Multiple choice questions | Business & Finance homework help


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Section1: Multiple Choice Questions (circle one answer)


1.      Which is perhaps the most important advantage of the corporate business form?


a.      Easy to start up.

b.      Double taxation for shareholders can be avoided.

c.       Running a corporation is usually not very expensive.

d.      Access to the capital market.

e.      None of the above is an important advantage.


2.      Best practices to mitigate and perhaps solve the principal-agent problem could be:


a.      Competitive Salary

b.      incentives & monitoring

c.       Stock options

d.      All of the above


3.      Regarding the stock market, one problem with using stock options as incentives is


a.      The transaction costs for CEOs to sell their options are relatively high.

b.      CEOs are only allowed to exercise their options when the stock price of the company is equal to the strike price.

c.       Executives only have partial influence on their firm’s stock price.

d.      Typically, stock options expire after 2 years and therefore are short-term incentives.

e.      There are no problems with using stock options to incent executives.


4.      From the options given below, which one could be more effective to align managers’ behavior with shareholders’ interests?


a.      Develop strong industry standards for executives’ work ethics.

b.      Increase penalties for managers who intentionally mislead shareholders.

c.       Consult all shareholders on the operational decisions of executives.

d.      Ask managers to behave more like shareholders.

e.      None of the above. There is no third way.


5.      A relationship between a firm’s auditors and its consultants can be a problem because:


a.      Auditors may be pressured to overlook borderline practices.

b.      Responsibility of effective monitoring is hindered because their bonuses depend on how much money the consulting group earns for the accounting firm.

c.       There is a conflict of interest for auditors.

d.      All of the above.

e.      None of the above.


6.      Board members are chosen by


a.      Being related to a member of the board

b.      A vote by all employees

c.       A vote of the shareholders

d.      Promotion within the company

e.      An appointment by the executive committee


7.      It is beneficial for the shareholders if the Board of Directors


a.      own none of the company’s stock.

b.      has a famous figurehead on the board. 

c.       has some independent board members.

d.      None of the above.


8.      The primary responsibilities of a Board of Directors include:


a.      Evaluating & monitoring the performance of CEO.

b.      Determining CEO compensation.

c.       Providing expert advice to the CEO.

d.      To secure the firm’s activities and financial condition are accurately reported to its stakeholders

e.      All of the above.


9.      Traditional roles of the analysts are to conduct analyses of their assigned firm in order to:


a.      Make trading recommendations

b.      Make earnings estimates

c.       Underwrite issues

d.      All of the above.

e.      Both a and b.


10.  Which of the following is true about creditors and stockholders?


a.      Stockholders are entitled to the firm’s net income before creditors get their interest payment.

b.      Because creditors get their return first, they may have less incentive to monitor managerial behavior than stockholders.

c.       Under extreme circumstances (e.g., a firm cannot make its interest payments), creditors cannot enforce the firm to liquidate its assets.

d.      An individual cannot be both a creditor and a stockholder.

e.      Both b and c.





11.  Which type of institutional investor is the most active in monitoring the firm?


a.      Mutual Funds

b.      Pension Funds

c.       Insurance Company

d.      Bank trusts

e.      Venture Capitalists


12.  Around the world, the two most common types of large shareholders that actively participate in management are:


a.      Family-Owners and State-Owners

b.      Individual and Institutional

c.       Individual and Family-Owners

d.      Individual and State-Owners

e.      Institutional and State-Owners


















Section 2:  Short Essay Questions (Provide short answers of 2-3 sentences)







Q1a) From the point of view of Shareholders: What is expected to be achieved by the shareholders when remunerate CEO’s and top managers with stock options and what sort of risks are on stake?

Q1b)From the point of view of CEO’s and top managers: Stock options although appear to be attractive, in some cases top managers are not in favor of using them as their incentive pay.  Please comment the reasoning and the occasions of such reluctance.




Q2)Discuss in brief the characteristics a board member must have in order to qualify as independent. Is it ‘attractive’ to have independent members in the Board and why?




Q3)Describe some of the key reasons external auditors are very useful to firms, despite the fact that most firms are not happy to have external auditors.





Q4)Give some reasoning why the existence of corporate debt creates some significant corporate system monitor:





Q5)Who are the most common types of large shareholders around the globe and why?