Quiz 1 Issues in Financial Management

A company has introduced a new incentive contract that rewards managers with stock options. What is the primary goal of this contract?

To align managers’ financial interests with those of shareholders.

Based on fiduciary and ethical responsibility, which of the following best describes the proper goal of a corporation?

Maximize shareholder wealth.

Evaluate the use of shareholder lobbying as an effective control mechanism over management. What is a potential benefit?

It allows shareholders to directly influence managerial decisions and replace ineffective management.

Explain why incentive contracts are used as a mechanism for controlling management.

They align the interests of managers with those of shareholders.

How does the board of directors impact corporate governance?

By monitoring management’s performance.

How does the separation of ownership and management differ in a sole proprietorship compared to a corporation?

Sole proprietorships typically have no separation, while corporations do.

How does the threat of a merger act as a control mechanism over management?

It incentivizes managers to keep stock prices high.

In a corporation, how is the business entity legally viewed?

There is separation between the business and the owner.

Which of the following best describes the ownership structure of a corporation?

Divided into transferable shares.

Which type of partner in a partnership is typically responsible for making day-to-day decisions?

General Partners