Chapter 01 - Introduction to Corporate Finance

Chapter 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.

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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

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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.

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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

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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.

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maximum loss limited to the capital invested 24. tax-free income B. general partner II. II only B. B.Chapter 01 . stockholder IV. Which of the following individuals have unlimited liability based on their ownership interest? I. E. greater control over the business affairs of the partnership E. I and II only C. It is easy to create a sole proprietorship. The life of a sole proprietorship is potentially unlimited. Which one of the following best describes the primary advantage of being a limited partner instead of a general partner? A. sole proprietor III. and IV only 23. active participation in the firm's activities C. I. A sole proprietorship is taxed the same as a C corporation. faces double taxation whereas a limited partner does not. II. Which one of the following statements concerning a sole proprietorship is correct? A. A sole proprietor can generally raise large sums of capital quite easily. has a maximum loss equal to his or her equity investment. D. B. C. and III only E. limited partner A. has no say over a firm's daily operations. 1-6 . II. E. receives a salary in lieu of a portion of the profits. A general partner: A. 22.Introduction to Corporate Finance 21. no potential financial loss D. D. is solely responsible for all the partnership debts. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. II and IV only D. C. I.

Which one of the following statements is correct? A. double taxation III. limited partnership life III. II. has a greater ability to raise capital than a sole proprietorship. II and III only D. double taxation of partnership profits II. D. Corporate profits are taxable income to the shareholders when earned. and IV only 27. The majority of firms in the U. I. II. C. terminates at the death of any limited partner. II. D. Corporate shareholders elect the corporate president.Introduction to Corporate Finance 25. 1-7 . Stockholders face no potential losses related to their corporate investment. Corporations can raise large amounts of capital generally easier than partnerships can. and IV only D. and IV 28.S. III. Which of the following are advantages of the corporate form of business ownership? I. unlimited firm life A. III. and IV only E. ability to raise capital IV. unlimited personal liability for all partnership debts A. I and II only C. I. C. are structured as corporations. 26. E. II only B. has an unlimited life. III. limited liability for firm debt II. III and IV only C. consists solely of limited partners. II. B. I. active involvement in the firm by all the partners IV. Which of the following apply to a partnership that consists solely of general partners? I. III. A limited partnership: A. B. and IV only E. E. can opt to be taxed as a corporation.Chapter 01 . I and II only B.

III. C. II. must be amended should a firm decide to increase the number of shares authorized. define the name by which the firm will operate. Which one of the following statements is correct? A. I. are amended periodically. B. detail the method that will be used to elect corporate directors. limited liability for limited partners only C. E. A. A general partnership is legally the same as a corporation. I and III only B. describe the intended life and purpose of the organization. IV. III.Introduction to Corporate Finance 29. describe the purpose of the firm. all income generated is totally tax-free 1-8 . D. D. C. II and III only D. taxed similar to a partnership D. Which one of the following characteristics applies to a limited liability company? A. The articles of incorporation: I. 30. 32. Partnerships are the most complicated type of business to form. determine how a corporation regulates itself. Only firms organized as sole proprietorships have limited lives. set forth the number of shares of stock that can be issued. and IV only 31. All business organizations have bylaws. Corporate bylaws: A. available only to firms having a single owner B.Chapter 01 . taxed similar to a C corporation E. E. cannot be amended once adopted. Both sole proprietorship and partnership income is taxed as individual income. I and IV only C. B. II and IV only E.

S. corporation 1-9 . Which one of the following business types is best suited to raising large amounts of capital? A. business. limited liability company C. limited partnership D. joint stock company C. limited liability company 35. general partnership E. sole proprietorship B. Sam. corporation E.Introduction to Corporate Finance 33. Alfredo will be involved as an active consultant and manager and will also contribute funds. Which type of business organization has all the respective rights and privileges of a legal person? A. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. general partnership E. sole proprietorship B. general partnership C. limited partnership D. Alfredo. and Juan want to start a small U. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum.Chapter 01 . Which form of business entity should these individuals adopt? A. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. sole proprietorship B. corporation D. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. limited partnership 34.

sole proprietorship B. increase in the number of shares outstanding D. decrease in the per unit production costs C. Georgia. increase in the market value per share 39. corporation 37. maximize the current value per share C. minimize operational costs while maximizing firm efficiency E.Chapter 01 . they wish to be treated equally. 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. joint stock company C. maximize current dividends per share B. doing so increases employee salaries C. increase cash flow and avoid financial distress D. 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. 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. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected.Introduction to Corporate Finance 36. limited partnership D. doing so guarantees the company will grow in size at the maximum possible rate B. decrease in the net working capital E. maintain steady growth while increasing current profits 38. because this will increase the current dividends per share E. because managers often receive shares of stock as part of their compensation 1-10 . A. Which one of the following best states the primary goal of financial management? A. Sally and Alicia currently are general partners in a business located in Atlanta. limited liability company E.

