Chapter 01 - Introduction to Corporate FinanceChapter 01 Introduction to Corporate Finance Multiple Choice Questions 1. Which one of the following terms is defined as the management of a firm's long-term investments? A. working capital management B. financial allocation C. agency cost analysis D. capital budgeting E. capital structure 2. Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A. working capital management B. cash management C. cost analysis D. capital budgeting E. capital structure 3. Which one of the following is defined as a firm's short-term assets and its short-term liabilities? A. working capital B. debt C. investment capital D. net capital E. capital structure 4. A business owned by a solitary individual who has unlimited liability for its debt is called a: A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership. E. limited liability company. 1-1 Chapter 01 - Introduction to Corporate Finance 5. A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a: A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership. E. limited liability company. 6. A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: A. generally partner. B. sole proprietor. C. limited partner. D. corporate shareholder. E. zero partner. 7. A business created as a distinct legal entity and treated as a legal "person" is called a: A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership. E. unlimited liability company. 8. Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? A. articles of incorporation B. corporate breakdown C. agency problem D. bylaws E. legal liability 1-2 Chapter 01 - Introduction to Corporate Finance 9. A stakeholder is: A. a person who owns shares of stock. B. any person who has voting rights based on stock ownership of a corporation. C. a person who initially founded a firm and currently has management control over that firm. D. a creditor to whom a firm currently owes money. E. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm. 10. 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? A. I and IV only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV 11. Which one of the following functions should be the responsibility of the controller rather than the treasurer? A. daily cash deposit B. income tax returns C. equipment purchase analysis D. customer credit approval E. payment to a vendor 12. The controller of a corporation generally reports directly to the: A. board of directors. B. chairman of the board. C. chief executive officer. D. president. E. vice president of finance. 1-3 Chapter 01 - Introduction to Corporate Finance 13. Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure? A. The vice president of finance reports to the chairman of the board. B. The chief executive officer reports to president. C. The controller reports to the president. D. The treasurer reports to the vice president of finance. E. The chief operations officer reports to the vice president of production. 14. Which one of the following is a capital budgeting decision? A. determining how many shares of stock to issue B. deciding whether or not to purchase a new machine for the production line C. deciding how to refinance a debt issue that is maturing D. determining how much inventory to keep on hand E. determining how much money should be kept in the checking account 15. 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 A. I and IV only B. I, II, and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV 16. Which one of the following is a capital structure decision? A. determining which one of two projects to accept B. determining how to allocate investment funds to multiple projects C. determining the amount of funds needed to finance customer purchases of a new product D. determining how much debt should be assumed to fund a project E. determining how much inventory will be needed to support a project 1-4 Chapter 01 - Introduction to Corporate Finance 17. The decision to issue additional shares of stock is an example of which one of the following? A. working capital management B. net working capital decision C. capital budgeting D. controller's duties E. capital structure decision 18. Which of the following accounts are included in working capital management? I. accounts payable II. accounts receivable III. fixed assets IV. inventory A. I and II only B. I and III only C. II and IV only D. I, II, and IV only E. II, III, and IV only 19. Which one of the following is a working capital management decision? A. determining the amount of equipment needed to complete a job B. determining whether to pay cash for a purchase or use the credit offered by the supplier C. determining the amount of long-term debt required to complete a project D. determining the number of shares of stock to issue to fund an acquisition E. determining whether or not a project should be accepted 20. Which one of the following statements concerning a sole proprietorship is correct? A. A sole proprietorship is designed to protect the personal assets of the owner. B. The profits of a sole proprietorship are subject to double taxation. C. The owner of a sole proprietorship is personally responsible for all of the company's debts. D. There are very few sole proprietorships remaining in the U.S. today. E. A sole proprietorship is structured the same as a limited liability company. 1-5 C. limited partner A. has a maximum loss equal to his or her equity investment. B. receives a salary in lieu of a portion of the profits. II and IV only D. 1-6 . Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. has no say over a firm's daily operations. is solely responsible for all the partnership debts. D. I and II only C. B.Chapter 01 . A sole proprietorship is taxed the same as a C corporation. E. II only B. C. no potential financial loss D. and IV only 23. Which one of the following best describes the primary advantage of being a limited partner instead of a general partner? A. tax-free income B. II. faces double taxation whereas a limited partner does not. maximum loss limited to the capital invested 24. E. general partner II. The life of a sole proprietorship is potentially unlimited. I. D. Which one of the following statements concerning a sole proprietorship is correct? A. Which of the following individuals have unlimited liability based on their ownership interest? I. A general partner: A.Introduction to Corporate Finance 21. sole proprietor III. stockholder IV. II. 22. greater control over the business affairs of the partnership E. I. It is easy to create a sole proprietorship. and III only E. A sole proprietor can generally raise large sums of capital quite easily. active participation in the firm's activities C. limited liability for firm