Question :
6.5 Corporate Governance Policy and the Financial Crisis of 2007-2009
1) : 1267087
6.5 Corporate Governance Policy and the Financial Crisis of 2007-2009
1) Why do corporations want to keep the price of their stock high?
A) A higher stock price increases the funds the firm can raise when it sells a given amount of stock.
B) Corporations can pay their managers lower salaries and avoid principal-agent problems when stock prices are higher.
C) Higher stock prices are correlated with lower expected profitability.
D) All of the above provide incentive for corporations to keep the price of their stock high.
2) An investor is more likely to buy a firm’s stock if the firm’s income statement shows ________ and if its balance sheet shows ________.
A) a large net worth; a large price-earnings ratio
B) a large after-tax profit; a large net worth
C) a large price-earnings ratio; a large dividend yield
D) low opportunity costs; large liabilities
3) In 2002, the Enron corporation was accused of falsifying information regarding liabilities on Enron’s balance sheets, thereby
A) increasing Enron’s assets on the balance sheet.
B) reducing Enron’s profit on the balance sheet.
C) increasing Enron’s net worth on the balance sheet.
D) reducing Enron’s net income on the income statement.
4) According to the article in the “An Inside Look” feature, Facebook is a
A) publicly traded company.
B) privately held company.
C) government owned company
D) sole proprietorship.
5) In response to accounting scandals in 2002, the federal government passed legislation requiring that corporate directors have a certain level of expertise with financial information and mandating that chief executive officers personally certify the accuracy of financial statements. What is the name of this legislation?
A) the Accountant Reliability Act
B) the 24th amendment to the Constitution
C) the Kennedy-Lott Act
D) the Sarbanes-Oxley Act
6) Compared to buying stock in a publicly-held firm, investing in a private firm
A) is often considered safer because private firms are subject to stricter SEC regulations.
B) is often considered riskier because public firms are subject to stricter SEC regulations.
C) is often considered riskier because private firms are subject to stricter SEC regulations.
D) is often considered safer because public firms are subject to stricter SEC regulations.
7) In addition to requiring that CEO’s personally certify the accuracy of financial statements, the Sarbanes-Oxley Act of 2002 also requires that
A) CEO’s conduct audits of their corporations themselves.
B) firms raise funds for expansion through the sale of bonds only, not stocks.
C) auditors disclose any potential conflicts of interest.
D) corporations issue financial statements monthly rather than quarterly.
8) When groups of mortgages are bundled together by financial institutions and sold to investors, these institutions are said to be ________ mortgage loans.
A) securitizing
B) underwriting
C) liquidating
D) harvesting
9) Mortgages issued to borrowers whose credit histories include failures to make payments on bills are known as ________ mortgages.
A) catastrophic
B) variable rate
C) subprime
D) Alt-A
10) Traditionally, Wall Street investment banks had been organized as partnerships, but by 2000 they had converted to being publicly traded companies. As partnerships, the principal-agent problem is ________ because there is ________ separation of ownership from control.
A) reduced; much
B) reduced; little
C) increased; much
D) increased; little
11) What is the Congressional act, enacted in 1933 and repealed in 1999, which prevented financial firms from being both commercial banks and investment banks?
A) the Sarbanes-Oxley Act
B) the Glass-Steagall Act
C) the Taft-Hartley Act
D) the Cellar-Kefauver Act
12) The Sarbanes-Oxley Act of 2002 requires that CEOs personally certify the accuracy of financial reports.
13) Briefly describe the Sarbanes-Oxley Act and explain why it was passed.
14) During 2007, many “subprime” and “Alt-A” borrowers began to default on their mortgages. Describe “subprime” and “Alt-A” borrowers.
