CHAPTER 1

Introduction to Corporate Finance I. DEFINITIONS

CONTROLLER c 1. The person generally directly responsible for overseeing the tax management, cost accounting, financial accounting, and data processing functions is the: a. treasurer. b. director. c. controller. d. chairman of the board. e. chief executive officer. TREASURER a 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. CAPITAL BUDGETING d 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. CAPITAL STRUCTURE e 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. WORKING CAPITAL MANAGEMENT a 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.

corporation. PARTNERSHIP AGREEMENT d 8. corporate bylaws. limited partnership. indemnity clause. e. limited liability company. sole proprietorship. e. b. A business formed by two or more individuals who each have unlimited liability for business debts is called a: a. unlimited liability company. state tax agreement. e. d. corporation. general partnership. d. c. e. b. limited liability company. indenture contract. d. c. CORPORATION a 9. b. d. The division of profits and losses among the members of a partnership is formalized in the: a. partnership agreement. ARTICLES OF INCORPORATION e 10. c. The corporate document that sets forth the business purpose of a firm is the: a. A business created as a distinct legal entity composed of one or more individuals or entities is called a: a. c. sole proprietorship. indenture contract. articles of incorporation. d. b. . general partnership. A business owned by a single individual is called a: a. group charter. corporate charter. c. sole proprietorship. e. b. limited partnership. GENERAL PARTNERSHIP c 7. statement of purpose. corporation.CHAPTER 1 SOLE PROPRIETORSHIP b 6. limited partnership. general partnership.

articles of incorporation. the costs that result from default and bankruptcy of a firm. d. maintain steady growth in both sales and net earnings. e. A business entity operated and taxed like a partnership. the costs of any conflicts of interest between stockholders and management. d. legal liability. Agency costs refer to: a. indenture provisions. limited proprietorship. charter agreements. avoid financial distress. maximize the current value per share of the existing stock. c. e. the total dividends paid to stockholders over the lifetime of a firm. b. b. d. sole proprietorship. AGENCY PROBLEM c 14. e. LIMITED LIABILITY COMPANY a 12. the agency problem. d. A conflict of interest between the stockholders and management of a firm is called: a. e. b. corporate income subject to double taxation. c. minimize operational costs and maximize firm efficiency. but with limited liability for the owners. c. e. corporate breakdown. . maximize current dividends per share of the existing stock. d. the total interest paid to creditors over the lifetime of the firm. AGENCY COSTS d 15. The primary goal of financial management is to: a. indemnity provisions. limited liability company. bylaws. c. stockholders’ liability. FINANCIAL MANAGEMENT GOAL b 13.CHAPTER 1 BYLAWS d 11. b. is called a: a. general partnership. corporation. c. b. The rules by which corporations govern themselves are called: a. corporate activism.

auction market.CHAPTER 1 STAKEHOLDERS e 16. e. c. liquidation market. DEALER MARKET c 19. secondary market. AUCTION MARKET d 20. NASDAQ market. OTC market. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm. secondary market. any person or entity that owns shares of stock of a corporation. 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. . c. A market where dealers buy and sell securities for themselves. dealer market. The original sale of securities by governments and corporations to the general public occurs in the: a. dealer market. liquidation market. secondary market. at their own risk. OTC market. c. d. any person or entity that has voting rights based on stock ownership of a corporation. primary market. e. b. SECONDARY MARKET c 18. proprietary market. e. private placement market. A market where trading takes place directly between buyers and sellers is called a(n): a. d. b. e. A stakeholder is: a. a creditor to whom the firm currently owes money and who consequently has a claim on the cash flows of the firm. e. primary market. b. primary market. primary market. c. c. is called a(n): a. liquidation market. d. d. When one shareholder sells stock directly to another the transaction is said to occur in the: a. dealer market. auction market. b. b. d. PRIMARY MARKET a 17.

c. Which one of the following is a capital budgeting decision? a. I and IV only b. only the timing of the project cash flows. How long should customers be given to pay for their credit purchases? III. and IV ORGANIZATIONAL STRUCTURE e 22. Should the firm build a new factory? a. III. only the risk of the project cash flows. the size. and IV only e. chairman of the board. determining how much inventory to keep on hand e. The treasurer reports to the chief executive officer. president. When considering a capital budgeting project the financial manager should consider: a. II and III only c. I. d. II. vice president of finance. c. b. d. determining how much debt should be borrowed from a particular lender b. How long will it take to produce a product? II. e. d. Which of the following questions are addressed by financial managers? I. I. deciding whether or not to open a new store c.CHAPTER 1 II. e. Which one of the following statements is correct concerning the organizational structure of a corporation? a. b. deciding when to repay a long-term debt d. ORGANIZATIONAL STRUCTURE b 23. CONCEPTS FINANCIAL MANAGEMENT d 21. The chief operations officer reports to the vice president of production. II. The vice president of finance reports to the chairman of the board. and risk of the project cash flows. and III only d. board of directors. III. only the size and timing of the project cash flows. determining how much money should be kept in the checking account CAPITAL BUDGETING e 25. e. only the size of the project. II. The chief executive officer reports to the board of directors. chief executive officer. CAPITAL BUDGETING b 24. b. The treasurer and the controller of a corporation generally report to the: a. c. . The controller reports to the president. Should the firm borrow more money? IV. timing.