debt II. ability to raise capital IV. Corporations can raise large amounts of capital generally easier than partnerships can.Introduction to Corporate Finance 25. Which one of the following statements is correct? A. consists solely of limited partners. II. C. and IV only E. double taxation of partnership profits II. D. I and II only C. and IV 28. are structured as corporations. Stockholders face no potential losses related to their corporate investment. II and III only D. Corporate shareholders elect the corporate president. double taxation III. unlimited firm life A. 1-7 .Chapter 01 . Corporate profits are taxable income to the shareholders when earned. unlimited personal liability for all partnership debts A. II. The majority of firms in the U. Which of the following apply to a partnership that consists solely of general partners? I. III. B. III. D. has an unlimited life. E.S. I. limited partnership life III. III. and IV only 27. C. and IV only D. II only B. II. A limited partnership: A. B. I and II only B. has a greater ability to raise capital than a sole proprietorship. III. Which of the following are advantages of the corporate form of business ownership? I. and IV only E. E. III and IV only C. I. 26. I. terminates at the death of any limited partner. can opt to be taxed as a corporation. II. active involvement in the firm by all the partners IV. available only to firms having a single owner B. A. Corporate bylaws: A. A general partnership is legally the same as a corporation. III. Only firms organized as sole proprietorships have limited lives. limited liability for limited partners only C. III. taxed similar to a C corporation E. detail the method that will be used to elect corporate directors. Both sole proprietorship and partnership income is taxed as individual income. D. All business organizations have bylaws. Which one of the following characteristics applies to a limited liability company? A. IV. B. E.Introduction to Corporate Finance 29.Chapter 01 . E. determine how a corporation regulates itself. are amended periodically. taxed similar to a partnership D. I. I and III only B. define the name by which the firm will operate. Which one of the following statements is correct? A. D. II and IV only E. II. I and IV only C. B. C. C. The articles of incorporation: I. 30. must be amended should a firm decide to increase the number of shares authorized. cannot be amended once adopted. II and III only D. 32. all income generated is totally tax-free 1-8 . Partnerships are the most complicated type of business to form. describe the purpose of the firm. describe the intended life and purpose of the organization. set forth the number of shares of stock that can be issued. and IV only 31. limited partnership D. sole proprietorship B. limited partnership D. sole proprietorship B.Chapter 01 . limited liability company 35. limited partnership 34. general partnership E. corporation E. Sam.Introduction to Corporate Finance 33.S. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. limited liability company C. corporation 1-9 . Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. business. Alfredo will be involved as an active consultant and manager and will also contribute funds. and Juan want to start a small U. joint stock company C. general partnership C. Alfredo. sole proprietorship B. Which form of business entity should these individuals adopt? A. general partnership E. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Which one of the following business types is best suited to raising large amounts of capital? A. corporation D. Which type of business organization has all the respective rights and privileges of a legal person? A. maximize current dividends per share B. Georgia. A. 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. doing so guarantees the company will grow in size at the maximum possible rate B. increase in the amount of the quarterly dividend B. sole proprietorship B. increase in the market value per share 39. limited partnership D. because managers often receive shares of stock as part of their compensation 1-10 . minimize operational costs while maximizing firm efficiency E. increase in the number of shares outstanding D. maintain steady growth while increasing current profits 38. joint stock company C. increase cash flow and avoid financial distress D. because this will increase the current dividends per share E. Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management? A. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Sally and Alicia currently are general partners in a business located in Atlanta. limited liability company E. they wish to be treated equally. decrease in the net working capital E. maximize the current value per share C. doing so increases employee salaries C. Which one of the following best states the primary goal of financial management? A.Chapter 01 . decrease in the per unit production costs C.Introduction to Corporate Finance 36. Why should financial managers strive to maximize the current value per share of the existing stock? A. because they have been hired to represent the interests of the current shareholders D. corporation 37. total sales 41. corporations delisting from major exchanges D. increased management awareness of internal controls C. Decisions made by financial managers should primarily focus on increasing which one of the following? A. the terrorists attacks on 9/11/2001. must continue to provide a detailed list of internal control deficiencies on an annual basis. must continue to provide audited financial statements to the public. D. 1-11 . Which one of the following is an unintended result of the Sarbanes-Oxley Act? A. C. can provide less information to its shareholders than it did prior to "going dark". market value per share of outstanding stock E. increased responsibility for corporate officers E. A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: A.Chapter 01 . identification of internal control weaknesses 43. deregulation of the stock exchanges. E. management greed and abuses. The Sarbanes-Oxley Act of 2002 is a governmental response to: A. 42. a weakening economy. decreasing corporate profits.Introduction to Corporate Finance 40. size of the firm B. growth rate of the firm C. B. C. B. can continue publicly trading its stock but only on the exchange on which it was previously listed. D. ceases to exist. gross profit per unit produced D. E. more detailed and accurate financial reporting B. and IV only E. II. III. decreased compliance costs III. refusing to expand the company if doing so will lower the value of the equity D. Which one of the following actions by a financial manager is most apt to create an agency problem? A. II. and IV 1-12 . III. I. Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. I. III. III. I. I and III only B. increased public disclosure by all corporations A. III and IV only C. refusing to lower selling prices if doing so will reduce the net profits C. refusing to borrow money when doing so will create losses for the firm B. I and II only B. I. agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales E. Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002? I. and IV only 45.Chapter 01 . threat of a company takeover IV. compensation based on the value of the stock II. stock option plans III. and III only D. II and IV only C. increased privatization of public corporations IV. stocks II. and IV only E.Introduction to Corporate Finance 44.S. and III only D. increasing current profits when doing so lowers the value of the firm's equity 46. threat of a proxy fight A. II. I. increased foreign stock exchange listings of U. I. II. closing a division of the firm that is operating at a loss 49. limited liability company 48. obtaining a patent for a new product 50. limited partnership D. agency play E.Chapter 01 .Introduction to Corporate Finance 47. Which form of business structure is most associated with agency problems? A. general partnership C. sole proprietorship B. hiring outside accountants to audit the company's financial statements E. Which one of the following is a means by which shareholders can replace company management? A. Sarbanes-Oxley Act D. stock options B. increasing the quarterly dividend C. increasing the size of a firm B. Which one of the following is least likely to be an agency problem? A. accepting an investment opportunity that will add value to the firm B. Which one of the following is an agency cost? A. increasing the market value of the firm's shares E. proxy fight 1-13 . closing a division with net losses D. concentrating on maximizing current profits C. promotion C. corporation E. investing in a new project that creates firm value D. indenture agreement D. I. II and IV only E. I and III only D. and IV only E. stock option E. long-term creditor III. stock audit 52.Introduction to Corporate Finance 51. chief operating office E. Which one of the following parties has ultimate control of a corporation? A. payment of government taxes A. Which of the following represent cash outflows from a corporation? I. II. proxy B. shareholders 53. Which of the following parties are considered stakeholders of a firm? I. I and IV only D. II. and IV only 1-14 . issuance of securities II. I and III only B.Chapter 01 . new loan proceeds IV. II. III. government IV. common stockholder A. and IV only 54. Which one of the following grants an individual the right to vote on behalf of a shareholder? A. III. IV only C. chairman of the Board B. by-laws C. I only B. employee II. board of directors C. payment of dividends III. chief executive officer D. II and IV only C. was facilitated in the secondary market. occurred in a dealer market. II and IV only D. payment of quarterly dividend A. was a private placement. repayment of long-term debt II. sale of a new share of stock to an individual investor C. Which of the following are cash flows from a corporation into the financial markets? I. gift of stock by a shareholder to a family member 57. Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange.Chapter 01 . I. gift of stock from one shareholder to another shareholder E. Federal Reserve C. New York Board of Governors B. stock ownership transfer from one shareholder to another shareholder D. and III only 56. I and III only C.Introduction to Corporate Finance 55. Which one of the following is a primary market transaction? A. This transaction: A. 58. B. NYSE Registration Office D. and IV only E. Market Dealers Exchange 1-15 . III. E. payment of loan interest IV. I and II only B. II. I. payment of government taxes III. Securities and Exchange Commission E. took place in the primary market. C. sale of currently outstanding stock by a dealer to an individual investor B. involved a proxy. Public offerings of debt and equity must be registered with which one of the following? A. D. Most debt securities are traded on the NYSE. Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. Private placements must be registered with the SEC. E. The listing requirements for the NYSE are more stringent than those of NASDAQ. E. auction market D. It is easier to be listed on NASDAQ than on the NYSE. Dealer markets have a physical trading floor. primary. Dealers arrange trades but never own the securities traded. D. OTC market 62. Which one of the following statements concerning NASDAQ is FALSE? A. secondary. C. Some large companies are listed on NASDAQ. 1-16 . Auction markets match buy and sell orders. B. B. C. NASDAQ is a broker market. Which one of the following statements is correct concerning the NYSE? A. primary. 61. NASDAQ is a dealer market. C. All secondary markets are auction markets. D. E. The NYSE is the largest dealer market for listed securities in the United States. The publicly traded shares of a NYSE-listed firm must be worth at least $250 million. C. 60.Introduction to Corporate Finance 59. secondary. 63. NASDAQ is an OTC market. The exchange with the strictest listing requirements is NASDAQ. E. This trade occurred in which one of the following? A. The NYSE is a dealer market. dealer market B. The stock is listed on the NYSE. Which one of the following statements concerning stock exchanges is correct? A. B. auction market E. D. B. NASDAQ is an electronic market. Which one of the following statements is generally correct? A.Chapter 01 . Any corporation desiring to be listed on the NYSE can do so for a fee. secondary. The NYSE is an OTC market functioning as both a primary and a secondary market. dealer market C. D. NASDAQ is an auction market. Introduction to Corporate Finance Essay Questions 64. 65. Describe the key advantages associated with the corporate form of organization. 66.Chapter 01 . What concerns might a loan officer have when loaning funds to a sole proprietorship that he or she might not have when loaning funds to a corporation? 1-17 . Why are so many businesses structured as sole proprietorships when the corporate form of business offers more advantages? 67. List and briefly describe the three general areas of responsibility for a financial manager. How might agency problems arise in partnerships? 1-18 .Chapter 01 . 70.Introduction to Corporate Finance 68. How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial intent of that Act? 71. Give some examples of ways in which manager's goals can differ from those of shareholders. From a liability point of view. what is the difference between investing in a sole proprietorship and a general partnership? 