Multinational Business Finance 14th Edition By David K. Eiteman – Test Bank
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Sample
Questions
Multinational Business Finance, 14e (Eiteman)
Chapter 4 Financial Goals and Corporate Governance
4.1 Who Owns the Business?
1) Foreign stock markets are frequently characterized by
controlling shareholders for the individual publicly traded firms. Which of the
following is NOT identified by the authors as typical controlling shareholders?
1. A)
the government (for example, privatized utilities)
2. B)
institutions (such as banks in Germany)
3. C)
family (such as in France)
4. D)
All of the above were identified by the authors as controlling shareholders.
Answer: D
Diff: 1
L.O.: 4.1 Who Owns the Business?
Skill: Recognition
AACSB: Application of knowledge
2) Which of the following is NOT typically associated with
the public ownership of
business organizations?
1. A)
the state
2. B)
the government
3. C)
families
4. D)
civil society
Answer: C
Diff: 1
L.O.: 4.1 Who Owns the Business?
Skill: Recognition
AACSB: Application of knowledge
3) Which of the following is NOT typically associated with
the private ownership of
business organizations?
1. A)
the government
2. B)
families
3. C)
individuals
4. D)
publicly traded, widely-held organizations
Answer: A
Diff: 1
L.O.: 4.1 Who Owns the Business?
Skill: Recognition
AACSB: Application of knowledge
4) State
Owned Enterprises (SOEs):
1. A)
are a form of public ownership.
2. B)
are created for commercial activities rather than civil or social activities.
3. C)
are the dominant form of business organization in some countries.
4. D)
are all of the above.
Answer: D
Diff: 1
L.O.: 4.1 Who Owns the Business?
Skill: Recognition
AACSB: Application of knowledge
5) The problems that may arise due to the separation of ownership
and management in large business organizations is know as:
1. A)
separation anxiety.
2. B)
the agency problem.
3. C)
corporate disconnect theory.
4. D)
none of the above
Answer: B
Diff: 1
L.O.: 4.1 Who Owns the Business?
Skill: Recognition
AACSB: Application of knowledge
6) Privatization is a term used to describe:
1. A)
firms that are purchased by the government.
2. B)
government operations that are purchased by corporations and other investors.
3. C)
firms that do not use publicly available debt.
4. D)
non-public meetings held by members of interlocking directorates.
Answer: B
Diff: 1
L.O.: 4.1 Who Owns the Business?
Skill: Recognition
AACSB: Application of knowledge
7) In the U.S. and U.K. stock markets are characterized by
ownership of firms concentrated in the hands of a few controlling shareholders.
In contrast, the rest of the world tends to have more widespread ownership of
shares.
Answer: FALSE
Diff: 1
L.O.: 4.1 Who Owns the Business?
Skill: Recognition
AACSB: Application of knowledge
8) State
Owned Enterprises (SOEs) by their very name cannot be traded
on stock exchanges because they are government owned.
Answer: FALSE
Diff: 1
L.O.: 4.1 Who Owns the Business?
Skill: Conceptual
AACSB: Application of knowledge
9) According to recent research, family-owned firms in some
highly-developed economies typically outperform publicly-owned firms.
Answer: TRUE
Diff: 1
L.O.: 4.1 Who Owns the Business?
Skill: Recognition
AACSB: Application of knowledge
10) According to recent research, family-owned firms in some
highly-developed economies typically outperform publicly-owned firms.
Answer: TRUE
Diff: 2
L.O.: 4.1 Who Owns the Business?
Skill: Recognition
AACSB: Application of knowledge
11) According to the authors, dual classes of voting stock are
the norm in non-Anglo-American markets.
Answer: TRUE
Diff: 1
L.O.: 4.1 Who Owns the Business?
Skill: Recognition
AACSB: Application of knowledge
12) One of the most challenging issues in the financial
management of the enterprise is the possible separation of ownership from
management resulting in the so-called principal agent problem. Define the
agency problem, explain possible ways to alleviate the agency problem and
discuss differences in across global markets.
