Test Bank, Fundamentals of Corporate Finance, 2e

Format: True/False
Learning Objective: LO
Level of !ifficult": #as"
$T%e financial manager is responsible for making decisions t%at are in t%e best interest of
t%e firm&s o'ners$
() True
B) False
(ns: (
Format: True/False
Learning Objective: LO
Level of !ifficult": #as"
2$T%e demand for a potential business product, as 'ell as t%e identification of '%at
product or services is to be produced, are bot% contained in a business plan$
() True
B) False
(ns: (
Format: True/False
Learning Objective: LO
Level of !ifficult": #as"
*$T%e local +epublican ,art" is a stake%older in a local firm t%at makes no political
donations to eit%er part"$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO
Level of !ifficult": #as"
-$( patent is a productive asset for a tec%nolog".based firm$
() True
B) False
(ns: (
Format: True/False
Learning Objective: LO
Level of !ifficult": /edium
0$1ntangible assets generate most of a manufacturing firm&s cas% flo's$
() True
B) False
1-1
(ns: B
Format: True/False
Learning Objective: LO
Level of !ifficult": #as"
2$T%e most fundamental 'a" t%at a business can gro' in si3e is from t%e reinvestment of
cas% flo's or earnings$
() True
B) False
(ns: (
Format: True/False
Learning Objective: LO
Level of !ifficult": /edium
4$5%en bankruptc" occurs, t%e firm 'ill al'a"s be li6uidated$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO
Level of !ifficult": /edium
7$Capital assets are generall" s%ort term in nature$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO
Level of !ifficult": /edium
8$( good capital budgeting decision is one in '%ic% t%e benefits are 'ort% more to t%e firm
t%an t%e cost of t%e asset$
() True
B) False
(ns: (
Format: True/False
Learning Objective: LO
Level of !ifficult": /edium
9$T%e financing decision determines %o' firms raise cas% to pa" for t%eir investments$
() True
1-2
B) False
(ns: (
Format: True/False
Learning Objective: LO
Level of !ifficult": #as"
$T%e dollar difference bet'een current assets and total liabilities is called 'orking capital$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO 2
Level of !ifficult": #as"
2$( sole proprietors%ip is an o'ner&s onl" business$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO 2
Level of !ifficult": /edium
*$T%e greatest number of businesses in t%e :nited ;tates are corporations$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO 2
Level of !ifficult": /edium
-$:nlimited liabilit" means t%at t%e o'ner of a firm is responsible for pa"ing all t%e firm&s
bills$
() True
B) False
(ns: (
Format: True/False
Learning Objective: LO 2
Level of !ifficult": /edium
0$T%e process of transferring o'ners%ip of a sole proprietors%ip is relativel" eas"$
1-3
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO 2
Level of !ifficult": /edium
2$<eneral partners in a business %ave limited liabilit" 'it% regard to t%eir firm&s
obligations$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO 2
Level of !ifficult": /edium
4$/ost large corporations are incorporated in =e' >ork because of its favorable ta?
treatment of corporate income and its statutes protecting t%e rig%ts of its o'ners$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO 2
Level of !ifficult": #as"
7$Corporations do not %ave t%eir income subject to double ta?ation$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO 2
Level of !ifficult": #as"
8$,rivatel" %eld corporations are allo'ed to %ave s%are%olders$
() True
B) False
(ns: (
Format: True/False
Learning Objective: LO *
Level of !ifficult": #as"
1-4
29$T%e treasurer of a corporation usuall" reports to t%e CFO of t%e firm$
() True
B) False
(ns: (
Format: True/False
Learning Objective: LO *
Level of !ifficult": #as"
2$T%e e?ternal auditors of t%e firm report t%eir findings directl" to t%e CFO of t%e firm$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO -
Level of !ifficult": #as"
22$/a?imi3ing revenue s%ould be t%e goal of t%e firm$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO 0
Level of !ifficult": #as"
2*$(n agenc" problem can arise '%en t%e agent of t%e firm is t%e sole o'ner of t%e firm$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO 0
Level of !ifficult": /edium
2-$T%e o'ners of a firm are unaffected b" agenc" costs$
() True
B) False
(ns: B
Format: True/False
Learning Objective: LO 2
Level of !ifficult": #as"
20$Corruption in business does not affect t%e functioning of t%e financial markets$
1-5
() True
B) False
(ns: B
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": #as"
22$To start a business, t%e o'ners need
() a market '%ere t%ere is demand for t%eir product$
B) a clear vision of '%at products or services t%e" 'ant to produce$
C) t%e kno'.%o' to successfull" market t%eir product$
!) all of t%e above$
(ns: !
