1. Which statement is true?
  1. Accounting information is one way to mitigate the agency problem between shareholders and management.
  2. Accounting information plays no role in the relationship between shareholders and management.
  3. Accounting information is primarily produced to reduce the agency problem between management and employees.
  4. More than one of the above is correct
  5. None of the above
  1. In some countries, if you call for assistance on the beach, you may be charged the expenses incurred by the lifeguard or the rescuing party. This is created, because:
  1. Otherwise an adverse selection problem exists, since the lifeguard doesn’t observe if you can swim, before you enter the water.
  2. To prevent the moral hazard problem of you being less careful swimming.
  3. To prevent free-riding, as you would otherwise rescued for free.
  4. More than one of the above is correct.
  5. None of the above.
  1. In the military, agency problems are solved through many ways, among which are:
  1. An extended line of hierarchy that reduces the number of agents and principals.
  2. All tasks are subject to severe penalty, if the agent shirks.
  3. Tasks are very simple, so the principal monitoring the agent becomes quite easy.
  4. More than one of the above is correct
  5. None of the above.
  1. Economic precepts fundamental to agency theory include all of the following, except:
  1. all market participants are rational
  2. individuals seek to maximize utility
  3. people strive to maximize benefits to their community
  4. people value, status, job title, love, free time,
  5. none of the above
  1. Which of the following is true?
  1. A free rider contributes to teamwork but does not receive pay
  2. Solutions to the agency problem require alignment of the interests of principal and agent
  3. The horizon problem describes agents who focus on the long-term
  4. Agency costs are an advertising expense
  5. None of the above
  1. Which of the following is true?
  1. People in firms have equal knowledge
  2. Employee empowerment increases when firms centralize key functions
  3. Decision rights and knowledge must be separated to minimize agency costs
  4. Theft by employees is an example of an agency cost
  5. None of the above
  1. Which of the following is true?
  1. Successful firms have lower transaction costs than markets do
  2. A legal system that protects ownership rights is critical to the efficient functioning of firms and markets
  3. Markets measure and reward performance
  4. Markets allocate resources to their highest value use
  5. All of the above
  1. When activities are performed inside firms, which of the following is true?
  1. Centralized firms delegate decision rights to the lowest operational level
  2. The best performance measurement systems use only financial data because it is objective
  3. Individuals strive to manipulate the performance evaluation system to maximize their own benefits
  4. For efficiency, a manager should have both decision rights and decision control
  5. None of the above
  1. The Sarbanes-Oxley Act:
  1. Was the reason the Enron scandal was caught
  2. Was the reason the whistleblowers decided to denounce wrongdoings at Enron and Worldcom
  3. Provides protection to whistleblowers denouncing irregularities
  4. More than one of the above is true
  5. None of the above
  1. The Sarbanes-Oxley Act:
  1. Encourages auditors to increase proximity to the firms by suggesting that auditors should simultaneously take consulting jobs.
  2. Prohibits the auditors to work simultaneously as consultants for the same companies they are auditing.
  3. Reduced the number of auditors working for firms listed at the NYSE.
  4. More than one of the above is true
  5. None of the above
  1. The Sarbanes-Oxley Act:
  1. Increases criminal penalties to white collar crimes.
  2. Mandates that CEO sign tax forms.
  3. Does not allow CEO to work simultaneously in other companies.
  4. More than one of the above is true
  5. None of the above
  1. In Portugal CMVM recommendations are:
  1. Mandatory, and firms not complying with most of these will be delisted.
  2. Mandatory, but firms not complying with most of these will not be delisted.
  3. Not mandatory, but firms not complying with most of these will be delisted.
  4. Not mandatory, and firms not complying with most of these will not be delisted.
  5. None of the above
  1. An analyst has gathered the following information about Barnstabur, Inc., for the year:
  2. Reported net income of $30,000.
  3. 5,000 shares of common stock and 2,000 shares of 8 percent, $90 par preferred stock outstanding during the whole year.
  4. During the year, Barnstabur issued at par, $60,000 of par, 6.0 percent convertible bonds, with each of the 60 bonds convertible into 110 shares of the Barnstabur common stock.

If Barnstabur’s effective tax rate is 40 percent what will Barnstabur report for diluted earnings per share (EPS)?

  1. $1.25.
  2. $2.36.
  3. $1.66.
  4. $1.53.
  5. None of the above
  1. What is the net income of a firm that has a return on equity of 12 percent, an equity multiplier (leverage) of 1.5, an asset turnover of 2, and sales of $1 million?
  1. $400,000.
  2. $36,000.
  3. $360,000.
  4. $40,000.
  5. None of the above
  1. Which of the following statements is TRUE regarding the reporting of earnings per share (EPS)?
  1. Diluted EPS must be less than or equal to basic EPS.
  2. Basic EPS must be less than diluted EPS.
  3. Basic EPS can be less than diluted EPS.
  4. The EPS when antidilutive securities are converted into shares of common stock is less than basic EPS.
  5. None of the above
  1. The SSP Company had 5 million shares outstanding on January 1. On February 15 the board of directors approved a 3:2 stock split, effective April 1. What is the weighted average number of shares outstanding for the SSP Company for year-end?
  1. 6,250,000 shares.
  2. 6,875,000 shares.
  3. 7,500,000 shares.
  4. 5,625,000 shares.
  5. None of the above

Suppose a worker can exert three effort levels low, medium and high. The worker’s effort induces production error with a certain probability just like we saw in the example in class. If the worker exerts a low effort, then the probability of error is 75%. If the worker exerts a medium effort, then the probability of error is 50%; and if the worker exerts a high effort then the probability of effort is 25%. Suppose everything else is pretty much the same as what we saw in that example, namely:

The worker’s utility function is:

U(w,e)=100 – 10/w – v(e),

where w is the wage received and v(e) takes the value of 2, if the effort is high, 1 is the effort is medium, and 0, if the effort is low. Production errors are jointly verifiable, but effort is not. The product produced is worth 20, if there is no production error and zero otherwise. The principle is risk-neutral. Assume that the worker has a reservation utility of U=0.

  1. In the first best case
  1. The medium effort level is redundant, as the agent chooses the high level cooperatively
  2. The medium effort adds a non-redundant participation constraint (IRC)
  3. The medium effort is not redundant but we get to the exactly same result.
  4. More than one of the above is true
  5. None of the above
  1. In the usual second best agency problem:
  1. The principal would need to design a compensation package with 3 salary levels.
  2. The principal need to solve a problem with more than one ICC.
  3. The medium effort is redundant, as the agent would always choose either high or low effort.
  4. More than one of the above is true.
  5. None of the above is true.
  1. What ICC (or ICCs) need to be considered in this problem?
  1. In general, when it comes to agency problems, first best solutions can be achieved when
  1. The agent is risk neutral and the principal is risk averse
  2. The principal cannot observe the agent’s actions, but he can observe performance signals that are statistically linked to the unobserved actions
  3. There is no moving support
  4. More than one of the above is true
  5. None of the above is true.