Chapter 2

Chapter 2 Financial Goals and Corporate Governance Multiple Choice 2./ Who Owns the Business? 1) Foreign stock markets are frequently characterized by controlling shareholders for the individual publicly traded firms. Which of the following is NOT identified by the authors as typical controlling shareholders? A) The government (for example, privatized utilities) B) Institutions (such as banks in Germany). C) Family (such as in France) J) All of the above were identified by the authors as controlling shareholders 2.2 What Is the Goal of Management? 1) "Maximize corporate wealth" A) is the primary objective of the non-Anglo-American model of management. B) as a management objective treats shareholders on a par with other corporate stakeholders such as creditors, labor, and local community. C) has a broader definition than just financial wealth. P) all of the above 2) The Shareholder Wealth Maximization Model A) combines the interests and inputs of shareholders, creditors, management, employees, and society. B) is being usurped by the Stakeholder Capitalism Model as those types of MNEs dominate their global industry segments clearly places shareholders as the primary stakeholder. D) is the dominant form of corporate management in the European-Japanese governance system. 3) The Stakeholder Capitalism Model A) clearly places shareholders as the primary stakeholder. By combines the interests and inputs of shareholders, creditors, management, employees, and society. C) has financial profit as its goal and is often termed impatient capital. D) is the Anglo-American model of corporate governance. 4) In the Anglo-American model of corporate governance, the primary goal of management is to A) maximize the wealth of all stakeholders maximize shareholder wealth C) minimize costs D) minimize risk 5) in finance, an efficient market is one in which A) prices are assumed to be correct. B) prices adjust quickly and accurately to new information C) prices are the best allocators of capital in the macro economy. Dy all of the above 6) Systematic risk can be defined as A) the total risk to the firm. B) the risk of the individual security, the risk of the market in general. D) the risk that can be systematically diversified away. 7) Unsystematic risk can be defined as A) the total risk to the firm. B) the risk of the individual security. C) the added risk that a firm's shares bring to a diversified portfolio. D) the risk of the market in general. 8) The study of how shareholders can motivate management to accept the prescriptions of the shareholder wealth maximization model is called A) market efficiency. B) the SWM model. g) agency theory. D) the SCM model. 9) Under the Shareholder Wealth Maximization Model of corporate governance, poor firm performance is likely to be faced with all but which of the following? A) Sale of shares by disgruntled current shareholders. B) Shareholder activism to attempt a change in current management. C) As a maximum threat, initiation of a corporate takeover. Prison time for executive management. 10) Which of the following is a reason why managers act to maximize shareholder wealth in Anglo-American markets? A) The use of stock options to align the goals of shareholders and managers B) The market for corporate control that allows for outside takeover of the firm. Performance based compensation for executive management Drall of the above 11) Which of the following is NOT true regarding the stakeholder capitalism model? Banks and other financial institutions are less important creditors than securities markets. B) Labor unions are more powerful than in the Anglo-American markets. C) Governments interfere more in the marketplace to protect important stakeholder groups. D) All of the above are TRUE. 12) The stakeholder capitalism model A) typically avoids the flaw of impatient capital. B) tries to meet the desires of multiple stakeholders. C) may leave management without a clear signal about tradeoffs among the several stakeholders. Dy all of the above 13) Which of the following is generally NOT considered to be a viable operational goal for a firm? A Maintaining a strong local currency. B) Maximization of after-tax income. C) Minimization of the firm's effective global tax burden. D) Correct positioning of the firm's income, cash flows and available funds as to country and currency. 14) Which of the following operational goals for the international firm may be incompatible with the others? A) Maintaining a strong local currency. B) Maximization of after-tax income. C) Minimization of the firm's effective global tax burden. P) Each of these goals may be incompatible with one or more of the others. 15) The primary operational goal for the firm is to A) maximize after-tax profits in each country where the firm is operating. B) minimize the total financial risk to the firm. Gmaximize the consolidated after-tax profits of the firm. D) maximize the total risk to the firm. The Sarbanelyethyhe i luty 2002 wide in notlom corporate governance limit the luderal Re ability in the buying and nown 1) limit rate with countries deemed lontent on torrorlum. True False 2. Who Chin the Business 1) in the US and markets are characterized by owner of concentrated in the hands of a few controlling Shareholder in contrast, the rest of the world tends to have more widespread ownership of shares 2.2 What is the Goal of Management? 1) The stakeholder capitalism model holds that total risk (operational and financial) is more important than just systematic risk. 2) In recent years the trend has been for markets to increasing focus on the shareholder wealth form of wealth maximization 3) Patient Capitalism is characterized by short-term focus by both management and investors +) Agency theory states that unsystematic risk can be eliminated through diversification 5) The stakeholder capitalism model does not assume that equity markets are either efficient or inefficient. 6) The stakeholder capitalism model assumes that only systematic risk "counts" or is a prime concern for management. 7) Dividend yield is the change in the share price of stock as traded in the public equity markets. 2.3 Corporate Governance 1) Regarding comparative corporate governance regimes: Bank-based regimes characterized by government influence in bank lending and a lack of transparency is often found in countries such as Korea and Germany. 2) Investor protection is typically better in countries with codified civil law (the Code Napoleon) than in countries with a legal system based in English common law. 3) The relatively low cost of compliance with the Sarbanes-Oxley Act (SOX) has been a surprising benefit of the act. 4) According to recent research, family-owned firms in some highly-developed economies typically outperform publicly-owned firms