WPC 480 CH. 10 EXAM QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026
Agency Relationship - Answers exists when one party delegates decision-making responsibility to a
second party for compensation
Managerial Opportunism - Answers the seeking of self-interest with guile (i.e., cunning or deceit)
A top-level manager's reputation - Answers is an imperfect predictor; opportunistic behavior cannot
be observed until it has occurred.
Shareholders do not prefer - Answers product diversification
Top-level managers do prefer - Answers the benefits of product diversification
Increased product diversification - Answers provides an opportunity for top-level managers to
increase their compensation.
Second potential benefit of product diversification - Answers reduces top-level managers'
employment risk ( job loss, loss of compensation, managerial reputation )
Free Cash Flow - Answers represents the cash remaining after the firm has invested in all projects that
have positive net present value within its current business.
Top-level managers may decide - Answers to invest free cash flow in product lines that are not
associated with the firm's current lines to increase firm's degree of diversification.
Overdiversification - Answers Excessive diversification leading to performance decline, such as
excessive free cash flow
Shareholders prefer - Answers riskier strategies and more focised diversification
Managers prefer - Answers a level of diversification that maximizes firm size and their compensation
while reducing their employment risk
Agency Costs - Answers the sum of incentive costs, monitoring costs, enforcement costs, and
individual financial losses incurred by principals because governance mechanisms cannot guarantee
total compliance by the agent
Firms incurs costs - Answers when it uses one or more governance mechanism.
Ownership Concentration - Answers the number of large-block shareholders and the total percentage
of the firm's shares they own
Government Mechanisms - Answers The forms of control that align the interests of principal and
agent so both parties have the incentive to work together to maximize organizational effectiveness.
Large-Block Shareholders - Answers typically own at least 5 percent of a company's issued shares
declined - Answers The number of individuals who are large-block shareholders has
Institutional owners - Answers have replaced individuals as large-block shareholders.
High degrees of ownership concentration - Answers the probability is greater that managers'
decisions will be designed to maximize shareholder value.
60 to 75% - Answers estimates of the amount of equity in U.S. firms held by institutional owners
range from
As investors - Answers institutional owners have both the size and the inventive to discipline
ineffective top-level managers.
Board of Directors - Answers a group of elected individuals whose primary responsibility is to act in
the owners' best interest.
Have not been highly effective - Answers evidence suggests that boards
Insiders - Answers the firm's CEO and other top-level managers
Related outsiders - Answers Individuals not involved with the firm's day-to-day operations, but who
have a relationship with the company
Outsiders - Answers individuals who are independent of the firm in terms of day-to-day operations
and other relationships
Executive Compensation - Answers a governance mechanism that seeks to align the interests of
managers and owners through salaries, bonuses, and long-term incentives such as stock awards and
options
Market for Corporate Control - Answers an external governance mechanism that is active when a
firm's internal governance mechanisms fail
Golden parachutes - Answers where a CEO can receive up to three years salary if his or her firm is
taken over
Poison Pill - Answers defensive provisions to deter hostile takeovers by making the target firm less
attractive
Agency Relationship - Answers exists when one party delegates decision-making responsibility to a
second party for compensation
Managerial Opportunism - Answers the seeking of self-interest with guile (i.e., cunning or deceit)
A top-level manager's reputation - Answers is an imperfect predictor; opportunistic behavior cannot
be observed until it has occurred.
Shareholders do not prefer - Answers product diversification
Top-level managers do prefer - Answers the benefits of product diversification
Increased product diversification - Answers provides an opportunity for top-level managers to
increase their compensation.
Second potential benefit of product diversification - Answers reduces top-level managers'
employment risk ( job loss, loss of compensation, managerial reputation )
Free Cash Flow - Answers represents the cash remaining after the firm has invested in all projects that
have positive net present value within its current business.
Top-level managers may decide - Answers to invest free cash flow in product lines that are not
associated with the firm's current lines to increase firm's degree of diversification.
Overdiversification - Answers Excessive diversification leading to performance decline, such as
excessive free cash flow
Shareholders prefer - Answers riskier strategies and more focised diversification
Managers prefer - Answers a level of diversification that maximizes firm size and their compensation
while reducing their employment risk
Agency Costs - Answers the sum of incentive costs, monitoring costs, enforcement costs, and
individual financial losses incurred by principals because governance mechanisms cannot guarantee
total compliance by the agent
Firms incurs costs - Answers when it uses one or more governance mechanism.
Ownership Concentration - Answers the number of large-block shareholders and the total percentage
of the firm's shares they own
Government Mechanisms - Answers The forms of control that align the interests of principal and
agent so both parties have the incentive to work together to maximize organizational effectiveness.
Large-Block Shareholders - Answers typically own at least 5 percent of a company's issued shares
declined - Answers The number of individuals who are large-block shareholders has
Institutional owners - Answers have replaced individuals as large-block shareholders.
High degrees of ownership concentration - Answers the probability is greater that managers'
decisions will be designed to maximize shareholder value.
60 to 75% - Answers estimates of the amount of equity in U.S. firms held by institutional owners
range from
As investors - Answers institutional owners have both the size and the inventive to discipline
ineffective top-level managers.
Board of Directors - Answers a group of elected individuals whose primary responsibility is to act in
the owners' best interest.
Have not been highly effective - Answers evidence suggests that boards
Insiders - Answers the firm's CEO and other top-level managers
Related outsiders - Answers Individuals not involved with the firm's day-to-day operations, but who
have a relationship with the company
Outsiders - Answers individuals who are independent of the firm in terms of day-to-day operations
and other relationships
Executive Compensation - Answers a governance mechanism that seeks to align the interests of
managers and owners through salaries, bonuses, and long-term incentives such as stock awards and
options
Market for Corporate Control - Answers an external governance mechanism that is active when a
firm's internal governance mechanisms fail
Golden parachutes - Answers where a CEO can receive up to three years salary if his or her firm is
taken over
Poison Pill - Answers defensive provisions to deter hostile takeovers by making the target firm less
attractive
