Chapter 01 - Introduction to Corporate Finance

Chapter 01 Introduction to Corporate Finance
Multiple Choice Questions

1. The person generally directly responsible for overseeing the tax management, cost accounting, financial accounting, and information system functions is the: A. treasurer. B. director. C. controller. D. chairman of the board. E. chief executive officer.

2. The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the: A. treasurer. B. director. C. controller. D. chairman of the board. E. chief operations officer.

3. The process of planning and managing a firm's long-term investments is called: A. working capital management. B. financial depreciation. C. agency cost analysis. D. capital budgeting. E. capital structure.

4. The mixture of debt and equity used by a firm to finance its operations is called: A. working capital management. B. financial depreciation. C. cost analysis. D. capital budgeting. E. capital structure.

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Chapter 01 - Introduction to Corporate Finance

5. The management of a firm's short-term assets and liabilities is called: A. working capital management. B. debt management. C. equity management. D. capital budgeting. E. capital structure.

6. A business owned by a single individual is called a: A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership. E. limited liability company.

7. A business formed by two or more individuals who each have unlimited liability for business debts is called a: A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership. E. limited liability company.

8. The division of profits and losses among the members of a partnership is formalized in the: A. indemnity clause. B. indenture contract. C. statement of purpose. D. partnership agreement. E. group charter.

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Chapter 01 - Introduction to Corporate Finance

9. A business created as a distinct legal entity composed of one or more individuals or entities is called a: A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership. E. unlimited liability company.

10. The corporate document that sets forth the business purpose of a firm is the: A. indenture contract. B. state tax agreement. C. corporate bylaws. D. debt charter. E. articles of incorporation.

11. The rules by which corporations govern themselves are called: A. indenture provisions. B. indemnity provisions. C. charter agreements. D. bylaws. E. articles of incorporation.

12. A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a: A. limited liability company. B. general partnership. C. limited proprietorship. D. sole proprietorship. E. corporation.

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maintain steady growth in both sales and net earnings. maximize current dividends per share of the existing stock. corporate income subject to double taxation. avoid financial distress. B. D. the agency problem. A conflict of interest between the stockholders and management of a firm is called: A. D. C. A stakeholder is: A. C. D. any person or entity that owns shares of stock of a corporation. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm. a creditor to whom the firm currently owes money and who consequently has a claim on the cash flows of the firm. B. E. the total interest paid to creditors over the lifetime of the firm. 1-4 . 15. stockholders' liability.Chapter 01 . the costs of any conflicts of interest between stockholders and management. a person who initially started a firm and currently has management control over the cash flows of the firm due to his/her current ownership of company stock. minimize operational costs and maximize firm efficiency. corporate breakdown. B. the total dividends paid to stockholders over the lifetime of a firm.Introduction to Corporate Finance 13. The primary goal of financial management is to: A. any person or entity that has voting rights based on stock ownership of a corporation. E. D. 16. the costs that result from default and bankruptcy of a firm. C. E. legal liability. B. E. 14. C. maximize the current value per share of the existing stock. Agency costs refer to: A. corporate activism.

protect investors from corporate abuses. D. The vice president of finance reports to the chairman of the board. protect financial managers from investors. B. president.Chapter 01 . deciding when to repay a long-term debt D. Which one of the following statements is correct concerning the organizational structure of a corporation? A. determining how much debt should be borrowed from a particular lender B. 19. B. E. decrease audit costs for U. C. The treasurer reports to the chief executive officer. not have any effect on foreign companies. The chief operations officer reports to the vice president of production. The Sarbanes Oxley Act of 2002 is intended to: A. E. chief executive officer. deciding whether or not to open a new store C.Introduction to Corporate Finance 17. E. D. 18. determining how much inventory to keep on hand E. reduce corporate revenues. board of directors. C. The treasurer and the controller of a corporation generally report to the: A. chief financial officer. determining how much money should be kept in the checking account 1-5 . chairman of the board. The chief executive officer reports to the board of directors. B. Which one of the following is a capital budgeting decision? A. D. 20. firms. C.S. The controller reports to the president.

Working capital management: A. 1998. the cost of going public in the United States has: A. B. I. C. I and III only C. 1952. E. accounts receivable IV. 1-6 . Working capital management includes decisions concerning which of the following? I. C. 2006. E. E. ensures that dividends are paid to all stockholders on an annual basis. inventory A. I. B. decreased.Chapter 01 . accounts payable II.Introduction to Corporate Finance 21. D. remained about the same. II and IV only D. and IV only 24. 22. ensures that long-term debt is acquired at the lowest possible cost. ensures that sufficient equipment is available to produce the amount of product desired on a daily basis. B. is concerned with the upper portion of the balance sheet. and III only E. 1967. long-term debt III. I and II only B. D. II. C. increased. III. It is impossible to tell since Sarbanes-Oxley compliance does not involve direct cost to the firm. The Sarbanes Oxley Act was enacted in: A. but over time has decreased. 23. Since the implementation of Sarbanes-Oxley. been erratic. D. 2002. balances the amount of company debt to the amount of available equity.