42. D. C. growth rate of the firm C. The Sarbanes-Oxley Act of 2002 is a governmental response to: A. A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: A. deregulation of the stock exchanges. Decisions made by financial managers should primarily focus on increasing which one of the following? A. identification of internal control weaknesses 43. B. must continue to provide audited financial statements to the public. can continue publicly trading its stock but only on the exchange on which it was previously listed. the terrorists attacks on 9/11/2001. E. gross profit per unit produced D.Introduction to Corporate Finance 40. a weakening economy. must continue to provide a detailed list of internal control deficiencies on an annual basis. size of the firm B.Chapter 01 . management greed and abuses. can provide less information to its shareholders than it did prior to "going dark". increased management awareness of internal controls C. corporations delisting from major exchanges D. total sales 41. E. B. C. 1-11 . more detailed and accurate financial reporting B. increased responsibility for corporate officers E. ceases to exist. market value per share of outstanding stock E. Which one of the following is an unintended result of the Sarbanes-Oxley Act? A. D. decreasing corporate profits.

and IV only 45. increased foreign stock exchange listings of U. I. threat of a company takeover IV. and III only D. III. increased public disclosure by all corporations A. stock option plans III.S. III and IV only C. increasing current profits when doing so lowers the value of the firm's equity 46. refusing to expand the company if doing so will lower the value of the equity D. I. I. stocks II. II. II. II. II. and IV only E. I and II only B. Which one of the following actions by a financial manager is most apt to create an agency problem? A. compensation based on the value of the stock II. and IV 1-12 . and III only D. refusing to borrow money when doing so will create losses for the firm B. III.Introduction to Corporate Finance 44.Chapter 01 . III. I. decreased compliance costs III. agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales E. increased privatization of public corporations IV. I. Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. threat of a proxy fight A. Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002? I. III. I. I and III only B. and IV only E. refusing to lower selling prices if doing so will reduce the net profits C. II and IV only C.

investing in a new project that creates firm value D. Sarbanes-Oxley Act D. limited partnership D. accepting an investment opportunity that will add value to the firm B. stock options B.Chapter 01 . proxy fight 1-13 . closing a division of the firm that is operating at a loss 49. Which form of business structure is most associated with agency problems? A. Which one of the following is a means by which shareholders can replace company management? A. concentrating on maximizing current profits C. Which one of the following is least likely to be an agency problem? A. promotion C. general partnership C. limited liability company 48. Which one of the following is an agency cost? A.Introduction to Corporate Finance 47. sole proprietorship B. obtaining a patent for a new product 50. agency play E. hiring outside accountants to audit the company's financial statements E. increasing the market value of the firm's shares E. corporation E. increasing the quarterly dividend C. increasing the size of a firm B. closing a division with net losses D.

II. chairman of the Board B. government IV. and IV only 54. employee II. payment of government taxes A. stock option E. common stockholder A. payment of dividends III. shareholders 53. III. indenture agreement D.Chapter 01 . I and IV only D. new loan proceeds IV. III. II and IV only E. Which one of the following grants an individual the right to vote on behalf of a shareholder? A. and IV only E. Which of the following parties are considered stakeholders of a firm? I. and IV only 1-14 . II. I. Which of the following represent cash outflows from a corporation? I. II and IV only C. chief executive officer D. I and III only B. II. by-laws C. I and III only D. I only B. chief operating office E. proxy B. board of directors C. IV only C.Introduction to Corporate Finance 51. long-term creditor III. issuance of securities II. Which one of the following parties has ultimate control of a corporation? A. stock audit 52.

This transaction: A. sale of currently outstanding stock by a dealer to an individual investor B. Federal Reserve C. took place in the primary market. Market Dealers Exchange 1-15 . B. gift of stock from one shareholder to another shareholder E. NYSE Registration Office D. and IV only E. New York Board of Governors B. 58. I and III only C. repayment of long-term debt II. occurred in a dealer market. III. Public offerings of debt and equity must be registered with which one of the following? A.Introduction to Corporate Finance 55. and III only 56. Securities and Exchange Commission E. I. D. was a private placement. Which one of the following is a primary market transaction? A. I and II only B. involved a proxy. gift of stock by a shareholder to a family member 57. C. payment of government taxes III. payment of loan interest IV. sale of a new share of stock to an individual investor C. Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. E. payment of quarterly dividend A. I. II. stock ownership transfer from one shareholder to another shareholder D. II and IV only D.Chapter 01 . Which of the following are cash flows from a corporation into the financial markets? I. was facilitated in the secondary market.

