Module 1

Different forms of businesses have different characteristics. Which of the following characteristics would apply to a corporation? Check all that apply.

-Chartered by a state and is its own legal entity separate and distinct from its owners and managers -Owners have limited liability -Has unlimited life -Easier to transfer ownership in the form of stock

Different forms of businesses have different characteristics. Which of the following characteristics would apply to a limited liability company and a limited liability partnership? Check all that apply

-Owners have limited liability and right to vote -Have corporate ownership structure -Limited financial liability -Taxed as a partnership

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 a stock option package for 250,000 shares, with 20% of shares maturing at the end of each of the next five years

Selena and Mario run a law firm in Chicago. The firm has debt of $100,000, but Selena and Mario will not be held personally liable for the law firm's debt.

LLC/LLP

In addition to well-designed executive compensation packages, two other motivational forces can align the interests of managers with those of their shareholders. Which of the following actions could be used to reduce the potential for these agency conflicts and ensure that the firm's managers will pursue the long-term wealth interests of their shareholders?

Let the manager know that a takeover is possible if he or she doesn't perform well.

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

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

Executives are often compensated above and beyond their salary and benefits. Which of the following perquisites would not encourage managers to maximize long-run shareholder wealth?

The use of a private jet

Willie started a business, based in a different state, with his uncle. Due to the business's underperformance, they had to close the business. Willie, however, ended up losing his house due to a litigation claim.

partnership

James, the CEO of a beverage company, is required to certify the accuracy of information provided in the company's quarterly reports.

corporation

In a state of market equilibrium, the intrinsic value of the stock will be________the market price of the stock.

equal to

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?

less likely

Vision Tech's stock price is currently trading at $35 per share. The consensus among analysts is that the intrinsic value of Vision Tech's stock is $26 per share. Is Vision Tech more or less likely to receive a hostile takeover bid?

less likely

In an attempt to minimize agency problems in a company (potential conflict of interest between the company's managers and shareholders), attractive compensation packages are created to retain and encourage managers. 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 stock price.

long run

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.

long run

stock overvalued and stock undervalued

look at graph in book 1.3

Vision Tech is a software company based out of San Francisco. Its stockholders are mostly individual investors and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Vision Tech's stock, would direct shareholder intervention be more or less likely to motivate the firm's management?

more likely

Vision Tech's stock price is currently trading at $18 per share. The consensus among analysts is that the intrinsic value of Vision Tech's stock is $28 per share. Is Vision Tech more or less likely to receive a hostile takeover bid?

more likely

Vision Tech's stock price is currently trading at $22 per share. The consensus among analysts is that the intrinsic value of Vision Tech's stock is $32 per share. Is Vision Tech more or less likely to receive a hostile takeover bid?

more likely

An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandalays Inc.'s stock should be $37.32 per share, but Mandalays Inc.'s stock is trading at $45.59 per share on the New York Stock Exchange (NYSE). Considering the analyst's expectations, the stock is currently:

overvalue

Joshua started a tutoring website. After a few months, a publishing company filed a lawsuit against his company for copyright infringement. Joshua had to shut down his business and lost all his personal assets in the process.

solo partnership