T1 Introduction to Corporate Finance

The main goal of corporate finance is maximizing shareholder value while managing the financial risk of the firm. Which of the following is not a primary goal of corporate finance?

 

• Making smart investment decisions

• Maximizing sales revenue

• Selecting value-creating project

• Making wise financing decisions

Raising capital is the process of a business securing funds to raise money for growth and expansion. When a company issues new shares of stock to raise capital for a specific project, what is this method of financing called?

• Debt financing

• Equity financing

• Hybrid financing

• Internal financing

Stakeholders are parties who are interested in an organization and are directly or indirectly affected by its actions. Examples of important stakeholders for a business include its shareholders, customers, suppliers, employees, and community. Why is the community considered as a stakeholder in a company?

• To compete in the market.

• To benefit from economic development.

• To provide goods and services.

• To generate revenue.

Whilst agency relationships are essential in business, it also can result in agency problems where the interests of the principal and the agent may diverge. Which of the following actions is the most efficient in mitigating the agency's problems?

• Reducing transparency.

• Aligning the interests of the principal and the agent.

• Encouraging information asymmetry.

• Ignoring the concerns of stakeholders.

Conflicts of interest between managers and shareholders lead to so-called agency problems. Which of the following statements is NOT TRUE about the factors that contribute to the agency problem:

• Moral hazard refers to a manager’s incentive to obtain benefits in kind is higher when he has no shares in a company.

• Risk aversion relates to the situation where managers are reluctant to invest in higher-risk projects to protect their jobs.

• Earnings retention addresses the action of the managers who prefer to grow the company, and increase its sales turnover and assets, rather than to increase the returns to the company’s shareholders.

• Time horizon explains the shareholder's concern about the short-term financial prospects of their company whereas managers might only be interested in the long-term effects.

Conflicts among various sets of stakeholders may arise due to divergent interests and resolving them is crucial for the sustainable and ethical operation of a business. What is the potential consequence of unresolved conflicts among stakeholders?

• Increased shareholder wealth.

• Enhanced corporate reputation.

• Disruption to business operations.

• Improved employee satisfaction.

As part of the stakeholders in the organization, managers have a personal interest in the success of their employer, which may motivate them to put more effort into their day-to-day work. Which of the following actions suggests a manager giving priority to their personal interests over those of the owners?

• Implementing transparent financial reporting.

• Engaging in creative accounting practices.

• Actively seeking takeover bids for the company.

• Focusing on building the company's reputation.

Conflicts of interest may arise when managers prioritize their personal interests ahead of the owners such as decisions related to remuneration, empire building, creative accounting practices, off-balance sheet finance, and engagement in takeover bids. What does "empire building" refer to?

• Constructing physical structures for the company.

• Expanding the company's operations and assets to gain prestige.

• Promoting a collaborative organizational culture.

• Refused takeover by others due to fear of losing jobs.

Agency cost refers to a typical corporate situation due to disagreements between shareholders and managers. Which of the statements below refer to an example of indirect agency cost?

 

I. The cost of implementing control devices.

II. The fear of job loss prevents management from pursuing profitable but risky investments.

III. Management avoids challenging decisions that might be beneficial for the long-term health of the company due to concerns about potential backlash or resistance from employees.

IV. The expenses related to hiring non-executive directors as members of the Board.

 

• I and II

• II and III

• III and IV

• I and IV

            Control mechanisms are considered necessary to reduce the divergence of agents' interests from the principals' interests. Which of the following control mechanisms is specifically aimed at influencing the behaviour of managers by leveraging the fear of job loss?

 

I. Gearing Ratio

II. Threat of Firing

III. Managerial Reward Scheme

IV. Annual Reports & Audited Accounts

V. Corporate Control

• II and III

• I and IV

• III and V

• II and V