C. 63. NASDAQ is an auction market. Some large companies are listed on NASDAQ. Auction markets match buy and sell orders. E. NASDAQ is a dealer market. secondary. 1-16 . D. 60. NASDAQ is an electronic market.Chapter 01 . C. Dealer markets have a physical trading floor. C. D. Private placements must be registered with the SEC. All secondary markets are auction markets. C. dealer market B. It is easier to be listed on NASDAQ than on the NYSE. The publicly traded shares of a NYSE-listed firm must be worth at least $250 million. The NYSE is a dealer market. Which one of the following statements concerning stock exchanges is correct? A. The exchange with the strictest listing requirements is NASDAQ. auction market D. E. Which one of the following statements concerning NASDAQ is FALSE? A. dealer market C. The NYSE is an OTC market functioning as both a primary and a secondary market. B. B.Introduction to Corporate Finance 59. auction market E. E. Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. Which one of the following statements is correct concerning the NYSE? A. secondary. primary. NASDAQ is a broker market. Any corporation desiring to be listed on the NYSE can do so for a fee. secondary. OTC market 62. B. Most debt securities are traded on the NYSE. primary. The stock is listed on the NYSE. Dealers arrange trades but never own the securities traded. B. 61. The listing requirements for the NYSE are more stringent than those of NASDAQ. D. D. NASDAQ is an OTC market. Which one of the following statements is generally correct? A. E. This trade occurred in which one of the following? A. The NYSE is the largest dealer market for listed securities in the United States.

Chapter 01 .Introduction to Corporate Finance Essay Questions 64. Why are so many businesses structured as sole proprietorships when the corporate form of business offers more advantages? 67. 65. 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 . Describe the key advantages associated with the corporate form of organization. 66. List and briefly describe the three general areas of responsibility for a financial manager.

How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial intent of that Act? 71. How might agency problems arise in partnerships? 1-18 . what is the difference between investing in a sole proprietorship and a general partnership? 69. 70.Chapter 01 . From a liability point of view.Introduction to Corporate Finance 68. Give some examples of ways in which manager's goals can differ from those of shareholders.

Chapter 01 . 1-19 . Compare and contrast the NYSE with NSADAQ.Introduction to Corporate Finance 72.

capital structure Refer to section 1. capital budgeting E. Which one of the following terms is defined as the management of a firm's long-term investments? A.1 Topic: Capital structure 1-20 . Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A. capital structure Refer to section 1.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1.1 Topic: Capital budgeting 2.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. cash management C.Introduction to Corporate Finance Chapter 01 Introduction to Corporate Finance Answer Key Multiple Choice Questions 1.Chapter 01 . working capital management B. working capital management B. capital budgeting E. cost analysis D. financial allocation C. agency cost analysis D.

capital structure Refer to section 1. net capital E. general partnership. D. investment capital D. A business owned by a solitary individual who has unlimited liability for its debt is called a: A. limited partnership.2 Topic: Sole proprietorship 1-21 . sole proprietorship. Which one of the following is defined as a firm's short-term assets and its short-term liabilities? A.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. working capital B.Introduction to Corporate Finance 3.1 Topic: Working capital 4. B.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. E. corporation. C. Refer to section 1.Chapter 01 . limited liability company. debt C.

C. corporation. D. E. corporate shareholder. D. generally partner. limited liability company. 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. B.Introduction to Corporate Finance 5. sole proprietor.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. B. limited partner. C.Chapter 01 . sole proprietorship. zero partner. general partnership.2 Topic: Limited partner 1-22 . E. Refer to section 1. A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: A. limited partnership. Refer to section 1.2 Topic: General partnership 6.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1.

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? A.2 Topic: Corporation 8. A business created as a distinct legal entity and treated as a legal "person" is called a: A.Introduction to Corporate Finance 7. legal liability Refer to section 1. articles of incorporation B. limited partnership. sole proprietorship. corporate breakdown C.Chapter 01 . corporation. C. agency problem D. D. unlimited liability company. bylaws E. B. Refer to section 1.4 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1.4 Topic: Agency problem 1-23 .2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. general partnership. E.