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": #as"
24$( stake%older is
() an"one geograp%icall" close to t%e firm&s %ead6uarters$
B) an"one 'it% a claim on t%e cas% flo's of t%e firm$
C) an" governmental agenc"$
!) all of t%e above$
(ns: B
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": #as"
27$1f "ou %ave loaned capital to a firm, t%en "ou could be
() a s%are%older$
B) a stake%older$
C) a partner$
!) all of t%e above$
(ns: B
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": /edium
28$5%ic% of t%e follo'ing are stake%olders@
() a s%are%older
B) a lender
C) t%e 1+;
!) all of t%e above
1-6
(ns: !
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": /edium
*9$( trademark is an e?ample of
() a productive asset$
B) an intangible asset$
C) a nebulous asset$
!) none of t%e above$
(ns: B
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": /edium
*.5%ic% of t%e follo'ing is a basic source of funds for t%e firm@
() debt
B) e6uit"
C) asset li6uidations
!) a and b above
(ns: !
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": #as"
*2.T%e cas% remaining after t%e firm %as met its operating e?penses, pa"ments to creditors,
and ta?es is called
() earnings per s%are$
B) capital contributed in e?cess of par$
C) residual cas%$
!) assets$
(ns: C
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": #as"
**.Cas% dividends are paid out of
() residual cas%$
B) li6uidated assets$
C) long.term debt$
!) all of t%e above$
(ns: (
1-7
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": /edium
*-.Current liabilities are liabilities t%at
() 'ill be converted to cas% 'it%in a "ear$
B) must be paid 'it%in a "ear$
C) 'ill be converted to e6uit" 'it%in a "ear$
!) none of t%e above
(ns: B
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": /edium
*0.Capital budgeting involves
() %o' a firm&s da".to.da" financial matters s%ould be managed$
B) %o' t%e firm s%ould finance its assets$
C) '%ic% productive assets t%e firm s%ould emplo"$
!) all of t%e above$
(ns: C
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": #as"
*2.5orking capital management decisions involve
() %o' a firm&s da".to.da" financial matters s%ould be managed$
B) %o' t%e firm s%ould finance its assets$
C) '%ic% productive assets t%e firm s%ould emplo"$
!) all of t%e above$
(ns: (
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": /edium
*4.Capital budgeting decisions generall" involve
() t%e fi?ed asset portion of t%e balance s%eet$
B) t%e s%ort.term portion of t%e balance s%eet$
C) t%e current liabilit" portion of t%e balance s%eet$
!) all of t%e above$
(ns: (
Format: /ultiple C%oice
1-8
Learning Objective: LO
Level of !ifficult": #as"
*7.( good capital budgeting decision is
() one in '%ic% t%e benefits of t%e project are e6ual to t%e cost of t%e asset$
B) one in '%ic% t%e benefits of t%e project are less t%an t%e cost of t%e asset$
C) one in '%ic% t%e benefits of t%e project are more t%an t%e cost of t%e asset$
!) all of t%e above$
(ns: C
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": /edium
*8.Financial markets in '%ic% e6uit" and debt instruments 'it% maturities greater t%an one
"ear are traded are called
() mone" markets$
B) capital markets$
C) stock markets$
!) none of t%e above$
(ns: B
Format: /ultiple C%oice
Learning Objective: LO
Level of !ifficult": #as"
-9.,rofitabilit" of a firm can be negativel" affected b"
() too muc% inventor"$
B) too little inventor"$
C) eit%er a or b$
!) neit%er a nor b$
(ns: C
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": #as"
-.(bout 40 percent of all businesses in t%e :nited ;tates are
() sole proprietors%ips$
B) partners%ips$
C) corporations$
!) limited liabilit" partners%ips$
(ns: (
Format: /ultiple C%oice
Learning Objective: LO 2
1-9
Level of !ifficult": /edium
-2.5%ic% of t%e follo'ing business organi3ational forms subjects t%e o'nerAs) to unlimited
liabilit"@
() sole proprietors%ip
B) partners%ip
C) corporation
!) a and b
(ns: !
