Quiz On The Nexus Of Contracts
(30).webp "Quiz On The Nexus Of Contracts - Quiz")
This quiz will be used to help evaluate progress for the nexus of contracts section of Corporate Finance classes.
- 1.
The basic idea behind the nexus of contracts discussion is
- A.
That only shareholders matter
- B.
That employees and managers deserve to control the board of directors
- C.
That all stakeholders are important, but shareholders generally are in the best position to monitor and hence are the most important.
- D.
That conflicts between stakeholders do not effect firm value
Correct Answer
C. That all stakeholders are important, but shareholders generally are in the best position to monitor and hence are the most important.Explanation
The correct answer is that all stakeholders are important, but shareholders generally are in the best position to monitor and hence are the most important. This explanation highlights the main idea behind the nexus of contracts discussion, which is that while all stakeholders are important, shareholders have a unique role in monitoring and overseeing the firm's activities. Shareholders have a financial interest in the success of the company and are therefore motivated to ensure that management acts in their best interest. This perspective acknowledges the importance of all stakeholders but emphasizes the monitoring role of shareholders.Rate this question:
-
- 2.
The board of directors ________.
- A.
Is elected by shareholders
- B.
Is responsible for monitoring management.
- C.
Is responsible for hiring and firing top management.
- D.
Approves or makes big strategic decisions
- E.
All of the above are true.
Correct Answer
E. All of the above are true.Explanation
The board of directors is responsible for making important strategic decisions, such as approving or rejecting major initiatives or investments. They are also elected by the shareholders, who have the power to choose the individuals they believe will best represent their interests. Additionally, the board is responsible for monitoring the management team and ensuring they are acting in the best interest of the company. Lastly, the board has the authority to hire and fire top management if necessary. Therefore, all of the statements provided are true regarding the role and responsibilities of the board of directors.Rate this question:
-
- 3.
Empirical evidence suggest that
- A.
Bond holders are less concerned with risk than are shareholders.
- B.
Paying managers with stock options leads to increased risk taking.
- C.
Employees tend to have a longer term focus than shareholders.
- D.
All of the above
Correct Answer
B. Paying managers with stock options leads to increased risk taking.Explanation
The correct answer is "paying managers with stock options leads to increased risk taking." This is supported by empirical evidence which suggests that when managers are compensated with stock options, they are more likely to take on higher risks in order to increase the value of the company's stock. This is because their personal wealth is tied to the performance of the stock, so they have an incentive to take actions that may lead to higher returns, even if it involves taking on more risk.Rate this question:
-
- 4.
Contracts within the "nexus" are both explicit and _______.
Correct Answer
implicitExplanation
Contracts within the "nexus" are both explicit and implicit. Explicit contracts are those that are clearly and directly stated, while implicit contracts are those that are understood or implied without being specifically stated. In the context of the "nexus," it can be inferred that there are both explicit contracts that are formally agreed upon, as well as implicit contracts that are understood and expected within the framework or network of relationships.Rate this question:
- 5.
Galais and Masulis (1976) pointed out that when a firm is "underwater" (firms assets are worth less than the amount of debt the firm has), shareholders
- A.
Are tempted to take on only low risk projects.
- B.
May be best off by taking very risky projects even if they are poor investments (negative NPV)
- C.
Would never pass up positive net present value projects.
- D.
Are in the best position to monitor
- E.
All of the above are true.
Correct Answer
B. May be best off by taking very risky projects even if they are poor investments (negative NPV)Explanation
The explanation for the given correct answer is that Galais and Masulis (1976) argue that when a firm is "underwater" and its assets are worth less than its debt, shareholders may be best off by taking very risky projects even if they have negative net present value (NPV). This is because shareholders have limited liability and can benefit from any upside potential of the risky projects without being responsible for the firm's debt. By taking on these risky projects, shareholders have a chance to recover their losses and potentially improve the firm's financial position.Rate this question:
-
- 6.