1 Topic: Financial management 1-24 . I.4 Topic: Stakeholder 10. B. and III only D. II and III only C. I. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm. a person who owns shares of stock. II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm acquire new equipment? A. E. a creditor to whom a firm currently owes money. How should a product be marketed? II. a person who initially founded a firm and currently has management control over that firm. Refer to section 1.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. II. D.Introduction to Corporate Finance 9. II. any person who has voting rights based on stock ownership of a corporation.4 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1. Which of the following questions are addressed by financial managers? I. C.Chapter 01 . Should the firm borrow more money? IV. and IV only E. A stakeholder is: A. III. and IV Refer to section 1. III. I and IV only B.

payment to a vendor Refer to section 1. chief executive officer.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1.1 Topic: Financial management 12. B. C.Chapter 01 . daily cash deposit B. Which one of the following functions should be the responsibility of the controller rather than the treasurer? A. president. vice president of finance. board of directors. equipment purchase analysis D. income tax returns C. chairman of the board. E. The controller of a corporation generally reports directly to the: A. customer credit approval E.Introduction to Corporate Finance 11.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. Refer to section 1.1 Topic: Corporate structure 1-25 . D.

The chief operations officer reports to the vice president of production.1 Topic: Corporate structure 14. C. The treasurer reports to the vice president of finance.Introduction to Corporate Finance 13. The chief executive officer reports to president. E. The controller reports to the president.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. Which one of the following is a capital budgeting decision? A. determining how much inventory to keep on hand E. deciding how to refinance a debt issue that is maturing D.1 Topic: Capital budgeting 1-26 .Chapter 01 . Refer to section 1. B.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. determining how many shares of stock to issue B. 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. determining how much money should be kept in the checking account Refer to section 1. deciding whether or not to purchase a new machine for the production line C. D.

1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. timing of all projected cash flows III.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. II.1 Topic: Capital budgeting 16. project start up costs II. II. 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. Which one of the following is a capital structure decision? A. III. and IV only C. I.1 Topic: Capital structure 1-27 . and III only D. determining how much inventory will be needed to support a project Refer to section 1. and IV only E. determining how to allocate investment funds to multiple projects C. I. dollar amount of each projected cash flow A. III. II. I. Which of the following should a financial manager consider when analyzing a capital budgeting project? I. II.Introduction to Corporate Finance 15. I and IV only B. determining which one of two projects to accept B. dependability of future cash flows IV.Chapter 01 . and IV Refer to section 1.

Introduction to Corporate Finance 17. I and III only C.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. accounts receivable III. II. fixed assets IV. III. II. inventory A. and IV only E. Which of the following accounts are included in working capital management? I. capital budgeting D. I and II only B.1 Topic: Working capital management 1-28 .1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1.Chapter 01 . I. capital structure decision Refer to section 1. net working capital decision C. accounts payable II. The decision to issue additional shares of stock is an example of which one of the following? A. controller's duties E.1 Topic: Capital structure 18. working capital management B. II and IV only D. and IV only Refer to section 1.

1 Topic: Working capital management 20. The profits of a sole proprietorship are subject to double taxation. The owner of a sole proprietorship is personally responsible for all of the company's debts. determining the amount of equipment needed to complete a job B. today. 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. E. Refer to section 1. B. A sole proprietorship is structured the same as a limited liability company.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1.1 AACSB: N/A Difficulty: Basic Learning Objective: 1-1 Section: 1. Which one of the following statements concerning a sole proprietorship is correct? A. C. Which one of the following is a working capital management decision? A. There are very few sole proprietorships remaining in the U. determining the number of shares of stock to issue to fund an acquisition E. A sole proprietorship is designed to protect the personal assets of the owner. D.S. determining whether or not a project should be accepted Refer to section 1.Chapter 01 .Introduction to Corporate Finance 19.2 Topic: Sole proprietorship 1-29 .

general partner II. Which of the following individuals have unlimited liability based on their ownership interest? I. I and II only C. Which one of the following statements concerning a sole proprietorship is correct? A. II and IV only D. II only B. II. stockholder IV. Refer to section 1. limited partner A.2 Topic: Unlimited liability 1-30 . sole proprietor III.Chapter 01 . D. C. B. and IV only Refer to section 1.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. E.2 Topic: Sole proprietorship 22.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. I. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. It is easy to create a sole proprietorship. I. The life of a sole proprietorship is potentially unlimited. and III only E.Introduction to Corporate Finance 21. A sole proprietorship is taxed the same as a C corporation. II. A sole proprietor can generally raise large sums of capital quite easily.

