MGT491 - Chapter 12 Practice Quiz

Which of the following real-world scenarios best exemplifies information asymmetry in a public stock company? a. Based on a tip-off by a Goldman Sachs employee, the Galleon Group sold its holdings in Goldman Sachs' stocks prior to the announcement of missed earnings estimates. b. GE knew that it could create a profitable venture out of producing green products, so it rolled out the Ecomagination strategy. c. Goldman Sachs followed through with the Abacus deal despite knowing its shortcomings. d. Mark Hurd, CEO of HP, was unaware of the sexual harassment allegations, and the board's demand for him to resign caught him by surprise.

a. Based on a tip-off by a Goldman Sachs employee, the Galleon Group sold its holdings in Goldman Sachs' stocks prior to the announcement of missed earnings estimates.

Because of poor management, the stock price of Orange Dolphin Inc. falls and many investors sell their shares. Soon Orange Dolphin becomes the target of a hostile takeover, during which Hans buys enough shares to exert control over the firm. In this scenario, Hans performs the role of a(n) a. corporate raider. b. corporate consultant. c. inside director. d. outside director.

a. corporate raider.

Which of the following scenarios best exemplifies a leveraged buyout of a microchip manufacturer, Rigoletto Inc.? a. A private equity firm, Stormcloud Inc., buys a large number of shares of Rigoletto in order to publicly trade it under a new name. b. Rigoletto buys back a large amount of its own shares from the stock market. c. The owner of another company buys all the outstanding shares of Rigoletto in order to take it private. d. Rigoletto sells all its shares and declares bankruptcy.

c. The owner of another company buys all the outstanding shares of Rigoletto in order to take it private.

A detergent manufacturer decides to clean up the waterways it uses even though no federal, state, or local laws require the firm to do this. The firm's managers believe that the cleanup will improve the company's image and benefit the environment. This scenario is an example of shareholder capitalism. True False

False

It can be difficult for shareholders of publicly traded companies to determine how much money those companies are making or losing because these companies use different accounting firms, and each accounting firm follows different rules. True False

False

It is up to shareholders to make certain that the financial statements that their firms release are correct and not misleading. True False

False

Jeannette was a manager at Fabco. Instead of working full-time on Fabco's projects, she used Fabco's tools, employees, computers, and other resources to work on a research project that she hopes might help her start her own firm. This is an example of adverse selection. True False

False

One of the most challenging aspects of principal—agent problems is that firms have almost no defenses against them. True False

False

Arnold is a firm believer in Milton Friedman's view of a firm's social obligations. With which of the following statements is Arnold most likely to agree? a. Businesses can use their resources to create profit as long as they do so within the rules of the game. b. Firms must go beyond their economic responsibility and act in socially responsible ways. c. Businesses should engage in open and free competition without deception or fraud, only as long as their competitors do so. d. Firms should define value creation broadly in terms of environmental impact.

a. Businesses can use their resources to create profit as long as they do so within the rules of the game.

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 is the best way to ensure that shareholders have the most legitimate claim on profits made by the organization. d. Doing so could be the only way to meet stockholder expectations in a highly competitive market.

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

Which of the following is an implication for the strategist in the context of corporate governance and a company's success? a. Effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage. b. Very few corporate-governance mechanisms can be effective in addressing the principal-agent problem. c. A firm that restricts its responsiveness to stockholders (and no other stakeholders) and keeps them committed to its vision will be successful. d. Leading by ethical example often has a lesser effect on employee behavior than words do.

a. Effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage

Elvira is the CEO of a firm. She has an opportunity to increase the competitive advantage of her company but is not sure if accepting the opportunity is ethical. Which of the following questions would help her decide if accepting the opportunity is ethical? a. How would the media report her decision to accept the opportunity if it were to become public? b. How long lasting would the competitive advantage be if she decided to accept the opportunity? c. What are the chances that her decision to accept the opportunity will be made public? d. How much profit would be made if she decided to accept the opportunity?

a. How would the media report her decision to accept the opportunity if it were to become public?

Ignacio Inc. is a public stock company. Which of the following statements about the company best illustrates the fact that its investors have limited liability? a. Shareholders of Ignacio are responsible to the company only to the capital they have invested. b. Shareholders of Ignacio are not permitted to trade their company stock at the New York Stock Exchange (NYSE). c. Employees of Ignacio are legally permitted to invest their capital in the company's stock. d. Employees of Ignacio are also the owners of the company.

a. Shareholders of Ignacio are responsible to the company only to the capital they have invested.