CEO pay is a controversial issue. Which of the following is true?
- A.
Over the past 40 years CEO pay has increased about the same as the median employee's pay.
- B.
CEO pay in the US is correlated with the size of the firm.
- C.
CEO pay is made up largely of salary.
- D.
CEO pay is approved by the board of directors
- E.
More than one of the above are true.
- F.
All of the above are true
Correct Answer
E. More than one of the above are true.Explanation
The correct answer is "more than one of the above are true." This is because both the statements "CEO pay in the US is correlated with the size of the firm" and "CEO pay is approved by the board of directors" are true. The question does not provide any information about the correlation between CEO pay and the median employee's pay or the composition of CEO pay, so we cannot determine if those statements are true or not.Rate this question:
-
- 7.
Agency costs ______.
- A.
Decrease overall firm value.
- B.
Were mentioned in Adam Smith's 1776 Wealth of Nations.
- C.
Include Jensen's Free Cash flow problem.
- D.
All of the above.
- E.
None of the above.
Correct Answer
D. All of the above.Explanation
Agency costs refer to the conflicts of interest that arise between the principals (shareholders) and agents (managers) in a company. These costs can arise due to the managers pursuing their own self-interests instead of maximizing shareholder value. Agency costs can decrease overall firm value as they lead to inefficiencies and reduce the returns for shareholders. Additionally, agency costs were indeed mentioned in Adam Smith's 1776 Wealth of Nations, highlighting their historical significance. Jensen's Free Cash Flow problem is another example of agency costs, where managers may misuse excess cash flows and make poor investment decisions. Therefore, the correct answer is "all of the above."Rate this question:
-
- 8.
Auditors help increase transparency and thus can be useful in reducing agency costs
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Auditors play a crucial role in increasing transparency within organizations. By conducting independent and objective assessments of financial statements, internal controls, and business operations, auditors help ensure that accurate and reliable information is provided to stakeholders. This transparency helps to reduce agency costs, which refer to the potential conflicts of interest between managers and shareholders. By providing assurance on the accuracy of financial information, auditors can help align the interests of managers and shareholders, ultimately reducing agency costs. Therefore, the statement "Auditors help increase transparency and thus can be useful in reducing agency costs" is true.Rate this question:
-
- 9.
Bond provisions (clauses in the contract) _______.
- A.
May be used to reduce conflicts of interest between bondholders and shareholders.
- B.
Are mainly included in bonds to reduce interest rates.
- C.
Can include limits on dividend payments
- D.
All of the above
Correct Answer
D. All of the aboveExplanation
Bond provisions, also known as clauses in the contract, serve multiple purposes. They can be used to reduce conflicts of interest between bondholders and shareholders, ensuring that the interests of both parties are protected. Additionally, bond provisions may include limits on dividend payments, which can help to safeguard the financial stability of the issuer. Moreover, these provisions can also be included in bonds to reduce interest rates, providing benefits to both the issuer and the bondholders. Therefore, the correct answer is "all of the above."Rate this question:
-
- 10.
Acting ethically can be good for shareholders because _______.
- A.
The market is a harsh disciplinarian.
- B.
Contracting and monitoring costs are reduced.
- C.
Reputation is a valuable, but fragile, asset.
- D.
All of the above.
Correct Answer
D. All of the above.Explanation
Acting ethically can be good for shareholders because the market is a harsh disciplinarian, meaning that unethical behavior can lead to negative consequences such as loss of customers, legal issues, and damage to the company's reputation. Additionally, when a company acts ethically, contracting and monitoring costs are reduced as there is less need for extensive legal and regulatory oversight. Furthermore, reputation is a valuable asset for a company, and acting ethically helps to build and maintain a positive reputation, which in turn can attract more customers and investors. Therefore, all of the above reasons contribute to why acting ethically can be beneficial for shareholders.Rate this question:
-
Back to top