C. has more management responsibility than a limited partner. The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts. 26. E. Which one of the following best describes the primary advantage of being a limited partner rather than a general partner? A. A sole proprietorship is often structured as a limited liability company. A sole proprietorship is the least common form of business ownership. The owners of a sole proprietorship share profits as established by the partnership agreement. D. D. A general partner: A. Which one of the following statements concerning a sole proprietorship is correct? A. has less legal liability than a limited partner. The legal costs to form a sole proprietorship are quite substantial. B. The owner can generally raise large sums of capital quite easily. The ownership of the firm is easy to transfer to another individual. is the term applied only to corporations which invest in partnerships. The life of the firm is limited to the life span of the owner. entitlement to a larger portion of the partnership's income B. greater management responsibility E. B.Introduction to Corporate Finance 25. faces double taxation whereas a limited partner does not. E. C. cannot lose more than the amount of his/her equity investment. C. liability for firm debts limited to the capital invested 28. Which one of the following statements concerning a sole proprietorship is correct? A. The profits of a sole proprietorship are taxed twice. B. ability to manage the day-to-day affairs of the business C.Chapter 01 . E. 27. D. 1-7 . The company must pay separate taxes from those paid by the owner. no potential financial loss D.

II. 1-8 . Which of the following are advantages of the corporate form of business ownership? I. E. The income of a corporation is taxed as personal income of the stockholders. allows for easy transfer of interest from one general partner to another. ability to raise capital IV. and IV only E. III and IV only C. B. I and II only B. 30. I. personal liability for firm debt III. is taxed the same as a corporation. and IV only E. III. E.Chapter 01 . III. C. B. and IV only 32. has less of an ability to raise capital than a proprietorship. and III only D. Which one of the following statements is correct concerning corporations? A. II and III only D. The stockholders are usually the managers of a corporation. unlimited firm life A.Introduction to Corporate Finance 29. II. I. lack of ability to transfer partnership interest A. greater ability to raise capital than a sole proprietorship IV. agreement defines whether the business income will be taxed like a partnership or a corporation. double taxation III. The ability of a corporation to raise capital is quite limited. II. limited life of the firm II. C. III and IV only C. A partnership: A. terminates at the death of any general partner. and IV only 31. D. I and II only B. I. The majority of firms are corporations. limited liability for firm debt II. The largest firms are usually corporations. I. D. III. Which of the following are disadvantages of a partnership? I.

set forth the procedure by which the stockholders elect the senior managers of the firm. 34. establish the name of the corporation. The articles of incorporation: A. mandate the procedure for electing corporate directors. B. set forth the number of shares of stock that can be issued. B. 36. being taxed like a corporation with liability like a partnership. having liability exposure similar to that of a sole proprietor. The bylaws: A.Chapter 01 . C. Partnerships are the most complicated type of business to form. All types of business formations have limited lives. Which one of the following statements is correct? A. B. Both sole proprietorships and partnerships are taxed in a similar fashion.Introduction to Corporate Finance 33. B. Both partnerships and corporations incur double taxation. having liability exposure similar to that of a general partner. The owners of a limited liability company prefer: A. E. C. D. C. E. 1-9 . 35. D. C. set forth the rules by which the corporation regulates its existence. D. are amended annually by the company stockholders. being taxed personally on all business income. can set forth the conditions under which the firm can avoid double taxation. E. being taxed like a corporation. E. are rules which apply only to limited liability companies. D. Both partnerships and corporations have limited liability for general partners and shareholders. can be used to remove company management. set forth the purpose of the firm.

C. the managers often receive shares of stock as part of their compensation. sole proprietorship B. Financial managers should strive to maximize the current value per share of the existing stock because: A. general partnership C. market value of the existing owners' equity. D. financial distress of the firm. doing so increases the salaries of all the employees. marketability of the managers. size of the firm. Which type of business organization has all the respective rights and privileges of a legal person? A. corporation E. the current stockholders are the owners of the corporation. 1-10 . E. B. E. limited liability company 39. doing so means the firm is growing in size faster than its competitors. general partnership E. C. corporation D. growth rate of the firm. sole proprietorship B.Chapter 01 . B. The decisions made by financial managers should all be ones which increase the: A. Which one of the following business types is best suited to raising large amounts of capital? A. D. doing so guarantees the company will grow in size at the maximum possible rate.Introduction to Corporate Finance 37. limited partnership 38. 40. limited liability company C. limited partnership D.

