Corporate Governance & Financial Management 3

Question 1

Which of the following best describes the concept of 'earnings quality' in financial governance?

Accepted Answer

The degree to which reported earnings reflect sustainable, cash-backed operating performance

Answer

High earnings quality means reported profits are derived from core operations, backed by cash flows, and are repeatable rather than driven by one-time items or accounting choices.

Question 2

A board compensation committee ties executive bonuses exclusively to annual EPS growth. What financial governance risk does this create?

Accepted Answer

Executives may be incentivized to cut R&D or buy back shares to boost EPS short-term

Answer

EPS-only incentives can motivate executives to prioritize short-term EPS manipulation over sustainable value creation through real investment.

Question 3

What does the weighted average cost of capital (WACC) represent in corporate financial decision-making?

Accepted Answer

The minimum return a company must earn on investments to satisfy all capital providers

Answer

WACC is the blended required return across debt and equity capital, representing the hurdle rate that investments must exceed to create shareholder value.

Question 4

Under US corporate law, what is the board's duty when a company faces potential insolvency?

Accepted Answer

Fiduciary duties shift to include creditors, not just shareholders

Answer

In the 'zone of insolvency,' courts have held that directors' fiduciary obligations expand to include the interests of creditors as stakeholders.

Question 5

A company reports strong net income but consistently negative operating cash flow. What should the audit committee investigate?

Accepted Answer

Whether aggressive revenue recognition or accrual accounting is inflating reported profits

Answer

A persistent divergence between net income and operating cash flow is a red flag for aggressive accounting, such as premature revenue recognition.

Corporate Governance Practice Test

Corporate Governance Practice Test

Corporate Governance & Financial Management 3