Which of the Following Mechanisms Would Be Most Likely to Help

question 36

Multiple Choice

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

• A) Decrease the use of restrictive covenants in bond agreements.
• B) Take actions that reduce the possibility of a hostile takeover.
• C) Elect a board of directors that allows managers greater freedom of action.
• D) Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.
• E) Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

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Definitions:

Effective Interest Rate Method

A method of amortizing the discount or premium on bonds payable that reflects the constant rate of interest over the life of the bond.

Amortization Schedule

An Amortization Schedule is a table detailing each periodic payment on an amortizing loan, including the amount of principal and the amount of interest that comprises each payment until the loan is paid off at the end of its term.

Bond Carrying Amount

The net value of a bond on a balance sheet, which may differ from its face value due to amortization or market changes.

Premium Amortization

The process of gradually reducing the premium paid on bonds purchased above their face value over the life of the bonds.