I. the board solicits renewal of current members. refusing to borrow money when doing so will create losses for the firm B. general partnership C. B. agreeing to expand the company at the expense of stockholders' value D. refusing to lower selling prices if doing so will reduce the net profits C. C. limited liability company 44. limited partnership D. stock option plans III. D. and IV 43.Introduction to Corporate Finance 41. sole proprietorship B.Chapter 01 . Which one of the following actions by a financial manager creates an agency problem? A. E. increasing current costs in order to increase the market value of the stockholders' equity 42. I and II only B. corporation E. threat of conversion to a partnership A. I. III. Which of the following help convince managers to work in the best interest of the stockholders? I. the firm is declared insolvent. A proxy fight occurs when: A. II. I and III only E. II and III only D. threat of a proxy fight IV. compensation based on the value of the stock II. the firm files for bankruptcy. a competitor offers to sell their ownership in the firm. agreeing to pay bonuses based on the book value of the company stock E. II and III only C. 1-11 . a group solicits proxies to replace the board of directors. Which form of business structure faces the greatest agency problems? A.

Sole proprietorships are predominantly started because: A. Annual reports must list deficiencies in internal controls IV. the proprietorship life is limited to the business owner's life. Officers of the corporation must review and sign annual reports. common stockholder 46. they are easily and cheaply setup. discouraged. E. all business taxes are paid as individual tax. II only C. illegal. II and III only E. B. but legal. long-term creditor D.Chapter 01 . 48. III. B. None of the above. C.Introduction to Corporate Finance 45. I and III only D. legal. list only the securities of the largest firms. E. A. II and IV only 47. employee B. D. Which one of the following parties is considered a stakeholder of a firm? A. impossible to have in our efficient market. Which of the following are key requirements of the Sarbanes-Oxley Act? I. 1-12 . Annual reports must be filed with the SEC within 30 days of year end. D. All of the above. I only B. II. short-term creditor C. preferred stockholder E. C. Officers of the corporation must now own more than 5% of the firm's stock. Insider trading is: A.

E. compensation contracts that tie compensation to corporate success. D.Introduction to Corporate Finance 49. issuance of new securities. C. insider trading.Chapter 01 . C. The Securities Exchange Act of 1934 focuses on: A. Federal Deposit Insurance Corporation (FDIC) insurance. 50. all stock transactions. C. B. the monetary system. The basic regulatory framework in the United States was provided by: A. C. B. None of the above. In a limited partnership: A. E. shareholder election of a board of directors who select management. only a limitation on what the partner can earn. D. D. 52. there is no limitation on liability. All of the above. E. 51. the Securities Exchange Act of 1934. each limited partner's liability is limited to his annual salary. each limited partner's liability is limited to the amount he put into the partnership. Both A and B. D. the threat of a takeover by another firm. Federal Deposit Insurance Corporation (FDIC) insurance. insider trading. E. A and B. issuance of new securities. each limited partner's liability is limited to his net worth. Managers are encouraged to act in shareholders' interests by: A. The Securities Act of 1933 focuses on: A. E. sales of existing securities. B. all stock transactions. All of the above. B. D. B. 53. the Securities Act of 1933. C. 1-13 . sales of existing securities.

What advantages does the corporate form of organization have over sole proprietorships or partnerships? 57. B. E. generally the same since accounting profits reflect when the cash flows are received.Chapter 01 . why is it so common for small businesses to initially be formed as sole proprietorships? 1-14 . generally not the same because cash inflows occur before revenue recognition. If the corporate form of business organization has so many advantages over the sole proprietorship. generally the same since they reflect current laws and accounting standards. Both c and d. Accounting profits and cash flows are: A. Essay Questions 55. C. List and briefly describe the three basic questions addressed by a financial manager. generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows.Introduction to Corporate Finance 54. 56. D.

Chapter 01 .Introduction to Corporate Finance 58. If so. IBM will receive no direct cash flows as a consequence of your sale. what impact would this have on the functioning of primary and secondary markets for common stock? 61. should IBM's management care about the price you get for your shares? 1-15 . then. Since you will sell it in the secondary market. Suppose you own 100 shares of IBM stock which you intend to sell today. What should be the goal of the financial manager of a corporation? Why? 59. Why. Do you think agency problems arise in sole proprietorships and/or partnerships? 60. Assume for a moment that the stockholders in a corporation have unlimited liability for corporate debts.

