Sample Solutions Exam
FNCE 370
Overview of Corporate Finance
Sample Examination (Solutions)
Part I: Multiple Choice
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FNCE 370 Sample Examination (Solutions)
1/8
May 2006
Part II: Written Response
26.
Agency problems are said to be inherent in the corporate form of an organization. Why do you think this is the case? Do you think agency problems arise in a sole proprietorship or a partnership? What steps would you take to reduce agency problems in a so-called typical corporation?
Suggested Answer
(See pp. 10–15 in the textbook)
Agency problems are inherent in the corporate form of an organization because of the separation of ownership and management. Although shareholders can control the corporation by electing its board of directors, they cannot directly control the operations of the corporation or the work performed by managers. Management may have goals that differ from maximizing shareholders’ wealth (e.g., shirking, acquiring perks).
Agency problems do arise in a sole proprietorship and a partnership, when owners delegate the company’s operations to employees. Agency problems may also arise between owners and creditors such as banks and suppliers. Owners may want to maximize profits by delaying the payment of debts for as long as possible.
The following are two major ways agency problems can be reduced in a typical corporation. • Align management goals with shareholder goals (e.g., tie financial performance to share value).
• Replace managers through controlling board of directors elections.
27.
Define the three forms of market efficiency. Why should a financial decision maker, such as a corporate treasurer or CFO, be concerned with market efficiency?
Suggested Answer
(See pp. 352–358 in the textbook)
The following are the three forms of market efficiency.
• Strong form efficient—all information is reflected in stock prices,
Overview of Corporate Finance
Sample Examination (Solutions)
Part I: Multiple Choice
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
c b b e a c d b b d d d c c a c b b c e c d b e a
FNCE 370 Sample Examination (Solutions)
1/8
May 2006
Part II: Written Response
26.
Agency problems are said to be inherent in the corporate form of an organization. Why do you think this is the case? Do you think agency problems arise in a sole proprietorship or a partnership? What steps would you take to reduce agency problems in a so-called typical corporation?
Suggested Answer
(See pp. 10–15 in the textbook)
Agency problems are inherent in the corporate form of an organization because of the separation of ownership and management. Although shareholders can control the corporation by electing its board of directors, they cannot directly control the operations of the corporation or the work performed by managers. Management may have goals that differ from maximizing shareholders’ wealth (e.g., shirking, acquiring perks).
Agency problems do arise in a sole proprietorship and a partnership, when owners delegate the company’s operations to employees. Agency problems may also arise between owners and creditors such as banks and suppliers. Owners may want to maximize profits by delaying the payment of debts for as long as possible.
The following are two major ways agency problems can be reduced in a typical corporation. • Align management goals with shareholder goals (e.g., tie financial performance to share value).
• Replace managers through controlling board of directors elections.
27.
Define the three forms of market efficiency. Why should a financial decision maker, such as a corporate treasurer or CFO, be concerned with market efficiency?
Suggested Answer
(See pp. 352–358 in the textbook)
The following are the three forms of market efficiency.
• Strong form efficient—all information is reflected in stock prices,