Managers May Be Tempted to Make Decisions That Are Not

question 72

Multiple Choice

Managers may be tempted to make decisions that are not in the best interests of the company because ________.

• A) performance measures in use reward them for decisions that are in the best interests of the company
• B) performance measures in use reward them for decisions that are not in the best interests of the company
• C) the managers do not understand the use of decision-making tools
• D) the managers are evaluated several times each year

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Definitions:

Miller Model

A theory on dividend policy developed by Merton Miller, which considers the impact of taxes and bankruptcy costs on a company’s optimal capital structure.

MM Model

Modigliani-Miller Theorem; a foundational concept in corporate finance that proposes, under certain market conditions, the valuation of a firm is unaffected by its capital structure.

Personal Taxes

Taxes levied on individuals' income, capital gains, and other forms of personal wealth.

Operating Leverage

The extent to which fixed costs are used in a firm’s operations. If a high percentage of a firm’s total costs are fixed costs, then the firm is said to have a high degree of operating leverage. Operating leverage is a measure of one element of business risk, but does not include the second major element, sales variability.