FINN 3120 Exam 1

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

Which one of the following situations is most apt to create an agency conflict?

Basing management bonuses on the length of employment

Which one of the following is most apt to align management's priorities with shareholders' interests?

Compensating managers with shares of stock that must be held for a minimum of three years

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

Corporation

Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts?

General partnership

Maria is the sole proprietor of an antique store that is located in a rented warehouse. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and apply the proceeds to the debt II. Sell the lighting fixtures from the building and apply the proceeds to the debt III. Withdraw funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt

I, III, and IV only

Which one of the following is an advantage of being a limited partner?

Losses limited to capital invested

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?

Sole proprietorship

One advantage of the corporate form of organization is the:

ability to raise larger sums of equity capital than other organizational forms.

The shareholders of Weil's Markets would benefit if the firm were to be acquired by Better Foods. However, Weil's board of directors rejects the acquisition offer. This is an example of:

an agency conflict.

Probably the least effective means of aligning management goals with shareholder interests is:

automatically increasing management salaries on an annual basis.

A sole proprietorship:

has its profits taxed as personal income.

Corporate shareholders:

have the ability to change the corporation's bylaws.

A corporation:

is a legal entity separate from its owners.

Levi had an unexpected surprise when he returned home this morning. He found that a chemical spill from a local manufacturer had spilled over onto his property. The potential claim that he has against this manufacturer is that of a(n):

stakeholder.

An employee has a claim on the cash flows of Martin's Machines. This claim is defined as a claim by one of the firm's:

stakeholders.

An agency issue is most apt to develop when:

the control of a firm is separated from the firm's ownership.