C. D. Which one of the following best describes the primary advantage of being a limited partner instead of a general partner? A. Refer to section 1. E. no potential financial loss D. maximum loss limited to the capital invested Refer to section 1. tax-free income B.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1.2 Topic: Limited partner 24. has no say over a firm's daily operations. is solely responsible for all the partnership debts. has a maximum loss equal to his or her equity investment. A general partner: A. greater control over the business affairs of the partnership E. active participation in the firm's activities C.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. receives a salary in lieu of a portion of the profits. faces double taxation whereas a limited partner does not.Introduction to Corporate Finance 23. B.Chapter 01 .2 Topic: General partner 1-31 .

has a greater ability to raise capital than a sole proprietorship. E.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. C. consists solely of limited partners. A limited partnership: A. unlimited personal liability for all partnership debts A. I. B. Which of the following apply to a partnership that consists solely of general partners? I. and IV only E. and IV only Refer to section 1. II only B. has an unlimited life.2 Topic: Partnership 1-32 .Chapter 01 . Refer to section 1. double taxation of partnership profits II. III. limited partnership life III. I and II only C. can opt to be taxed as a corporation. D. II and III only D. active involvement in the firm by all the partners IV. II.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1.Introduction to Corporate Finance 25. terminates at the death of any limited partner. II.2 Topic: Partnership 26.

Which of the following are advantages of the corporate form of business ownership? I. are structured as corporations. B. and IV only E. Corporations can raise large amounts of capital generally easier than partnerships can. I.2 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1. C. and IV Refer to section 1. Corporate profits are taxable income to the shareholders when earned. The majority of firms in the U. double taxation III. Corporate shareholders elect the corporate president. E. D. Stockholders face no potential losses related to their corporate investment. I and II only B. Refer to section 1.Chapter 01 . II. and IV only D. III and IV only C. II.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1.2 Topic: Corporation 28.2 Topic: Corporation 1-33 .S. limited liability for firm debt II. ability to raise capital IV.Introduction to Corporate Finance 27. I. III. unlimited firm life A. III. Which one of the following statements is correct? A. III.

IV. A. III. Partnerships are the most complicated type of business to form.2 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1. describe the purpose of the firm. Both sole proprietorship and partnership income is taxed as individual income. are amended periodically. C.2 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1.Introduction to Corporate Finance 29.2 Topic: Business entity 30. II and IV only E. I and IV only C. E. set forth the number of shares of stock that can be issued. and IV only Refer to section 1. II and III only D. II. The articles of incorporation: I. I. A general partnership is legally the same as a corporation. All business organizations have bylaws. III. B. detail the method that will be used to elect corporate directors.2 Topic: Articles of incorporation 1-34 . D.Chapter 01 . Only firms organized as sole proprietorships have limited lives. Which one of the following statements is correct? A. I and III only B. Refer to section 1.

2 Topic: Limited liability company 1-35 .2 Topic: Corporate bylaws 32. D. Which one of the following characteristics applies to a limited liability company? A. Refer to section 1. taxed similar to a partnership D. C. determine how a corporation regulates itself. must be amended should a firm decide to increase the number of shares authorized. cannot be amended once adopted.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. define the name by which the firm will operate.2 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1.Introduction to Corporate Finance 31. taxed similar to a C corporation E. Corporate bylaws: A. B. all income generated is totally tax-free Refer to section 1.Chapter 01 . available only to firms having a single owner B. describe the intended life and purpose of the organization. limited liability for limited partners only C. E.

limited liability company C. sole proprietorship B. Which one of the following business types is best suited to raising large amounts of capital? A. limited partnership Refer to section 1.Introduction to Corporate Finance 33. corporation E.Chapter 01 .2 Topic: Corporation 1-36 .2 Topic: Corporation 34. limited partnership D. limited liability company Refer to section 1. general partnership C. corporation D. sole proprietorship B.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1.2 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. general partnership E. Which type of business organization has all the respective rights and privileges of a legal person? A.

sole proprietorship B. 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. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. Alfredo will be involved as an active consultant and manager and will also contribute funds. general partnership E. limited liability company E.2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1. and Juan want to start a small U. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Alfredo.2 Topic: Limited partnership 36. corporation Refer to section 1. business. Which form of business entity should these individuals adopt? A. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations.Introduction to Corporate Finance 35. Georgia. 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. joint stock company C. limited partnership D. joint stock company C. they wish to be treated equally. sole proprietorship B.2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1.S. corporation Refer to section 1.Chapter 01 . A. Sam.2 Topic: Limited liability company 1-37 . They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. limited partnership D.