Answer: The separation of ownership from management raises
the possibility that the two entities may have different business and financial
objectives. This is the so-called principal agent problem. There are several
strategies for aligning shareholder and management interests, the most common
of which is for senior management to own shares or share options. What is then
good for the managers’ own personal wealth is similar to that of general
shareholders.
The United States and United Kingdom are two country markets
characterized by wide-spread ownership of shares. Management may own some small
portion of stock in their firms, but largely management is a hired agent that
is expected to represent the interests of shareholders. In contrast, many firms
in many other global markets are characterized by controlling shareholders such
as government, institutions (e.g., banks in Germany), family (e.g., in France,
Italy, and throughout Asia and Latin America), and consortiums of interests
(e.g., keiretsus in Japan and chaebols in South Korea). A business that is
owned and managed by the same entity does not suffer the agency problem.
Diff: 1
L.O.: 4.1 Who Owns the Business?
Skill: Conceptual
AACSB: Application of knowledge
4.2 The Goal of Management
1) “Maximize corporate wealth”:
1. A) is
the primary objective of the non-Anglo-American model of management.
2. B) as
a management objective treats shareholders on a par with other corporate
stakeholders such as creditors, labor, and local community.
3. C)
has a broader definition than just financial wealth.
4. D)
all of the above
Answer: D
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
2) The Shareholder Wealth Maximization Model (SWM):
1. A)
combines the interests and inputs of shareholders, creditors, management,
employees, and society.
2. B) is
being usurped by the Stakeholder Capitalism Model as those types of MNEs
dominate their global industry segments.
3. C)
clearly places shareholders as the primary stakeholder.
4. D) is
the dominant form of corporate management in the European-Japanese governance
system.
Answer: C
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
3) The Stakeholder Capitalism Model (SCM):
1. A)
clearly places shareholders as the primary stakeholder.
2. B)
combines the interests and inputs of shareholders, creditors, management,
employees, and society.
3. C)
has financial profit as its goal and is often termed impatient capital.
4. D) is
the Anglo-American model of corporate governance.
Answer: B
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
4) In the Anglo-American model of corporate governance, the
primary goal of management is to:
1. A)
maximize the wealth of all stakeholders.
2. B)
maximize shareholder wealth.
3. C)
minimize costs.
4. D)
minimize risk.
Answer: B
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
5) In finance, an efficient market is one in which:
1. A)
prices are assumed to be correct.
2. B)
prices adjust quickly and accurately to new information.
3. C)
prices are the best allocators of capital in the macro economy.
4. D)
all of the above
Answer: D
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
6) Systematic risk can be defined as:
1. A)
the total risk to the firm.
2. B)
the risk of the individual security.
3. C)
the risk of the market in general.
4. D)
the risk that can be systematically diversified away.
Answer: C
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
7) Unsystematic risk can be defined as:
1. A)
the total risk to the firm.
2. B)
the risk of the individual security.
3. C)
the added risk that a firm’s shares bring to a diversified portfolio.
4. D)
the risk of the market in general.
Answer: B
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
8) The study of how shareholders can motivate management to
accept the prescriptions of the shareholder wealth maximization model is
called:
1. A)
market efficiency.
2. B)
the SWM model.
3. C)
agency theory.
4. D)
the SCM model.
Answer: C
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
9) Under the Shareholder Wealth Maximization Model (SWM) of
corporate governance, poor firm performance is likely to be faced with all but
which of the following?
1. A)
sale of shares by disgruntled current shareholders
2. B)
shareholder activism to attempt a change in current management
3. C) as
a maximum threat, initiation of a corporate takeover
4. D)
prison time for executive management
Answer: D
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
10) Which of the following is a reason why managers act to
maximize shareholder wealth in Anglo-American markets?