I. II. II and III only c. c. net working capital. accounts payable II.CHAPTER 1 CAPITAL STRUCTURE a 26. III and IV only d. and IV only WORKING CAPITAL MANAGEMENT e 29. WORKING CAPITAL MANAGEMENT e 28. ensures that long-term debt is acquired at the lowest possible cost. working capital management. I. II and IV only d. the capital structure decision. c. Working capital management includes decisions concerning which of the following? I. and IV only CAPITAL STRUCTURE e 27. capital budgeting. Working capital management: a. long-term debt III. b. III. III. a controller’s duties. IV. d. ensures that dividends are paid to all stockholders on an annual basis. the net working capital decision. amount of long-term debt to assume. . is concerned with having sufficient funds to operate the business on a daily basis. d. II. II. I and II only b. I. I and III only c. and III only e. Capital structure decisions include consideration of the: I. balances the amount of company debt to the amount of available equity. ensures that sufficient equipment is available to produce the amount of product desired on a daily basis. I and II only b. cost of acquiring funds. accounts receivable IV. current assets and liabilities. a. The decision of which lender to use and which type of long-term loan is best for a project is part of: a. inventory a. e. III. e. and IV only e. I. b.

b. is taxed the same as a corporation. liability for firm debts limited to the capital invested PARTNERSHIP b 33. allows for easy transfer of interest from one general partner to another. has less legal liability than a limited partner. A sole proprietorship is often structured as a limited liability company. . faces double taxation whereas a limited partner does not. is the term applied only to corporations which invest in partnerships. SOLE PROPRIETORSHIP a 31. PARTNERSHIP c 34. A general partner: a. ability to manage the day-to-day affairs of the business c. c. e. c. A sole proprietorship is the least common form of business ownership. c. has less of an ability to raise capital than a proprietorship. has more management responsibility than a limited partner. d.CHAPTER 1 SOLE PROPRIETORSHIP d 30. The owners of a sole proprietorship share profits as established by the partnership agreement. greater management responsibility e. e. cannot lose more than the amount of his/her equity investment. The profits of a sole proprietorship are taxed twice. c. d. The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts. terminates at the death of any general partner. The life of the firm is limited to the life span of the owner. The ownership of the firm is easy to transfer to another individual. Which one of the following statements concerning a sole proprietorship is correct? a. no potential financial loss d. d. The company must pay separate taxes from those paid by the owner. PARTNERSHIP e 32. Which one of the following statements concerning a sole proprietorship is correct? a. b. e. entitlement to a larger portion of the partnership’s income b. e. b. The owner can generally raise large sums of capital quite easily. agreement defines whether the business income will be taxed like a partnership or a corporation. Which one of the following best describes the primary advantage of being a limited partner rather than a general partner? a. d. A partnership: a. The legal costs to form a sole proprietorship are quite substantial. b.

Which of the following are disadvantages of a partnership? I. ARTICLES OF INCORPORATION c 39. double taxation III. set forth the rules by which the corporation regulates its existence. c. b. set forth the number of shares of stock that can be issued. d. The ability of a corporation to raise capital is quite limited. II. I. and IV only CORPORATION a 37. and IV only e. e. Which one of the following statements is correct concerning corporations? a. I. III and IV only c. I. The income of a corporation is taxed as personal income of the stockholders. ability to raise capital IV. II. limited life of the firm II. Both sole proprietorships and partnerships are taxed in a similar fashion. II. III and IV only c. d. c. e. c. can be used to remove company management. All types of business formations have limited lives. personal liability for firm debt III. b. Which one of the following statements is correct? a. and IV only e. Both partnerships and corporations have bylaws. The majority of firms are corporations. III. III. I.CHAPTER 1 PARTNERSHIP d 35. Which of the following are advantages of the corporate form of business ownership? I. b. Both partnerships and corporations incur double taxation. III. Partnerships are the most complicated type of business to form. and IV only CORPORATION e 36. can set forth the conditions under which the firm can avoid double taxation. . are amended annually by the company stockholders. BUSINESS TYPES b 38. II and III only d. e. unlimited firm life a. The largest firms are usually corporations. limited liability for firm debt II. greater ability to raise capital than a sole proprietorship IV. and III only d. d. The stockholders are usually the managers of a corporation. lack of ability to transfer partnership interest a. I and II only b. I and II only b. The articles of incorporation: a.

