Quiz On The Nexus Of Contracts

10 Questions | Total Attempts: 43

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Quiz On The Nexus Of Contracts

This quiz will be used to help evaluate progress for the nexus of contracts section of Corporate Finance classes.


Questions and Answers
  • 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

  • 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.

  • 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

  • 4. 
    Contracts within the "nexus" are both explicit and _______.
  • 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.

  • 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

  • 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.

  • 8. 
    Auditors help increase transparency and thus can be useful in reducing agency costs
    • A. 

      True

    • B. 

      False

  • 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

  • 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.

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