Homework One
Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002?
Increase protection against corporate fraud
Below are examples of business transactions. Choose the type of financial management decision that is relevant to each. Deciding whether to expand a manufacturing plant [x] Deciding whether to issue new equity and use the proceeds to retire outstanding debt [y] Modifying the firm's credit collection policy with its customers [z]
x- Capital budgeting y- Capital structure z- Working capital management
Advantage or Disadvantage 1. The double taxation to shareholders of distributed earnings and dividends 2. Ability to raise capital 3. Ease of transferability 4. Unlimited life
1. Disadvantage 2-4 Advantage
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 3 years before the shares can be sold
Which one of the following statements is correct?
Correct- All stock trades between existing shareholders are secondary market transactions.
What goal should always motivate the actions of the firm's financial manager?
Current market value(share price) of the equity
Jamie is employed as a commercial loan officer for a regional bank centered in the Midwestern section of the U.S. Her job falls into which one of the following areas of finance?
Financial Institutions
How should the firm raise additional capital to fund its expansion?
How much cash should the firm keep in the reserve
Which of the following are potential ways to align management goals with shareholder interests? 1. Employee stock options 2. Threat of a takeover 3. Management bonuses tied to performance goals 4. Threat of a proxy fight
I, II, III, and IV
Which of the following are advantages of the corporate form of organization? 1. Ability to raise large sums of equity capital 2. Ease of ownership transfer 3. Profits taxed at the corporate level 4. Limited liability for all owners
I, II, and IV only
What does it mean when we say the New York Stock Exchange is an auction market? How are auction markets different from dealer markets? What kind of market is NASDAQ?
In auction markets like the NYSE, Correct Brokers and agents meet at a physical location to buy and sell their assets. Markets like Nasdaq represent Correct Dealers operating in dispersed locales who buy and sell assets themselves, usually communicating with other dealers electronically or literally over the counter.
Which one of the following best matches the primary goal of financial management?
Increasing the market value of a firm
Which one of the following is an advantage of being a limited partner?
Losses limited to capital invested
You've probably noticed coverage in the financial press of an initial public offering (IPO) of a company's securities. Web search company Google is a relatively recent example. IPO is a [x].
primary market transaction.
Limited liability companies are primarily designed to:
provide limited liability while avoiding double taxation.
Who owns a corporation? Describe the process whereby the owners control the firm's management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise? In the corporate form of ownership, the Correct shareholders are the owners of the firm. The Correct shareholders elect the Correct Board of directors of the corporations, who in turn appoint the firm's Correct management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else's best interests, rather than those of the Correct shareholders. If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.
shareholders Board of directors management creditors preferred shareholders