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": /edium
-*.5%ic% of t%e follo'ing business organi3ational forms creates a ta? liabilit" on income at
t%e personal income ta? rate@
() sole proprietors%ip
B) partners%ip
C) corporation
!) a and b
(ns: !
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": /edium
--.5%ic% of t%e follo'ing business organi3ational forms is easiest to raise capital@
() sole proprietors%ip
B) partners%ip
C) corporation
!) a and b
(ns: C
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": #as"
-0.5%ic% of t%e follo'ing o'ners is protected b" limited liabilit"@
() a sole proprietor
B) a general partner
C) a limited partner
!) none of t%e above
(ns: C
Format: /ultiple C%oice
Learning Objective: LO 2
1-10
Level of !ifficult": /edium
-2.5%ic% of t%e follo'ing cannot be engaged in managing t%e business@
() a sole proprietor
B) a general partner
C) a limited partner
!) none of t%e above
(ns: C
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": #as"
-4.5%ic% organi3ational form accounts for 89 percent of t%e revenues of all firms in t%e
:nited ;tates@
() sole proprietors%ip
B) partners%ip
C) corporation
!) a and b
(ns: C
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": #as"
-7.5%ic% organi3ational form best enables a firm to sell its securities to t%e market@
() sole proprietors%ip
B) partners%ip
C) private corporation
!) public corporation
(ns: !
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": #as"
-8.5%ic% of t%e follo'ing organi3ational forms is subject to t%e most ;#C regulations@
() sole proprietors%ip
B) partners%ip
C) private corporation
!) public corporation
(ns: !
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": /edium
00.5%ic% organi3ational form best enables t%e o'ners of t%e firm to monitor t%e actions of
1-11
ot%er o'ners of t%e same firm@
() sole proprietors%ip
B) partners%ip
C) private corporation
!) public corporation
(ns: B
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": /edium
0.5%ic% of t%e follo'ing is considered a %"brid organi3ational form@
() sole proprietors%ip
B) partners%ip
C) corporation
!) limited liabilit" partners%ip
(ns: !
Format: /ultiple C%oice
Learning Objective: LO *
Level of !ifficult": #as"
02.5%ic% of t%e follo'ing reports directl" to t%e o'ners of t%e firm Aassume t%e firm is a
public corporation)
() CFO
B) C#O
C) board of directors
!) audit committee
(ns: C
Format: /ultiple C%oice
Learning Objective: LO *
Level of !ifficult": #as"
0*.5%ic% of t%e follo'ing is responsible for seeing t%at t%e best possible financial anal"sis
is presented@
() CFO
B) C#O
C) board of directors
!) audit committee
(ns: (
Format: /ultiple C%oice
Learning Objective: LO *
Level of !ifficult": /edium
1-12
0-.5%ic% of t%e follo'ing is responsible for performing an independent audit of t%e firm&s
financial statements@
() CFO
B) C#O
C) C,( firm
!) audit committee
(ns: C
Format: /ultiple C%oice
Learning Objective: LO *
Level of !ifficult": #as"
00.Bo' is t%e C,( firm insulated from being pressured b" management@
() T%e audit committee approves %iring, firing and fees paid to e?ternal auditors$
B) T%e c%airman of t%e board approves t%e e?ternal auditor&s fees as 'ell as t%e
engagement letter$
C) T%e 1+; approves t%e e?ternal auditor&s fees as 'ell as t%e engagement letter$
!) T%e C,( firm is not insulated from management$
(ns: (
Format: /ultiple C%oice
Learning Objective: LO -
Level of !ifficult": #as"
02.5%ic% of t%e follo'ing is an appropriate goal for t%e firm@
() profit ma?imi3ation
B) revenue ma?imi3ation
C) s%are%older 'ealt% ma?imi3ation
!) ta? minimi3ation
(ns: C
Format: /ultiple C%oice
Learning Objective: LO -
Level of !ifficult": #as"
04.5%en anal"sts and investors determine t%e value of a firm&s stock, t%e" s%ould consider
() t%e si3e of t%e e?pected cas% flo's associated 'it% o'ning t%e stock$
B) t%e timing of t%e cas% flo's$
C) t%e riskiness of t%e cas% flo's$
!) all of t%e above$
(ns: !