Why might a corporation wish to list its shares on a national exchange such as the NYSE as opposed to a regional exchange or NASDAQ? 1-16 . the ownership of the stock certificates can be transferred directly to the lender. Why might a lender want such an assignment? What advantage of the corporate form of organization comes into play here? 63.Introduction to Corporate Finance 62. One thing lenders sometimes require when loaning money to a small corporation is an assignment of the common stock as collateral on the loan.Chapter 01 . if the business fails to repay its loan. Then.

director. financial planning. E. and information system functions is the: A. Difficulty level: Easy Topic: CONTROLLER Type: DEFINITIONS 2. C. C. treasurer. B. and capital expenditures is the: A.Chapter 01 . D. E. The person generally directly responsible for overseeing the cash and credit functions. cost accounting. D. controller. Difficulty level: Easy Topic: TREASURER Type: DEFINITIONS 1-17 . chairman of the board. chairman of the board. chief executive officer. controller. chief operations officer. The person generally directly responsible for overseeing the tax management. director. financial accounting. treasurer.Introduction to Corporate Finance Chapter 01 Introduction to Corporate Finance Answer Key Multiple Choice Questions 1. B.

Chapter 01 . working capital management. capital budgeting. The mixture of debt and equity used by a firm to finance its operations is called: A. Difficulty level: Easy Topic: CAPITAL STRUCTURE Type: DEFINITIONS 5. D. C. debt management. D. C. capital structure. Difficulty level: Easy Topic: WORKING CAPITAL MANAGEMENT Type: DEFINITIONS 1-18 . E. financial depreciation. The process of planning and managing a firm's long-term investments is called: A. capital structure. capital budgeting. working capital management. B.Introduction to Corporate Finance 3. capital structure. equity management. B. C. working capital management. cost analysis. capital budgeting. Difficulty level: Easy Topic: CAPITAL BUDGETING Type: DEFINITIONS 4. agency cost analysis. D. B. financial depreciation. E. E. The management of a firm's short-term assets and liabilities is called: A.

C. group charter. limited liability company. sole proprietorship. indenture contract. Difficulty level: Easy Topic: SOLE PROPRIETORSHIP Type: DEFINITIONS 7. indemnity clause. D. C. E. Difficulty level: Easy Topic: PARTNERSHIP AGREEMENT Type: DEFINITIONS 1-19 . limited liability company. corporation. corporation. sole proprietorship. E. B.Chapter 01 . statement of purpose. C. B. The division of profits and losses among the members of a partnership is formalized in the: A. D. D. Difficulty level: Easy Topic: GENERAL PARTNERSHIP Type: DEFINITIONS 8. A business owned by a single individual is called a: A. partnership agreement. limited partnership.Introduction to Corporate Finance 6. general partnership. limited partnership. A business formed by two or more individuals who each have unlimited liability for business debts is called a: A. B. general partnership. E.

Introduction to Corporate Finance 9. indenture provisions. C. Difficulty level: Easy Topic: ARTICLES OF INCORPORATION Type: DEFINITIONS 11. bylaws. charter agreements. Difficulty level: Easy Topic: BYLAWS Type: DEFINITIONS 1-20 . The rules by which corporations govern themselves are called: A. indenture contract. corporate bylaws. B. C. general partnership. unlimited liability company. debt charter. limited partnership. C. sole proprietorship. D. Difficulty level: Easy Topic: CORPORATION Type: DEFINITIONS 10. indemnity provisions. state tax agreement. A business created as a distinct legal entity composed of one or more individuals or entities is called a: A. B. D. E. D. E. articles of incorporation. articles of incorporation. corporation. E.Chapter 01 . B. The corporate document that sets forth the business purpose of a firm is the: A.

stockholders' liability. Difficulty level: Easy Topic: FINANCIAL MANAGEMENT GOAL Type: DEFINITIONS 14. B. Difficulty level: Easy Topic: AGENCY PROBLEM Type: DEFINITIONS 1-21 . the agency problem. Difficulty level: Easy Topic: LIMITED LIABILITY COMPANY Type: DEFINITIONS 13.Chapter 01 . E. limited liability company. The primary goal of financial management is to: A. corporate activism. E. maintain steady growth in both sales and net earnings. C. A business entity operated and taxed like a partnership. limited proprietorship. D. E. maximize current dividends per share of the existing stock. D. B. but with limited liability for the owners. C. D. sole proprietorship. legal liability. corporation. maximize the current value per share of the existing stock. A conflict of interest between the stockholders and management of a firm is called: A. B. corporate breakdown. C. is called a: A. avoid financial distress. minimize operational costs and maximize firm efficiency. general partnership.Introduction to Corporate Finance 12.

