Finance Chapter 1

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Which one of the following terms is defined as the management of a firm’s long-term investments?

capital budgeting

Which one of the following terms is defined as the mixture of a firm’s debt and equity financing?

capital structure

Which one of the following is defined as a firm’s short-term assets and its short-term liabilities?

working capital

A business owned by a solitary individual who has unlimited liability for its debt is called a:

sole proprietorship.

A business formed by two or more individuals who each have unlimited liability for all of the firm’s business debts is called a:

general partnership

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:

limited partner.

A business created as a distinct legal entity and treated as a legal "person" is called a:


Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

agency problem

A stakeholder is:

any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

Which of the following questions are addressed by financial managers?
I. How should a product be marketed?
II. Should customers be given 30 or 45 days to pay for their credit purchases?
III. Should the firm borrow more money?
IV. Should the firm acquire new equipment?

II, III, and IV only

Which one of the following functions should be the responsibility of the controller rather than the treasurer?

income tax returns

The controller of a corporation generally reports directly to the:

vice president of finance

Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure?

The treasurer reports to the vice president of finance.

Which one of the following is a capital budgeting decision?

deciding whether or not to purchase a new machine for the production line

Which of the following should a financial manager consider when analyzing a capital budgeting project?
I. project start up costs
II. timing of all projected cash flows
III. dependability of future cash flows
IV. dollar amount of each projected cash flow

I, II, III, and IV

Which one of the following is a capital structure decision?

determining how much debt should be assumed to fund a project

The decision to issue additional shares of stock is an example of which one of the following?

capital structure decision

Which of the following accounts are included in working capital management?
I. accounts payable
II. accounts receivable
III. fixed assets
IV. inventory

I, II, and IV only

Which one of the following is a working capital management decision?

determining whether to pay cash for a purchase or use the credit offered by the supplier

Which one of the following statements concerning a sole proprietorship is correct?

The owner of a sole proprietorship is personally responsible for all of the company’s debts.

Which of the following individuals have unlimited liability based on their ownership interest?
I. general partner
II. sole proprietor
III. stockholder
IV. limited partner

I and II only

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?

maximum loss limited to the capital invested

A general partner:

is solely responsible for all the partnership debts.

A limited partnership:

has a greater ability to raise capital than a sole proprietorship

Which of the following apply to a partnership that consists solely of general partners?
I. double taxation of partnership profits
II. limited partnership life
III. active involvement in the firm by all the partners
IV. unlimited personal liability for all partnership debts

II, III, and IV only

Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life

I, III, and IV only

Which one of the following statements is correct?

Corporations can raise large amounts of capital generally easier than partnerships can.

Which one of the following statements is correct?

Both sole proprietorship and partnership income is taxed as individual income.

The articles of incorporation:
I. describe the purpose of the firm.
II. are amended periodically.
III. set forth the number of shares of stock that can be issued.
IV. detail the method that will be used to elect corporate directors.

I and III only

Corporate bylaws:

determine how a corporation regulates itself.

Which one of the following characteristics applies to a limited liability company?

taxed similar to a partnership

Which one of the following business types is best suited to raising large amounts of capital?


Which type of business organization has all the respective rights and privileges of a legal person?


Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm’s debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm’s profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?

limited partnership

Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Which form of business entity should they consider to replace their general partnership assuming they wish to remain the only two owners of their business? Whichever organization they select, they wish to be treated equally.

limited liability company

Which one of the following best states the primary goal of financial management?

maximize the current value per share

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?

increase in the market value per share

Why should financial managers strive to maximize the current value per share of the existing stock?

because they have been hired to represent the interests of the current shareholders

Decisions made by financial managers should primarily focus on increasing which one of the following?

market value per share of outstanding stock

The Sarbanes-Oxley Act of 2002 is a governmental response to:

management greed and abuses.

Which one of the following is an unintended result of the Sarbanes-Oxley Act?

corporations delisting from major exchanges

A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:

can provide less information to its shareholders than it did prior to "going dark".

Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002?
I. increased foreign stock exchange listings of U.S. stocks
II. decreased compliance costs
III. increased privatization of public corporations

I and III only

Which one of the following actions by a financial manager is most apt to create an agency problem?

increasing current profits when doing so lowers the value of the firm’s equity

Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes.
I. compensation based on the value of the stock
II. stock option plans
III. threat of a company takeover
IV. threat of a proxy fight

I, II, III, and IV

Which form of business structure is most associated with agency problems?


Which one of the following is an agency cost?

hiring outside accountants to audit the company’s financial statements

Which one of the following is least likely to be an agency problem?

increasing the market value of the firm’s shares

Which one of the following is a means by which shareholders can replace company management?

proxy fight

Which one of the following grants an individual the right to vote on behalf of a shareholder?


Which one of the following parties has ultimate control of a corporation?


Which of the following parties are considered stakeholders of a firm?
I. employee
II. long-term creditor
III. government
IV. common stockholder

I and III only

Which of the following represent cash outflows from a corporation?
I. issuance of securities
II. payment of dividends
III. new loan proceeds
IV. payment of government taxes

II and IV only

Which of the following are cash flows from a corporation into the financial markets?
I. repayment of long-term debt
II. payment of government taxes
III. payment of loan interest
IV. payment of quarterly dividend

I, III, and IV only

Which one of the following is a primary market transaction?

sale of a new share of stock to an individual investor

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:

was facilitated in the secondary market.

Public offerings of debt and equity must be registered with which one of the following?

Securities and Exchange Commission

Which one of the following statements is generally correct?

Auction markets match buy and sell orders.

Which one of the following statements concerning stock exchanges is correct?

Some large companies are listed on NASDAQ.

Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is listed on the NYSE. This trade occurred in which one of the following?

secondary, auction market

Which one of the following statements is correct concerning the NYSE?

The listing requirements for the NYSE are more stringent than those of NASDAQ.

Which one of the following statements concerning NASDAQ is FALSE?

NASDAQ is an auction market

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