decrease in the per unit production costs C. increase in the number of shares outstanding D.3 AACSB: N/A Difficulty: Basic Learning Objective: 1-2 Section: 1. increase in the market value per share Refer to section 1. increase cash flow and avoid financial distress D. Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management? A. Which one of the following best states the primary goal of financial management? A.Introduction to Corporate Finance 37. maintain steady growth while increasing current profits Refer to section 1. decrease in the net working capital E. maximize the current value per share C.3 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-2 Section: 1. minimize operational costs while maximizing firm efficiency E. increase in the amount of the quarterly dividend B.3 Topic: Goal of financial management 1-38 .Chapter 01 .3 Topic: Goal of financial management 38. maximize current dividends per share B.

because this will increase the current dividends per share E. doing so increases employee salaries C. doing so guarantees the company will grow in size at the maximum possible rate B. total sales Refer to section 1.3 Topic: Goal of financial management 40.3 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-2 Section: 1. because managers often receive shares of stock as part of their compensation Refer to section 1.3 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-2 Section: 1. size of the firm B. Why should financial managers strive to maximize the current value per share of the existing stock? A. Decisions made by financial managers should primarily focus on increasing which one of the following? A. growth rate of the firm C.Introduction to Corporate Finance 39.3 Topic: Goal of financial management 1-39 . because they have been hired to represent the interests of the current shareholders D. gross profit per unit produced D. market value per share of outstanding stock E.Chapter 01 .

decreasing corporate profits. deregulation of the stock exchanges. B. more detailed and accurate financial reporting B. Refer to section 1.Introduction to Corporate Finance 41. identification of internal control weaknesses Refer to section 1. increased responsibility for corporate officers E. corporations delisting from major exchanges D.3 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1. the terrorists attacks on 9/11/2001. increased management awareness of internal controls C. management greed and abuses.Chapter 01 . Which one of the following is an unintended result of the Sarbanes-Oxley Act? A. a weakening economy. C.3 Topic: Sarbox 42.3 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1. The Sarbanes-Oxley Act of 2002 is a governmental response to: A. E. D.3 Topic: Sarbox 1-40 .

D.3 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1. increased privatization of public corporations IV. II. III. III.3 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1. E.S. can provide less information to its shareholders than it did prior to "going dark". and IV only Refer to section 1. II. increased foreign stock exchange listings of U. stocks II. C. ceases to exist. increased public disclosure by all corporations A. II and IV only C. A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: A. B. and IV only E. must continue to provide audited financial statements to the public.Introduction to Corporate Finance 43. Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002? I. decreased compliance costs III. and III only D. I.Chapter 01 . can continue publicly trading its stock but only on the exchange on which it was previously listed. I and III only B. Refer to section 1. must continue to provide a detailed list of internal control deficiencies on an annual basis.3 Topic: Sarbox 1-41 .3 Topic: Sarbox 44. I.

4 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1.4 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1. Which one of the following actions by a financial manager is most apt to create an agency problem? A. III. II. and IV Refer to section 1. threat of a company takeover IV. refusing to expand the company if doing so will lower the value of the equity D.4 Topic: Agency problem 1-42 . I and II only B. agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales E. I. I. threat of a proxy fight A. increasing current profits when doing so lowers the value of the firm's equity Refer to section 1.4 Topic: Agency problem 46. Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. I. stock option plans III. II. III.Introduction to Corporate Finance 45. III and IV only C.Chapter 01 . I. and IV only E. refusing to borrow money when doing so will create losses for the firm B. compensation based on the value of the stock II. refusing to lower selling prices if doing so will reduce the net profits C. and III only D.

increasing the quarterly dividend C.Introduction to Corporate Finance 47. Which one of the following is an agency cost? A. general partnership C. corporation E.4 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1. hiring outside accountants to audit the company's financial statements E. limited partnership D.4 Topic: Agency cost 1-43 .Chapter 01 . Which form of business structure is most associated with agency problems? A. investing in a new project that creates firm value D.4 Topic: Agency problem 48. sole proprietorship B. limited liability company Refer to section 1. closing a division of the firm that is operating at a loss Refer to section 1. accepting an investment opportunity that will add value to the firm B.4 AACSB: Ethics Difficulty: Basic Learning Objective: 1-4 Section: 1.

