BA 323 FINANCE - SDSU EXAM 1 FREQUENTLY TESTED
ACTUAL QUESTIONS WITH CORRECT ANSWERS
Question 1.
What is the main goal of the corporation?
ANSWER
To make capital gains for shareholders. Maximize value of the firm.
Question 2.
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.
Question 3.
What are the 3 most important management positions?
ANSWER
CEO, COO, CFO
Question 4.
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.
Question 5.
What is the major disadvantages and advantages of corporations compared to other forms of
business organizations? intrinsic value? In an efficient market, will a stock's price equal the
stock's intrinsic value?
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. to possess, i.e. the 'correct price'. In an efficient market a
stock's price should equal it's intrinsic value.
1
, Question 6.
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).
Question 7.
What is corporate governance?
ANSWER
The system of governing a company that aligns the interests of shareholders and managers together.
Question 8.
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.
Question 9.
Change in CEO Compensation starting in the 1980s?
ANSWER
Movement away from salaries to stock options to foster growth, innovation and risk-taking.
Question 10.
Why is it a good idea for CEO compensation to track an dex 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.
Question 11.
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.
2
ACTUAL QUESTIONS WITH CORRECT ANSWERS
Question 1.
What is the main goal of the corporation?
ANSWER
To make capital gains for shareholders. Maximize value of the firm.
Question 2.
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.
Question 3.
What are the 3 most important management positions?
ANSWER
CEO, COO, CFO
Question 4.
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.
Question 5.
What is the major disadvantages and advantages of corporations compared to other forms of
business organizations? intrinsic value? In an efficient market, will a stock's price equal the
stock's intrinsic value?
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. to possess, i.e. the 'correct price'. In an efficient market a
stock's price should equal it's intrinsic value.
1
, Question 6.
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).
Question 7.
What is corporate governance?
ANSWER
The system of governing a company that aligns the interests of shareholders and managers together.
Question 8.
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.
Question 9.
Change in CEO Compensation starting in the 1980s?
ANSWER
Movement away from salaries to stock options to foster growth, innovation and risk-taking.
Question 10.
Why is it a good idea for CEO compensation to track an dex 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.
Question 11.
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.
2
