CHAPTER 12 and 1 QUIZ

One of the scandals that broke out at Hewlett-Packard (HP) involved Patricia Dunn, then chairman of the board, launching a covert investigation where she conducted spying on HP's board members, selected employees, and some journalists. True False

True

Which of the following real-world scenarios best exemplifies information asymmetry in a public stock company? a) Based on a tipoff by a Goldman Sachs employee, the Galleon Group was able to sell its holdings in Goldman Sachs' stocks prior to the announcement. b) GE knew that it could create a profitable venture out of producing green products, so it rolled out the ecomagination strategy. c) Mark Hurd, CEO of HP, was unaware of the sexual harassment allegations, and the board's demand for him to

a) Based on a tipoff by a Goldman Sachs employee, the Galleon Group was able to sell its holdings in Goldman Sachs' stocks prior to the announcement.

_____ is best described as a framework that helps firms recognize and address the economic, legal, social, and philanthropic expectations that society has of the business enterprise at a given point in time. a) Corporate social responsibility b) Integrated value network analysis c) Strategic social positioning d) Social strategy formulation

a) Corporate social responsibility

What was Goldman Sachs' rebuttal to SEC's claim that it defrauded investors? a) It is up to the clients to assess the risks involved in any investments. b) Fabrice Tourre was responsible for putting the deal together, and it was the lapse of an individual, not the entire firm. c) John Paulson did not reveal his intentions behind creating Abacus. d) Goldman Sachs' itself lost $100 million in the deal.

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

Which of the following scenarios best exemplifies a leveraged buyout of a telecommunications firm, Telbok Inc.? a) The owner of another company buys all the outstanding shares of Telbok. b) A private equity firm, Rainbow Inc., buys a large amount of shares of Telbok. c) Telbok sells all its shares and declares bankruptcy. d) Telbok buys back a large amount of its own shares from the stock market.

a) The owner of another company buys all the outstanding shares of Telbok.

Which of the following is true of the board of directors in a public stock company? a) Votes at shareholder meetings determine whose representatives are appointed to the board of directors. b) Because shareholders generally have uniform interests, the composition of the board is generally a unanimous decision. c) The board of directors acts as a facilitator to convey interests of the stockholders to the management without any real authority. d) The functions of the board of directors are limite

a) Votes at shareholder meetings determine whose representatives are appointed to the board of directors.

Sun Inc., a vendor, regularly supplies pallets to Octangle Corp. for its shipping business. Therefore, Sun Inc. is Octangle Corp.'s _____. a) external stakeholder b) internal stakeholder c) stockholder d) shareholder

a) external stakeholder

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) stock option b) commission c) stock exchange d) bonus

a) stock option

_____ are board members who are not employees of the firm but frequently are senior executives from other firms or full-time professionals. a) Inside directors b) Outside directors c) CEOs d) Auditors

b) Outside directors

All public companies listed on the U.S. stock exchanges must file a number of financial statements with the _____. a) Governance Metrics International (GMI) b) Securities and Exchange Commission (SEC) c) EDGAR database d) Wall Street Journal

b) Securities and Exchange Commission (SEC)

Who appoints the board of directors in a public stock company? a) Auditors b) Shareholders c) Employees d) CEOs

b) Shareholders

What does "limited liability for investors" imply in a public stock company? a) Shareholders are liable for their invested capital and personal wealth and not for any other investments made. b) Shareholders who provide the risk capital are liable only to the capital specifically invested. c) Shareholders are liable for all the decisions made by the board of directors of the company. d) Shareholders have financial but not legal responsibilities toward the public stock company.

b) Shareholders who provide the risk capital are liable only to the capital specifically invested.

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 d

b) adverse selection

According to the perspective of shareholder capitalism, _____. a) shareholders in public stock companies are restricted from buying shares of two competing companies b) shareholders in public stock companies have the most legitimate claim on profits c) shareholders in public stock companies have significant decision-making power d) shareholders in public stock companies have unlimited financial liability

b) shareholders in public stock companies have the most legitimate claim on profits

Which of the following best qualifies as a firm's internal stakeholder a) An auditor assigned to the firm by a federal government agency b) A labor union with whom the firm's employees can affiliate c) A manager taking care of the firm's operations in a foreign market d) A competitor manufacturing the same products as that of the firm

c) A manager taking care of the firm's operations in a foreign market

Frank is a board member at Lofloy Greens Inc., a publicly traded company. In addition to his duties on the board, Frank is also a full-time employee as a senior manager at Spinson Locomotives Inc. Which of the following is most likely to be true of Frank? a) Frank is a part-time employee at Lofloy Greens. b) Frank cannot serve as a director on Spinson Locomotives' board. c) Frank is an outside director on Lofloy's board of directors. Frank is a stockholder of Lofloy Greens.

c) Frank is an outside director on Lofloy's board of directors.

The informational advantage that agents possess over principals is often based on the fact that: a) the information is extremely secure and protected from exposure to anyone outside the company. b) public stock companies are characterized by information symmetry. c) insiders are the first to learn about important developments before the information is released to the public. d) agents are legally permitted to freely trade the information in exchange for benefits, unlike principals.

c) insiders are the first to learn about important developments before the information is released to the public.

Rachel owns a large portion of Cube Inc.'s stocks. However, she is not employed by the company. In this scenario, Rachel is the company's _____. a) customer b) creditor c) internal stakeholder d) external stakeholder

c) internal stakeholder

Which of the following perspectives best supports the Shared Value creation framework? a) Markets are more often than not defined by societal needs rather than economic needs. b) Failing to create value for society almost always reflects on the bottom line. c) A firm's competitive advantage depends on pitting economic and societal needs in a trade-off. d) Externalities such as pollution, wasted energy, and costly accidents actually create internal costs.

d) Externalities such as pollution, wasted energy, and costly accidents actually create internal costs.

What was Leo Apotheker's role in the downfall of HP's market value? a) Mr. Apotheker leaked sensitive internal information to an online magazine. b) Mr. Apotheker was involved in a sexual harassment lawsuit with Jodie Fisher, an independent contractor. c) Mr. Apotheker appointed Meg Whitman as the interim head of HP. d) Mr. Apotheker was instrumental in acquiring the overvalued British software company Autonomy.

d) Mr. Apotheker was instrumental in acquiring the overvalued British software company Autonomy.

What are poison pills? a) They are used by shareholders to prevent the founder of a company from taking the company private through a leveraged buyout. b) They are unspecified conditions in the contract between stakeholders in an organization. c) They are used by companies in a bid to perform a hostile takeover of competing firms. d) They are defensive provisions that kick in should a buyer reach a certain level of share ownership.

d) They are defensive provisions that kick in should a buyer reach a certain level of share ownership.

Clare, the CEO of Femica Inc., reports to the board of directors appointed by the shareholders of Femica. Based on shareholder suggestions, the board ties Clare's compensation to the performance of Femica. Due to this pressure, Clare begins devoting extra time to projects and undertakes other activities to ensure that she has job security and that she receives adequate compensation. This conflict between Clare's interests and the board's interests best illustrates a(n) _____. a) shareholder cap

d) principal-agent problem

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 do not have the safety of serving on the boards of other firms. c) they are part-time employees of the firm. d) they have more independence than inside directors.

d) they have more independence than inside directors.