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Questions and Answers
What is the primary function of shareholders and creditors in a company?
What is the primary function of shareholders and creditors in a company?
- To manage the company's relationships with suppliers and customers
- To ensure the company's compliance with government regulations
- To provide the capital and financial resources to finance the company's activities (correct)
- To oversee the daily operations of the company
Which of the following is NOT a typical stakeholder group in a company?
Which of the following is NOT a typical stakeholder group in a company?
- The media (correct)
- The government and regulators
- The employees
- The board of directors
What is the common characteristic that defines a stakeholder?
What is the common characteristic that defines a stakeholder?
- Having a vested interest in the company (correct)
- Being employed by the company
- Being a government official
- Having a direct financial interest in the company
Who is responsible for overseeing the daily operations of a company?
Who is responsible for overseeing the daily operations of a company?
What is the primary function of the board of directors in a company?
What is the primary function of the board of directors in a company?
Which stakeholder group is responsible for ensuring a company's compliance with government regulations?
Which stakeholder group is responsible for ensuring a company's compliance with government regulations?
What do customers typically expect from a company's products or services?
What do customers typically expect from a company's products or services?
Why do suppliers have a long-term interest in a company's stability?
Why do suppliers have a long-term interest in a company's stability?
What is the primary interest of short-term creditors?
What is the primary interest of short-term creditors?
Which stakeholders are most concerned with ensuring the well-being of their nations' economies?
Which stakeholders are most concerned with ensuring the well-being of their nations' economies?
What is a key concern for most companies?
What is a key concern for most companies?
What would most likely benefit from a significant increase in the market value of a company?
What would most likely benefit from a significant increase in the market value of a company?
Who provides the human capital for a company's day-to-day operations?
Who provides the human capital for a company's day-to-day operations?
According to the shareholder theory, whose interests are prioritized?
According to the shareholder theory, whose interests are prioritized?
What is the role of the board of directors in a company?
What is the role of the board of directors in a company?
What do suppliers provide to a company?
What do suppliers provide to a company?
What is the primary objective of the stakeholder theory?
What is the primary objective of the stakeholder theory?
What role do government and regulators play in a company?
What role do government and regulators play in a company?
What is the characteristic of a dispersed ownership structure?
What is the characteristic of a dispersed ownership structure?
What is the purpose of dual-share classes in a corporation?
What is the purpose of dual-share classes in a corporation?
What is the strategy used by managers to extract private benefits?
What is the strategy used by managers to extract private benefits?
What is the characteristic of a concentrated ownership structure?
What is the characteristic of a concentrated ownership structure?
What is the purpose of straight voting in a corporation?
What is the purpose of straight voting in a corporation?
What is the primary concern for a debtholder when a company increases its leverage?
What is the primary concern for a debtholder when a company increases its leverage?
Why might increasing dividend payments to shareholders conflict with debtholders' interests?
Why might increasing dividend payments to shareholders conflict with debtholders' interests?
What is the reason for the debt/equity conflict in a company?
What is the reason for the debt/equity conflict in a company?
What could be a reason for a company to reject a high-risk high-reward project?
What could be a reason for a company to reject a high-risk high-reward project?
What is the likely outcome of a company's decision to increase its leverage?
What is the likely outcome of a company's decision to increase its leverage?
Why might a company include covenants in its debt agreements?
Why might a company include covenants in its debt agreements?
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Study Notes
Stakeholder Groups
- A stakeholder is any individual or group that has a vested interest in a company.
- Stakeholders in a business include:
- Shareholders and creditors (provide capital and financial resources)
- Board of directors (steward of the company)
- Managers (execute strategy and day-to-day operations)
- Employees (provide human capital)
- Customers (demand for products and services)
- Suppliers (raw inputs and outsourced functions)
- Government and regulators (dictate rules and regulations)
Stakeholder Purpose/Function
- Shareholders: provide financial resources, expect return on investment
- Customers: expect products/services to satisfy needs, provide benefits, and meet safety standards
- Suppliers: provide inputs and services, expect long-term stability
- Government and regulators: protect public interest and ensure well-being of economy
Shareholder vs Stakeholder Theory
- Shareholder Theory: prioritize shareholder value, consider other stakeholders only as they affect shareholder value
- Stakeholder Theory: consider interests of all stakeholders, making ESG an explicit objective
Shareholder Rights and Relationships
- Shareholders have rights, e.g., controlling and minority relationships
- Shareholder relationships can be:
- Dispersed (many shareholders, none with control)
- Concentrated (individual/group with control)
- Hybrid (combination of dispersed and concentrated)
Manager and Board Relationships
- Managers may extract private benefits by withholding information from the board
- Dual-share classes can give company insiders more control
Shareholder vs Creditor Interests
- Shareholders: prefer high leverage for higher return potential
- Creditors: prefer lower leverage to reduce risk and ensure debt repayment
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