Introduction to Corporate Finance
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Questions and Answers

What is a key responsibility of the board regarding the CEO and other executives?

  • To increase the compensation structure for top performers.
  • To evaluate the integrity of their leadership. (correct)
  • To ensure they are creating a culture of transparency.
  • To monitor shareholder dividends closely.

    • Which type of director is classified as someone connected to the company through employment or family?

  • Independent Directors
  • Inside Directors (correct)
  • Executive Directors
  • Outside Directors

    • What has research shown about the relationship between board size and firm value?

  • The performance of boards is determined solely by the number of directors.
  • Larger boards result in increased firm value.
  • Board size has no impact on firm performance.
  • Smaller boards are linked to greater firm value. (correct)

    • What aspect significantly influences the decision-making quality of boards?

    <p>The size of the board. (A)</p> Signup and view all the answers

    What is one factor that the board must consider according to ethical standards?

    <p>Taking into account the interests of all stakeholders. (C)</p> Signup and view all the answers

    What role do financial institutions primarily serve in the financial market?

    <p>They act as intermediaries between suppliers and users of funds. (D)</p> Signup and view all the answers

    What is a primary focus of social responsibility in corporations?

    <p>Ethical treatment of employees and the community. (A)</p> Signup and view all the answers

    Which of the following is considered a controversial business activity that companies may engage in?

    <p>Gaming (D)</p> Signup and view all the answers

    What financial trend is most associated with advances in technology like E-business and Fintech?

    <p>Financial engineering (D)</p> Signup and view all the answers

    What should be the primary goal of financial management in a corporation?

    <p>Maximize shareholder wealth (B)</p> Signup and view all the answers

    What do agency costs refer to?

    <p>Costs associated with conflicts between principals and agents (C)</p> Signup and view all the answers

    How can managerial compensation be structured to align interests between management and shareholders?

    <p>By offering stock options and performance incentives (A)</p> Signup and view all the answers

    What is the role of the board of directors in corporate governance?

    <p>To monitor and hire the executive team, set compensation, and approve major decisions (D)</p> Signup and view all the answers

    What is an example of an agency problem?

    <p>A manager prioritizing personal interests over shareholder interests (A)</p> Signup and view all the answers

    Which of the following correctly defines the principle-agent relationship?

    <p>Stockholders hire managers to represent their interests (B)</p> Signup and view all the answers

    What effect can the threat of a takeover have on management performance?

    <p>It can result in better management practices (D)</p> Signup and view all the answers

    Which statement about corporate governance is correct?

    <p>Principles of corporate governance ensure the board is accountable for oversight (B)</p> Signup and view all the answers

    What typically does executive compensation include?

    <p>Salaries and bonuses (C)</p> Signup and view all the answers

    How is CEO pay determined to be fair?

    <p>It aligns with market wages (C)</p> Signup and view all the answers

    What type of compensation is not typically included in long-term incentives?

    <p>Cash bonuses (D)</p> Signup and view all the answers

    What is a consequence of linking managers' pay to firm performance?

    <p>It incentivizes managers to increase stock prices (B)</p> Signup and view all the answers

    Which turnover type involves resignation due to poor performance?

    <p>Involuntary turnover (D)</p> Signup and view all the answers

    Which of the following is typically part of cash compensation?

    <p>Salary (A)</p> Signup and view all the answers

    In the context of CEO turnover, what can voluntary turnover result from?

    <p>Health issues or death (B)</p> Signup and view all the answers

    What is a problem regarding CEO compensation if paid above market wages?

    <p>It signals potential financial issues (A)</p> Signup and view all the answers

    What is the primary role of independent directors on a board?

    <p>To monitor the firm as a watchdog (C)</p> Signup and view all the answers

    What is a significant factor that may affect independent directors' motivation to monitor firm performance?

    <p>Their personal wealth being tied to performance (B)</p> Signup and view all the answers

    What trend has been observed regarding compensation for outside directors?

    <p>Standardization of equity-based pay like shares and options (B)</p> Signup and view all the answers

    Which of the following serves as a primary purpose of executive compensation?

    <p>To attract and retain skilled executives (B)</p> Signup and view all the answers

    How might the market for CEOs affect the salaries they receive?

    <p>It requires companies to offer high salaries to attract candidates (B)</p> Signup and view all the answers

    What is a common misconception about the salary of CEOs?

    <p>The question of whether CEOs are paid too much is often misunderstood (B)</p> Signup and view all the answers

    What type of pay structure has become more common for outside directors?

    <p>Equity-based compensation such as stocks or options (C)</p> Signup and view all the answers

    Which statement accurately reflects the role of managerial compensation?

    <p>It must motivate performance while discouraging self-interest (D)</p> Signup and view all the answers

    Study Notes

    Introduction to Corporate Finance

    • The goal of financial management is to maximize the current value of a company's stock.
    • This does not mean that any action is acceptable to maximize shareholder wealth, ethical considerations are crucial.
    • The agency problem arises from the conflict of interest between the principal (stockholders) and the agent (managers).
    • Agency costs are incurred due to these conflicts of interest.

    Managing Managers

    • Board of directors is responsible for overseeing and monitoring the management team
    • Managerial compensation strategies, like incentives, aim to align management and shareholder interests.
    • Corporate control, including the threat of takeovers, can motivate better management.

    Board Independence

    • Board independence is crucial, with a majority of independent directors, to ensure effective oversight and monitoring.
    • Smaller boards are often associated with higher firm value and performance.

    CEO Compensation

    • CEO compensation serves to attract, retain, and motivate qualified executives while discouraging self-interested behavior.
    • CEO compensation includes cash compensation, stock options, restricted stock awards, and other long-term incentives.
    • There's a market for CEOs, and compensation should reflect their market value, not exceed it.

    CEO Turnover

    • Turnover can occur due to various reasons including voluntary resignation, retirement, or involuntary termination due to performance issues or scandals.

    The Role of Financial Markets in Corporate Finance

    • Financial markets facilitate the flow of funds between those who have surplus funds (suppliers) and those who need funds (users).
    • These markets can be divided into money markets (short-term) and capital markets (long-term).
    • Primary markets are where new securities are issued, while secondary markets involve trading of existing securities among investors.

    The Stakeholder Theory

    • The stakeholder theory recognizes that companies have responsibilities to various stakeholders, not just shareholders.
    • These stakeholders can include customers, employees, suppliers, communities, and the environment.

    Social Responsibility and Ethical Investing

    • Investors are becoming more concerned with the ethical and social responsibility of corporations.
    • Ethical investing involves considering factors like environmental impact, labor practices, and corporate governance when making investment decisions.

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    Description

    This quiz covers essential concepts in corporate finance, including the goals of financial management, the agency problem, and the significance of board independence. Learn about managerial compensation strategies and their impact on aligning interests between shareholders and managers. Test your understanding of how ethical considerations play a role in maximizing shareholder wealth.

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