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BUSA 4900 Chapter 12

Terms in this set (30)

Because of poor management, the stock prices of DigiKing Inc. falls and many investors sell their shares. Soon DigiKing becomes the target of a hostile takeover, during which Charles buys enough shares to exert control over the firm. In this scenario, Charles performs the role of a(n)

A) outside director.

B) inside director.

C) corporate raider.

D) corporate consultant.
C) corporate raider.
At Opnic Corp., a cross-functional team is formed to work on a project for a new client. The team consists of Darius and four other members. At most of the team's presentations to senior management, Darius takes the lead and discusses project specifics with the management, while others chip in with additional information. At the completion of the project, Darius is recommended for promotion, while the other team members receive little recognition for their hard work. The reality is that Darius did very little actual work but spent some time compiling the project report based on different documents submitted by the others. This scenario at Opnic Corp. is a typical consequence of

A) moral hazard

B) corporate governance.

C) shared value creation.

D) adverse selection.
D) adverse selection.
GE's board has only one inside director, Jeffrey Immelt, GE's CEO, who also acts as chairman of the board. This is known as duality. Which of the following statements represents the best argument for this duality in GE?


A) The CEO is likely to be more responsible because he is setting his own performance targets.

B) The CEO might be able to influence the board through setting the meeting agendas.

C) The CEO possesses invaluable inside information that can help chair the board effectively.

D) The CEO will suggest board appointees who are friendly toward him or her.
C) The CEO possesses invaluable inside information that can help chair the board effectively.
Raj is a recent graduate who states that he has interned at a major accounting firm so that his value as a candidate for employment increases. A start-up recruits Raj based on his stated credentials without verifying them. Two days into the job, Raj's team lead realizes that Raj does not know much of what he claimed to know during the interview. This scenario best exemplifies


A) corporate governance.

B) shared value creation.

C) moral hazard.

D) adverse selection.
D) adverse selection.
Poison pills have become rare because


A) federal laws prevent hostile takeovers.

B) leveraged buyouts can effectively skirt the measures put in place by poison pills.

C) the market for corporate control is dead.

D) they retard an effective function of equity markets.
D) they retard an effective function of equity markets.
Hoptin Inc. is a public stock company. Which of the following best exemplifies the legal personality of the company?


A) Kevin, an employee at Hoptin, is not responsible for any losses that Hoptin incurs.

B) John is a shareholder of Hoptin but does not have any managerial duties.

C) Rosa can legally sell shares of Hoptin in the stock market.

D) Jessi Hoptin, the company's founder, died a few years ago, yet the company is doing well.
D) Jessi Hoptin, the company's founder, died a few years ago, yet the company is doing well.
The risk of employee opportunism on behalf of agents in a public stock company is exacerbated by


A) corporate governance.

B) groupthink.

C) information asymmetry.

D) stakeholder strategy.
C) information asymmetry.
If the board of directors at GE decides to pursue a stakeholder strategy, should they change the ecomagination strategy?


A) No, they should not change the strategy because the change would necessitate making tough ethical decisions.

B) Yes, they should change the strategy because it provides benefits to the society.

C) No, they should not change the strategy because the strategy already helps them save costs while generating huge revenues.

D) Yes, they should change the strategy because creating value for society is against the principles of stakeholder strategy.
C) No, they should not change the strategy because the strategy already helps them save costs while generating huge revenues.
In public stock companies, which of the following expectations of principals is most likely to lead to principal-agent problems?


A) the expectation that the agent will follow the country's laws and regulations

B) the expectation that the agent will go above and beyond the call of duty

C) the expectation that the agent will reconnect economic and social needs

D) the expectation that the agent will act in the principal's best interest
D) the expectation that the agent will act in the principal's best interest
Which of the following is a common result of a hostile takeover of a company?


A) The new owner keeps the company intact.

B) The new owner enhances the reputations of the company's management.

C) The new owner keeps the board of directors of the company the same.

D) The new owner sells the company in pieces.
D) The new owner sells the company in pieces.
Which of the following is the result of a leveraged buyout (LBO)?


A) An LBO changes a public company into a private company.

B) An LBO changes the CEO of a public company.

C) An LBO changes a private company into a public company.

D) An LBO changes the board of directors of a private company.
A) An LBO changes a public company into a private company.
________ are board members who are not employees of the firm, but frequently are senior executives from other firms or full-time professionals.


A) CEOs

B) Inside directors

C) Outside directors

D) Auditors
C) Outside directors
Question 8 Saved
Travis, the CEO of Riplon Corp., used company funds to buy a car worth $1 million and a house for $6 million in Santa Fe. This is an example of


A) adverse selection.

B) shared value creation.

C) on-the-job consumption.

D) corporate governance.
C) on-the-job consumption.
What was Goldman Sachs' rebuttal to SEC's claim that it defrauded investors?

A) Fabrice Tourre was responsible for putting the deal together, and it was the lapse of an individual, not the entire firm.

B) It is up to the clients to assess the risks involved in any investments.

C) Goldman Sachs' itself lost $100 million in the deal.

D) John Paulson did not reveal his intentions behind creating Abacus.
B) It is up to the clients to assess the risks involved in any investments.
Kaito is the CEO of Henson and Fukui Consulting Inc. Kaito's efforts to persuade the board of directors to pursue a new business strategy fail. He borrows money from different sources and purchases all the outstanding shares of Henson and Fukui Consulting. What does this scenario best exemplify?