promotion C. obtaining a patent for a new product Refer to section 1. concentrating on maximizing current profits C. Which one of the following is least likely to be an agency problem? A. increasing the size of a firm B. Sarbanes-Oxley Act D. increasing the market value of the firm's shares E.Chapter 01 .4 Topic: Proxy fight 1-44 . Which one of the following is a means by which shareholders can replace company management? A.4 Topic: Agency cost 50.Introduction to Corporate Finance 49. closing a division with net losses D. agency play E.4 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1.4 AACSB: N/A Difficulty: Basic Learning Objective: 1-4 Section: 1. stock options B. proxy fight Refer to section 1.

chief operating office E. shareholders Refer to section 1. Which one of the following parties has ultimate control of a corporation? A. stock option E.Introduction to Corporate Finance 51. stock audit Refer to section 1. chairman of the Board B.4 Topic: Corporate responsibility 1-45 . chief executive officer D.4 Topic: Proxy 52.Chapter 01 . proxy B. Which one of the following grants an individual the right to vote on behalf of a shareholder? A. by-laws C.4 AACSB: N/A Difficulty: Basic Learning Objective: 1-4 Section: 1.4 AACSB: N/A Difficulty: Basic Learning Objective: 1-4 Section: 1. indenture agreement D. board of directors C.

and IV only E. IV only C. I and IV only D.Introduction to Corporate Finance 53. III. Which of the following parties are considered stakeholders of a firm? I. employee II. common stockholder A. III.4 AACSB: N/A Difficulty: Basic Learning Objective: 1-4 Section: 1. II. II and IV only C. government IV. I and III only B. II and IV only E. and IV only Refer to section 1. new loan proceeds IV. payment of dividends III. II.4 Topic: Stakeholder 54. issuance of securities II. long-term creditor III. II.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. I. I and III only D. I only B. payment of government taxes A.5 Topic: Cash outflows 1-46 . Which of the following represent cash outflows from a corporation? I. and IV only Refer to section 1.Chapter 01 .

payment of government taxes III.5 Topic: Primary market 1-47 . stock ownership transfer from one shareholder to another shareholder D. and IV only E. repayment of long-term debt II. III. I and II only B. II and IV only D. I. Which one of the following is a primary market transaction? A. sale of a new share of stock to an individual investor C.Chapter 01 . and III only Refer to section 1.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1.Introduction to Corporate Finance 55. I and III only C. payment of quarterly dividend A. I.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. gift of stock from one shareholder to another shareholder E. sale of currently outstanding stock by a dealer to an individual investor B. Which of the following are cash flows from a corporation into the financial markets? I. II. gift of stock by a shareholder to a family member Refer to section 1.5 Topic: Cash flows 56. payment of loan interest IV.

New York Board of Governors B. C.Introduction to Corporate Finance 57. E.5 Topic: Secondary market 58. was a private placement.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. Federal Reserve C. B. occurred in a dealer market.5 Topic: SEC 1-48 . took place in the primary market.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. NYSE Registration Office D. Securities and Exchange Commission E.Chapter 01 . D. Refer to section 1. This transaction: A. involved a proxy. Public offerings of debt and equity must be registered with which one of the following? A. Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. was facilitated in the secondary market. Market Dealers Exchange Refer to section 1.

B. Private placements must be registered with the SEC.5 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1.5 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1. All secondary markets are auction markets. NASDAQ is a broker market. B. Most debt securities are traded on the NYSE. Some large companies are listed on NASDAQ.Introduction to Corporate Finance 59. The NYSE is a dealer market. C. Refer to section 1. E. Refer to section 1.5 Topic: Auction and dealer markets 60. Which one of the following statements concerning stock exchanges is correct? A. Dealers arrange trades but never own the securities traded.5 Topic: NYSE and NASDAQ 1-49 .Chapter 01 . D. Dealer markets have a physical trading floor. C. D. Which one of the following statements is generally correct? A. Auction markets match buy and sell orders. E. The exchange with the strictest listing requirements is NASDAQ.

auction market D.5 Topic: NYSE 1-50 . This trade occurred in which one of the following? A. D. B. Refer to section 1. The publicly traded shares of a NYSE-listed firm must be worth at least $250 million.5 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1.Chapter 01 . C. The NYSE is an OTC market functioning as both a primary and a secondary market.Introduction to Corporate Finance 61. Which one of the following statements is correct concerning the NYSE? A. The stock is listed on the NYSE.5 AACSB: N/A Difficulty: Intermediate Learning Objective: 1-3 Section: 1.5 Topic: Secondary auction market 62. The listing requirements for the NYSE are more stringent than those of NASDAQ. Any corporation desiring to be listed on the NYSE can do so for a fee. auction market E. E. secondary. primary. primary. dealer market C. secondary. OTC market Refer to section 1. The NYSE is the largest dealer market for listed securities in the United States. dealer market B. Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. secondary.