Format: /ultiple C%oice
Learning Objective: LO 0
1-13
Level of !ifficult": /edium
07.One reason for t%e e?istence of agenc" problems bet'een managers and s%are %olders is
t%at
() t%ere is a separation of o'ners%ip and control of t%e firm$
B) managers kno' %o' to manage t%e firm better t%an s%are%olders$
C) s%are%olders %ave unreasonable e?pectations about managerial performance$
!) none of t%e above
(ns: (
Format: /ultiple C%oice
Learning Objective: LO 0
Level of !ifficult": /edium
08.5%ic% of t%e follo'ing is a principal 'it%in t%e agenc" relations%ip@
() a compan" engineer
B) t%e C#O of t%e firm
C) a s%are%older
!) t%e board of directors
(ns: C
Format: /ultiple C%oice
Learning Objective: LO 0
Level of !ifficult": #as"
29.;%are%olders elect CCCCCCCCCCCCCC to represent t%eir interest in t%e firm$
() a c%airman
B) C#O
C) a board of directors
!) all of t%e above
(ns: C
Format: /ultiple C%oice
Learning Objective: LO 0
Level of !ifficult": /edium
2.(n e?ample of a direct agenc" cost is
() a manager turning do'n a value.contributing project because of its risks$
B) a manager e?pensing a large dinner on t%e compan" e?pense report$
C) a manager using too little debt 'it%in t%e firm&s capital structure because of t%e
additional risk associated 'it% debt$
!) all of t%e above
(ns: B
Format: /ultiple C%oice
Learning Objective: LO 0
1-14
Level of !ifficult": /edium
22.5%ic% of t%e follo'ing can %elp align t%e be%avior of managers 'it% t%e goals of
s%are%olders@
() management compensation
B) managerial labor markets
C) an independent board of directors
!) all of t%e above
(ns: !
Format: /ultiple C%oice
Learning Objective: LO 0
Level of !ifficult": #as"
2*.1f a firm %as %ad an agenc" problem t%at is reflected in a poor performing stock for a
long period of time, t%en t%e firm ma" become a target of CCCCCCCCCCCCCCCCC$
() an ;#C investigation$
B) a corporate raider$
C) an 1+; investigation$
!) a bankruptc" la'"er$
(ns: B
Format: /ultiple C%oice
Learning Objective: LO 0
Level of !ifficult": /edium
2-.#?ecutives t%at repeatedl" put t%eir o'n interests before t%at of t%e firm ma" find t%at
t%e" %ave difficult" finding anot%er job after t%eir current one$ T%is is an e?ample of
() t%e managerial labor market disciplining managers$
B) t%e market for corporate control$
C) t%e board of directors affecting t%e prospects of a manager$
!) none of t%e above$
(ns: (
Format: /ultiple C%oice
Learning Objective: LO 0
Level of !ifficult": #as"
20.5%o or '%at is responsible for setting t%e agenda at meetings of t%e board of directors@
() c%airman of t%e board of directors
B) president
C) nominating committee
!) audit committee
(ns: (
1-15
Format: /ultiple C%oice
Learning Objective: LO 0
Level of !ifficult": #as"
22.( director '%o is not an emplo"ee of t%e firm is called
() an e?ecutive director$
B) an inside director$
C) an independent director$
!) an official director$
(ns: C
Format: /ultiple C%oice
Learning Objective: LO 0
Level of !ifficult": #as"
24.5%ic% of t%e follo'ing is NOT one of t%e strategies incorporated in t%e ;arbanes.O?le"
(ct of 2992@
() attain greater board independence
B) establis% compliance programs
C) establis% et%ics programs
!) dictate ma?imum compensation levels
(ns: !