sole proprietorship b. set forth the purpose of the firm. having liability exposure similar to that of a sole proprietor. marketability of the managers. Which one of the following business types is best suited to raising large amounts of capital? a. b. being taxed like a corporation. CORPORATION c 42. GOAL OF FINANCIAL MANAGEMENT d 45. establish the name of the corporation. e. LIMITED LIABILITY COMPANY c 41. growth rate of the firm. size of the firm. are rules which apply only to limited liability companies. financial distress of the firm. limited liability company GOAL OF FINANC IAL MANAGEMENT c 44. the current stockholders are the owners of the corporation. limited partnership CORPORATION d 43. corporation e. c. c. having liability exposure similar to that of a general partner. c. AGENCY PROBLEM . b. Financial managers should strive to maximize the current value per share of the existing stock because: a. being taxed like a corporation with liability like a partnership. limited partnership d. e. mandate the procedure for electing corporate directors. Which type of business organization has all the respective rights and privileges of a legal person? a. sole proprietorship b. the managers often receive shares of stock as part of their compensation. e. general partnership e. d. doing so guarantees the company will grow in size at the maximum possible rate. d. corporation d.CHAPTER 1 BYLAWS d 40. being taxed personally on all business income. doing so increases the salaries of all the employees. e. The bylaws: a. set forth the procedure by which the stockholders elect the senior managers of the firm. b. The owners of a limited liability company prefer: a. doing so means the firm is growing in size faster than its competitors. d. b. d. limited liability company c. market value of the existing owners’ equity. c. The decisions made by financial managers should all be ones which increase the: a. general partnership c.

limited liability company AGENCY COST c 49. I and II only b. II.CHAPTER 1 c 46. Which one of the following actions by a financial manager creates an agency problem? refusing to borrow money when doing so will create losses for the firm refusing to lower selling prices if doing so will reduce the net profits agreeing to expand the company at the expense of stockholders’ value agreeing to pay bonuses based on the market value of the company stock increasing current costs in order to increase the market value of the stockholders’ equity AGENCY PROBLEM e 47. compensation based on the value of the stock II. d. limited partnership d. II. forgoing an investment opportunity which would add to the market value of the owner’s equity II. a. paying a dividend to each of the existing shareholders III. I. III. II. sole proprietorship b. II and III only b. threat of a proxy fight a. and IV only e. III. purchasing new equipment which increases the value of each share of stock IV. Which of the following are agency costs? I. e. I. and IV AGENCY PROBLEM d 48. III and IV only c. hiring outside auditors to verify the accuracy of the company financial statements a. I. threat of a company takeover IV. II and IV only e. I. and IV only . I and III only c. Which form of business structure faces the greatest agency problems? a. general partnership c. c. corporation e. Which of the following help convince managers to work in the best interest of the stockholders? I. I and IV only d. stock option plans III. and III only d. b.

II only c. NASDAQ is an auction market. II and IV only STOCK EXCHANGE d 54. Which of the following statements concerning auction markets is (are) correct? I. e. and IV only e. II. short-term creditor c. c. an individual investor selling shares of stock to another individual d. payment of dividends III. Which one of the following parties is considered a stakeholder of a firm? a. I and IV only d. a bank selling shares of a medical firm to an individual e. Some large companies are listed on NASDAQ. preferred stockholder e. II and III only e. and IV only PRIMARY MARKET b 52. III. I and III only d. new loan proceeds IV. III. a dealer buying newly issued shares of stock from a corporation c. long-term creditor d. IV. Which one of the following is a primary market transaction? a. The NYSE has more listed stocks than NASDAQ. All trades involve a dealer in an auction market. An auction market is called an over-the-counter market. . employee b. payment of government taxes a.CHAPTER 1 STAKEHOLDERS a 50. b. Which one of the following statements concerning stock exchanges is correct? a. II. d. The NYSE is an auction market. Most debt securities are traded on the NYSE. a dealer selling shares of stock to an individual investor b. common stockholder CASH FLOWS b 51. I and III only b. II and IV only c. I. The NYSE is a dealer market. issuance of securities II. I only b. Which of the following represent cash outflows from a firm? I. The exchange with the strictest listing requirements is NASDAQ. II. a sole proprietor buying shares of stock from an individual investor AUCTION MARKET b 53. a.

Dealer markets: a. Most smaller firms are listed on NASDAQ rather than on the NYSE. NASDAQ d 57. I. a. b. c. The NYSE is an over-the-counter exchange functioning as both a primary and a secondary market. The NYSE is the largest dealer market for listed securities in the United States. NYSE a 56. are reserved strictly for trading debt securities. NASDAQ is an electronic market. c. Which one of the following statements is correct concerning the NYSE? a. d. PROBLEMS Not applicable for Chapter 1 . A firm is expected to have a market value for its publicly held shares of at least $100 million to be listed on the NYSE. III. NASDAQ is an auction market. II and IV only d. II. I and II only b. include the American Exchange and the Pacific Stock Exchange. Any corporation desiring to be listed on the NYSE can do so. and IV only e. are called over-the-counter markets. III. e.CHAPTER 1 DEALER MARKETS c 55. only exist outside of the United States. I and III only c. IV. The NYSE accounts for only 50 percent of the shares traded in the auction markets. Which of the following statements concerning NASDAQ are correct? I. II. I. NASDAQ is an OTC market. d. II. b. and IV III. list only the securities of the largest firms. e.

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. . for a typical small business. BUSINESS ORGANIZATIONS 60. List and briefly describe the three basic questions addressed by a financial manager. Working capital management: This refers to a firm’s short-term assets and short-term liabilities. Other goals. If the corporate form of business organization has so many advantages over the sole proprietorship. BUSINESS ORGANIZATIONS 59. the heart and sole of the business is the person who founded it. FINANCIAL MANAGEMENT GOAL 61. so the life of the business may effectively be limited to the life of the founder during its early years. Also. 2. such as maximizing earnings. If the sole proprietor has limited capital to start with. limited liability for business debts may not be a significant advantage if the proprietor has limited capital.CHAPTER 1 IV. This goal focuses on enhancing the returns to stockholders who are the owners of the firm. it may not be desirable to spend part of that capital forming a corporation. ESSAYS FINANCIAL MANAGEMENT 58. the ability to raise more capital. 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. 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. 3. Finally. The three areas are: 1. 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. most of which is tied up in the business anyway. focus too narrowly on accounting income and ignore the importance of market values in managerial finance. the owners’ limited liability for business debts. and the opportunity of an unlimited life of the business. Capital structure: This refers to the specific mixture of long-term debt and equity a firm uses to finance its operations. Capital budgeting: The financial manager ties to identify investment opportunities that are worth more to the firm than they cost to acquire.

Alternatively. IBM will receive no direct cash flows as a consequence of your sale. if the sale price is high. For example. It would be very difficult for a young. as employees are hired to represent the firm. it typically requires life insurance be carried on the business owner in an amount sufficient to cover the loan. Suppose you own 100 shares of IBM stock which you intend to sell today. Why. Assume for a moment that the stockholders in a corporation have unlimited liability for corporate debts. it is likely the business will be severely harmed and the sale value of the firm greatly diminished. there is once again a separation of ownership and management. among other things. as well as potentially impacting their standing in the employment market. Why might the SBA demand such coverage? The SBA knows that the heart of a small business is the existence of the owner and that a sole proprietorship ends when the owner dies. If so. Should the owner die. In particular. BUSINESS ORGANIZATIONS 63. FINANCIAL MANAGEMENT GOALS 65. you would not invest in companies you expected to be unable to satisfy their financial obligations. such separation is not likely to exist to the degree it does in a corporation. Since you will sell it in the secondary market. and therefore doing a good job. . However.CHAPTER 1 AGENCY THEORY 62. then. When the Small Business Administration (SBA) makes a loan to a sole proprietorship. Both the primary and secondary markets for common stock would be severely hampered if this rule existed. you would be very careful which stocks you invest in. this indirectly reflects on the reputation of the managers. If the shareholder’s sale price is low. In a sole proprietorship and a small partnership. LIMITED LIABILITY 64. this indicates that the market believes current management is increasing firm value. should IBM’s management care about the price you get for your shares? The current market price of IBM stock reflects. untested business to acquire enough capital to grow. there is still potential for agency conflicts. Thus. the SBA requires the life insurance to ensure the loan will be repaid should the owner die. market opinion about the quality of firm management. 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. what impact would this have on the functioning of primary and secondary markets for common stock? With unlimited liability.

EXCHANGE LISTINGS 67. a lender may wish to liquidate the business. However. One thing lenders sometimes require when loaning money to a small corporation is an assignment of the common stock as collateral on the loan. the lender is able to sell the business simply by reselling the stock in the business. the lure of greater prestige certainly hasn’t prompted some major corporations. . 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. such as Microsoft.CHAPTER 1 TRANSFER OF OWNERSHIP IN A CORPORATION 66. Often it is time consuming and difficult to take title of all of the business assets individually. Plus. there is a prestige factor in being listed on one of the national exchanges. 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. By taking control of the stock. There is still a prestige factor in moving from NASDAQ to the NYSE since the NYSE has more restrictive membership requirements. the ownership of the stock certificates can be transferred directly to the lender. Then. This illustrates once again the ease of transfer of ownership of a corporation. if the business fails to repay its loan. to move to the NYSE.

Sign up to vote on this title
UsefulNot useful