Module 1

What is a correct statement about a limited liability partnership (LLP)?

A general partner of a limited liability partnership is personally liable for all business debts.

The finance function is relatively independent of most other corporate functions. Marketing decisions, for example, might affect the firm's need for funds but are not affected by conditions in financial markets or other financing issues.

False. Coordination of the finance function and the marketing function is critical to the success of a company, especially a small, newly formed firm because it is necessary to ensure that sufficient cash is generated to survive .

Financial managers should seek the combination of assets, liabilities, and capital that generate the largest expected projected income in the current accounting period.

False. Managers can increase the value of a firm by making decisions that increase the firm's expected future cash flows, generate the expected cash flows sooner, increase the certainty of the expected cash flows, or produce any combination of these actions.

To properly maximize the value of the firm, the financial manager should execute his or her duties independent of cash flow decisions made by other senior managers.

False. Managers can increase the value of a firm by making decisions that increase the firm's expected future cash flows, generate the expected cash flows sooner, increase the certainty of the expected cash flows, or produce any combination of these actions.

Having the manager's compensation tied to the company's performance increases the agency problem that corporation face.

False. The potential conflict between two parties - the principals (outside shareholders) and the agents (managers) - is an agency problem. A common method used to motivate managers to operate in a manner consistent with stock price maximization is to tie managers' compensation to the company's performance.

What is a true statement about the financial services provided by organizations?

Financial services organzations help individuals and companies determine how to invest money to achieve their financial goals.

What is a true statement about an S corporation?

The income of an S corporation passes through the company to the owners.

What is an example of ethical behavior of the management of a corporation?

The managers take steps to adhere to laws and regulations relating to product safety.

What is an example of actions consistent with social responsibility and is not necessarily inconsistent with stockholder wealth maximization?

Investing in a smokestake filter to reduce sulphur-dioxide emissions to decrease the tax being levied on the firm by the state for pollution it produces each year.

What is true of the greater concentration of ownership in non-U.S. firms than in U.S. firms?

It permits greater monitoring and control by individuals or groups than the more dispersed ownership structures of U.S. firms.

What form of business offers limited personal liability to owners as well as the choice to be taxed as either a corporation or as a partnership?

Limited liability company (LLC).

What action should be taken by managers to avoid takeover threats?

Managers should take action to maximize stock prices.

What is a true statement of stockholders in continental Europe?

Many stockholders assign banks their proxy votes for the directors of the companies.

What should be a primary goal pursued by the financial manager of a firm?

Maximizing the market value of the firm's stock.

What is true of finanical services provided by persons working in banks, insurance companies, and brokerage firms?

Persons working in banks, insurance companies, and brokerage firms help individuals and companies determine how to invest money to achieve their financial goals.

What is a disadvantage of the corporate form of business?

Setting up a corporation is more complex and time-consuming than setting up a proprietorship or a partnership.

What is a reason for a company to go international?

The company is manufacturing the finished product in their country at a very high production cost.

The 11 "titles" in the Sarbanes-Oxley Act of 2002 established standards for accountability and responsibility in reporting financial information for publicly-traded corporations. What activities does the act provide that a corporation must abide by?

The corporation must provide additional information about the procedures used to construct and report financial statements.

There are more partnerships and proprietorships than corporations in the United States, but corporations produce more goods and services than do other forms of business.

True.

A limited partner in a limited liability partnership (LLP) is _____.

liable for only the amount invested in the partnership.

Financial services refer to functions provided by organizations that _____.

recommend the types of securities to be issued to finance plant expansions.

The success of financial institutions requires an understanding of _____.

regulations that affect these financial institutions.

The credit manager is supervised by the ____.

treasurer.

The sooner cash is received, the more valuable it is.

True.

Nations do not have the sovereignty to takeover (expropriate) the assets of a firm without compensation.

False.

What mathematical expressions computes earnings per share (EPS)?

Earnings per share = Net Income ÷ Number of outstanding shares of common stock

What is true of earnings per share?

Earnings per share is often used as an indication of the firm's potential for generating future cash flows.

What external factor affects the value of a firm's stock?

General level of economic activity.

What is a correct statement about business ethics?

Good business ethics attract and keep employees of the highest caliber.

What is a correct statment about business ethics?

Good business ethics reduce the economic viability of the communities where these firms operate.

The term multinational corporation is used to describe a firm that operates in two or more countries.

True

A corporation has the legal authority to act like a person when conducting business.

True.

Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those cash flows denominated in the parent company's home currency.

True.

If a firm's managers want to maximize stock price, it is in their best interests to operate efficient, low-cost plants, develop new and safe products that consumers want, and maintain good relationships with customers, suppliers, creditors, and the communities in which they operate.

True.

In general, the role of a finanical manager is to plan for the acquisition and use of funds so as to maximize the value of the firm.

True.

In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms.

True.

The riskiness of projected EPS can impact the firm's value.

True.

Paying Payroll Service (PPS) recently declared bankruptcy. The price of PPS's stock has dropped from approximately $10 per share one year ago to $1 today. You can imagine that stockholders are not happy that the value of their stock has dropped so significantly. At the same time the financial position of the firm was deteriorating, PPS executives increased their salaries and perquisites substantially. Nothing they did violated any laws or was considered an unethical act. We would most likely describe this situation as _____.

an agency problem.

Because financial institutions in other countries are generally less regulated than those in the U.S., they generally _____.

can provide businesses a greater variety of services than U.S. banks can.

The accounting and tax departments are the responsibility of the ____.

controller.

In many countries, the terms under which companies compete, the actions that must be taken or avoided, and the terms of trade of various transactions are determined by _____.

direct negotiation between the host government and the multinational corporation.