Format: /ultiple C%oice
Learning Objective: LO 0
Level of !ifficult": /edium
27.5%ic% of t%e follo'ing po'ers does t%e audit committee %ave t%e aut%orit" to do@
() audit t%e personal bank account of t%e C#O
B) 6uestion an" person emplo"ed b" t%e firm
C) audit t%e compensation files of firms in t%e same industr"
!) none of t%e above
(ns: B
Format: /ultiple C%oice
Learning Objective: LO 0
Level of !ifficult": #as"
28.5%at is t%e major complaint concerning t%e ;arbanes.O?le" (ct of 2992 b" firms@
() t%e legislative ma?imum allo'able compensation for a C#O
B) t%e legal re6uirement to disclose project information
C) t%e cost of compliance
!) t%e cost of maintaining an ;#C.emplo"ed officer at t%e firm&s premises
(ns: C
Format: /ultiple C%oice
1-16
Learning Objective: LO 2
Level of !ifficult": /edium
49.( societ"&s ideas about '%at actions are rig%t and 'rong are
() morals$
B) et%ics$
C) la's$
!) un'ritten la's$
(ns: B
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": #as"
4.T%e golden rule is an e?ample of
() a current la'$
B) an %istorical la'$
C) an un'orkable rule in financial markets$
!) an et%ical norm$
(ns: !
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": /edium
42.(n e?ample of an econom" t%at %ad trouble establis%ing a stock market and attracting
foreign investment is
() +ussia$
B) C%ina$
C) t%e C3ec% +epublic$
!) Dapan$
(ns: (
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": #as"
4*.Corruption in business
() creates inefficiencies in an econom"$
B) in%ibits gro't% in an econom"$
C) slo's t%e rate of economic gro't% in a countr"$
!) all of t%e above
(ns: !
Format: /ultiple C%oice
Learning Objective: LO 2
1-17
Level of !ifficult": /edium
4-.5%ic% corporate officer, '%en %e or s%e is guilt" of serious misconduct, can subject t%e
firm to t%e most serious losses in financial 'ealt%@
() C#O
B) CFO
C) C%ief Tec%nolog" Officer
!) C%ief +isk Officer
(ns: B
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": #as"
40.(n officer of a firm t%at is a majorit" o'ner in a competing firm 'ill probabl" be subject
to
() an 1+; audit$
B) a conflict of interest 'it% %is s%are %olders$
C) arbitrage profit returns to t%e ;#C$
!) an FB1 investigation$
(ns: B
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": /edium
42.CCCCCCCCCCCCCoccurAs) '%en one part" in a business transaction %as information t%at is
unavailable to t%e ot%er parties in t%e transaction$
() ,rofits
B) 1nformation as"mmetr"
C) 1nformation efficienc"
!) =one of t%e above
(ns: B
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": #as"
44.5it% regard to information, a central idea of fairness suggests t%at
() decisions s%ould be made on an even pla"ing field$
B) insiders s%ould be able to trade '%enever t%e" 'ant$
C) insiders s%ould never be able to trade$
!) outsiders s%ould not be allo'ed to trade since, b" definition, t%e" are at a
disadvantage$
(ns: (
Format: /ultiple C%oice
1-18
Learning Objective: LO *
Level of !ifficult": #as"
47.5%ic% of t%e follo'ing individuals is t"picall" most responsible for managing a large
corporationEs financial function@
() T%e C#O$
B) T%e C%airman of t%e board$
C) T%e CBO.
