prashantsahni

A firm would like to issue new securities to fund a new project. The firm’s managers have been paid predominantly with equity-based compensation and now hold most of the firm’s stock. If the firm wants to motivate their managers to work harder, which of the following securities should be issued?

A) Shelf registered preferred stock.

B) Debt.

C) Common stock.

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In terms of providing the strongest incentive for managers, the firm should issue debt. If the project is profitable and the firm has issued debt, the managers/owners won’t have to share their residual claim on profits with other common stock holders. By issuing debt, the manager/owners can more clearly see the end result of their efforts, and this will motivate them to perform better.
Additionally, debt provides an incentive effect relative to preferred stock because the firm will have a legally binding obligation to make payments on the debt and management will not be able to waste cash on extravagant projects and perks.

prashantsahni

Which of the following statements regarding debt and its effect on corporate health via corporate governance mechanisms is most accurate?

A) Debt is unambiguously beneficial.

B) In some situations it can be beneficial; in others it can be a detriment.

C) Debt is unambiguously detrimental.

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In some situations debt can be beneficial; in others debt can be a detriment. It is beneficial when it motivates management to not waste cash. With the pressure to make periodic interest and principal payments, management does not have the luxury of spending cash on frivolous projects and perks. If the firm has no cash after paying the debtholders, it is detrimental because it prevents the firm from investing in valuable projects.

prashantsahni

Which of the following is NOT representative of a firm in a stakeholder society?

A) Employees are treated fairly and given extra benefits such as child care and extra family time off which makes them feel more secure and part of a community.

B) Because the firm is viewed favorably by the community it is extended tax breaks and favorable terms by creditors and suppliers.

C) Managers of the firm are under greater control by the stakeholders.

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In a stakeholder society the social responsibilities of the corporation are to treat the employees fairly with respect to salaries, job security, training, child care, exercise facilities, family time off, etc. This results in the firm being viewed favorably by the community thus creditors offer better financing terms and suppliers offer better pricing and credit terms. By attempting to protect the best interests of all stakeholders the managers are left largely unmonitored thus there is less control of the management under a stakeholder society. In a stockholder society management is under greater control and scrutiny by the stockholders to perform well to maintain a high stock price.

prashantsahni

Which of the following statements regarding advantages and disadvantages in a stakeholder society is least accurate?

A) Profits are sacrificed in the short term for increased shareholder wealth in the long-run.

B) Stockholders and creditors may be hesitant to invest fearing that gains must be shared with other stakeholders.

C) Taxes are distributed more equitably under a stakeholder society than a shareholder society.

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There is no evidence that taxes are redistributed more equitably under a stakeholder society where management and the board of directors redistribute taxes to the stakeholders versus a shareholder society where elected officials redistribute taxes.

prashantsahni

According to the Cadbury Report concerning the best practices in maintaining a board of directors, the pay of executive directors should be:

A) unrelated to the profits of the company.

B) merit based only.

C) subject to the recommendations of a committee that is made up wholly or mainly of non-executive directors.

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The Cadbury Report (3.3) only says that the pay should be subject to the recommendations of a committee that is made up wholly or mainly of non-executive directors.

prashantsahni

The Cadbury Report for best practice in maintaining an effective board of directors makes a recommendation concerning non-executive directors. It specifies that there should be:

A) a majority of non-executive directors, and no specific number is mentioned.

B) no more than five, but no fewer than three.

C) a sufficient number so that their views carry weight in the board’s decisions, but no specific number is mentioned.

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The Cadbury Report (1.3) specifies that the board should include non-executive directors in a sufficient number for their views to carry weight in the board’s decisions, but no specific number is mentioned.

prashantsahni

A board of directors should have a company secretary, who is responsible for ensuring that the board procedures are followed and that there is compliance with the applicable rules and regulations. With respect to having access to the secretary and/or removing the secretary, the Cadbury Report specifies that:

A) all directors should have access to the advice and services of the company secretary, and removal of the company secretary should be a matter for the board as a whole.

B) only the chairman of the board should have access to the advice and services of the company secretary, and removal of the company secretary should be a matter for the board as a whole.

C) all directors should have access to the advice and services of the company secretary, and removal of the company secretary should be a matter of the chairman of the board only.

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With respect to having access to the secretary and removing the secretary, the Cadbury Report (1.6) specifies that all directors should have access to the advice and services of the company secretary, and removal of the company secretary should be a matter for the board as a whole.