BA 323 Finance - SDSU Exam 1 [2026] | UPDATED
ACTUAL QUESTIONS AND CORRECT ANSWERS
• Who ultimately owns the corporation? What is the relationship between
shareholders, the board of directors, and management? -✓✓ANSWER:
Shareholders ultimately own the corporation. Management (managers) are
naturally inclined to act in their own interests but that may not be in the best
interests of shareholders. The board of directors - elected by the shareholders -
can oversee managerial behavior through corporate governance.
• What are the 3 most important management positions? -✓✓ANSWER: CEO,
COO, CFO
• What is the Sarbanes-Oxley legislation? Why was it passed? -✓✓ANSWER:
Sarbanes-Oxley was passed in 2002 as a result of the Enron and Worldcom
scandals. It makes corporate management legally responsible for the accuracy of
their financial statements.
• What is the major disadvantages and advantages of corporations compared to
other forms of business organizations? -✓✓ANSWER: Advantages: Ease of raising
money (BIGGEST ADVANTAGE), Unlimited life, Easy transfer of ownership, and
limited liability (you can only lose what you've invested).
Disadvantages: Double taxation and cost of setup and report filing.
• What is a stock's intrinsic value? In an efficient market, will a stock's price equal
the stock's intrinsic value? -✓✓ANSWER: A stock's intrinsic ("true") value is the
value the investor inherently believes the stock to possess, i.e. the 'correct price'.
In an efficient market a stock's price should equal it's intrinsic value.
, • Why do shareholders have a conflict of interest with managers? -✓✓ANSWER:
Managers are naturally inclined to act in their own best interests (which are not
always the same as the interest of stockholders).
• What is corporate governance? -✓✓ANSWER: The system of governing a
company that aligns the interests of shareholders and managers together.
• What are various strategies for aligning the interests of shareholders and
management? -✓✓ANSWER: Stock instead of cash. Long vesting periods. Stronger
oversight by board or outside investors.
• Change in CEO Compensation starting in the 1980s? -✓✓ANSWER: Movement
away from salaries to stock options to foster growth, innovation and risk-taking.
• Why is it a good idea for CEO compensation to track an overall market index like
the S&P 500? -✓✓ANSWER: To align interests of shareholder and management.
Expect CEO compensation to track S&P 500; as opposed to a bond-market which
would discourage risks.
• What is the bondholder-stockholder conflict? Do bondholders prefer safer or
risky corporate investments? -✓✓ANSWER: Bondholders prefer safe, secure
investments while stockholders prefer riskier business maneuvers for possible
greater capital gains.
• What is the difference between shareholder theory and stakeholder theory? -
✓✓ANSWER: Shareholder Theory = Maximize capital gains for shareholders.
ACTUAL QUESTIONS AND CORRECT ANSWERS
• Who ultimately owns the corporation? What is the relationship between
shareholders, the board of directors, and management? -✓✓ANSWER:
Shareholders ultimately own the corporation. Management (managers) are
naturally inclined to act in their own interests but that may not be in the best
interests of shareholders. The board of directors - elected by the shareholders -
can oversee managerial behavior through corporate governance.
• What are the 3 most important management positions? -✓✓ANSWER: CEO,
COO, CFO
• What is the Sarbanes-Oxley legislation? Why was it passed? -✓✓ANSWER:
Sarbanes-Oxley was passed in 2002 as a result of the Enron and Worldcom
scandals. It makes corporate management legally responsible for the accuracy of
their financial statements.
• What is the major disadvantages and advantages of corporations compared to
other forms of business organizations? -✓✓ANSWER: Advantages: Ease of raising
money (BIGGEST ADVANTAGE), Unlimited life, Easy transfer of ownership, and
limited liability (you can only lose what you've invested).
Disadvantages: Double taxation and cost of setup and report filing.
• What is a stock's intrinsic value? In an efficient market, will a stock's price equal
the stock's intrinsic value? -✓✓ANSWER: A stock's intrinsic ("true") value is the
value the investor inherently believes the stock to possess, i.e. the 'correct price'.
In an efficient market a stock's price should equal it's intrinsic value.
, • Why do shareholders have a conflict of interest with managers? -✓✓ANSWER:
Managers are naturally inclined to act in their own best interests (which are not
always the same as the interest of stockholders).
• What is corporate governance? -✓✓ANSWER: The system of governing a
company that aligns the interests of shareholders and managers together.
• What are various strategies for aligning the interests of shareholders and
management? -✓✓ANSWER: Stock instead of cash. Long vesting periods. Stronger
oversight by board or outside investors.
• Change in CEO Compensation starting in the 1980s? -✓✓ANSWER: Movement
away from salaries to stock options to foster growth, innovation and risk-taking.
• Why is it a good idea for CEO compensation to track an overall market index like
the S&P 500? -✓✓ANSWER: To align interests of shareholder and management.
Expect CEO compensation to track S&P 500; as opposed to a bond-market which
would discourage risks.
• What is the bondholder-stockholder conflict? Do bondholders prefer safer or
risky corporate investments? -✓✓ANSWER: Bondholders prefer safe, secure
investments while stockholders prefer riskier business maneuvers for possible
greater capital gains.
• What is the difference between shareholder theory and stakeholder theory? -
✓✓ANSWER: Shareholder Theory = Maximize capital gains for shareholders.
