BA323 BRINCKS EXAM 1 | ALL QUESTIONS AND
CORRECT ANSWERS | GRADED A+ | NEWEST
VERSION | VERIFIED ANSWERS
•What are derivatives?
•Which type of derivative is most frequently used? Which?
•Hedgers versus speculators ---------CORRECT ANSWER-----------------
Derivatives are like contracts. Derivatives are financial securities who's
value is based on a benchmark. Hedgers take an offset position in a
derivative in order to avoid risk while speculators bet on the direction that
an asset moves for profit.
•What is an IPO? Why do companies go public? ---------CORRECT
ANSWER-----------------An IPO is the initial public offering when a company
publicly list shares on the market. Companies go public in order to raise
capital from a wider audience of investors.
On average, do IPOs make or lose money over time? Why is it so
important for private equity funds to invest in a large number of IPOs? -------
--CORRECT ANSWER-----------------IPOs tend to lose money over time
since most companies stock value decreases over a 5 year period.
Investing in multiple IPOs is used to reduce risk.
What are the implications of market efficiency? ---------CORRECT
ANSWER-----------------Understanding the intrinsic value of a stock and how
new information may affect its value. Market efficiency is determined by the
flow of information and how closely companies are followed by investors.
•What is behavioral finance? Know the four behavioral biases discussed in
class. ---------CORRECT ANSWER-----------------Behavioral finance are
,cognitive biases that cause investors to make systematic mistakes that
lead to inefficiencies.
Over-optimism/overconfidence ---------CORRECT ANSWER-----------------
Investors are more optimistic about expected future returns than they
should be.
What is the main goal of the corporation? ---------CORRECT ANSWER------
-----------Maximize shareholder value.
Who ultimately owns the corporation? What is the relationship between
shareholders, the board of directors, and management? ---------CORRECT
ANSWER-----------------Shareholders ultimately own the corporation.
Shareholders vote in the board of directors.
What are the 3 most important management positions? ---------CORRECT
ANSWER-----------------Chief Executive Officer, Chief Financial Officer, and
Chief Operations Officer
What is the Sarbanes-Oxley legislation? Why was it passed? ---------
CORRECT ANSWER-----------------The Sarbanes-Oxley legislation holds
CEOs and CFOs accountable for their financial reports. Can be jailed if
fraud occurs.
What is the major disadvantages and advantages of corporations
compared to other forms of business organizations? ---------CORRECT
ANSWER-----------------Advantages:
Unlimited Life
, Easy Transfer of ownership
Limited liability
Ease of raising capital
Disadvantages:
Double taxation
Cost of setup and report filing
What is a stock's intrinsic value? In an efficient market, will a stock's price
equal the stock's intrinsic value? ---------CORRECT ANSWER-----------------
A stock's intrinsic value is its "true" value in equilibrium. In theory, if the
market is efficient the stock's price should equal its intrinsic value.
Why do shareholders have a conflict of interest with managers? ---------
CORRECT ANSWER-----------------Managers tend to conflict with
shareholders since they tend to act within self-interest (Compensation
packages, interventions by shareholders, threat of firing, and threat of
takeover)
•What is corporate governance?
•What are various strategies for aligning the interests of shareholders and
management?
•Change in CEO Compensation starting in the 1980s
•Why is it a good idea for CEO compensation to track an overall market
index like the S&P 500? ---------CORRECT ANSWER-----------------
Corporate governance is the act of holding managers accountable for poor
performance.
Strategies to align interests of shareholders and management include:
Using stock as a form of compensation.
Vesting periods.
Stronger oversight by board or outside investors.
CORRECT ANSWERS | GRADED A+ | NEWEST
VERSION | VERIFIED ANSWERS
•What are derivatives?
•Which type of derivative is most frequently used? Which?
•Hedgers versus speculators ---------CORRECT ANSWER-----------------
Derivatives are like contracts. Derivatives are financial securities who's
value is based on a benchmark. Hedgers take an offset position in a
derivative in order to avoid risk while speculators bet on the direction that
an asset moves for profit.
•What is an IPO? Why do companies go public? ---------CORRECT
ANSWER-----------------An IPO is the initial public offering when a company
publicly list shares on the market. Companies go public in order to raise
capital from a wider audience of investors.
On average, do IPOs make or lose money over time? Why is it so
important for private equity funds to invest in a large number of IPOs? -------
--CORRECT ANSWER-----------------IPOs tend to lose money over time
since most companies stock value decreases over a 5 year period.
Investing in multiple IPOs is used to reduce risk.
What are the implications of market efficiency? ---------CORRECT
ANSWER-----------------Understanding the intrinsic value of a stock and how
new information may affect its value. Market efficiency is determined by the
flow of information and how closely companies are followed by investors.
•What is behavioral finance? Know the four behavioral biases discussed in
class. ---------CORRECT ANSWER-----------------Behavioral finance are
,cognitive biases that cause investors to make systematic mistakes that
lead to inefficiencies.
Over-optimism/overconfidence ---------CORRECT ANSWER-----------------
Investors are more optimistic about expected future returns than they
should be.
What is the main goal of the corporation? ---------CORRECT ANSWER------
-----------Maximize shareholder value.
Who ultimately owns the corporation? What is the relationship between
shareholders, the board of directors, and management? ---------CORRECT
ANSWER-----------------Shareholders ultimately own the corporation.
Shareholders vote in the board of directors.
What are the 3 most important management positions? ---------CORRECT
ANSWER-----------------Chief Executive Officer, Chief Financial Officer, and
Chief Operations Officer
What is the Sarbanes-Oxley legislation? Why was it passed? ---------
CORRECT ANSWER-----------------The Sarbanes-Oxley legislation holds
CEOs and CFOs accountable for their financial reports. Can be jailed if
fraud occurs.
What is the major disadvantages and advantages of corporations
compared to other forms of business organizations? ---------CORRECT
ANSWER-----------------Advantages:
Unlimited Life
, Easy Transfer of ownership
Limited liability
Ease of raising capital
Disadvantages:
Double taxation
Cost of setup and report filing
What is a stock's intrinsic value? In an efficient market, will a stock's price
equal the stock's intrinsic value? ---------CORRECT ANSWER-----------------
A stock's intrinsic value is its "true" value in equilibrium. In theory, if the
market is efficient the stock's price should equal its intrinsic value.
Why do shareholders have a conflict of interest with managers? ---------
CORRECT ANSWER-----------------Managers tend to conflict with
shareholders since they tend to act within self-interest (Compensation
packages, interventions by shareholders, threat of firing, and threat of
takeover)
•What is corporate governance?
•What are various strategies for aligning the interests of shareholders and
management?
•Change in CEO Compensation starting in the 1980s
•Why is it a good idea for CEO compensation to track an overall market
index like the S&P 500? ---------CORRECT ANSWER-----------------
Corporate governance is the act of holding managers accountable for poor
performance.
Strategies to align interests of shareholders and management include:
Using stock as a form of compensation.
Vesting periods.
Stronger oversight by board or outside investors.