any person or entity that owns shares of stock of a corporation. protect financial managers from investors. the total interest paid to creditors over the lifetime of the firm. the costs that result from default and bankruptcy of a firm.Introduction to Corporate Finance 15. B. C. any person or entity that has voting rights based on stock ownership of a corporation.Chapter 01 . a creditor to whom the firm currently owes money and who consequently has a claim on the cash flows of the firm. E. Difficulty level: Easy Topic: SARBANES OXLEY Type: CONCEPTS 1-22 . D. B. decrease audit costs for U. corporate income subject to double taxation. A stakeholder is: A. D. The Sarbanes Oxley Act of 2002 is intended to: A. firms. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm. Difficulty level: Easy Topic: STAKEHOLDERS Type: DEFINITIONS 17. the total dividends paid to stockholders over the lifetime of a firm.S. a person who initially started a firm and currently has management control over the cash flows of the firm due to his/her current ownership of company stock. B. the costs of any conflicts of interest between stockholders and management. protect investors from corporate abuses. not have any effect on foreign companies. D. reduce corporate revenues. E. C. Difficulty level: Easy Topic: AGENCY COSTS Type: DEFINITIONS 16. E. C. Agency costs refer to: A.

Introduction to Corporate Finance 18. E. chief financial officer. The vice president of finance reports to the chairman of the board. Which one of the following statements is correct concerning the organizational structure of a corporation? A. deciding when to repay a long-term debt D.Chapter 01 . The treasurer reports to the chief executive officer. determining how much debt should be borrowed from a particular lender B. B. The chief executive officer reports to the board of directors. Difficulty level: Medium Topic: ORGANIZATIONAL STRUCTURE Type: CONCEPTS 20. The treasurer and the controller of a corporation generally report to the: A. chairman of the board. D. determining how much inventory to keep on hand E. C. chief executive officer. E. D. B. The controller reports to the president. board of directors. deciding whether or not to open a new store C. determining how much money should be kept in the checking account Difficulty level: Medium Topic: CAPITAL BUDGETING Type: CONCEPTS 1-23 . Which one of the following is a capital budgeting decision? A. C. The chief operations officer reports to the vice president of production. president. Difficulty level: Easy Topic: ORGANIZATIONAL STRUCTURE Type: CONCEPTS 19.

1998. the cost of going public in the United States has: A. C. C. accounts payable II. It is impossible to tell since Sarbanes-Oxley compliance does not involve direct cost to the firm. accounts receivable IV.Chapter 01 . III. I and III only C. B. and IV only Difficulty level: Medium Topic: WORKING CAPITAL MANAGEMENT Type: CONCEPTS 1-24 . Working capital management includes decisions concerning which of the following? I. Difficulty level: Medium Topic: SARBANES OXLEY Type: CONCEPTS 22. but over time has decreased. The Sarbanes Oxley Act was enacted in: A. inventory A. been erratic. I. 1967. II and IV only D. D. Since the implementation of Sarbanes-Oxley. increased. decreased. Difficulty level: Medium Topic: SARBANES-OXLEY Type: CONCEPTS 23. long-term debt III. E. I and II only B. E. remained about the same. B. 2002. D.Introduction to Corporate Finance 21. II. 2006. I. 1952. and III only E.

is concerned with the upper portion of the balance sheet. A sole proprietorship is often structured as a limited liability company. E. The profits of a sole proprietorship are taxed twice. D. The owner can generally raise large sums of capital quite easily. Working capital management: A. Which one of the following statements concerning a sole proprietorship is correct? A. D. The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts. C. Difficulty level: Easy Topic: WORKING CAPITAL MANAGEMENT Type: CONCEPTS 25. Which one of the following statements concerning a sole proprietorship is correct? A. ensures that dividends are paid to all stockholders on an annual basis. The ownership of the firm is easy to transfer to another individual. E. The company must pay separate taxes from those paid by the owner.Chapter 01 . B. A sole proprietorship is the least common form of business ownership.Introduction to Corporate Finance 24. Difficulty level: Easy Topic: SOLE PROPRIETORSHIP Type: CONCEPTS 1-25 . The owners of a sole proprietorship share profits as established by the partnership agreement. ensures that sufficient equipment is available to produce the amount of product desired on a daily basis. The legal costs to form a sole proprietorship are quite substantial. The life of the firm is limited to the life span of the owner. C. D. Difficulty level: Easy Topic: SOLE PROPRIETORSHIP Type: CONCEPTS 26. B. E. C. balances the amount of company debt to the amount of available equity. ensures that long-term debt is acquired at the lowest possible cost. B.