1. A)
the use of stock options to align the goals of shareholders and managers
2. B)
the market for corporate control that allows for outside takeover of the firm
3. C)
performance based compensation for executive management
4. D)
all of the above
Answer: D
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
11) Which of the following is NOT true regarding the stakeholder
capitalism model?
1. A) Banks
and other financial institutions are less important creditors than securities
markets.
2. B)
Labor unions are more powerful than in the Anglo-American markets.
3. C)
Governments interfere more in the marketplace to protect important stakeholder
groups.
4. D) All
of the above are TRUE.
Answer: A
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
12) The stakeholder capitalism model:
1. A)
typically avoids the flaw of impatient capital.
2. B)
tries to meet the desires of multiple stakeholders.
3. C)
may leave management without a clear signal about tradeoffs among the several
stakeholders.
4. D)
all of the above
Answer: D
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
13) Which of the following is generally NOT considered to be a
viable operational goal for a firm?
1. A)
maintaining a strong local currency
2. B)
maximization of after-tax income
3. C)
minimization of the firm’s effective global tax burden
4. D)
correct positioning of the firm’s income, cash flows and available funds as to
country and currency
Answer: A
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
14) Which of the following operational goals for the
international firm may be incompatible with the others?
1. A)
maintaining a strong local currency
2. B)
maximization of after-tax income
3. C)
minimization of the firm’s effective global tax burden
4. D)
Each of these goals may be incompatible with one or more of the others.
Answer: D
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
15) The primary operational goal for the firm is to:
1. A)
maximize after-tax profits in each country where the firm is operating.
2. B)
minimize the total financial risk to the firm.
3. C)
maximize the consolidated after-tax profits of the firm.
4. D)
maximize the total risk to the firm.
Answer: C
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
16) With shareholder wealth maximization as the manager’s goal,
capital may be termed:
1. A)
impatient.
2. B)
patient.
3. C)
borrowed.
4. D)
bought.
Answer: A
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
17) If share price rises from $12 to $15 per share, and pays a
dividend of $1 per share, what was the rate of return to shareholders?
26. A)
26.67%
27. B)
-13.33%
28. C)
33.33%
29. D)
16.67%
Answer: C
Diff: 3
L.O.: 4.2 The Goal of Management
Skill: Analytical
AACSB: Analytical thinking
18) PolyProduction Inc. has two classes of common stock. Class A
has 5 million shares with 10 votes per share. Class B has 5 million shares with
1 vote per share. If the dividends per share are equal for both class A and B
stock, then Class A shareholders have ________ of the votes and ________ of the
dividends.
90. A)
90.91%; 90.91%
91. B)
90.91%; 50.00%
92. C)
50.00%; 50.00%
93. D)
83.33%; 33.33%
Answer: B
Diff: 3
L.O.: 4.2 The Goal of Management
Skill: Analytical
AACSB: Analytical thinking
19) In recent years the trend has been for markets to increasing
focus on the shareholder wealth form of wealth maximization.
Answer: TRUE
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
20) Non-Anglo-American markets are dominated by the
“one-vote-one-share” rule.
Answer: FALSE
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
21) The stakeholder capitalism model (SCM) holds that total risk
(operational and financial) is more important than just systematic risk.
Answer: FALSE
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
22) In recent years the trend has been for markets to increasing
focus on the global stakeholders.
Answer: FALSE
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
23) Patient Capitalism is characterized by short-term focus by
both management and investors.
Answer: FALSE
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
24) Agency theory states that unsystematic risk can be
eliminated through diversification.
Answer: FALSE
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
25) The stakeholder capitalism model does not assume that equity
markets are either efficient or inefficient.
Answer: TRUE
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
26) The stakeholder capitalism model assumes that only
systematic risk “counts” or is a prime concern for management.
Answer: FALSE
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
27) Dividend yield is the change in the share price of stock as
traded in the public equity markets.
Answer: FALSE
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
28) The goal of all international corporations is to maximize
shareholder wealth.
Answer: FALSE
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
29) Systematic risk can be eliminated through portfolio
diversification.
