End of chapter questions (1-5)

Three years ago you purchased 500 shares in the Kellogg Company, but yesterday you sold 200 those shares through your broker. This is: - An over-the-counter market transaction. - A futures market transaction. - A money market transaction. - A primary market transaction. - A secondary market transaction.

- A secondary market transaction. Feedback: Secondary markets involve securities and other financial assets traded among investors after they have been issued by corporations.

Which of the following statements about business organizations is CORRECT? - Tax advantages of incorporation offset the corporate shareholders' exposure to unlimited liability. - A significant risk in starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business. - It is generally easier to transfer one's ownership interest in a partnership than in a corporation. - If a corporation elects to be taxed as a P corporation, then both it and its stockholders can avoid all federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses. - It's unlikely for a firm to be organized as a corporation when it requires a lot of capital. Feedback: Incorrect. A significant risk in starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.

- A significant risk in starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business. Feedback: A significant risk in starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.

Which of the following factors tend to encourage management to act in their stockholders' best interests? - Threat of a hostile takeover. - Firing managers who do not perform well. - A reasonable compensation package sufficient to attract and retain able managers. - Direct intervention by shareholders. - All of the above encourage management to act in stockholders' best interests.

- All of the above encourage management to act in stockholders' best interests. Feedback: All of these factors should encourage management to act in stockholders' best interests.

Which of the following statements reflects the position of most people in business? - Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation. - Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees. - It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. Whistleblowers are generally promoted more rapidly than other employees because of the courage it takes to blow the whistle. - A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation.

- Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation. Feedback: Compliance may hurt short-term profits, and companies rarely welcome new regulations, but having rules in place and ethics training helps people understand what is expected of them and reminds them of the consequences of their actions.

Of the following statements, which is CORRECT? - The NYSE is an example of an over-the-counter market. - As they are generally defined, money market transactions involve debt securities with maturities of less than one year. - Only institutions, and not individuals, can engage in derivative market transactions. - If you purchase 100 shares of Facebook stock from your friend Sam, this is an example of a primary market transaction. - If H&R Block issues additional shares of common stock through an investment banker, this would be a secondary market transaction.

- As they are generally defined, money market transactions involve debt securities with maturities of less than one year. Feedback: Money markets are the financial markets in which funds are borrowed or loaned for periods of less than one year.

Thinking about the financial markets, which of the following statements is CORRECT? - If General Electric were to issue new stock this year, this would be considered a secondary market transaction as the company already has stock outstanding. - Capital market transactions involve only preferred stock or common stock. - Both NASDAQ dealers and specialists on the NYSE hold inventories of stocks. - Money market transactions only involve securities denominated in U.S. dollars. - The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year, whereas futures markets transactions involve securities with maturities greater than one year.

- Both NASDAQ dealers and specialists on the NYSE hold inventories of stocks. Feedback: Futures markets involve transactions set to close in the future, no matter how short or how long. Capital markets include long-term debt securities. A primary market transaction involves the issuance of new securities, and money markets may be denominated in any currency. Both dealers and specialists hold inventories of stock.

Of the following actions, which one is most likely to reduce conflicts of interest between managers and stockholders? - Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. - For a firm that compensates managers with stock options, reduce the time before options are vested (i.e., the time before options can be exercised and the shares that are received can be sold). - Pay managers large cash salaries and give them no stock options. - Beef up the restrictive covenants in the firm's debt agreements. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock. Feedback: Correct. Corporate takeovers are most likely to occur when a firm is underperforming. Managers who fear losing their jobs will try to maximize shareholder wealth.

- Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. Feedback: Corporate takeovers are most likely to occur when a firm is underperforming. Managers who fear losing their jobs will try to maximize shareholder wealth.

Bethany is planning to start a business. Why might she choose to operate her business as a corporation rather than as a proprietorship or a partnership? - Corporations generally find it easier to raise large amounts of capital. - A smaller amount of a corporation's income is generally subject to federal taxes. - Corporate investors are exposed to unlimited liability. - Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. - Corporations generally face fewer regulations. Feedback: Correct. Outsiders who are thinking about investing in a business are generally not willing to be subjected to unlimited liability, and they also want to be able to sell their shares should they choose to do so. Corporations provide these advantages; hence, firms that need large amounts of capital that must be raised in capital markets generally choose to incorporate.

- Corporations generally find it easier to raise large amounts of capital. Feedback: Outsiders who are thinking about investing in a business are generally not willing to be subjected to unlimited liability, and they also want to be able to sell their shares should they choose to do so. Corporations provide these advantages; hence, firms that need large amounts of capital that must be raised in capital markets generally choose to incorporate.