E. is taxed the same as a corporation. has less of an ability to raise capital than a proprietorship. E. Difficulty level: Easy Topic: PARTNERSHIP Type: CONCEPTS 1-26 . C. terminates at the death of any general partner. greater management responsibility E.Introduction to Corporate Finance 27. faces double taxation whereas a limited partner does not. allows for easy transfer of interest from one general partner to another. A general partner: A. entitlement to a larger portion of the partnership's income B. D. B. A partnership: A. B. C. D. Which one of the following best describes the primary advantage of being a limited partner rather than a general partner? A. has more management responsibility than a limited partner. no potential financial loss D. is the term applied only to corporations which invest in partnerships. Difficulty level: Easy Topic: PARTNERSHIP Type: CONCEPTS 29. agreement defines whether the business income will be taxed like a partnership or a corporation.Chapter 01 . liability for firm debts limited to the capital invested Difficulty level: Easy Topic: PARTNERSHIP Type: CONCEPTS 28. ability to manage the day-to-day affairs of the business C. cannot lose more than the amount of his/her equity investment. has less legal liability than a limited partner.

and IV only Difficulty level: Medium Topic: CORPORATION Type: CONCEPTS 32. and IV only E. personal liability for firm debt III. II and III only D. II. C. limited life of the firm II. II. III. III. I and II only B. I. Which of the following are disadvantages of a partnership? I. I. I. The stockholders are usually the managers of a corporation. ability to raise capital IV. III and IV only C. II. The largest firms are usually corporations. Which one of the following statements is correct concerning corporations? A. D. III and IV only C. I and II only B. I. unlimited firm life A. and III only D. Which of the following are advantages of the corporate form of business ownership? I. Difficulty level: Easy Topic: CORPORATION Type: CONCEPTS 1-27 . greater ability to raise capital than a sole proprietorship IV. and IV only Difficulty level: Medium Topic: PARTNERSHIP Type: CONCEPTS 31. The ability of a corporation to raise capital is quite limited. and IV only E. double taxation III. B. limited liability for firm debt II.Introduction to Corporate Finance 30. lack of ability to transfer partnership interest A.Chapter 01 . E. III. The majority of firms are corporations. The income of a corporation is taxed as personal income of the stockholders.

E. Both sole proprietorships and partnerships are taxed in a similar fashion. C. The bylaws: A. B. B. Which one of the following statements is correct? A. Partnerships are the most complicated type of business to form. All types of business formations have limited lives. establish the name of the corporation. Difficulty level: Medium Topic: BUSINESS TYPES Type: CONCEPTS 34. set forth the rules by which the corporation regulates its existence. set forth the procedure by which the stockholders elect the senior managers of the firm. C. D. Difficulty level: Medium Topic: BYLAWS Type: CONCEPTS 1-28 . set forth the number of shares of stock that can be issued. can set forth the conditions under which the firm can avoid double taxation.Introduction to Corporate Finance 33. E. B. are rules which apply only to limited liability companies. Both partnerships and corporations have limited liability for general partners and shareholders.Chapter 01 . are amended annually by the company stockholders. mandate the procedure for electing corporate directors. C. D. Difficulty level: Medium Topic: ARTICLES OF INCORPORATION Type: CONCEPTS 35. Both partnerships and corporations incur double taxation. set forth the purpose of the firm. The articles of incorporation: A. D. E. can be used to remove company management.

Difficulty level: Medium Topic: LIMITED LIABILITY COMPANY Type: CONCEPTS 37.Chapter 01 . limited liability company C. E. general partnership C. general partnership E. limited liability company Difficulty level: Easy Topic: CORPORATION Type: CONCEPTS 1-29 . The owners of a limited liability company prefer: A. sole proprietorship B. Which type of business organization has all the respective rights and privileges of a legal person? A. sole proprietorship B.Introduction to Corporate Finance 36. Which one of the following business types is best suited to raising large amounts of capital? A. having liability exposure similar to that of a sole proprietor. limited partnership D. being taxed like a corporation. corporation D. C. being taxed like a corporation with liability like a partnership. B. limited partnership Difficulty level: Easy Topic: CORPORATION Type: CONCEPTS 38. corporation E. being taxed personally on all business income. D. having liability exposure similar to that of a general partner.

Difficulty level: Easy Topic: GOAL OF FINANCIAL MANAGEMENT Type: CONCEPTS 41. growth rate of the firm. B. increasing current costs in order to increase the market value of the stockholders' equity Difficulty level: Medium Topic: AGENCY PROBLEM Type: CONCEPTS 1-30 . agreeing to expand the company at the expense of stockholders' value D. E. market value of the existing owners' equity. doing so means the firm is growing in size faster than its competitors. D. the current stockholders are the owners of the corporation. doing so guarantees the company will grow in size at the maximum possible rate. B. Difficulty level: Easy Topic: GOAL OF FINANC IAL MANAGEMENT Type: CONCEPTS 40. doing so increases the salaries of all the employees. The decisions made by financial managers should all be ones which increase the: A. C. refusing to lower selling prices if doing so will reduce the net profits C. agreeing to pay bonuses based on the book value of the company stock E. C. Which one of the following actions by a financial manager creates an agency problem? A. the managers often receive shares of stock as part of their compensation. financial distress of the firm. D.Chapter 01 . refusing to borrow money when doing so will create losses for the firm B.Introduction to Corporate Finance 39. size of the firm. E. marketability of the managers. Financial managers should strive to maximize the current value per share of the existing stock because: A.

