2024 CFA Mock Test 3

1. Corporate governance:

A.complies with a set of global standards.
B.is independent of both shareholder theory and stakeholder theory.
C.seeks to minimize and manage conflicting interests between insiders and external shareholders.

Correct Answer: C

Answer Explanation:

Corporate governance refers to a system of managing a company’s internal controls and processes so that conflicts of interest between the company’s internal and external shareholders are minimised, C is correct; corporate governance practices vary in different countries and jurisdictions, and even within countries, different systems of corporate governance may co-exist, A is wrong to say that it follows a set of globally harmonised standards, A is incorrect to say that it follows a set of globally harmonised standards, and the systems of corporate governance adopted by most countries usually reflect either shareholder theory or stakeholder theory, B is wrong.

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2. Under the stakeholder theory, corporate governance is most consistent with a system of:

A.internal controls and procedures by which individual companies are managed.
B.defined roles for management and the majority shareowner(s).
C.checks and balances to minimize the conflicting interests among shareowners.

Correct Answer: A

Answer Explanation:

Corporate governance is a system for managing a company’s internal controls and processes, A is correct; it is not necessary for the majority shareholder to have a role defined through corporate governance; rather, the majority shareholder exerts influence and/or control through the voting mechanisms associated with its shareholding, B is incorrect; and the primary purpose of corporate governance is to manage conflicts of interest between management and outside shareholders, not between shareholders, C is incorrect.

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3. Which group of company stakeholders would be least affected if the firm’s financial position weakens?

A.Suppliers.
B.Customers.
C.Managers and employees.

Correct Answer: B

Answer Explanation:

Customers spend money to buy goods and services from the firm, so a deterioration in the firm’s financial position is unlikely to affect customers, B is correct; suppliers are concerned about the firm’s ability to generate enough cash flow to pay off its debts, A is incorrect; and management and employees are concerned about the firm’s ability to survive (e.g., whether it will be able to pay them their salaries on time and in full), C is incorrect.

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4. Which of the following represents a principal–agent conflict between shareholders and management?

A.Risk tolerance.
B.Multiple share classes.
C.Accounting and reporting practices.

Correct Answer: A

Answer Explanation:

The interests of shareholders and management may differ in terms of risk tolerance, as shareholders have a higher risk tolerance because their specific corporate risks can be dispersed through diversified portfolio investments, while management usually prefers to avoid risks in order to protect its employment status, A is correct; multiple share classes) conflicts exist between controlling shareholders and minority shareholders, not between shareholders and management, B is wrong; C is not a principal-agent relationship conflict.

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5. The type of voting in board elections that is most beneficial to shareholders with a small number of shares is best described as:

A.statutory voting.
B.voting by proxy.
C.cumulative voting.

Correct Answer: C

Answer Explanation:

Cumulative voting (cumulative voting) allows shareholders to allocate all of their votes to a specific candidate without having to distribute the votes equally among all the candidates, and by casting all of the votes for a single candidate, they have the opportunity to obtain a higher level of representation on the board of directors than is permitted by statutory voting, so it favours minority shareholders, C is correct; statutory voting (statutory voting) favours controlling shareholders, A is incorrect; voting by proxy (代理投票) means that the owner of a share authorises another person to vote on his or her behalf at a general meeting of shareholders, B is incorrect.

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6. Which of the following issues discussed at a shareholders’ general meeting would most likely require only a simple majority vote for approval?

A.Voting on a merger.
B.Election of directors.
C.Amendments to bylaws.

Correct Answer: B

Answer Explanation:

Election of directors is considered an ordinary resolution and therefore requires only a simple majority vote, B is correct; Voting on a merger and Amendments to bylaws both require a supermajority vote, A and C are incorrect. Voting on a merger and amendments to bylaws require a supermajority vote.

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7. Which of the following statements regarding stakeholder management is most accurate?

A.Company management ensures compliance with all applicable laws and regulations.
B.Directors are excluded from voting on transactions in which they hold material interest.
C.The use of variable incentive plans in executive remuneration is decreasing.

Correct Answer: B

Answer Explanation:

Usually related transactions require a vote of the board of directors (or shareholders’ meeting), except for directors who hold a related interest, B is correct; it is the board of directors (The Board), not management, that ensures compliance with all applicable laws and regulations, A is incorrect; and the use of variable incentive plans in executive compensation should be increased, not decreased, C is incorrect.

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8. In countries where employee representatives commonly sit on supervisory boards, the employee representatives are most likely:

A.appointed by the CEO.
B.elected by employees.
C.members of the management board.

Correct Answer: B

Answer Explanation:

Employee representatives on the supervisory board are usually elected by the employees, B is correct, A is wrong; employee representatives are usually part of the supervisory board (supervisory board), not the management board (members of the management board), C is wrong.

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9. Which of the following represents a responsibility of a company’s board of directors?

A.Implementation of strategy.
B.Enterprise risk management.
C.Considering the interests of shareholders only.

Correct Answer: B

Answer Explanation:

The board of directors usually needs to ensure that the company has an appropriate enterprise risk management system, B is correct; the board of directors is to set the strategic direction (Guides strategic direction), the management implementation of strategy (Implementation of strategy), A is wrong; the board of directors can not only consider the interest of shareholders, C is wrong.

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10. Which of the following best allows a board of directors to act in the interest of the company and shareholders?

A.Independent board members are selected from outside the industry.
B.Internal directors provide monitoring of the firm’s management.
C.The board has the authority to select and terminate senior management.

Correct Answer: C

Answer Explanation:

The board is responsible for making decisions that are in the best interests of the company and its shareholders; management performance is assessed through the implementation of the strategy set by the board, and in order to ensure that the strategy is strongly executed, the board must have the power to select and terminate senior management; some independent members should have at least industry expertise; and outside directors should provide oversight within the company.

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