69. Compare and contrast the NYSE with NSADAQ.Chapter 01 .Introduction to Corporate Finance 72. 1-19 . 1 Topic: Capital budgeting 2.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. Which one of the following terms is defined as the management of a firm's long-term investments? A. Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A. working capital management B. cost analysis D. working capital management B. agency cost analysis D. capital budgeting E. capital structure Refer to section 1.1 Topic: Capital structure 1-20 . capital budgeting E.Chapter 01 . financial allocation C. capital structure Refer to section 1.Introduction to Corporate Finance Chapter 01 Introduction to Corporate Finance Answer Key Multiple Choice Questions 1.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. cash management C. Introduction to Corporate Finance 3. limited liability company. limited partnership. net capital E. debt C. Which one of the following is defined as a firm's short-term assets and its short-term liabilities? A.Chapter 01 .1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. working capital B.1 Topic: Working capital 4. E. Refer to section 1. C. sole proprietorship.2 Topic: Sole proprietorship 1-21 .2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. investment capital D. D. corporation. general partnership. B. A business owned by a solitary individual who has unlimited liability for its debt is called a: A. capital structure Refer to section 1. limited partner. zero partner.2 Topic: General partnership 6. limited partnership. C. sole proprietor. Refer to section 1. limited liability company. corporation. A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a: A.Chapter 01 .2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. generally partner.2 Topic: Limited partner 1-22 . Refer to section 1. D. corporate shareholder. D.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. B. general partnership. B. E. sole proprietorship. E. C. A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: A.Introduction to Corporate Finance 5. D. C. agency problem D. B.Chapter 01 . sole proprietorship. articles of incorporation B. E. legal liability Refer to section 1.2 Topic: Corporation 8.4 Topic: Agency problem 1-23 . bylaws E. unlimited liability company. corporate breakdown C.Introduction to Corporate Finance 7.4 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1. A business created as a distinct legal entity and treated as a legal "person" is called a: A. general partnership.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. Refer to section 1. limited partnership. corporation. Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? A. and III only D. II. II. Should the firm acquire new equipment? A.4 Topic: Stakeholder 10. I and IV only B. Should customers be given 30 or 45 days to pay for their credit purchases? III.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm. III. I.Chapter 01 . II. I. and IV only E.4 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1. A stakeholder is: A. Refer to section 1. C.1 Topic: Financial management 1-24 . D. a person who initially founded a firm and currently has management control over that firm. How should a product be marketed? II. III. B. a creditor to whom a firm currently owes money. a person who owns shares of stock. E. Which of the following questions are addressed by financial managers? I. any person who has voting rights based on stock ownership of a corporation. II and III only C. and IV Refer to section 1. Should the firm borrow more money? IV.Introduction to Corporate Finance 9. Refer to section 1. president. Which one of the following functions should be the responsibility of the controller rather than the treasurer? A. customer credit approval E. vice president of finance. payment to a vendor Refer to section 1.1 Topic: Financial management 12. board of directors. E. income tax returns C.Introduction to Corporate Finance 11. chief executive officer. The controller of a corporation generally reports directly to the: A.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. equipment purchase analysis D. daily cash deposit B. D.Chapter 01 .1 Topic: Corporate structure 1-25 . chairman of the board. B. C.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. deciding how to refinance a debt issue that is maturing D. B. deciding whether or not to purchase a new machine for the production line C.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. The chief operations officer reports to the vice president of production. E. The vice president of finance reports to the chairman of the board. Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure? A. The chief executive officer reports to president.1 Topic: Capital budgeting 1-26 . determining how much inventory to keep on hand E. Refer to section 1. Which one of the following is a capital budgeting decision? A. The treasurer reports to the vice president of finance. The controller reports to the president.Chapter 01 .Introduction to Corporate Finance 13. determining how much money should be kept in the checking account Refer to section 1. C. determining how many shares of stock to issue B. D.1 Topic: Corporate structure 14. Chapter 01 .Introduction to Corporate Finance 15. II. determining how much inventory will be needed to support a project Refer to section 1. and IV Refer to section 1. II. III. and III only D. determining how to allocate investment funds to multiple projects C. determining how much debt should be assumed to fund a project E. determining the amount of funds needed to finance customer purchases of a new product D.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. and IV only C. I.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. determining which one of two projects to accept B. I and IV only B. dependability of future cash flows IV. II. I. II.1 Topic: Capital budgeting 16.1 Topic: Capital structure 1-27 . Which of the following should a financial manager consider when analyzing a capital budgeting project? I. III. project start up costs II. timing of all projected cash flows III. and IV only E. dollar amount of each projected cash flow A. I. Which one of the following is a capital structure decision? A. I and III only C. II. capital budgeting D. The decision to issue additional shares of stock is an example of which one of the following? A. accounts payable II. controller's duties E.