capital structure: the mix of long-term debt and equity used to finance a firm's operations 3. NASDAQ is an OTC market. The three basic areas are: 1. C. It is easier to be listed on NASDAQ than on the NYSE.5 AACSB: N/A Difficulty: Basic Learning Objective: 1-3 Section: 1. B.Chapter 01 . Refer to section 1. capital budgeting: the identification of investment opportunities that have a positive net value 2. D.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. E. NASDAQ is an auction market.1 Topic: Financial manager 1-51 .5 Topic: NASDAQ Essay Questions 64. NASDAQ is a dealer market.1 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-1 Section: 1. Which one of the following statements concerning NASDAQ is FALSE? A. List and briefly describe the three general areas of responsibility for a financial manager. NASDAQ is an electronic market.

the ability to raise large amounts of capital. thereby effectively limiting the life of the business to that of its founder. the owners' limited liability for business debts. for a typical small firm. 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.2 Topic: Sole proprietorship 1-52 . and the potential for an unlimited life for the organization.Introduction to Corporate Finance 65. The advantages of the corporate form of organization are the ease of transferring ownership. it may not be desirable to spend part of that capital forming a corporation. 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.Chapter 01 . Describe the key advantages associated with the corporate form of organization. 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. Feedback: Refer to section 1. Also.2 Topic: Corporation 66. Feedback: Refer to section 1. If the sole proprietor has limited capital to start with. Finally.2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1.2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1.

Likewise. From a liability point of view.Chapter 01 . but those of your partners. the entity would cease to exist.2 Topic: Organizational structure 68. should the owner lose interest in the business or become ill. the business might also cease to exist. However. Feedback: Refer to section 1.2 Topic: Personal liability 1-53 .2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1. In a general partnership. With a corporation.2 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1. Should that individual die. as a sole proprietor you should be totally aware of all the business dealings of the firm. you may or may not handle the financial transactions and thus are accepting the responsibility for actions taken not only by yourself. 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. 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. the company ownership could be sold in any one of those situations such that the business entity would continue to exist.Introduction to Corporate Finance 67.

There are numerous examples. The primary goal of a financial manager should be to maximize the current value of the outstanding stock.Chapter 01 .4 Topic: Agency conflict 70. 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. a review and sign off by the corporate officers of the annual financial statements. exchange. This goal focuses on enhancing the returns to stockholders who are the owners of the firm.3 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1. and foreign listings were most likely not intended by the supporters of the Act. and first-class travel and conference locations. the costs.S. and the responsibility for the accuracy of the financial reports placed directly on senior management of the firm. and the perks to which they feel entitled.4 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1. While some of the results do match the intent of the Act. Feedback: Refer to section 1. 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. However. large corporate offices. managers frequently are more concerned with their personal benefits from employment. This cost has caused other firms to "go dark" or to opt for listing on a foreign exchange rather than a U. Feedback: Refer to section 1. to name a few.3 Topic: Sarbox 1-54 . some of which are excessive compensation packages. excessive staffing.Introduction to Corporate Finance 69. the prestige of their position. they are paying a cost to do so. "going dark". While firms that have opted to remain publicly-owned are complying with these requirements. Give some examples of ways in which manager's goals can differ from those of shareholders.

4 AACSB: Ethics Difficulty: Intermediate Learning Objective: 1-4 Section: 1. Feedback: Refer to section 1. 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.Introduction to Corporate Finance 71. opt to remain on NASDAQ even though they qualify for NYSE listing. Note however.5 AACSB: Reflective thinking Difficulty: Intermediate Learning Objective: 1-3 Section: 1. In a general partnership. The NYSE is an auction market where sell orders are matched with buy orders. and do. Dealers buy and sell for their own inventory.4 Topic: Agency conflict 72. Compare and contrast the NYSE with NSADAQ. the opportunity exists for an agency problem to arise between the general and the limited partners.Chapter 01 . The NYSE has a physical trading floor located on Wall Street in New York City. that larger firms can. in a limited partnership. However. 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. NASDAQ is a dealer market which is solely electronic and therefore has no physical trading floor. Feedback: Refer to section 1.5 Topic: Exchanges 1-55 . especially if the partnership is small.

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