Quiz - The Principle of Governance and Control

An agency problem in finance usually pertains to whom?

• A. Management and employees

• B. Management and stockholders

• C. Employees and customers

• D. Customers and stockholdolders

Which of the following is more likely to be a solution to agency problems ?

• A. A stock option plan for the CEO that very competitive but only for the CEO

• B. A stock option plan that is barely competitive concerning all the top management team.

• C. An active Board of Directors but relatively inexperienced.

• D. An experienced Board of Directors but with a limited power of monitoring the top management team.

In agency problems, there are two ways that mergers and acquisitions benefit managers. Those are...

• A. Diversify Human Capital and Increase Size

• B. Increase Competitive Advantage and Competitive Parity

• C. Increase Profits and Economic Value

• D. None of the Above

What is the difference between a merger and an acquisition?

• A. No real difference—the terms are synonymous

• B. An acquisition is a merger involving a hostile takeover

• C. In a merger, there is never any acquirer or target—two companies simply fuse

• D. A merger is a type of acquisition in which the acquirer and the target combine to become one legal entity

Which of the following is not a dubious reason for a merger ?

• A. Diversification

• B. Increasing the Earnings Per Share (EPS)

• C. Lowers cost of debt

• D. The acquirer uses a surplus of cash.

Which of the following is not a sensible reason for a merger ?

• A. Economies of Scale

• B. Economies of Vertical Integration

• C. Combining Complementary Resources

• D. None of the above

Corporations that grow through buying other corporations are growing via which of the below strategies:

• A. Organic Growth

• B. Acquisition

• C. Divestiture

• D. All of the above

In the long run, a successful acquisition is one that:

• A. enables the acquirer to make an all-equity purchase, thereby avoiding additional debt contracting.

• B. enables the acquirer to diversify its asset base.

• C. increases the market price of the acquirer's stock over what it would have been without the acquisition.

• D. increases the amount of financial debt.

The public sale of common stock in a subsidiary in which the parent usually retains majority control is called

• A. a LBO (leveraged buyout) transaction.

• B. a spin-off.

• C. a partial sell-off.

• D. an equity carve-out.

Empirical evidence on acquisitions indicates .... excess returns on average to the shareholders of the selling company, and .... excess returns on average to those of the buying company.

• A. no; no

• B. substantial; no

• C. no; substantial

• D. substantial; substantial