Business Finance Chapter 1

Which of the following is a disadvantage of sole proprietorships and partnerships?

Difficulty of transferring ownership

A good financial decision will do which of the following?

Increase the value of the firm's existing stock Increase market value of shareholders' equity

A partnership must have at least _______ owners.

2

Which of the following are true of a sole proprietorship?

A proprietorship has a limited life. It is one of the simplest types of businesses to form.

______ budgeting is the process of planning and managing a firm's long-term assets.

Capital

Which term applies to the mixture of debt and equity maintained by a firm?

Capital structure

In large firms, financial activity is usually associated with which top officer?

Chief financial officer

Which corporate officer is responsible for accurate financial accounting of the firm's activities?

Controller

Which of the following positions generally report to the chief financial officer (CFO)?

Controller Treasurer

The federal government taxes which of the following?

Corporate earnings and shareholder dividends

Which of these topics is not of especial interest to a financial manager?

Debt

A general partnership has which of the following characteristics?

Each owner has unlimited liability for all firm debts. All the partners share in gains or losses of the partnership.

According to the textbook, which of the following is not one of the three main questions to be addressed if you wanted to start your own business?

How many employees will I need?

In a shareholder-manager relationship, who is the agent?

Managers

In an over-the-counter market, which of the following is true?

Many dealers are also connected electronically. Most of the buying and selling is done by the dealer.

Which of the following are defining features of the primary market?

Proceeds from the sale of securities goes to the issuing firm It is the market where initial public offerings are made

Which one of these is an important mechanism used by unhappy stockholders to replace current management?

Proxy fight

Corporations in other countries are often called:

Public limited companies Limited liability companies Joint stock companies

A shareholder's liability is limited to which of these?

The amount the shareholder invested in the corporation

What is the main goal of financial management?

To maximize current share value

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?

WorldCom Tyco Enron

The threat of ______ motivates managers to make good decisions.

a takeover

The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.

agency

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?

agency problem

The conflict of interest between an agent and a principal is called a(n)

agency problem.

The New York Stock Exchange is a(n) _____.

auction market

Working capital includes which of the following?

cash short-term assets inventory

The ______ office is responsible for corporate tax reporting.

controller's

The four basic areas of finance include investments, financial institutions, international finance, and

corporate finance

Public limited companies and joint stock companies are other names for __________.

corporations

The Sarbanes-Oxley Act provides incentives for companies to go public in US markets.

false

True or False: "Profit maximization" is the goal for the management of a corporation in short-run only.

false

A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons.

legal

A limited liability company's owners have ______ liability.

limited

Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts.

limited

What type of partnership involves both general and limited partners to run the business?

limited partnership

Agency costs occur when _________ and stockholder interests are not in line with one another.

management

Since ________ and ownership are separated, a corporation's life is unlimited.

management

A business without separate legal authority formed by two or more people is known as a _____.

partnership

A limited liability company is taxed like a _________, but retains ________ ________ for owners.

partnership; limited liability

The owners of a corporation are called ______.

shareholders

A(n) ______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm.

stakeholder

In a for-profit business, owners' equity is equivalent to:

the total value of stock in a corporation

A corporation borrows money in its own name.

true

How does the Sarbanes-Oxley Act primarily work to make sure that companies tell the truth in financial statements?

It makes management personally responsible for the accuracy of a company's financial statements.

Which of the following are considered non-owner stakeholders in a company?

Suppliers Employees Government

Which of the following are key questions for investments?

What are the risks and rewards associated with investing? What is the best mixture of financial assets to hold? What determines the price of a financial asset?

The relationship between stockholders and management can best be described as a(n) ______ relationship.

agency

"Increasing shareholder wealth" means increasing the _________.

current common stock value

A bad financial decision is defined as a decision that ______ shareholder wealth.

decreases

The goal of a "for profit" business is to ______ the value of shareholder wealth.

maximize

Why don't large businesses organize as sole proprietorships or partnerships?

It can be difficult to raise cash for investment in these forms, and that limits the ability of the business to grow.

One of the important questions in the area of investments includes the potential risks and reward associated with investing in

financial assets

How is ownership of a corporation represented?

shares of stock

Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:

stock options

True or false: In a large corporation, stockholders and managers are usually separate groups.

true

A sole proprietor has ______ personal liability for all business debts and obligations.

unlimited

Why would the threat of a takeover motivate a manager to act in stockholders' interest?

Running the firm well and acting in the stockholders' interest makes the firm a less attractive takeover target to begin with.

_______ ______ can be used to encourage managers to maximize the value of the stock.

Stock options

The Sarbanes-Oxley Act requires corporate officers to:

confirm the validity of the financial statements be responsible for errors in the annual report

Which of these have been noted as unintended consequences of the Sarbanes-Oxley Act?

firms going public outside of the U.S. market eliminating public disclosure for many firms public firms "going dark" and leaving the stock market

A treasurer's responsibilities typically include:

handling cash flows. making financial plans. managing capital expenditure decisions.

Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of __________ management.

working capital

What three subjects is the financial manager concerned with?

working capital management capital structure capital budgeting

Which of the following are included in a firm's capital structure?

Equity Long-term debt

When are corporate profits taxed?

Individuals pay taxes on corporate dividends. Corporations pay taxes on corporate profits.

Business finance is broadly concerned with which of the following (select all that apply)?

How to manage day-to-day finances of the firm How to finance long-term investments Which long-term investment to make

Is profit maximization the primary objective of a business?

No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.

Which of the following is NOT one of the basic areas of finance?

Personal finance

An organization must prepare ______ and bylaws when forming a corporation.

articles of incorporation

The Sarbanes-Oxley Act is intended to strengthen protection against:

corporate accounting fraud and financial malpractice

A partnership in which partners share in gains or losses, and carry unlimited liability for all partnership debts, is called a:

general partnership

In a limited partnership, a limited partner's liability for business debts is ______.

limited to their cash contribution to the partnership

When one owner or creditor sells to another, the transaction takes place in the _________ market

secondary

Who elects the board of directors, and ultimately maintains control of the firm?

stockholders

A corporation receives cash from financial markets by selling ______ and ______.

stocks and bonds

The officer responsible for managing the firm's cash flows is the ______.

treasurer

How is ownership transferred in a corporation?

Ownership is transferred by gifting or selling shares of stock

According to Figure 1.2, where does cash generated by a corporation typically go?

Paid to shareholders and creditors Reinvested in the firm To pay corporate taxes

Capital budgeting is concerned with making and managing expenditures on _____.

long-term assets