Finance Module 3 Learning Checks

Which term reflects a person's beliefs about right and wrong, good and bad, or just and unjust?
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Which term reflects a person's beliefs about right and wrong, good and bad, or just and unjust?
Moral
What characterizes an ethical action?
It is based on accepted standards of conduct.
Lucas is a financial advisor working for Bullzai, Inc. He is faced with a dilemma. Bullzai has started changing its practices in order to increase profit. As a financial advisor, he is now supposed to suggest to clients to invest in portfolios that will not do as well as the portfolios that Bullzai is invested in. This is an accepted practice done by other businesses in the industry, and it complies with all standards set by the government. However, Lucas knows that this practice is not in his clients' best interest. What type of dilemma is Lucas facing?
This is not a legal issue because the new practice complies with the law, and it is not an ethical issue because it is a commonly accepted practice within the industry. It is a moral issue because it deals with Lucas's own sense of right and wrong.
Which type of error would result in a set repercussion or penalty given by the government?
Legal
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Nora is an investment manager, which means that she is paid to invest other people's money. To meet her goal for the month, she is seeking to invest money from clients in an investment that is risky but potentially has a higher return. What about this situation represents an ethical dilemma?
She is considering investing in a risky asset just to meet her monthly goal.
What are the effects of attempting to maximize shareholder value for a business in an unethical way?
It often leads to decreased shareholder value for the business.
Endothon Company has decided to move its production from the United States to a foreign country. Which situation below would constitute an unethical action by the company?
Saving money by paying inadequate wages to workers overseas
Why would bondholders set bond contracts that are very strict to deter the company from taking on risky projects?
Bondholders are primarily interested in making sure they will be paid back.
Which kind of projects are bondholders interested in?
Safe projects with a higher chance of providing sufficient compensation
Which scenario is an example of an agency problem?
A manager purchases a company car and allocates it as a company expense.
How can agency costs be mitigated?Aligning managers' interests with shareholders' interestsWhat is the third step in finding a solution to an ethical dilemma?Consider all stakeholders involvedWhat does the term legal describe?An action that is in accordance with the laws and rules set by an authority.Jack is a personal financial advisor. He is with a new client, and the client is asking him what he recommends for her portfolio. Jack knows that his firm's investment product performed well last year, but its performance changes from year to year—some years it is better than the market, and some years it is not. Also, the fee to invest in the product is higher than the fee to invest in a market index fund. If Jack sells his company's investment product, the customer's loyalty to the company is doubled. Which actions should Jack take?Give a personal recommendation of the company's product while explaining its performance relative to the market over the past several years.Why might a manager manipulate accounting procedures?To make the company's performance look goodWhich situation is an example of an agency problem?Managers follow their own interests instead of the owners' interest.A company is trying to finance a project with a mortgage loan from a bank. The company's assessment of the project indicates that the company may experience several years of loss until the project becomes profitable. This means that the company might lose its ability to pay back the loan and the interest on the mortgage. What action might the bank take to protect its interest?Set a strict covenant that the company cannot easily achieve.