Corporate Finance PASSED Actual Exam
Questions and CORRECT Answers
Q. Under the stakeholder theory, corporate governance is most consistent with a system of:
internal controls and procedures by which individual companies are managed.
defined roles for management and the majority shareowner(s).
checks and balances to minimize the conflicting interests among shareowners. - CORRECT
ANSWER✔✔✔✔- A is correct. Corporate governance is the system of internal controls and
procedures by which individual companies are managed.
B is incorrect because the majority shareholder doesn't necessarily have a specific role that is
defined through corporate governance. Instead, the majority shareholder exercises influence
and/or control through voting mechanisms tied to their shareholdings.
C is incorrect because Corporate governance is primarily aimed at managing the conflicting
interests between management and external shareholders, not amongst shareholders.
Q. Corporate governance:
complies with a set of global standards.
is independent of both shareholder theory and stakeholder theory.
seeks to minimize and manage conflicting interests between insiders and external
shareholders. - CORRECT ANSWER✔✔✔✔- C is correct. Corporate governance is the
arrangement of checks, balances, and incentives a company needs to minimize and manage
the conflicting interests between insiders and external shareholders.
Q. Which group of company stakeholders would be least affected if the firm's financial
position weakens?
Suppliers
Customers
,Managers and employees - CORRECT ANSWER✔✔✔✔- B is correct. Compared with
other stakeholder groups, customers tend to be less concerned with, and affected by, a
company's financial performance
Which stakeholders would most likely realize the greatest benefit from a significant increase
in the market value of the company?
Creditors
Customers
Shareholders - CORRECT ANSWER✔✔✔✔- C is correct. Shareholders own shares of stock
in the company, and their wealth is directly related to the market value of the company. A is
incorrect because creditors are usually not entitled to any additional cash flows (beyond
interest and debt repayment) if the company's value increases. B is incorrect because
customers may have an interest in the company's stability and long-term viability but they do
not benefit directly from an increase in a company's value.
Q. Which of the following represents a principal-agent conflict between shareholders and
management?
Risk tolerance
Multiple share classes
Accounting and reporting practices - CORRECT ANSWER✔✔✔✔- A is correct.
Shareholder and manager interests can diverge with respect to risk tolerance. In some cases,
shareholders with diversified investment portfolios can have a fairly high risk tolerance
because specific company risk can be diversified away. Managers are typically more risk
averse in their corporate decision making to better protect their employment status.
Q. Which of the following issues discussed at a shareholders' general meeting would most
likely require only a simple majority vote for approval?
Voting on a merger
Election of directors
, Amendments to bylaws - CORRECT ANSWER✔✔✔✔- B is correct. The election of
directors is considered an ordinary resolution and, therefore, requires only a simple majority
of votes to be passed.
Q. Which of the following statements regarding stakeholder management is most accurate?
Company management ensures compliance with all applicable laws and regulations.
Directors are excluded from voting on transactions in which they hold material interest.
The use of variable incentive plans in executive remuneration is decreasing. - CORRECT
ANSWER✔✔✔✔- B is correct. Often, policies on related-party transactions require that
such transactions or matters be voted on by the board (or shareholders), excluding the
director holding the interest.
Which of the statements about extraordinary general meetings (EGMs) of shareholders is
true?
The appointment of external auditors occurs during the EGM.
A corporation provides an overview of corporate performance at the EGM.
An amendment to a corporation's bylaws typically occurs during the EGM. - CORRECT
ANSWER✔✔✔✔- C is correct. An amendment to corporate bylaws would normally take
place during an EGM, which covers significant changes to a company, such as bylaw
amendments. A and B are incorrect because the appointment of external auditors and a
corporate performance overview would typically take place during the AGM.
Which of the following is not typically used to protect creditors' rights?
