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Multiple choice questions: Monetary policy, Agency theory

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Question 21:
Which of the following statements is true?
A. Shareholders as a group have little or no ability to force managers to pursue maximization of the firm's value
B. The effectiveness of a board of directors in monitoring managers will be enhanced by appointing members from the firm who are well-informed about the management problems facing the firm
C. Reducing the amount of debt financing can reduce the divergence between the shareholders' interests and the owner's interested
D. Equity ownership by managers is thought to be one of the most effective corporate control mechanisms
E. All of the above are true

Question 22:
Typically unemployment _________ during a recession and _________ during an expansion
A Rises; rises even more
B Rises; falls
C Rises; does not change
D Falls; rises
E Falls; falls even more

Question 23:
Monetary policy refers to
A Decisions to determine the government's budget
B Policy directed toward increasing exports and reducing imports
C The determination of the nation's money supply
D Policies to reduce the power of unions and monopolies
E Government policies aimed at changing the underlying structure or institutions of the economy

Question 24:
Holding all else constant, an increase in the preferences of Americans for Mexican goods will _________ the supply of dollars in the foreign exchange market and _________ the equilibrium Mexican peso/U.S. dollar exchange rate.
A Increase; increase
B Increase; decrease
C Not change; not change
D Decrease; increase
E Decrease; decrease

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Solution Summary

The problem set includes multiple choice questions about monetary policy, unemployment, and recession.

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Financial Mang.

Discussion 1
• Assume that you recently received your MBA and now work as an assistant to the CFO of a large corporation. Your boss has asked you to prepare a financial forecast for the coming year. Address the following questions:
• How would you set up the model to be presented to the executives? How many scenarios would you choose? What other information would you provide? What would you not include and why?
• What are the pros and cons of being able to examine the results of changing dividend policy and capital structure policy?
• What are the values of financial forecasting? What is your opinion of the most important points to keep in mind when creating financial forecasts?

Discussion 2
• Why is the NPV method for budgeting accepted as the most valuable budgeting tool? If you were not allowed to use NPV for a budget you were developing, what other method(s) would you use? Explain your choices.
• Project S has a cost of $10,000 and is expected to produce cash flows of $3,000 per year for 5 years. Project L costs $25,000 and is expected to generate cash flows of $7,400 per year for 5 years.
• What is the NPV, IRR, MIRR, and PI for each project, assuming a 12 percent cost of capital?
• Which project would you select, assuming they are mutually exclusive, using each ranking? Why? Which project should you actually choose? Why?
• How do simulation analysis and scenario analysis differ in the way they treat very bad and very good outcomes? What does this imply about using each technique to evaluate risk?

Discussion 3
Franco Modigliani and Merton Miller are considered the architects of capital structure theory. They had many ideas regarding capital structure and the implications of that structure on a firm's performance. Since their first article was published in 1958, many financial theorists have attempted to test the validity of existing capital theories. This assignment will allow you to take a look at some major capital structure theories and how they influence finance.
• What does the following statement mean to you? "One type of leverage affects both EBIT and EPS. The other type affects only EPS."
• What conclusions did Modigliani and Miller draw regarding the effect of capital structure on a firm's value and cost of capital, assuming no corporate taxes?
• How do their conclusions change when each introduces corporate taxes? Explain.
• If a firm's managers thought that Modigliani and Miller were exactly right, what capital structure would they choose to maximize their firm's value? Why?
• Choose two criticisms of the MM models of capital structure. Write an argument positing that those criticisms do not outweigh the benefits of those theories.

Discussion 4
• Have you ever wanted to go into business for yourself? Why or why not?
• What tradeoffs does the entrepreneur face?
• Why is entrepreneurship so important in a market economy?

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