A proxy fight occurs when: A. a group solicits proxies to replace the board of directors. general partnership C. I and III only E. corporation E. a competitor offers to sell their ownership in the firm. II and III only C. limited partnership D. III.Introduction to Corporate Finance 42. sole proprietorship B. threat of a proxy fight IV. threat of conversion to a partnership A. and IV Difficulty level: Medium Topic: AGENCY PROBLEM Type: CONCEPTS 43. Difficulty level: Easy Topic: PROXY FIGHT Type: CONCEPTS 1-31 . limited liability company Difficulty level: Medium Topic: AGENCY PROBLEM Type: CONCEPTS 44.Chapter 01 . C. B. I. II and III only D. the firm is declared insolvent. Which of the following help convince managers to work in the best interest of the stockholders? I. stock option plans III. compensation based on the value of the stock II. D. II. the board solicits renewal of current members. Which form of business structure faces the greatest agency problems? A. the firm files for bankruptcy. I. I and II only B. E.

C. common stockholder Difficulty level: Easy Topic: STAKEHOLDERS Type: CONCEPTS 46. D. impossible to have in our efficient market. illegal. long-term creditor D. Officers of the corporation must review and sign annual reports. preferred stockholder E. II and III only E. II only C. E. III.Introduction to Corporate Finance 45. Annual reports must be filed with the SEC within 30 days of year end. I and III only D. discouraged. short-term creditor C. A. Officers of the corporation must now own more than 5% of the firm's stock. Difficulty level: Medium Topic: REGULATION Type: CONCEPTS 1-32 . legal. II and IV only Difficulty level: Medium Topic: SARBANES-OXLEY Type: CONCEPTS 47. B. I only B. Which one of the following parties is considered a stakeholder of a firm? A. list only the securities of the largest firms. Annual reports must list deficiencies in internal controls IV. II. but legal. employee B.Chapter 01 . Which of the following are key requirements of the Sarbanes-Oxley Act? I. Insider trading is: A.

Difficulty level: Medium Topic: GOVERNANCE Type: CONCEPTS 50. C. All of the above. Sole proprietorships are predominantly started because: A. B. E. D.Introduction to Corporate Finance 48. C. Managers are encouraged to act in shareholders' interests by: A. the proprietorship life is limited to the business owner's life.Chapter 01 . insider trading. None of the above. compensation contracts that tie compensation to corporate success. sales of existing securities. the threat of a takeover by another firm. they are easily and cheaply setup. E. Difficulty level: Easy Topic: SOLE PROPRIETORSHIPS Type: CONCEPTS 49. The Securities Exchange Act of 1934 focuses on: A. issuance of new securities. shareholder election of a board of directors who select management. D. D. all business taxes are paid as individual tax. B. Difficulty level: Medium Topic: REGULATION Type: CONCEPTS 1-33 . Both A and B. all stock transactions. C. E. Federal Deposit Insurance Corporation (FDIC) insurance. B. All of the above.

the monetary system. B. D.Introduction to Corporate Finance 51. Federal Deposit Insurance Corporation (FDIC) insurance. insider trading. The Securities Act of 1933 focuses on: A. C. D. Difficulty level: Medium Topic: REGULATION Type: CONCEPTS 52. there is no limitation on liability. each limited partner's liability is limited to his annual salary. E. all stock transactions. the Securities Act of 1933. A and B. B. All of the above. In a limited partnership: A. Difficulty level: Easy Topic: REGULATION Type: CONCEPTS 53. each limited partner's liability is limited to the amount he put into the partnership. Difficulty level: Easy Topic: LIMITED PARTNERSHIP Type: CONCEPTS 1-34 . the Securities Exchange Act of 1934. sales of existing securities. The basic regulatory framework in the United States was provided by: A. B. C. E. None of the above. each limited partner's liability is limited to his net worth. D. E. only a limitation on what the partner can earn.Chapter 01 . C. issuance of new securities.