A) buyback

B) merger

C) initial public offering

D) leveraged buyout
D) leveraged buyout
Why does Michael Porter recommend expanding the customer base of an organization in terms of the shared value creation framework?

A) Doing so could yield significant business opportunities that could improve the standard of living of the poor.

B) Doing so will help to prevent the inclusion of more nontraditional partners into internal firm value chains.

C) Doing so could be the only way to meet stockholder expectations in a highly competitive market.

D) Doing so is the best way to ensure that shareholders have the most legitimate claim on profits made by the organization.
A) Doing so could yield significant business opportunities that could improve the standard of living of the poor.
All public companies listed on the U.S. stock exchanges must file a number of financial statements with the


A) Securities and Exchange Commission (SEC).

B) The Wall Street Journal.

C) EDGAR database.

D) GovernanceMetrics International (GMI).
A) Securities and Exchange Commission (SEC).
Which of the following is the source of the principal-agent problem in publicly traded companies?


A) the law of legal personality

B) transferability of investor ownership

C) the separation of ownership and control

D) limited liability for investors
C) the separation of ownership and control
Which of the following statements best supports the separation of ownership and control in publicly traded companies?

A) Shareholders can freely trade the company stocks.

B) Shareholders own stocks but do not run the company.

C) Managers control the company but may also have stock ownership.

D) Shareholders are liable only for the capital they invest and not for their personal wealth.
B) Shareholders own stocks but do not run the company.
What helps notions such as fairness, honesty, and reciprocity to be codified into law?


A) The notions are characteristics inherited by each person irrespective of the culture.

B) The notions are synonymous with law.

C) The notions differ to some degree in different cultures around the globe.

D) The notions are universal norms.
D) The notions are universal norms.
The ________ is the centerpiece of corporate governance and is composed of inside and outside members.


A) group of shareholders

B) institutional investors group

C) board of directors

D) scientific advisory board
C) board of directors
Outside directors are more likely to watch out for the interests of shareholders of their firm because

A) they are more likely to benefit from using inside information to trade stocks.

B) they are part-time employees of the firm.

C) they have more independence than inside directors.

D) they do not have the safety of serving on the boards of other firms.
C) they have more independence than inside directors.
Warren owns shares in a company called Gerarch Communications Inc. The company's financial performance has been declining over the past few months, and the value of its stock has been decreasing. Warren wants to proactively cut his losses and therefore sells his shares. Lawrence, a trading enthusiast, buys shares in Gerarch Communications because he believes that the share prices cannot go anywhere but up. Which of the following characteristics of a public stock company does this scenario best exemplify?


A) legal personality

B) transferability of investor ownership

C) limited liability for investors

D) separation of legal ownership and management control
B) transferability of investor ownership
A company scientist at a biotechnology company decides to work on his own research project, hoping to eventually start his own firm, rather than on the project he was assigned. However, the company's stockholders are unaware of this situation. This is an example of a(n) ________ in the context of a principle-agent problem.


A) adverse selection

B) moral hazard

C) stakeholder strategy

D) shared value creation
B) moral hazard
Grameen Bank in Bangladesh was founded to provide microcredit to impoverished farmers who wanted to start their own entrepreneurial ventures that would help themselves climb out of poverty. This best exemplifies Michael Porter's suggestion that


A) businesses should focus on creating regional clusters such as Silicon Valley in the U.S.

B) the largest but poorest socioeconomic group can yield significant business opportunities.

C) managers need to keep economic needs and societal needs disconnected from each other.

D) a firm should expand its internal value chain to include nontraditional partners.
B) the largest but poorest socioeconomic group can yield significant business opportunities.
One of the ways to foster ethical behavior in employees is to


A) avoid codifying organizational culture.

B) align the vision statement of the organization with its informal culture.

C) view clients as counter parties to transactions.

D) create a control system that encourages desired values.
D) create a control system that encourages desired values.
Which of the following is true of business ethics?

A) The perception of what is ethical and what is not is similar across different cultures.

B) Business ethics needs to be codified into law in order to be followed.

C) Certain notions such as fairness, honesty, and reciprocity are universal norms.

D) Business ethics is an agreed-upon code of conduct in business, based on laws.
C) Certain notions such as fairness, honesty, and reciprocity are universal norms.
The board of directors of a public stock company consists of


A) employees of a company who belong to the senior management and directly report to the CEO of the firm.

B) the legal owners of a publicly traded company that was purchased in a leveraged buyout.

C) managers appointed by the owners of a company to run its day-to-day operations.

D) individuals who formally represent the firm's shareholders and oversee the work of executives.
D) individuals who formally represent the firm's shareholders and oversee the work of executives.
Which of the following characteristics of a public stock company deals with principals and agents?


A) limited liability of investors

B) legal personality

C) separation of legal ownership and management control

D) transferability of investor ownership
C) separation of legal ownership and management control
A compensatory governance mechanism that allows executives to buy a company's stock at a predetermined price sometime in the future is called a(n)


A) commission.

B) stock option.

C) bonus.

D) stock exchange.
B) stock option.
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