Ch 01 An Overview of Financial Management

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Question #1

Amalgamated Metals Corporation’s stockholders are mostly individual investors, and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Amalgamated Metals Corporation’s stock, direct shareholder intervention would be _____ likely to motivate the firm’s management.

A less

B more

Question #2

In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the ________ value of the company’s common stock price.

A capital

B short term

C long term

Question #3

Michael owns Michael’s Tantalizing Tees, a T-shirt shop in a small college town in New Hampshire. With a staff of three part-time employees, Michael operates the business in accordance with his personal goals, dreams, and capabilities.
Does Michael have an agency conflict to deal with?

A Yes; as both the owner and operator of Michael’s Tantalizing Tees, Michael has created the necessary agency relationship through which an agency conflict can exist.

B Yes; there is always an inherent conflict of interest between owners and operators (managers).

C No; by having part-time, as opposed to full-time, employees, Michael is prevented from experiencing an agency conflict.

D No; as both the owner and operator of Michael’s Tantalizing Tees, Michael has not created the necessary agency relationship through which an agency conflict can exist.

Question #4

Vision Tech’s stock price is currently trading at $41 per share. The consensus among analysts is that the intrinsic value of Vision Tech’s stock is $33 per share. Is Vision Tech more or less likely to receive a hostile takeover bid?

A More likely

B Less likely

Question #5

Vision Tech is a software company based out of San Francisco. Its stockholders are mostly institutional investors and there is relatively little individual ownership. If these institutions dilute their positions and sell off their stake in Vision Tech’s stock to several individual investors, would direct shareholder intervention be more or less likely to motivate the firm’s management?

A More likely

B Less likely

Question #6

Executive compensation packages often tie performance to bonus and incentive awards, supplemental retirement packages, perquisites, and severance pay, in order to encourage the management team to align their performance with organizational goals.
Which of the following compensation proposals is most likely to be in the best interest of the company’s shareholders?

A base salary of $500,000 plus perquisites worth $250,000

B A base salary of $500,000 plus a stock option package for 250,000 shares that mature in six months