!) T%e CFO$
(ns: !
Format: /ultiple C%oice
Learning Objective: LO -
Level of !ifficult": /edium
48.1f a firm establis%es ma?imi3ing profits at t%e most important goal of t%e firm, '%ic% of
t%e follo'ing 'ould not be given proper consideration@
() ;ales revenues
B) #?penses
C) +isk
!) Cost of goods sold
(ns: C
Format: /ultiple C%oice
Learning Objective: LO -
Level of !ifficult": /edium
70.5%ic% of t%e follo'ing does ma?imi3ing s%are%older 'ealt% not usuall" account for@
() +isk$
B) <overnment regulation$
C) T%e timing of cas% flo's$
!) (mount of cas% flo's$
(ns: B
Format: /ultiple C%oice
Learning Objective: LO -
Level of !ifficult": /edium
7.5%ic% of t%e follo'ing factors or activities can be controlled b" t%e management of a
firm@
() Capital budgeting$
B) T%e level of economic activit"$
C) T%e level of interest rates$
!) ;tock market conditions$
1-19
(ns: (
Format: /ultiple C%oice
Learning Objective: LO 2
Level of !ifficult": /edium
72.T%e legal s"stem and market forces impose substantial costs on individuals and
institutions t%at engage in unet%ical be%avior$ 5%ic% of t%e follo'ing 'ould not be an
e?ample of t%e above@
() Financial losses$
B) Legal fines$
C) (genc" conflicts$
!) Dail time$
(ns: C
Format: #ssa"
Learning Objective: LO -
7*.#?plain '%at s%ould be t%e goal of t%e firm$
(ns: T%e goal of t%e firm s%ould be to ma?imi3e s%are%older 'ealt%, '%ic% in most
cases is e6uivalent to ma?imi3ing t%e price of t%e s%ares of t%e firm$ =ote t%at t%is
is not t%e same as ma?imi3ing profits since ma?imi3ing profits can occur '%ile
taking on too muc% risk A'%ic% can lo'er t%e value of t%e s%are%olders
investment)$ /a?imi3ing profits also does not take t%e timing of t%e profits into
account$ ,rofits, moreover, s%ould not be confused 'it% cas%$ /a?imi3ing
s%are%older 'ealt% is also not t%e same as minimi3ing risk, '%ic% can occur
'it%out taking an" risks$
Format: #ssa"
Learning Objective: LO 0
7-.#?plain %o' agenc" costs mig%t be found 'it%in a firm '%ose C#O o'ns no s%ares in
t%e firm and '%ose compensation package is unaffected b" t%e profits Acas% or
accounting profits) of t%e firm$
(ns: ;ince t%e manager %as no o'ners%ip interest in t%e firm, s%e %as no incentive to
make t%e cas% profits of t%e firm as %ig% as possible$ 1n fact, s%e %as a personal
incentive to %ave t%e firm pa" for as man" personal lu?uries as possible since %er
compensation package 'ill be completel" unaffected b" %er decision to purc%ase
t%e lu?uries$ 1n a firm like t%e above, 'e mig%t e?pect t%e firm to e?pend a
material amount of resources on items t%at t%e manager s%ould probabl" pa" for
%erself$
Format: #ssa"
Learning Objective: LO 2
1-20
70.>ou %ave a friend '%o tells "ou t%at et%ics are completel" unimportant in business since
a number of la's %ave been set up for us to kno' t%e rules of t%e game$
(ns: !espite %eav" regulation, t%e financial sector %as a long and ric% %istor" of
financial scandals$ 5%ile a good man" of t%e scandals are due to la's t%at %ave
been disregarded, man" of t%e scandals began as et%ical lapses$ T%is suggests t%at
la's are not enoug% to preclude be%avior t%at is detrimental to t%e 'ell.
functioning of t%e markets$
1-21