Large corporations are taxed more favorably than proprietorships. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of international businesses (in terms of the number of businesses) are organized as corporations, all governed by the same legal statutes. - Corporate stockholders are exposed to unlimited liability. - Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships. - Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment. - Feedback: Incorrect. The unfavorable tax treatment of corporations keeps most businesses, which are small, from incorporating. This is offset by ease of ownership transfer and limited liability, which are important to large businesses.

- Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment. Feedback: The unfavorable tax treatment of corporations keeps most businesses, which are small, from incorporating. This is offset by ease of ownership transfer and limited liability, which are important to large businesses.

Which of the following represents a significant disadvantage to the corporate form of organization? - Difficulty in transferring ownership. - Exposure to taxation of corporate earnings and stockholder dividend income. - Degree of liability to which corporate owners and managers are exposed. - Level of difficulty corporations' face in obtaining large amounts of capital in financial markets. - All of the above are disadvantages to the corporate form of organization.

- Exposure to taxation of corporate earnings and stockholder dividend income. Feedback: Corporations' earnings are taxed, and then earnings paid out as dividends to shareholders are taxed again, generally at a rate of 15%.

Which of the following statements describes a primary market transaction? - Facebook issues 2,000,000 shares of new stock and sells them to the public through an investment banker. - You buy 200 shares of Honda stock from your brother. The trade is not made through a broker; you just give him cash and he gives you the stock. - Microsoft sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years. - One financial institution buys 200,000 shares of BP stock from another institution. An investment banker arranges the transaction. - You sell 200 shares of Kroger stock on the NYSE through your broker.

- Facebook issues 2,000,000 shares of new stock and sells them to the public through an investment banker. Feedback: A primary market transaction is one that brings an asset to the public markets for the first time.

The acronym IPO stands for "independent public offering." - True - False Feedback: Correct. "IPO" stands for "initial public offering," which is the process for introducing a company to the public markets.

- False Feedback: "IPO" stands for "initial public offering," which is the process for introducing a company to the public markets.

The chairperson of the board and the CEO are one and the same. - True - False Feedback: Incorrect. The chairperson is often the CEO, but not always.

- False Feedback: The chairperson is often the CEO, but not always.

The primary financial objective of the firm is to maximize EPS. - True - False Feedback: Incorrect. The primary financial objective is stockholder wealth maximization, which is the maximization of stock price.

- False Feedback: The primary financial objective is stockholder wealth maximization, which is the maximization of stock price.

Maximizing the stock price on a specific target date will maximize shareholder value. - True - False Feedback: The primary operating goal should be to maximize the long-run stock price, or the intrinsic value.

- False Feedback: The primary operating goal should be to maximize the long-run stock price, or the intrinsic value.

One of the following statements about issuing and owning securities is incorrect. Which statement is NOT CORRECT? - When stock in a closely held corporation is offered to the public for the first time, the transaction is called going public, or an IPO, and the market for such stock is called the new issue, or IPO, market. - Going public establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. - It is possible for a firm to go public and yet not raise any additional new capital for the firm itself. - The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC. - When a corporation's shares are owned by a few individuals, we say that the firm is closely, or privately, held.

- Going public establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. Feedback: A firm owned by a few individuals is closely held, going public establishing intrinsic value and a liquid market, the SEC handles registration, and an IPO involves selling shares to the public for the first time whether or not it raises money for the company.

Which of the following statements about hedge funds is CORRECT? - Hedge funds have more in common with commercial banks than with any other type of financial institution. - Hedge funds have more in common with investment banks than with any other type of financial institution. - Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only the wealthiest investors invest in hedge funds, and they understand the risks. - Hedge funds are extremely popular in Europe and Asia, but they are rarely used or made available in the United States. - Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.

- Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only the wealthiest investors invest in hedge funds, and they understand the risks. Feedback: Incorrect. Hedge funds are legal investments that are as highly regulated as most other types of financial institutions. They are for investors who understand the risks involved.

Which of the following statements about legal and ethical issues is CORRECT? - Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business. - If a lower level person in a firm does something illegal, like "cooking the books," to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted. - Ethics is not an important consideration in business and in business schools. - There are many types of unethical business behavior. One example is when executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders. - If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted. Feedback: Incorrect. If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.

- If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted. Feedback: If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.

Which of the following statements about IPOs is CORRECT? - It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed. - In a Dutch auction, investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay. - IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day that the stock is offered to the public. - The term "IPO" stands for Individual Purchase Order, and it is the price at which individual shares of a new company are offered for purchase. - Sometimes, a company is forced to issue more shares than it wants to sell in an IPO because the share price is so low and demand is high.

