Deck 8: The Firms Environment, Governance, Strategy, Operations, and Financial Structure

Question 1

Technological advances allow a firm's earnings to grow over time because they increase the productivity of:

A)labor.
B)capital.
C)both labor and capital.

Answer 1

both labor and capital.

Question 2

Lang, Ofek, and Stulz (1996) analyzed the relationship between leverage and growth opportunities.They focus on the market's assessment of the ability of the firm to generate profitable growth.Their measure of profitable growth opportunities is Tobin's q ratio, the ratio of the market value of the firm's equity to its book value.They summarize their results as follows: "We show that there is a negative relation between leverage and future growth.This negative relation between leverage and growth holds for firms with (i) Tobin's q ratio, but not for firms with (ii)__ Tobin's q.

Answer 2

A

Question 3

For which of the periods below was U.S.macroeconomic performance poorest?

A)1960-1973
B)1974-1982
C)1983-2000

Answer 3

1974-1982

Question 4

A firm's ________ provides valuable services in terms of ensuring that: (i) all parties involved in a project are working on coordinated and timely bases; (ii) original plans and specifications are followed, or alternatively that necessary changes are approved by senior management; (iii) effective product quality and cost controls are instituted at every stage of the process; and (iv) reports on all activities are accurate.

A)internal auditing team
B)inspection team
C)external governance committee
D)internal governance committee

Question 5

A typical ______ involves a campaign among competing groups for the right to cast shareholders' votes on their behalf in elections for a focal firm's board directors.

A)proxy contest
B)shareholder-initiated proposal
C)initiation procedure
D)takeover contest

Question 6

For firm XYZ in the previous problem, suppose the firm's business risk is defined in terms of $\sigma$ (ROA), and $\sigma$ (ROA)=19%.Assuming that the debt is default-free, compute $\sigma$ (ROE).
  $\sigma$ (ROE)

A)19.000%
B)24.325%
C)30.875%
D)49.400%

Question 7

Scrutiny by the media and analysts has at least two important implications for a firm, but does NOT include:

A)information they generate reduces information asymmetry.
B)their oversight of a firm's management serves shareholders' interest.
C)they accurately forecast the returns on individual firms based on private information they generate.

Question 8

Empirical studies have found that, across firms, Tobin's Q ratio initially increases with managerial ownership fraction, but beyond a critical level, the ratio decreases with further increases in managerial ownership.One argument for why this ratio decreases at higher managerial ownership levels is that:

A)board directors no longer believe that they need to monitor management's incentives.
B)fewer passive shareholders own the firm's stock.
C)outside blockholders tend to be attracted to firms with high managerial ownership, and outside blockholder ownership generally destroys firm value.
D)management can use their shares to leverage their entrenched position.

Question 9

The _______ of a firm's management hierarchy is defined in terms of the allocation of decision- making power among senior managers versus lower-level managers.

A)steepness
B)composition
C)sharpness
D)structure

Question 10

At the end of year 1 firm XYZ has TA=$325 bn., and it is financed with debt with a book value of $125 mn.and equity with a book value of $200 mn.The firm must pay 10% interest annually on its debt.In year 2, the firm had a net income of $55 mn.The firm's year 2 ROA was ___(i)___, and the firm's year 2 ROE was ___(ii)___.

Question 11

The most fundamental services that governments provide to firms are:

A)the establishment of product and financial markets.
B)the regulation of industries.
C)the establishment of property rights and the enforcement of legal contracts.
D)building infrastructure and monitoring managers.

Question 12

A typical _______ involves changing some aspect the firm's internal corporate governance, such as the structure or composition of a firm's board of directors.

A)proxy contest
B)shareholder-initiated proposal
C)initiation procedure
D)takeover contest