRECT?
Student Response
1. One disadvantage of operating a business as a sole proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level. 2.
One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.
3.
It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.
4. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.
5. Corporations face fewer regulations than sole proprietorships.
3. Which of the following statements is CORRECT?
Student Response
1. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers.
2. Bond covenants are an effective way to resolve conflicts between shareholders and managers. 3.
One advantage to forming a corporation is that the owners of the firm have limited liability.
4. Because of their simplified organization, it is easier for sole proprietors and partnerships to raise large amounts of outside capital than it is for corporations.
5. Corporations face few regulations and more favorable tax treatment than do sole proprietorships and partnerships.
4. Which of the following statements is
CORRECT?
Student Response
1. In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner. 2.
Sole proprietorships and partnerships generally have a tax advantage over corporations.
3. Sole proprietorships are subject to more regulations than corporations.
4. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy.
5. Corporations of all types are subject to the corporate income tax.
5. Which of the following actions would be most likely to reduce conflicts of interest between stockholders and bondholders?
Student Response
1. The bankruptcy of Enron Corporation, and the fraud committed by some of its officers, was much discussed, but it did not lead to any important changes in business practices.
2. If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted. 3.
If someone deliberately understates costs and thereby causes reported profits to increase, then this can cause the price of the stock to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.
4. There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm.
5. Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business.
6. The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose, barring any new information coming out about the stock.
Student Response
1. False 2.
True
7. A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.
Student Response 1.
False
2. True
8. If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.
Student Response
1. True 2.
False
9. Globalization of business has been facilitated by improvements in telecommunications.
Student Response 1.
True
2. False
10. Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible. However, there can be conflicts between stockholders and bondholders.
Student Response
1. True 2.
False