- In a Dutch auction, investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay. Feedback: PO stands for initial public offering, in which the prices are usually determined by the investment bankers based on indications of interest from investors. This is less efficient but more popular than a Dutch auction, in which investors commit to buying shares at a specific price. An IPO is considered to be undersubscribed if investors don't want to buy the shares offered, and the company is not obligated to issue shares to satisfy demand.

The Gabriel Corporation has asked you, a consultant, to recommend an action that is likely to reduce potential conflicts between stockholders and bondholders. Which action do you propose? - Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders). - The passage of laws that make it harder for hostile takeovers to succeed. - Compensating managers with more stock options and less cash income. - A government regulation that banned the use of convertible bonds. - The firm begins to use only long-term debt (e.g., debt that matures in 30 years or more) rather than debt that matures in less than one year.

- Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders). Feedback: Bondholders want to be paid. Financing risky projects with additional debt increases the potential for conflicts between stockholders and bondholders. Adding covenants to bond agreements will reduce conflicts between stockholders and bondholders.

Imagine that you are the chairman of the board of a large corporation. Which of the following mechanisms do you think the board should choose to adopt to motivate top-level managers to act in the best interests of stockholders? - Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. - Decrease the use of restrictive covenants in bond agreements. - Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock. - Take actions that reduce the possibility of a hostile takeover. - Elect a board of directors that allows managers greater freedom of action.

- Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. Feedback: The goal of management should be to maximize long-run shareholder wealth, and paying executives with stock and stock options can help reduce incentives for short-term performance.

Which of the following statements accurately describes business organizations? - In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. - A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company. - In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. - Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. - A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

- Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. Feedback: The limited liability and ease of transfer make the corporate structure superior to the partnership structure to those interested in making investments.

Which of the following is an example of a capital market instrument? - U.S. Treasury bills. - Preferred stock. - Banker's acceptances. - Money market mutual funds. - Commercial paper.

- Preferred stock. Feedback: Capital markets are markets for stocks and for intermediate- or long-term debt.

Which of the following is an example of securities traded in money markets? - Short-term debt securities such as Treasury bills and commercial paper. - Long-term bonds. - Foreign currencies. - Consumer automobile loans. - Common stocks.

- Short-term debt securities such as Treasury bills and commercial paper. Feedback: Money markets are the financial markets in which funds are borrowed or loaned for periods of less than one year.

Which of the following statements about financial institutions and securities is CORRECT? - The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market. - Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks. - A liquid security is a security whose value is derived from the price of some other "underlying" asset. - While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. - Money markets are markets for long-term debt and common stocks.

- The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market. Feedback: Commercial banks specialize in raising money, money market funds invest in short-term debt securities, and liquid securities are those that are easy to buy and sell. NASDAQ is a dealer market, which means it has all facilities needed to conduct security transactions without a physical location.

Which of the following statements about financial markets is CORRECT? - If an investor sells shares of stock through a broker, then it would be a primary market transaction. - Home mortgage loans are traded in the money market. - Capital markets deal only with common stocks and other equity securities. - While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. - The New York Stock Exchange is an auction market, and it has a physical location.

- The New York Stock Exchange is an auction market, and it has a physical location. Feedback: The New York Stock Exchange is an auction market located on the corner of Broad and Wall Streets in New York City. Home mortgages are long-term debt securities, which are traded on capital markets and issued by commercial banks. The capital markets include both equities and long-term debt securities.

Of the following policy changes, which would be the most likely to REDUCE potential conflicts of interest between stockholders and managers? - The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash. - The company changes the way executive stock options are handled, with all options vesting after one year rather than having 20% of the options awarded vest every two years over a 10-year period. - A firm's compensation system is changed so that managers receive larger cash salaries and no long-term options to buy stock. The company's outside marketing firm is given a lucrative year-by-year consulting contract with the company. - Congress passes a law that severely restricts hostile takeovers.

- The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash. Feedback: The goal of management should be to maximize long-run shareholder wealth, and having outside directors with significant stock can help reduce incentives for short-term performance.

Which of the following situations would most likely encourage a firm's managers to make decisions that are in the best interests of stockholders? - The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced. - The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds, rather than by small individual investors, rises from 10% to 80%. - The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. - The firm's founder, who is also the president and chairperson of the board, sells 85% of her shares. - The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval.

- The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds, rather than by small individual investors, rises from 10% to 80%. Feedback: Small stockholders have little clout with management, while large institutional investors are better able to force managers to operate in stockholders' interests.

f you sat on the board of directors of Tyng Corporation, which of the following actions would you recommend to reduce potential conflicts of interest between Tyng's stockholders and bondholders? - Abolishing the Securities and Exchange Commission. - Compensating managers with stock options. - Financing risky projects with additional debt. - The threat of hostile takeovers. - The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions.