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1.1 Topic: Capital structure 18. II. II and IV only D.Chapter 01 .1 Topic: Working capital management 1-28 . I and II only B. and IV only E. working capital management B. capital structure decision Refer to section 1. inventory A. accounts receivable III. net working capital decision C. Which of the following accounts are included in working capital management? I. I. III.Introduction to Corporate Finance 17. and IV only Refer to section 1.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. fixed assets IV. 2 Topic: Sole proprietorship 1-29 .S. B. E.Introduction to Corporate Finance 19. The profits of a sole proprietorship are subject to double taxation. determining the number of shares of stock to issue to fund an acquisition E. determining whether or not a project should be accepted Refer to section 1.1 Topic: Working capital management 20. D. A sole proprietorship is structured the same as a limited liability company. The owner of a sole proprietorship is personally responsible for all of the company's debts. determining whether to pay cash for a purchase or use the credit offered by the supplier C. There are very few sole proprietorships remaining in the U. Refer to section 1.Chapter 01 . determining the amount of equipment needed to complete a job B. C. Which one of the following is a working capital management decision? A. A sole proprietorship is designed to protect the personal assets of the owner.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. today.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. Which one of the following statements concerning a sole proprietorship is correct? A. determining the amount of long-term debt required to complete a project D. I. A sole proprietorship is taxed the same as a C corporation. B.2 Topic: Unlimited liability 1-30 . limited partner A. II and IV only D. II only B. general partner II.Chapter 01 . A sole proprietor can generally raise large sums of capital quite easily. and IV only Refer to section 1. and III only E. D.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. The life of a sole proprietorship is potentially unlimited. II. sole proprietor III. C. Refer to section 1. I.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. It is easy to create a sole proprietorship.2 Topic: Sole proprietorship 22. II.Introduction to Corporate Finance 21. I and II only C. E. stockholder IV. Which one of the following statements concerning a sole proprietorship is correct? A. Which of the following individuals have unlimited liability based on their ownership interest? I. C. maximum loss limited to the capital invested Refer to section 1.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. receives a salary in lieu of a portion of the profits.Introduction to Corporate Finance 23. B.2 Topic: Limited partner 24.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. no potential financial loss D. has a maximum loss equal to his or her equity investment. tax-free income B. is solely responsible for all the partnership debts. greater control over the business affairs of the partnership E. D.Chapter 01 .2 Topic: General partner 1-31 . has no say over a firm's daily operations. E. Refer to section 1. A general partner: A. Which one of the following best describes the primary advantage of being a limited partner instead of a general partner? A. active participation in the firm's activities C. faces double taxation whereas a limited partner does not. active involvement in the firm by all the partners IV. A limited partnership: A. II.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. I. D. has a greater ability to raise capital than a sole proprietorship. has an unlimited life.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. can opt to be taxed as a corporation. terminates at the death of any limited partner. II only B. II and III only D. consists solely of limited partners. limited partnership life III. unlimited personal liability for all partnership debts A. III. and IV only E.Chapter 01 . E.2 Topic: Partnership 1-32 .2 Topic: Partnership 26. Refer to section 1. I and II only C. C. B.Introduction to Corporate Finance 25. and IV only Refer to section 1. II. Which of the following apply to a partnership that consists solely of general partners? I. double taxation of partnership profits II. Corporate shareholders elect the corporate president. E.Chapter 01 . Which one of the following statements is correct? A. III and IV only C. are structured as corporations. and IV Refer to section 1. and IV only E.2 Topic: Corporation 1-33 . The majority of firms in the U.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. B. unlimited firm life A. I and II only B. and IV only D. I. ability to raise capital IV. Corporations can raise large amounts of capital generally easier than partnerships can. III. II.Introduction to Corporate Finance 27.2 Topic: Corporation 28. II. Which of the following are advantages of the corporate form of business ownership? I. double taxation III.2 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1. III. C. Stockholders face no potential losses related to their corporate investment. III. Refer to section 1.S. limited liability for firm debt II. I. Corporate profits are taxable income to the shareholders when earned. D. III. A general partnership is legally the same as a corporation. III. describe the purpose of the firm. Which one of the following statements is correct? A. B. E. IV. II and III only D. and IV only Refer to section 1. A.2 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1. are amended periodically. D.Introduction to Corporate Finance 29.2 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1. Only firms organized as sole proprietorships have limited lives. Partnerships are the most complicated type of business to form. I and IV only C. The articles of incorporation: I. Refer to section 1. I. All business organizations have bylaws.Chapter 01 . detail the method that will be used to elect corporate directors.2 Topic: Articles of incorporation 1-34 . Both sole proprietorship and partnership income is taxed as individual income. II.2 Topic: Business entity 30. I and III only B. C. II and IV only E. set forth the number of shares of stock that can be issued. 2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. Which one of the following characteristics applies to a limited liability company? A. limited liability for limited partners only C. Corporate bylaws: A. available only to firms having a single owner B. describe the intended life and purpose of the organization.2 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1. E. Refer to section 1.Introduction to Corporate Finance 31. D. must be amended should a firm decide to increase the number of shares authorized. cannot be amended once adopted. determine how a corporation regulates itself. C.2 Topic: Limited liability company 1-35 . define the name by which the firm will operate. all income generated is totally tax-free Refer to section 1. taxed similar to a C corporation E.2 Topic: Corporate bylaws 32. B.Chapter 01 . taxed similar to a partnership D. corporation D.