Answer: FALSE
Diff: 1
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
30) A recent study shows that privately held firms use less
financial leverage and enjoy lower costs of debt than publicly traded firms.
Answer: TRUE
Diff: 2
L.O.: 4.2 The Goal of Management
Skill: Recognition
AACSB: Application of knowledge
31) In the stakeholder
capitalism model (SCM) the assumption of market efficiency is
absolutely critical.
Answer: FALSE
Diff: 2
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
32) Describe the management objectives of a firm governed by the
shareholder wealth maximization model and one governed by the stakeholder
wealth maximization model. Give an example of how these two models may lead to
different decision-making by executive management.
Answer: Shareholder wealth maximization attempts to do
just that, typically through the maximization of share price. Stakeholder
wealth maximization is much more difficult because of the necessity to satisfy
many stakeholders all having approximately equal claim on the objectives of
management. These stakeholders may include shareholders, creditors, customers,
employees, and community. Differing decisions may occur in a situation that
involves significant social costs. For example, in the U.S. the decision to
shift production from a local factory to a foreign one may be in large based on
the change in NPV as the result of the move with only minor consideration of
the impact that a change in location would have on the community at large or
the local employees. A manager of a stakeholder driven firm may place equal or
greater emphasis on the local employees and community and choose to maintain
the current facility rather than move even if the foreign operation provided a
much greater NPV. Ultimately, the latter may cause an inefficient allocation of
scarce resources and lead to an overall lower standard of living.
Diff: 3
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
33) Define patient and impatient capitalism and discuss how each
may lead to different decision-making in the shareholder wealth maximization
model.
Answer: Patient capitalism may be defined as a focus on
long-term shareholder wealth maximization and is often associated with
management focusing on long term investments with less emphasis placed on
short-term or trendy objectives. On the other hand, impatient capitalism could
be described as a destructive focus on the short term by both management and
investors. These differences in the time horizon could lead to different and
perhaps inferior decisions by existing management and ultimately be costly to
the shareholders.
Diff: 3
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
34) What are the most important distinctions that make state owned enterprises (SOEs)
different from other forms of government organizations?
Answer: State
owned enterprises are created distinctly for the purpose of
commercial activities, rather than the multitude of other social, civil, and
regulatory activities of government. SOEs are today, in many countries, the
dominant form of business entity.
Diff: 2
L.O.: 4.2 The Goal of Management
Skill: Conceptual
AACSB: Application of knowledge
4.3 Publicly Traded versus Privately Held: The
Global Shift
1) The number of publicly traded firms:
1996. A)
peaked in the U.S. in 1996.
1997. B)
peaked worldwide in 1996.
1998. C)
increased significantly in 2009 as a result of the international financial
crisis.
1999. D)
all of the above
Answer: A
Diff: 1
L.O.: 4.3 Publicly Traded versus Privately Held: The
Gloabl Shift
Skill: Recognition
AACSB: Application of knowledge
2) Which of the following is NOT a source of new stock exchange
listing additions?
1. A)
initial public offerings
2. B)
movements of share listings from one exchange to another
3. C)
spinouts from larger firms
4. D)
all of the above are sources
Answer: D
Diff: 1
L.O.: 4.3 Publicly Traded versus Privately Held: The
Gloabl Shift
Skill: Recognition
AACSB: Application of knowledge
3) Which of the following is NOT a delisting category?
1. A)
forced delistings
2. B)
mergers
3. C)
acquisitions
4. D)
all of the above are categories of delistings
Answer: D
Diff: 1
L.O.: 4.3 Publicly Traded versus Privately Held: The
Gloabl Shift
Skill: Recognition
AACSB: Application of knowledge
4) U.S. listings of publicly traded firms as a percentage of
worldwide listings of such firms INCREASED from 11% in 1996 to approximately
33% in 2010.
