Multiple Choice - Part 1: Corporations and Financial Markets

1.1 Which of the following is or are an advantage of incorporation?

A) Access to capital markets

B) Limited liability

C) Unlimited life

D) All of the above

D) All of the above

1.2 In a corporation who ultimately makes the business decisions?

A) The Board of Directors

B) Debt holders

C) Shareholders

D) Investors

A) The Board of Directors

1.3 Who is charged with running the corporation according to the board’s policies?

A) Chief operating officer

B) Company president

C) Chief executive officer

D) Chief financial officer

C) Chief executive officer

1.4 When does the Principal Agent Problem arise?

A) Managers have little incentive to work for shareholders when it hurts their own interest

B) Because ownership and control are separated

C) Both A and B

D) None of the above

C) Both A and B

1.5 What do we call it when an investor buys enough stock in a poorly performing firm to replace the board and CEO?

A) Shareholder proposal

B) Leveraged buyout

C) Shareholder action

D) Hostile takeover

D) Hostile takeover

1.6 Buying Coca Cola shares on the primary market means what?

A) Coca Cola receives the money through new shares

B) You buy from another investor

C) You buy from the stock exchange

D) You buy from the central bank

A) Coca Cola receives the money through new shares

1.7 Buying Coca Cola shares on the secondary market means what?

A) Coca Cola receives the money through new shares

B) You buy from another investor

C) You buy from the stock exchange

D) You buy from the central bank

B) You buy from another investor

What is the primary financial objective of a corporation?

A) Maximize accounting earnings

B) Maximize sales growth

C) Maximize market share

D) Maximize market value of equity

D) Maximize market value of equity

Why is limited liability important for shareholders?

A) It guarantees dividends

B) It caps their losses at the amount invested

C) It avoids corporate taxes

D) It ensures one share one vote

B) It caps their losses at the amount invested

Which feature clearly distinguishes a corporation from a sole proprietorship?

A) Limited life

B) No need for financial reporting

C) Unlimited personal liability of owners

D) Legal separation between firm and owners

D) Legal separation between firm and owners

Which of the following is a secondary market transaction?

A) Firm issues new bonds to investors

B) Firm sells new shares in an IPO

C) Investor buys existing shares from another investor on the exchange

D) Bank grants a term loan to a firm

C) Investor buys existing shares from another investor on the exchange

Which statement about an IPO vs a seasoned equity offering is correct?

A) Both are the first time the firm sells securities

B) An IPO is the first public share issue; a seasoned offering is a later share issue

C) An IPO sells bonds; a seasoned offering sells equity

D) IPOs are secondary market trades

B) An IPO is the first public share issue; a seasoned offering is a later share issue

Which best describes the role of a financial intermediary?

A) Sets monetary policy

B) Matches savers and borrowers on its own balance sheet

C) Only operates stock exchanges

D) Guarantees all investments

B) Matches savers and borrowers on its own balance sheet

Corporate governance can be described as what?

A) A way to minimize taxes

B) The system of rules and incentives aligning managers with owners

C) A method to avoid financial regulation

D) A way to guarantee dividends

B) The system of rules and incentives aligning managers with owners

Why does separation of ownership and control create agency problems?

A) Owners cannot trade shares

B) Managers bear all risk of projects

C) Managers control resources but do not bear full gains or losses

D) Boards cannot fire managers

C) Managers control resources but do not bear full gains or losses

Which is NOT a mechanism to reduce agency problems?

A) Performance based compensation

B) Shareholder voting and active boards

C) Hostile takeovers

D) Issuing more non voting shares to management

D) Issuing more non voting shares to management

Which is an example of a financial intermediary?

A) New York Stock Exchange

B) European Central Bank

C) Mutual fund

D) Credit rating agency

C) Mutual fund