Proxy voting
Collateral to secure debt obligations
The imposition of a covenant to limit a company's debt level - CORRECT
ANSWER✔✔✔✔- A is correct. Proxy voting is a practice adopted by shareholders, not
Questions and CORRECT Answers
Q. Under the stakeholder theory, corporate governance is most consistent with a system of:
internal controls and procedures by which individual companies are managed.
defined roles for management and the majority shareowner(s).
checks and balances to minimize the conflicting interests among shareowners. - CORRECT
ANSWER✔✔✔✔- A is correct. Corporate governance is the system of internal controls and
procedures by which individual companies are managed.
B is incorrect because the majority shareholder doesn't necessarily have a specific role that is
defined through corporate governance. Instead, the majority shareholder exercises influence
and/or control through voting mechanisms tied to their shareholdings.
C is incorrect because Corporate governance is primarily aimed at managing the conflicting
interests between management and external shareholders, not amongst shareholders.
Q. Corporate governance:
complies with a set of global standards.
is independent of both shareholder theory and stakeholder theory.
seeks to minimize and manage conflicting interests between insiders and external
shareholders. - CORRECT ANSWER✔✔✔✔- C is correct. Corporate governance is the
arrangement of checks, balances, and incentives a company needs to minimize and manage
the conflicting interests between insiders and external shareholders.
Q. Which group of company stakeholders would be least affected if the firm's financial
position weakens?
Suppliers
Customers
,Managers and employees - CORRECT ANSWER✔✔✔✔- B is correct. Compared with
other stakeholder groups, customers tend to be less concerned with, and affected by, a
company's financial performance
Which stakeholders would most likely realize the greatest benefit from a significant increase
in the market value of the company?
Creditors
Customers
Shareholders - CORRECT ANSWER✔✔✔✔- C is correct. Shareholders own shares of stock
in the company, and their wealth is directly related to the market value of the company. A is
incorrect because creditors are usually not entitled to any additional cash flows (beyond
interest and debt repayment) if the company's value increases. B is incorrect because
customers may have an interest in the company's stability and long-term viability but they do
not benefit directly from an increase in a company's value.
Q. Which of the following represents a principal-agent conflict between shareholders and
management?
Risk tolerance
Multiple share classes
Accounting and reporting practices - CORRECT ANSWER✔✔✔✔- A is correct.
Shareholder and manager interests can diverge with respect to risk tolerance. In some cases,
shareholders with diversified investment portfolios can have a fairly high risk tolerance
because specific company risk can be diversified away. Managers are typically more risk
averse in their corporate decision making to better protect their employment status.
Q. Which of the following issues discussed at a shareholders' general meeting would most
likely require only a simple majority vote for approval?
Voting on a merger
Election of directors
, Amendments to bylaws - CORRECT ANSWER✔✔✔✔- B is correct. The election of
directors is considered an ordinary resolution and, therefore, requires only a simple majority
of votes to be passed.
Q. Which of the following statements regarding stakeholder management is most accurate?
Company management ensures compliance with all applicable laws and regulations.
Directors are excluded from voting on transactions in which they hold material interest.
The use of variable incentive plans in executive remuneration is decreasing. - CORRECT
ANSWER✔✔✔✔- B is correct. Often, policies on related-party transactions require that
such transactions or matters be voted on by the board (or shareholders), excluding the
director holding the interest.
Which of the statements about extraordinary general meetings (EGMs) of shareholders is
true?
The appointment of external auditors occurs during the EGM.
A corporation provides an overview of corporate performance at the EGM.
An amendment to a corporation's bylaws typically occurs during the EGM. - CORRECT
ANSWER✔✔✔✔- C is correct. An amendment to corporate bylaws would normally take
place during an EGM, which covers significant changes to a company, such as bylaw
amendments. A and B are incorrect because the appointment of external auditors and a
corporate performance overview would typically take place during the AGM.
Which of the following is not typically used to protect creditors' rights?
Proxy voting
Collateral to secure debt obligations
The imposition of a covenant to limit a company's debt level - CORRECT
ANSWER✔✔✔✔- A is correct. Proxy voting is a practice adopted by shareholders, not
