Some fundamental multiple-choice questions derived from this chapter:
1. According to the chapter, what is the typical attitude of American stockholders towards the companies they own?
a) Stockholders actively assert their rights as owners and closely monitor management decisions.
b) Stockholders are generally apathetic and docile, deferring to management's judgment on most matters.
c) Stockholders maintain a balanced level of oversight, questioning some management decisions but trusting them on operational matters.
d) Stockholders take an entrepreneurial role, directing management to take risks and pursue growth.
2. On what types of issues might management's interests conflict with stockholders'?
a) Executive compensation, business expansion, dividend payments, company continuation, information sharing
b) Hiring decisions, marketing strategies, pricing, research and development
c) Capital allocation, debt levels, cash flow management, liquidity
d) Mergers and acquisitions, joint ventures, strategic partnerships
3. According to the chapter, what are some steps management could take to address a stock trading significantly below liquidation value?
a) Initiate a stock buyback program, cut dividends to boost cash reserves, avoid drawing attention to the stock price
b) Explore reasons for low earnings, return excess cash to shareholders, highlight liquidation value, consider selling the company
c) Take on more debt, use excess cash to reinvest in the business, acquire companies trading at higher multiples
d) Launch a marketing campaign to promote the stock, start paying dividends, split the stock to lower the share price
4. What does the chapter say is management's responsibility around their company's share price?
a) They have no responsibility for share prices.
b) They should work to keep prices as low as possible.
c) They should try to boost the price as high as possible.
d) They should aim to prevent extreme undervaluation or overvaluation.
5. What does the chapter say is the problem with a company buying back cheap shares from existing shareholders?
a) It waters down future earnings per share.
b) It uses capital that could be reinvested in the business.
c) It takes advantage of desperate shareholders.
d) It dilutes the holdings of remaining shareholders.
6. What does the chapter say about companies returning capital to shareholders?
a) It should be avoided because it signals lack of growth opportunities.
b) It should only be done if absolutely necessary to avoid bankruptcy.
c) It is a prudent step when cash holdings exceed business needs.
d) It is unfair to shareholders who would rather see the cash reinvested.
7. According to the chapter, what is management's role in representing shareholder interests?
a) Management's interests naturally coincide with shareholders' interests.
b) Management should balance interests of shareholders, employees, and the public.
c) Management's decisions always reflect the best interests of shareholders.
d) Management has a duty to act solely on behalf of shareholders.
Answers: BABDC CD