- The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions. Feedback: Stock options and the threat of takeovers reduce conflicts between managers and shareholders. Financing risky projects with additional debt increases the potential for conflicts between stockholders and bondholders. Adding covenants to bond agreements will reduce conflicts between stockholders and bondholders.

You recently sold 100 shares of Facebook stock to your uncle. You had the certificates and gave them to him. In exchange, he wrote you a check. Which of the following best describes this transaction? - This is an example of a direct transfer of capital. - This is an example of an exchange of physical assets. - This is an example of a derivative market transaction. - This is an example of a money market transaction. - This is an example of a primary market transaction.

- This is an example of a direct transfer of capital. Feedback: If one person transfers an asset to another without the involvement of a financial intermediary, then a direct transfer of capital has occurred.

A stock is considered to be closely held if the corporation's shares are owned by a few individuals who are associated with the firm's management. - True - False

- True Feedback: A closely held corporation is one owned by a few individuals, typically associated with the firm's management.

A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. One example is a commercial bank, which takes in demand deposits and then uses that money to make long-term mortgage loans. - True - False

- True Feedback: A financial intermediary matches those who need money with those who supply it.

A corporation is said to be publicly owned if its shares are held by the investing public, which may include individuals, other corporations, and institutional investors. - True - False

- True Feedback: A publicly owned corporation is one owned by a relatively large number of individuals who are not actively involved in the firm's management.

Financial institutions are more diversified today than they were in the past, when federal separated investment banks, commercial banks, insurance companies, and other financial companies. Today, large financial services corporations offer services that they could not in the past. - True - False

- True Feedback: Financial intermediaries have evolved with changes in regulations and customer needs.

There are factors that influence stock price over which managers have virtually no control. - True - False

- True Feedback: Managers have no control over factors such as (1) external constraints, (2) the general level of economic activity, (3) taxes, (4) interest rates, and (5) conditions in the stock market.

Data from the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite Index give information about past stock returns. - True -False

- True Feedback: Market indexes such as the Dow Jones, the S&P 500, and the NASDAQ provide information about historical returns.

Maximizing the firm's expected profits for the current year does not necessarily maximize the stockholders' wealth for the current year. - True - False

- True Feedback: Risky transactions that generate short-term profits sometimes fail, thus eliminating wealth.

To find the annual rate of return on any given stock, add the stock's dividend for the year plus the change in the stock's price during the year, then divide by its beginning-of-year price. - True - False

- True Feedback: The return on a stock is a function of its dividend and the change in price.

The equation used to find the annual rate of return on any given stock is the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price. When applied to a large portfolio of stocks, like those in the S&P 500, the average of the returns on each stock can be used to find stock market returns for the year in question. - True - False

- True Feedback: The returns on a stock and on an index are calculated in the same way.

A stock's return can be broken out into its dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). These returns can be calculated for all of the stocks in the S&P 500. You can find an indicator of the "return on the market" by calculating the weighted average of those returns, using each stock's total market value. - True - False

- True Feedback: The returns on a stock and on an index are calculated the same way.

Hedge funds are similar to mutual funds except that they are less regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions. - True - False

- True Feedback: Correct. Hedge funds are largely unregulated and are marketed primarily to institutions and individuals with high net worths.

Calistoga Combines is a publicly-owned firm. In order to best serve shareholders, its' primary operating goal should be to: - Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value. - Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth. - Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers. - Maximize the firm's expected EPS, which must also maximize the firm's price per share. - Minimize the firm's risks because most stockholders dislike risk. In turn, this will maximize the firm's stock price.

- Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers. Feedback: The goal of management should be to maximize long-run shareholder wealth, and good compensation packages can reduce a manager's incentives to focus on the short term instead.

Imagine that a firm's board of directors wants to maximize value for all of its stockholders in general, as opposed to some specific stockholders. A smart solution would be to design an executive compensation system that aims to build the firm's long-term value. - True - False

- true Feedback: The primary operating goal should be to maximize the long-run stock price, or the intrinsic value.

In most corporations, the CFO is outranked by the CEO. - True - False Feedback: Correct. The CFO generally reports to the CEO, who oversees all executives.

-True Feedback: The CFO generally reports to the CEO, who oversees all executives.

The board of directors is the highest ranking body in a corporation. The members of the board are elected by the shareholders, and the chairperson of the board is the highest ranking member of the board. The CEO generally reports to the board and its chairperson, and the board generally has the authority to remove the CEO. - True - False Feedback: Correct. The board represents the shareholders, and the interests of shareholders may be very different from the interests of the CEO and other managers.

-True Feedback: The board represents the shareholders, and the interests of shareholders may be very different from the interests of the CEO and other managers.

Maximizing expected EPS will maximize shareholder value. - True - False

-True Feedback: The primary operating goal should be to maximize the long-run stock price, or the intrinsic value.