General Electric's board has only one inside director, John Flannery, 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 possesses invaluable inside information that can help him or her chair the board effectively. b. The CEO might be able to influence the board through setting the meeting agendas. c. Any CEO will suggest board appointees who are friendly toward him or her. d. A CEO is likely to be more responsible because he or she is setting his or her own performance targets.

a. The CEO possesses invaluable inside information that can help him or her chair the board effectively.

A bank, CQC, offers a customer a personal loan. In which of the following circumstances will this decision most likely be considered unethical? a. The bank knows that the customer will be unable to pay the loan if the interest rate rises. b. The bank is not aware of the investments made by the customer. c. The bank has the financial statements of the customer, but it is not aware of each source of income. d. The bank is depending on the customer to pay back the loan before term completion.

a. The bank knows that the customer will be unable to pay the loan if the interest rate rises.

Angelica is the CEO of Sandhaven Ltd., a publicly traded company. The shareholders want Angelica on the board of directors despite her recent appointment as the CEO. This decision of the shareholders is most likely because Angelica is a. likely to provide the board with valuable inside information. b. more likely than other board members to take care of the stockholders. c. also the CEO of other companies. d. a board member of a major client.

a. likely to provide the board with valuable inside information.

Which of the following characteristics of a public stock company deals with principals and agents? a. separation of legal ownership and management control b. limited liability of investors c. transferability of investor ownership d. legal personality

a. separation of legal ownership and management control

Which of the following is the source of the principal-agent problem in publicly traded companies? a. the separation of ownership and control b. the law of legal personality c. limited liability for investors d. transferability of investor ownership

a. the separation of ownership and control

Gary owns shares in a company called Archibald Industries Inc. The company's financial performance has been declining over the past few months, and the value of its stock has been decreasing. Gary wants to proactively cut his losses and therefore sells his shares. Anneke, a trading enthusiast, buys shares in Archibald Industries because she 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. transferability of investor ownership b. legal personality c. limited liability for investors d. separation of legal ownership and management control

a. transferability of investor ownership

Sirhan is president of a medium-sized bank. What can he do to lessen the chances of employees or board members taking part in insider trading? a. Work with analysts and customer-facing employees to root out information asymmetry. b. Create a strict code of ethics and explain that inside traders will be fired. c. Forbid managers and executives from having access to private information. d. Forbid board members from having access to private information.

b. Create a strict code of ethics and explain that inside traders will be fired.

Gino is the CEO of a financial services firm. What action should Gino take to be sure the firm avoids moral hazards? a. He must create a plan in which government agencies or a consortium of other financial services firms will assume any future debts of the company. b. Gino should define undue risk-taking, institute strict auditing of loans, and make it clear that the company will fire employees who lend recklessly. c. He should closely monitor the behavior and performance of new employees to be certain that they have the skills they claimed to have in interviews. d. Gino must increase hiring and develop influential relationships with government officials so that his firm will be considered "too big to fail."

b. Gino should define undue risk-taking, institute strict auditing of loans, and make it clear that the company will fire employees who lend recklessly.

Delores recently became a board member of a firm that has a history of reckless actions by senior employees. Which task would be appropriate for Delores to undertake to help safeguard the company's financial health? a. Take part in the annual reviews of employees in the financial department. b. Request and review a copy of the firm's risk assessment plan, if such a plan exists. c. Draft and circulate a statement that the firm's board members serve at the pleasure of the CEO. d. Determine how to postpone or evade the firm's compliance with local, regional, and national regulations.

b. Request and review a copy of the firm's risk assessment plan, if such a plan exists.

Which of the following statements is true of shareholders in a public stock company? a. They are the centerpiece of corporate governance. b. They are granted a charter of incorporation by the state and legally own company stock. c. They directly supervise and coordinate the manufacture of products and delivery of services. d. They are appointed by a board of directors to oversee the company's management.

b. They are granted a charter of incorporation by the state and legally own company stock.

How did Uber conflict with Carnegie Mellon University's National Robotics Engineering Center (NREC)? a. Uber bribed NREC officials to give permission for building an extension to the NREC facility that focuses solely on Uber research. b. Uber poached entire NREC research teams with signing bonuses, twice the salaries, and stock options, thereby threatening the future of NREC. c. Uber allegedly stole ideas from the NREC research team and then claimed that these ideas were generated by their own researchers. d. Uber promised a large donation to NREC but then reneged on the offer when NREC would not provide Uber with researchers.

b. Uber poached entire NREC research teams with signing bonuses, twice the salaries, and stock options, thereby threatening the future of NREC.