Answer: FALSE
Diff: 1
L.O.: 4.3 Publicly Traded versus Privately Held: The
Gloabl Shift
Skill: Recognition
AACSB: Application of knowledge
5) Companies that are delisted cease to trade.
Answer: FALSE
Diff: 1
L.O.: 4.3 Publicly Traded versus Privately Held: The
Gloabl Shift
Skill: Recognition
AACSB: Application of knowledge
6) Since movements between exchanges typically are a zero sum
within a country, and spinouts and bulletin board movements are few in number,
real growth in listings comes from IPOs.
Answer: FALSE
Diff: 1
L.O.: 4.3 Publicly Traded versus Privately Held: The
Gloabl Shift
Skill: Recognition
AACSB: Application of knowledge
7) The decline of share listings in the United States has led to
considerable debate over whether these trends represent a fundamental global
business shift away from the publicly traded corporate form, or something that
is more U.S.-centric combined with the economic times. Develop an argument to
why the decline happened.
Answer: One recent study argued that it was not really the
increasingly burdensome U.S. regulatory environment that was to blame, but
rather a proliferation of factors that caused the decline in market making,
sales, and research support for small and medium-sized equities. Beginning with
the introduction of online brokerage in 1996 and online trading rules in 1997,
more and more equity trading in the United States shifted to electronic
communication networks which allowed all market participants to trade directly
with the exchange order books, and not through brokers or brokerage houses.
Although this increased competition reduced transaction costs dramatically, it
also undermined the profitability of the retail brokerage houses, which had
always supported research, market making, and sales and promotion of the small-
to medium-sized equities. Without this financial support, the smaller stocks
were no longer covered and promoted by the major equity houses. Without that
research, marketing, promotion and coverage, their trading volumes and values
fell.
Diff: 1
L.O.: 4.3 Publicly Traded versus Privately Held: The Gloabl
Shift
Skill: Conceptual
AACSB: Application of knowledge
4.4 Corporate Governance
1) Which of the following broad topics is NOT identified as an
area to be established as good corporate governance practice by the
Organization for Economic Cooperation and Development (OECD)?
1. A)
protect the rights of shareholders
2. B)
disclosure and transparency
3. C)
the proper role of stakeholders in the governance of the firm
4. D)
All of the above should be a concern of good corporate governance.
Answer: D
Diff: 1
L.O.: 4.4 Corporate Governance
Skill: Recognition
AACSB: Application of knowledge
2) The relationship among stakeholders used to determine and
control the strategic direction and performance of an organization is termed:
1. A)
corporate governance.
2. B)
Anglo-American activism.
3. C)
capital structure.
4. D)
working capital management.
Answer: A
Diff: 1
L.O.: 4.4 Corporate Governance
Skill: Recognition
AACSB: Application of knowledge
3) When discussing the structure of corporate governance, the
authors distinguish between internal and external factors. ________ is an
example of an internal factor, and ________ is an example of an external
factor.
1. A)
Equity markets; executive management
2. B)
Debt markets; board of directors
3. C)
Executive management; auditors
4. D)
Auditors; regulators
Answer: C
Diff: 1
L.O.: 4.4 Corporate Governance
Skill: Recognition
AACSB: Application of knowledge
4) Which of the following is NOT commonly associated with a
government affiliated form of corporate governance regime?
1. A) no
minority influence
2. B)
lack of transparency
3. C)
state ownership of enterprise
4. D)
All are associated with this type of corporate governance regime.
Answer: D
Diff: 1
L.O.: 4.4 Corporate Governance
Skill: Recognition
AACSB: Application of knowledge
5) Generally speaking, which of the following is NOT considered
an important factor in the composition and control of corporate boards of
directors?
1. A)
the number of insider vs outside directors
2. B)
the total number of directors on the board
3. C)
the composition of the compensation committee
4. D)
All of the above are important factors of board composition.
Answer: D
Diff: 1
L.O.: 4.4 Corporate Governance
Skill: Recognition
AACSB: Application of knowledge
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