SEVI 3013 Exam 3 UPDATED ACTUAL
Exam Questions and CORRECT Answers
Corporate governance - CORRECT ANSWER - the set of mechanisms used to manage the
relationships among stakeholders and to determine and control the strategic direction and
performance of organizations
how is corporate governance used to monitor and control managers' decisions? - CORRECT
ANSWER - it includes oversight in areas where there are conflicts of interest among major
stakeholders, including the election of directors, supervision of CEO pay, and the organization's
overall structure and strategic direction.
Three internal governance mechanisms - CORRECT ANSWER - 1. ownership concentration
2. board of directors
3. executive compensation
The separation of ownership and managerial control - CORRECT ANSWER - allows
shareholders to purchase stock, which entitles them to income (residual returns) from the firm's
operations after paying expenses
agency relationship - CORRECT ANSWER - exists when one party delegates decision-
making responsibility to a second party for compensation
Managerial opportunism - CORRECT ANSWER - the seeking of self-interest with guile (i.e.,
cunning or deceit)
problems that result from the agency relationship - CORRECT ANSWER - - the potential for
a divergence of interests
- a lack of direct control of the firm by shareholders
, Managerial opportunism prevents - CORRECT ANSWER - the maximization of shareholder
wealth
Product diversification can create two benefits for top-level managers that shareholders do not
enjoy - CORRECT ANSWER - 1. Top-level managers can increase their compensation.
2. Managerial employment risk—the risk of job loss, loss of compensation, and loss of
managerial reputation—can be reduced.
Agency costs - CORRECT ANSWER - 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
corporate governance mechanisms have received greater scrutiny due to the passing of -
CORRECT ANSWER - The Sarbanes-Oxley Act of 2002
board of directors - CORRECT ANSWER - a group of elected individuals whose primary
responsibility is to act in the owners' best interests by formally monitoring and controlling the
firm's top-level managers
board members are classified into one of three groups - CORRECT ANSWER - 1. Insiders
2. Related outsiders
3. Outsiders
Insiders - CORRECT ANSWER - The firm's CEO and other top-level managers
Related outsiders - CORRECT ANSWER - • Individuals not involved with the firm's day-to-
day operations, but who have a relationship with the company
Outsiders - CORRECT ANSWER - Individuals who are independent of the firm in terms of
day-to-day operations and other relationships
Exam Questions and CORRECT Answers
Corporate governance - CORRECT ANSWER - the set of mechanisms used to manage the
relationships among stakeholders and to determine and control the strategic direction and
performance of organizations
how is corporate governance used to monitor and control managers' decisions? - CORRECT
ANSWER - it includes oversight in areas where there are conflicts of interest among major
stakeholders, including the election of directors, supervision of CEO pay, and the organization's
overall structure and strategic direction.
Three internal governance mechanisms - CORRECT ANSWER - 1. ownership concentration
2. board of directors
3. executive compensation
The separation of ownership and managerial control - CORRECT ANSWER - allows
shareholders to purchase stock, which entitles them to income (residual returns) from the firm's
operations after paying expenses
agency relationship - CORRECT ANSWER - exists when one party delegates decision-
making responsibility to a second party for compensation
Managerial opportunism - CORRECT ANSWER - the seeking of self-interest with guile (i.e.,
cunning or deceit)
problems that result from the agency relationship - CORRECT ANSWER - - the potential for
a divergence of interests
- a lack of direct control of the firm by shareholders
, Managerial opportunism prevents - CORRECT ANSWER - the maximization of shareholder
wealth
Product diversification can create two benefits for top-level managers that shareholders do not
enjoy - CORRECT ANSWER - 1. Top-level managers can increase their compensation.
2. Managerial employment risk—the risk of job loss, loss of compensation, and loss of
managerial reputation—can be reduced.
Agency costs - CORRECT ANSWER - 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
corporate governance mechanisms have received greater scrutiny due to the passing of -
CORRECT ANSWER - The Sarbanes-Oxley Act of 2002
board of directors - CORRECT ANSWER - a group of elected individuals whose primary
responsibility is to act in the owners' best interests by formally monitoring and controlling the
firm's top-level managers
board members are classified into one of three groups - CORRECT ANSWER - 1. Insiders
2. Related outsiders
3. Outsiders
Insiders - CORRECT ANSWER - The firm's CEO and other top-level managers
Related outsiders - CORRECT ANSWER - • Individuals not involved with the firm's day-to-
day operations, but who have a relationship with the company
Outsiders - CORRECT ANSWER - Individuals who are independent of the firm in terms of
day-to-day operations and other relationships
