Finance Exam 1

One attractive alternative to the corporation for a small business is the ________ because it combines the tax benefits of a parternship with the limited liability of a corporation

limited liability company

Which basic principle of finance correctly describes the following statement: "Investors respond to new information by buying and selling their investments. The speed with which investors act and the way that prices respond to the information determine the efficiency of the market"?

market prices reflect information

Which of the following is a significant disadvantage of a general partnership?

Each partner is fully responsible for the liabilities incurred by the partnership.

A company has the option to pay bond interest or not, true or false

False

ABC Corporation issued and sold 10 shares of stock to Irene Investor, a private individual. This represents a secondary market transaction, true or false

False

Each year, shareholders receive a dividend equal to the firm's net earnings divided by the number of shares of common stock, true or false?

False

Established firms in need of additional capital can raise it in the secondary market

False

In efficient markets, price adjustments to new information are gradual, true or false?

False

Limited partnerships have two classes of partners. The _____ partner actually runs the business and faces unlimited liability for the firm's debt, while the _________ partner is only liable up to the amount the __________ partner invested

General, limited, limited

Which of the following is true about preferred stock?

Preferred dividends are not tax deductible to corporation.

Colin, a private individual, sold one thousand shares of stock in DEF Corporation to Colleen, also a private individual. This represents a:

Secondary Market transaction

Which of the following categories of owners enjoys limited liability?

Shareholders (common stock) of a corporation

For these types of organization, no distinction is made between business and personal assets

Sole proprietorship, and General Partnership

In terms of organizational costs, which of the following sequences is generally correct, mowing from lowest to highest cost?

Sole proprietorship, general partnership, limited partnership, corporation

Managers of corporations need to act in the ethical manner:

Because a business must be trusted by investors, customer and the public if it to succeed.

In measuring value, the focus should be on:

Cash flow

Which basic principle of finance correctly describes the following statement: "Profit is an accounting concept designed to measure a business's performance over an interval of time. Cash flow is the amount of cash that can actually be taken out of the business over this same interval"?

Cash flows are the source of value

The true owners of the corporation are the:

Common stockholders

Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose?

Corporation

Which of the following financial instruments is not traded in the capital markets?

Debt with a maturity of less than one year

Characteristics of typical bonds include all of the following except:

The dividend rate

Which of the following best describes the goal of the firm?

The maximization of the total market value of the firm's common stock

The market for short - term debt is known as

The money market

What does the agency problem refer to?

The problem that results from potential conflicts of interest between the manager of a business and the stockholders.

A corporation is owned by:

The shareholders who hold the company's stock

Which basic principle of finance correctly describes the following statement: "We won't take on additional risk unless we expect to be compensated with additional return"?

There is a risk-return tradeoff

Which of the following is true about bonds?

They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.

Owners of common stock are the owners of the firm, true or false

True

The Sarbanes-Oxley Act of 2002 (SOX) was passed to directly confront concerns about both agency and ethical issues. Which of the following statements correctly describe this act?

While the goal of SOX is to provide greater protection against accounting fraud and financial misconduct, the demanding reporting requirements of SOX are quite costly and may inhibit firms from listing on U.S. stock markets; The purpose of SOX is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the security laws; SOX holds corporate advisors who have access to or influence on company decisions, legally accountable for any instances of misconduct.

What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form?

Owners have unlimited liability

There are three basic questions that are addressed by studying finance. They are:

1. How can the firm best manage its cash flows as they arise in its day-to-day operations (working capital management decisions). 2. What long-term investments should the firm undertake (capital budgeting decisions). 3. How should the firm raise money to fund new investments (capital structure decisions)

Which of the following statements regarding a sole proprietorship are correct?

1. Sole proprietorships are easy to set up with no paperwork required before the business can be opened. 2. The sole proprietor impersonally responsible for all debt of the sole proprietorship. 3. Sources of funds for a sole proprietorship typically include personal savings, as well as raising funds from a personal loans from friends and family.

The typical business organization for large companies is the corporation. Advantages of the corporate form of business organization include:

1. The life of the business is not tied to the status of the corporate owners 2. The owners' liability is limited to the amount of their investment in the company. 3. Corporations have a greater ease in raising large sums of money than other forms of business organization.

There are four basic principles of finance. Which principle correctly describes the following statement: "A dollar today is worth more than a dollar received in the future. Conversely, a dollar received in the future is worth less than a dollar received today"?

Money has a time value

When manager have little or no ownership in the firm, they are less likely to work energetically for the company's shareholders. We call this type of conflict a:

Agency Problem

Which of the following financial instruments entails the most risk and potentially the highest returns for investors?

Common Stock

There are several measures that can be taken to help limit the agency problem. They are:

Compensation plans can be put in place to reward managers when they maximize shareholder wealth; the board of directors can actively monitor the actions of managers to keep pressure on them to act in the best interest of shareholders; firms that fail to maximize shareholder wealth may be taken over and their management team replaced; financial markets play a key role in monitoring management.

Capital markets are markets for short term debt instruments maturing in less than one year, and money markets are markets for long term debt instruments maturing in more than one year, true or false

False

Limited partners may actively manage the business, true or false

False

Primary markets are always larger than secondary markets, true or false

False

The Sarbane-Oxley Act addresses insider trading by members of Congress, true or false

False

Even if you are not planning a career in finance, a working knowledge of finance can be useful in both your personal and professional life for the following reasons:

Financial management is a key component of other academic disciplines such as management, marketing, production and operations management, and accounting; Even if you do not pursue a career in fin cane, you may find yourself working closely with finance managers; As an individual you will be faced with numerous financial decisions throughout your life. Knowledge of financial principles will help you make the right decisions; For those who plan to be entrepreneurs, managing company finances is crucial to the survival of firm.

Which of the following is a characteristic of a limited partnership?

It allows one or more partners to have limited liability; it prohibits the limited partners from participating in the management of the partnership; it required one or more of the partners to be a general partner to whom the privilege of limited liability does not apply

Which of the following forms of organizations blends elements of partnerships and corporations?

Limited Liability companies (LLCs)

What is not an advantage of the sole proprietorship?

Limited liability

Which of the following is not true for limited partnerships?

Limited partners can only manage the business

The price of Netflix stock dropped sharply after customers responded negatively to a change in pricing policies. The change in stock price illustrates which principle?

Market prices reflect information

Investors in common stock increase their wealth when the:

Market value of the stock goes up and when the stock pays a dividend

Which of the following is a characteristic of an efficient market?

Security prices reflect fair value of the firm

Which of the following forms of business organization is the dominant economic force in the United States?

The Corporation

Serious ethical violations by corporations such as Enron led to the passage of

The Sarbanes-Oxley Act

Which of the following are legal forms of business organization?

The corporation, the sole proprietorship, and the partnership

Mutual Funds and ETFs provide the investor a chance to diversify without having to buy shares in numerous corporations, true or false

True

Private equity firms are financial intermediaries that are not trade on public capital markets, true or false

True

The difference between mutual funds and ETFs is that ETFs are traded on exchanges and mutual funds are not, true or false

True

There are more companies listed on NASDAQ than are listed on the New York Stock Exchange, true or false

True