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1.Chapter 01 . limited liability company Refer to section 1. limited liability company C.2 Topic: Corporation 1-36 .Introduction to Corporate Finance 33.2 Topic: Corporation 34. Which one of the following business types is best suited to raising large amounts of capital? A. corporation E. sole proprietorship B. Which type of business organization has all the respective rights and privileges of a legal person? A. sole proprietorship B. general partnership E. general partnership C. limited partnership D. limited partnership Refer to section 1.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. S. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam.2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1. joint stock company C. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. corporation Refer to section 1. business.Chapter 01 . Alfredo. corporation Refer to section 1. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Sally and Alicia currently are general partners in a business located in Atlanta. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. limited liability company E. joint stock company C. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. they wish to be treated equally. Which form of business entity should these individuals adopt? A.Introduction to Corporate Finance 35. general partnership E. and Juan want to start a small U. sole proprietorship B. A.2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1. sole proprietorship B.2 Topic: Limited liability company 1-37 . 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. limited partnership D.2 Topic: Limited partnership 36. Georgia. limited partnership D. increase in the market value per share Refer to section 1.3 AACSB: N/A Difficulty: Basic Learning Objective: 1-2 Section: 1.3 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-2 Section: 1.Introduction to Corporate Finance 37. Which one of the following best states the primary goal of financial management? A. maintain steady growth while increasing current profits Refer to section 1. Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management? A. increase in the amount of the quarterly dividend B. increase in the number of shares outstanding D.3 Topic: Goal of financial management 1-38 .3 Topic: Goal of financial management 38. minimize operational costs while maximizing firm efficiency E. maximize current dividends per share B. decrease in the per unit production costs C. maximize the current value per share C. decrease in the net working capital E.Chapter 01 . increase cash flow and avoid financial distress D. because managers often receive shares of stock as part of their compensation Refer to section 1. market value per share of outstanding stock E.3 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-2 Section: 1. total sales Refer to section 1. doing so guarantees the company will grow in size at the maximum possible rate B.3 Topic: Goal of financial management 40. gross profit per unit produced D.3 Topic: Goal of financial management 1-39 . Why should financial managers strive to maximize the current value per share of the existing stock? A.3 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-2 Section: 1. because they have been hired to represent the interests of the current shareholders D. size of the firm B. growth rate of the firm C. because this will increase the current dividends per share E. Decisions made by financial managers should primarily focus on increasing which one of the following? A.Chapter 01 .Introduction to Corporate Finance 39. doing so increases employee salaries C. D. E. The Sarbanes-Oxley Act of 2002 is a governmental response to: A. B. Refer to section 1.3 Topic: Sarbox 1-40 . Which one of the following is an unintended result of the Sarbanes-Oxley Act? A. corporations delisting from major exchanges D. management greed and abuses. decreasing corporate profits. identification of internal control weaknesses Refer to section 1. C.Chapter 01 . increased management awareness of internal controls C. more detailed and accurate financial reporting B. a weakening economy. deregulation of the stock exchanges.3 Topic: Sarbox 42.3 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1.Introduction to Corporate Finance 41.3 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1. the terrorists attacks on 9/11/2001. increased responsibility for corporate officers E. II and IV only C. increased public disclosure by all corporations A. must continue to provide a detailed list of internal control deficiencies on an annual basis. must continue to provide audited financial statements to the public. and IV only E. I.3 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1. increased privatization of public corporations IV. Refer to section 1. Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002? I. C. I and III only B.Chapter 01 . D. III. and IV only Refer to section 1. I. II.3 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1. decreased compliance costs III.3 Topic: Sarbox 44. B.Introduction to Corporate Finance 43.S. ceases to exist. increased foreign stock exchange listings of U. and III only D. II. E. can continue publicly trading its stock but only on the exchange on which it was previously listed.3 Topic: Sarbox 1-41 . stocks II. A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: A. III. can provide less information to its shareholders than it did prior to "going dark". threat of a company takeover IV. I. Which one of the following actions by a financial manager is most apt to create an agency problem? A.Introduction to Corporate Finance 45. III. III and IV only C. III. compensation based on the value of the stock II. stock option plans III.4 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1. refusing to expand the company if doing so will lower the value of the equity D. threat of a proxy fight A. II. I. refusing to borrow money when doing so will create losses for the firm B. agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales E. refusing to lower selling prices if doing so will reduce the net profits C. and IV Refer to section 1.4 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1.4 Topic: Agency problem 46. II. and III only D. Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. I and II only B. I. I. and IV only E. increasing current profits when doing so lowers the value of the firm's equity Refer to section 1.Chapter 01 .4 Topic: Agency problem 1-42 . Introduction to Corporate Finance 47. accepting an investment opportunity that will add value to the firm B.Chapter 01 .4 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1. limited partnership D. Which one of the following is an agency cost? A. hiring outside accountants to audit the company's financial statements E.4 Topic: Agency cost 1-43 . increasing the quarterly dividend C. corporation E. general partnership C.4 Topic: Agency problem 48. investing in a new project that creates firm value D.4 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1. limited liability company Refer to section 1. closing a division of the firm that is operating at a loss Refer to section 1. sole proprietorship B. Which form of business structure is most associated with agency problems? A. 4 AACSB: N/A Difficulty: Basic Learning Objective: 1-4 Section: 1.4 Topic: Proxy fight 1-44 . Sarbanes-Oxley Act D. stock options B. closing a division with net losses D. increasing the market value of the firm's shares E.Chapter 01 . increasing the size of a firm B. promotion C.Introduction to Corporate Finance 49. proxy fight Refer to section 1.4 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1. agency play E. Which one of the following is least likely to be an agency problem? A. concentrating on maximizing current profits C. obtaining a patent for a new product Refer to section 1.4 Topic: Agency cost 50. Which one of the following is a means by which shareholders can replace company management? A. 4 Topic: Corporate responsibility 1-45 .Chapter 01 .Introduction to Corporate Finance 51. proxy B.4 Topic: Proxy 52.4 AACSB: N/A Difficulty: Basic Learning Objective: 1-4 Section: 1. chief operating office E. by-laws C. stock audit Refer to section 1. stock option E. board of directors C.4 AACSB: N/A Difficulty: Basic Learning Objective: 1-4 Section: 1. chairman of the Board B. Which one of the following parties has ultimate control of a corporation? A. indenture agreement D. chief executive officer D. Which one of the following grants an individual the right to vote on behalf of a shareholder? A. shareholders Refer to section 1. Introduction to Corporate Finance 53. employee II. long-term creditor III. I. and IV only E.4 AACSB: N/A Difficulty: Basic Learning Objective: 1-4 Section: 1. Which of the following represent cash outflows from a corporation? I.5 Topic: Cash outflows 1-46 . I and III only B.Chapter 01 . and IV only Refer to section 1. II. Which of the following parties are considered stakeholders of a firm? I.4 Topic: Stakeholder 54. I only B. and IV only Refer to section 1. I and IV only D. II and IV only C.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. government IV. II. payment of dividends III. payment of government taxes A. new loan proceeds IV. IV only C. III. II and IV only E. II. I and III only D. common stockholder A. III. issuance of securities II. and IV only E. stock ownership transfer from one shareholder to another shareholder D. gift of stock from one shareholder to another shareholder E. sale of a new share of stock to an individual investor C. II and IV only D.Introduction to Corporate Finance 55.5 Topic: Primary market 1-47 . I and III only C.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. sale of currently outstanding stock by a dealer to an individual investor B.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1.5 Topic: Cash flows 56. I. II.Chapter 01 . payment of quarterly dividend A. Which one of the following is a primary market transaction? A. payment of government taxes III. repayment of long-term debt II. I. gift of stock by a shareholder to a family member Refer to section 1. Which of the following are cash flows from a corporation into the financial markets? I. and III only Refer to section 1. I and II only B. payment of loan interest IV. III. This transaction: A. was a private placement. D. B.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. occurred in a dealer market. C. involved a proxy. Public offerings of debt and equity must be registered with which one of the following? A.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. New York Board of Governors B.Introduction to Corporate Finance 57. Securities and Exchange Commission E. E.Chapter 01 . was facilitated in the secondary market. took place in the primary market. Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange.5 Topic: SEC 1-48 . Market Dealers Exchange Refer to section 1. Federal Reserve C.5 Topic: Secondary market 58. Refer to section 1. NYSE Registration Office D. 5 Topic: Auction and dealer markets 60. E. Refer to section 1. C. Dealers arrange trades but never own the securities traded.5 Topic: NYSE and NASDAQ 1-49 .5 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1. All secondary markets are auction markets. Which one of the following statements is generally correct? A. The NYSE is a dealer market. Most debt securities are traded on the NYSE. Some large companies are listed on NASDAQ. Auction markets match buy and sell orders. The exchange with the strictest listing requirements is NASDAQ. D. C.5 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1. B.Introduction to Corporate Finance 59. Dealer markets have a physical trading floor. NASDAQ is a broker market. Refer to section 1. D. Which one of the following statements concerning stock exchanges is correct? A. E. Private placements must be registered with the SEC. B.Chapter 01 . secondary. The publicly traded shares of a NYSE-listed firm must be worth at least $250 million. dealer market C.5 Topic: NYSE 1-50 . This trade occurred in which one of the following? A. dealer market B. The stock is listed on the NYSE. auction market D.Chapter 01 . B. The listing requirements for the NYSE are more stringent than those of NASDAQ. The NYSE is an OTC market functioning as both a primary and a secondary market. OTC market Refer to section 1.5 Topic: Secondary auction market 62. The NYSE is the largest dealer market for listed securities in the United States.5 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1. C. Which one of the following statements is correct concerning the NYSE? A. D.Introduction to Corporate Finance 61. primary. secondary. auction market E. primary. secondary. Refer to section 1.5 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1. E. Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. Any corporation desiring to be listed on the NYSE can do so for a fee. C. E. It is easier to be listed on NASDAQ than on the NYSE. capital budgeting: the identification of investment opportunities that have a positive net value 2. NASDAQ is an auction market. NASDAQ is a dealer market. List and briefly describe the three general areas of responsibility for a financial manager. B. D. capital structure: the mix of long-term debt and equity used to finance a firm's operations 3. NASDAQ is an electronic market.Chapter 01 . NASDAQ is an OTC market.