4B Topic 1 Introduction to Corporate Finance

What should finance managers prioritize when making investment decisions?

• Maximize bondholders' wealth

• Maximize their own wealth

• Maximize shareholders' wealth

• Minimize financial risks

Why is it important to maintain a balanced mixture between debt and equity in financing decisions?

• To maximize financial distress

• To minimize revenue growth

• To avoid financial distress in the future

• To maximize borrowing capacity

How can management improve the firm's financial performance and value?

• By reducing revenue and profit

• By minimizing market share

• By increasing cost and defects

• By maximizing revenue and profit, expanding market share, and minimizing cost and defects

What does embed corporate governance involve?

• Maximizing short-term profits

• Affecting the long-term survival of the business

• Ignoring stakeholders' interests

• Minimizing shareholder control

Why do shareholders incur agency costs?

• To increase management's compensation

• To benefit bondholders

• To monitor management's behavior and ensure decisions that increase stock value

• To reduce their own wealth

What control device involves establishing a set of contracts between a principal and an agent to clarify the principal-agent relationship and encourage managers to act in the best interest of shareholders?

• Stock options plan

• Board of Directors election

• Contractual agreements

• Internal audit

How can shareholders provide appropriate incentives for management to pursue shareholder goals?

• By appointing an external auditor

• By increasing executive compensation

• By implementing a stable dividend policy

• By offering stock options tied to earnings performance

How can shareholders influence the composition of a company's Board of Directors (BOD)?

• By appointing external auditors

• By voting for BOD members

• By appointing internal auditors

• By setting a stable dividend policy

What control device involves appointing an external party or an in-house officer to assess financial accuracy and compliance within a company?

• Threat of firing to management

• Stock options plan

• Appointment of external auditor

• Stable dividend policy

What control mechanism can shareholders use to address management not acting in the best interest of stockholders?

• Providing a stable dividend policy

• Imposing high levels of debt on management

• Threatening to fire underperforming management

• Increasing executive compensation