generally not the same because cash inflows occur before revenue recognition. Topic: FINANCIAL MANAGEMENT Type: ESSAYS 56. Working capital management: This refers to a firm's short-term assets and short-term liabilities. generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows. Difficulty level: Medium Topic: ACCOUNTING PROFITS Type: CONCEPTS Essay Questions 55. B. the ability to raise more capital. The three areas are: 1.Introduction to Corporate Finance 54. the owners' limited liability for business debts. List and briefly describe the three basic questions addressed by a financial manager. 3. D.Chapter 01 . What advantages does the corporate form of organization have over sole proprietorships or partnerships? The advantages of the corporate form of organization over sole proprietorships and partnerships are the ease of transferring ownership. Capital budgeting: The financial manager tries to identify investment opportunities that are worth more to the firm than they cost to acquire. E. Topic: BUSINESS ORGANIZATIONS Type: ESSAYS 1-35 . Accounting profits and cash flows are: A. Both c and d. C. and the opportunity of an unlimited life of the business. generally the same since they reflect current laws and accounting standards. Capital structure: This refers to the specific mixture of long-term debt and equity a firm uses to finance its operations. generally the same since accounting profits reflect when the cash flows are received. 2. Managing the firm's working capital is a day-to-day activity that ensures the firm has sufficient resources to continue its operations and avoid costly interruptions.

If the corporate form of business organization has so many advantages over the sole proprietorship. Topic: BUSINESS ORGANIZATIONS Type: ESSAYS 58. why is it so common for small businesses to initially be formed as sole proprietorships? A significant advantage of the sole proprietorship is that it is cheap and easy to form.Introduction to Corporate Finance 57. such separation is not likely to exist to the degree it does in a corporation. Also. such as maximizing earnings. Other goals. most of which is tied up in the business anyway. Topic: FINANCIAL MANAGEMENT GOAL Type: ESSAYS 59. the heart and soul of the business is the person who founded it. However. so the life of the business may effectively be limited to the life of the founder during its early years. What should be the goal of the financial manager of a corporation? Why? The correct goal is to maximize the current value of the outstanding stock. as employees are hired to represent the firm. there is once again a separation of ownership and management. focus too narrowly on accounting income and ignore the importance of market values in managerial finance. it may not be desirable to spend part of that capital forming a corporation. If the sole proprietor has limited capital to start with. for a typical small business. limited liability for business debts may not be a significant advantage if the proprietor has limited capital. Do you think agency problems arise in sole proprietorships and/or partnerships? Agency conflicts typically arise when there is a separation of ownership and management of a business. This goal focuses on enhancing the returns to stockholders who are the owners of the firm. there is still potential for agency conflicts. Finally. In a sole proprietorship and a small partnership.Chapter 01 . For example. Topic: AGENCY THEORY Type: ESSAYS 1-36 .

Alternatively. what impact would this have on the functioning of primary and secondary markets for common stock? With unlimited liability. you would be very careful which stocks you invest in. this indirectly reflects on the reputation of the managers. Since you will sell it in the secondary market. as well as potentially impacting their standing in the employment market. market opinion about the quality of firm management. untested business to acquire enough capital to grow. you would not invest in companies you expected to be unable to satisfy their financial obligations. Suppose you own 100 shares of IBM stock which you intend to sell today. Topic: FINANCIAL MANAGEMENT GOALS Type: ESSAYS 1-37 . among other things. Why. If the shareholder's sale price is low. Assume for a moment that the stockholders in a corporation have unlimited liability for corporate debts. this indicates that the market believes current management is increasing firm value and therefore doing a good job. then. should IBM's management care about the price you get for your shares? The current market price of IBM stock reflects. If so. Both the primary and secondary markets for common stock would be severely hampered if this rule existed.Chapter 01 . It would be very difficult for a young. if the sale price is high. In particular. IBM will receive no direct cash flows as a consequence of your sale.Introduction to Corporate Finance 60. Topic: LIMITED LIABILITY Type: ESSAYS 61.

One thing lenders sometimes require when loaning money to a small corporation is an assignment of the common stock as collateral on the loan. a lender may wish to liquidate the business. such as Microsoft. Often it is time consuming and difficult to take title of all of the business assets individually. However. Topic: EXCHANGE LISTINGS Type: ESSAYS 1-38 . Topic: TRANSFER OF OWNERSHIP IN A CORPORATION Type: ESSAYS 63. to move to the NYSE. the ownership of the stock certificates can be transferred directly to the lender. This illustrates once again the ease of transfer of ownership of a corporation. There is still a perceived prestige factor in moving from NASDAQ to the NYSE since the NYSE has more restrictive membership requirements. the lender is able to sell the business simply by reselling the stock in the business.Chapter 01 . Plus. Why might a corporation wish to list its shares on a national exchange such as the NYSE as opposed to a regional exchange or NASDAQ? Being listed on a regional exchange effectively limits the capital access for the business. Then. there is a prestige factor in being listed on one of the national exchanges. if the business fails to repay its loan. By taking control of the stock. the lure of greater prestige certainly hasn't prompted some major corporations. Why might a lender want such an assignment? What advantage of the corporate form of organization comes into play here? In the event of a loan default.Introduction to Corporate Finance 62.