Question 1

Which of the following provides INCORRECT description of lemon problem

Accepted Answer

Lemon problem is an asymmetric information problem in which investors have more information than entrepreneurs about the value of business investment opportunities.

Answer

Lemon problem means that if investors require a 6% rate of return to finance a spaceship project managed by Richard Branson (from Virgin Blue), they also require only 6% rate of return to finance the same project managed by an unknown graduate from an average university.

Answer

Lemon problem leads to too high required rate of return for good entrepreneur and too low required rate of return for bad entrepreneur

Answer

With severe lemon problem, good entrepreneurs leave the market and only bad entrepreneurs remain in the market.

Question 2

Which of the following statement is CORRECT?

Accepted Answer

In a listed company, shareholders are the owners of the company and play the role of the principal. The CEO is hired to manage the company on behalf of shareholders and plays the role of the agent.

Answer

In a listed company, shareholders are the managers of the company and play the role of the principal. The CEO is the owner of the company and plays the role of the agent.

Answer

In a listed company, the board of directors is the owner of the company and play the role of the principal. The CEO is the manager of the company and plays the role of the agent.

Answer

In a listed company, shareholders are the owners of the company and play the role of the agent. The CEO is hired to manage the company on behalf of shareholders and plays the role of the principal.

Question 3

Which of the following provides CORRECT description of agency problem

Accepted Answer

None of the above statements is incorrect

Answer

A consequence of the agency problem is that the company does not achieve its potential profitability and shareholders obtain low rate of return by investing in the company

Answer

Agency problem is the problem that occurs after investors have invested in the company.

Answer

The agency problem arises when the agent acts for his own benefit instead of acting for the best interest of the principal.

Question 4

Which of the following provides INCORRECT description of the measures used to alleviate lemon problem

Accepted Answer

In listed companies, the CEO is responsible for the accuracy of financial reports

Answer

Analysis from financial analysis helps to reduce the information gap between potential investors and company managers

Answer

Potential investors can be provided with financial reports on the information on the current financial status of the company

Answer

Audited financial reports and financial reports that are prepared according to some accounting standards are more credible

Question 5

Which of the following statement about accounting principles is INCORRECT?

Accepted Answer

Accrual accounting means income is recognized when cash is received

Answer

Consistency means the same accounting policies and procedures should be used from one period to another period.

Answer

Materiality means only information that changes the decisions of users is reported

Answer

Going concern means the company is assumed to operate in the foreseeable future, and assets are valued based on historical costs

Question 6

Which of the following provides INCORRECT description of the corporate governance principles

Accepted Answer

The board of directors is chaired by a director who is directly involved in the daily management of the company

Answer

Majority of the board are independent directors with adequate skills and knowledge

Answer

The board of director appoints CEO, sets risk appetite, oversees reporting systems

Answer

Board of directors needs to provide shareholders with timely and appropriate information

Question 7

Which of the following provides INCORRECT description of Fisher’s separation theorem

Accepted Answer

In a free, competitive capital market, shareholders only value the managers’ efforts in paying out dividends

Answer

In a free, competitive capital market, all shareholders including highly risk adverse ones, value the managers’ efforts in making smart investment decisions to increase the company’s share price

Answer

In a free, competitive capital market, shareholders can buy or sell shares at the market value to meet their personal consumption and risk appetite

Answer

In a free, competitive capital market, shareholders can spread their wealth across time by lending and borrowing.

Question 8

A European call option gives the option holder the right, but not the obligation, to buy a stock at the strike price at maturity of the option. Suppose company A gives its CEO 1000 European call options at the beginning of the year and the strike price is set at the stock price at the beginning of the year, K = $50. The maturity of the option is one year. What are these options worth at the end of the year if stock price goes down to $20? goes up to $100?

Accepted Answer

$0;50000

Answer

$0; $20000

Answer

-$30000:50000

Answer

$50,000; $50,000

Question 9

Suppose company A compensates its CEO with 1000 European call options at the beginning of the year, with the strike price equal to the stock price at the beginning of the year. The maturity of the option is one year. Which of the following is INCORRECT?

Accepted Answer

None of the above statements is incorrect

Answer

The package encourages the CEO to withheld bad news or manipulate earnings at the time of maturity of the options

Answer

In a bearish year, the value of the options will be small even if the CEO work very hard. The compensation package does not reward hardworking CEO

Answer

In a bullish year, the value of the options will increase even if the CEO does not work very hard. The compensation package rewards the CEO for no reason.

Question 10

Which of the following statements about financial markets is INCORRECT?

Accepted Answer

Financial markets provide continuous information about share prices and encourage honest reporting about companies’ earnings

Answer

Financial market helps to discipline mangers. Poorly performed companies will see their share prices fall and can be taken over by other management teams

Answer

Not all companies find it beneficial to be listed

Answer

Financial markets provide useful information that facilitates decision making by managers. Poor decisions will be followed by drops in share price and managers can monitor share prices to make better decisions

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