Ben is a manager at Unique Accessories Inc. and is friends with the company's CEO. This privilege gives Ben the information that Unique Accessories is in the midst of talks to take over a leading rival. Ben buys stocks of Unique Accessories with the expectation that its stocks will appreciate. But the deal falls through, and the stocks of Unique Accessories depreciate in the following months. Are Ben's actions unethical? Why or why not? a. No. Ben did not ask the CEO to disclose such information to him. b. Yes. It is unethical to trade stocks based on insider information, irrespective of the final outcome. c. No. Ben did not make any profits from trading stocks using this information. d. Yes. It is illegal and unethical for Ben to possess any kind of insider information.

b. Yes. It is unethical to trade stocks based on insider information, irrespective of the final outcome.

Nate 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 Nate based on his stated credentials without verifying them. Two days into the job, Nate's team lead realizes that Nate does not know much of what he claimed to know during the interview. This scenario best exemplifies a. corporate governance. b. adverse selection. c. shared value creation. d. moral hazard.

b. adverse selection.

Which of the following is a major issue at the forefront of CEO compensation in recent years? a. a comparison of the compensation of senior management hired during and before the CEO's tenure b. the absolute size of the CEO pay package compared with the pay of the average employee c. a comparison of the performance of the organization before and after the CEO's tenure d. the performance of the CEO as an employee versus the performance as a board member

b. the absolute size of the CEO pay package compared with the pay of the average employee

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.

According to Michael Porter, which of the following is a problem with many publicly traded companies? a. Shareholders of publicly traded companies do not have a legitimate claim on profits. b. There is no transferability of stock ownership in publicly traded companies. c. They have defined value creation too narrowly in terms of financial performance. d. Publicly traded companies have no legal standing and are not responsible for their debts.

c. They have defined value creation too narrowly in terms of financial performance.

(scroll down) At Agile Ltd., a cross-functional team is formed to work on a project for a new client. The team consists of Charles and four other members. At most of the team's presentations to senior management, Charles takes the lead and discusses project specifics with the management, while others chip in with additional information. At the completion of the project, Charles is recommended for promotion, while the other team members receive little recognition for their hard work. The reality is that Charles did very little actual work but spent some time compiling the project report based on different documents submitted by the others. This scenario at Agile Ltd. is a typical consequence of a. moral hazard. b. shared value creation. c. adverse selection. d. corporate governance.

c. adverse selection.

One way to foster ethical behavior in employees is to a. view clients as counter parties to transactions. b. align the vision statement of the organization with its informal culture. c. create a control system that encourages desired values. d. avoid codifying organizational culture.

c. create a control system that encourages desired values.

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 go above and beyond the call of duty b. the expectation that the agent will follow the country's laws and regulations c. the expectation that the agent will act in the principal's best interest d. the expectation that the agent will reconnect economic and social needs

c. the expectation that the agent will act in the principal's best interest

Bellhaven Inc. has a board of directors that consists of seven members. Which of the following is most likely an accurate statement about Bellhaven's board of directors? a. Bellhaven's board of directors ensures the firm's compliance with laws and regulations but does not conduct risk assessments. b. Bellhaven's board of directors oversees the firm's succession plan but does not evaluate the firm's CEO. c. Bellhaven's board of directors provides guidance for the firm's CEO but does not monitor the firm's corporate actions. d. Bellhaven's board of directors has a minority number of inside directors and it evaluates the firm's strategic initiatives.

d. Bellhaven's board of directors has a minority number of inside directors and it evaluates the firm's strategic initiatives.

Sanjaya was recently hired at an up-and-coming firm that has a history of ethics violations. Which action is best for him to take if he wants to determine whether the firm is now acting ethically? a. Check the company's mission statement to make sure that it guarantees respect and integrity. b. Ignore the alleged ethics violations because there is no one standard of ethical behavior. c. Research the results of the ethics violations. If the perpetrators were fired or jailed, then the rest of the company is sound. d. Observe executives at the company, and see whether they model ethical behavior and demand it of others.

d. Observe executives at the company, and see whether they model ethical behavior and demand it of others.

Which of the following could most likely have prevented the accounting scandals of the early 2000s and the global financial crisis? a. separating economic interests and social needs b. adopting the principles of shareholder capitalism c. adopting a narrow shareholder perspective d. practicing effective corporate governance

d. practicing effective corporate governance