1) Which of the following statements is false?

A) One disadvantage of using leverage is that it does not allow the original owners of the firm to maintain their equity stake.

B) The separation of ownership and control creates the possibility of management entrenchment; facing little threat of being fired and replaced, managers are free to run the firm in their own best interests.

C) Managers also have their own personal interests, which may differ from those of both equity holders and debt holders.

D) The costs of reduced effort and excessive spending on perks are another form of agency cost.

Answer: Explanation:

.2) In many Canadian cases the actual ownership and exposure to the resources of the firm is ________ while the voting control is ________. This is accomplished by dominant shareholders (usually controlling families) that utilize super-voting shares, cross ownership, or pyramidal ownership structures.

A) large; small

B) small; large

C) large; large

D) small; small

3) When Air Canada was in the process of reorganizing under the CCAA in 2003-2004, it was able to win wage concessions from its powerful unions by explaining that ________, if continued, would push Air Canada into bankruptcy.

A) the high agency cost

B) the high leasing cost

C) the high variable cost

D) the high cost structure

4) Banks are generally opposed to high capital requirements. Moral hazard may partially explain why because:

A) subsidies and bailouts reduce the risks associated with a high leverage position

B) high leverage increases the bank's ability to benefit from the tax shield

C) imposed high capital requirements impedes the efficient operation of capital markets

D) imposed high capital requirements impedes the banks ability to use retained earnings to fund capital initiatives

Answer: Explanation: