Business Finance Test 1

Investors will be indifferent between two investments if both investments have the same expected return. True or False

False

The goal of the firm should be maximization of profits (net income per share). maximization of sales. maximization of market share. maximization of shareholder wealth.

maximization of shareholder wealth.

If two companies have the same net income and the same level of risk, they must also have the same stock price or the market is not in equilibrium. True or False

False

In general, the less risk a firm is willing to assume, the higher the expected return will be from a given course of action. True or False

False

Investors want a return that satisfies the following expectations: An additional return for taking on risk A return for delaying consumption An additional return for accepting dividends rather than capital gains Both A and B.

Both A and B

An efficient market is one where the prices of the assets traded in that market fully reflect all available information at any instant in time. True or False

True

Advantages of the corporate form of business organization include double taxation. easier transfer of ownership. minimal legal requirements. none of the above

easier transfer of ownership.

Which of the following forms of business organization is the largest in number? a. corporation b. partnership c. sole proprietorship

sole proprietorship

Capital budgeting is concerned with whether a company's assets should be financed with debt or equity. planning sales of a corporation's equity capital. what long-term investments a firm should undertake. managing a firms cash budgeting procedures.

what long-term investments a firm should undertake.

Which of the following forms of business organization limits the liability of owners? general partnership sole proprietorship two person partnership corporation

Corporation

limited liability company (LLC) is a cross between a.partnership and a corporation, and the LLC retains limited liability for its owners, but runs and is taxed like a partnership. True or False

False

Which of the following statements about the corporate form of business organization is true? Sole proprietorships are the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor. The corporate form has the disadvantage of double taxation relative to a sole proprietorship. The corporate form has the advantage of unlimited liability. The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation.

The corporate form has the disadvantage of double taxation relative to a sole proprietorship.

In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred. True or False

True

S-type corporations and limited liability companies are taxed like partnerships, but have the advantage of limited liability for their owners. True or False

True

Shareholder wealth maximization considers the effects of the riskiness of a prospective earnings stream. True or False

True

The sole proprietorship has no legal business structure separate from its owner. True False

True

he root cause of agency problems is conflicts of interest. True False

True

Disadvantages of the partnership are a. expense of formation b. lack of permanence. c. double taxation on income. d. unlimited liability e. b and d. f. a and d.

b and d.

he true owners of the corporation are the preferred stockholders. common stockholders. board of directors of the firm. holders of debt issues of the firm.

common stockholders

The primary goal of a publicly owned corporation is to ________. maximize earnings per share after taxes maximize dividends per share minimize shareholder risk maximize shareholder wealth

maximize shareholder wealth