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1.Introduction to Corporate Finance 63. working capital management: the daily control of a firm's short-term assets and short-term liabilities Feedback: Refer to section 1. The three basic areas are: 1. Which one of the following statements concerning NASDAQ is FALSE? A.5 Topic: NASDAQ Essay Questions 64.1 Topic: Financial manager 1-51 .1 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-1 Section: 1. Refer to section 1. thereby effectively limiting the life of the business to that of its founder. Finally. Describe the key advantages associated with the corporate form of organization. Why are so many businesses structured as sole proprietorships when the corporate form of business offers more advantages? A significant advantage of the sole proprietorship is that it is inexpensive and easy to form. and the potential for an unlimited life for the organization. it may not be desirable to spend part of that capital forming a corporation.Chapter 01 . If the sole proprietor has limited capital to start with. for a typical small firm. Feedback: Refer to section 1. the ability to raise large amounts of capital.2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1. the owners' limited liability for business debts.2 Topic: Corporation 66. Feedback: Refer to section 1. limited liability for business debts may not be a significant advantage if the proprietor has most of his or her personal assets tied up in the business already.Introduction to Corporate Finance 65.2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1.2 Topic: Sole proprietorship 1-52 . having an unlimited life for the business has no real advantage since the heart and soul of the business is the person who founded it. The advantages of the corporate form of organization are the ease of transferring ownership. Also. you may or may not handle the financial transactions and thus are accepting the responsibility for actions taken not only by yourself. Should that individual die. What concerns might a loan officer have when loaning funds to a sole proprietorship that he or she might not have when loaning funds to a corporation? The existence and viability of a sole proprietor is dependent upon one individual. With a corporation. but those of your partners.2 Topic: Personal liability 1-53 .2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1. should the owner lose interest in the business or become ill. Likewise. From a liability point of view. the business might also cease to exist. In a general partnership.2 Topic: Organizational structure 68.Chapter 01 .Introduction to Corporate Finance 67. However. as a sole proprietor you should be totally aware of all the business dealings of the firm. the company ownership could be sold in any one of those situations such that the business entity would continue to exist. the entity would cease to exist. what is the difference between investing in a sole proprietorship and a general partnership? Both a sole proprietor and a general partner have unlimited liability for the firm's debts. Feedback: Refer to section 1.2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1. Feedback: Refer to section 1. a review and sign off by the corporate officers of the annual financial statements. "going dark".4 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1.Introduction to Corporate Finance 69. While some of the results do match the intent of the Act. The primary goal of a financial manager should be to maximize the current value of the outstanding stock. Feedback: Refer to section 1. managers frequently are more concerned with their personal benefits from employment. the costs. large corporate offices. an annual report by management of the internal control and financial reporting within the firm along with an independent auditor's assessment of that report. excessive staffing.Chapter 01 . and first-class travel and conference locations. This cost has caused other firms to "go dark" or to opt for listing on a foreign exchange rather than a U.4 Topic: Agency conflict 70. and foreign listings were most likely not intended by the supporters of the Act. Feedback: Refer to section 1. However. This goal focuses on enhancing the returns to stockholders who are the owners of the firm. While firms that have opted to remain publicly-owned are complying with these requirements.3 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1. and the perks to which they feel entitled. to name a few.S.3 Topic: Sarbox 1-54 . some of which are excessive compensation packages. the prestige of their position. exchange. Give some examples of ways in which manager's goals can differ from those of shareholders. they are paying a cost to do so. and the responsibility for the accuracy of the financial reports placed directly on senior management of the firm. How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial intent of that Act? Some of the key requirements of Sarbanes-Oxley are: the prohibition of personal loans from the company to its officers. There are numerous examples. and do. Compare and contrast the NYSE with NSADAQ. the opportunity exists for an agency problem to arise between the general and the limited partners. In a general partnership. The NYSE has a physical trading floor located on Wall Street in New York City.5 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1.5 Topic: Exchanges 1-55 . Note however. Dealers buy and sell for their own inventory. How might agency problems arise in partnerships? Agency conflicts typically arise when there is a separation between the ownership and the management of a business. that larger firms can. Feedback: Refer to section 1.Introduction to Corporate Finance 71. opt to remain on NASDAQ even though they qualify for NYSE listing. However.Chapter 01 .4 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1. Feedback: Refer to section 1. NASDAQ is a dealer market which is solely electronic and therefore has no physical trading floor. in a limited partnership. The NYSE is an auction market where sell orders are matched with buy orders. especially if the partnership is small.4 Topic: Agency conflict 72. there is less of a chance of an agency conflict if all the partners are involved with the business on a regular basis. The listing requirements of the NYSE are more stringent than those of NASDAQ and thus the NYSE tends to list larger firms with smaller firms being listed on NASDAQ.