Chapter 1

A business that is a legal entity separate from the owners, yet treated as a legal person, is called a(n): a) corporation. b) sole proprietorship. c) general partnership. d) limited partnership. e) unlimited liability company.

a) corporation.

The Sarbanes-Oxley Act of 2002 holds a public company's ______ responsible for the accuracy of the company's financial statements. a) managers b) internal auditors c) external legal counsel d) internal legal counsel e) Securities and Exchange Commission agent

a) managers

A firm's ______ is the firm's mix of short-term assets and short-term liabilities. a) net working capital b) net debt c) investment capital d) net currency e)capital structure

a) net working capital

Which one of the following is a disadvantage of the corporate form of business? a) Shareholders may experience limited liability. b) Distributed profits may experience double taxation. c) Raising capital may be more difficult than for other forms of business. d) The firm may have unlimited life. e) The firm may issue additional shares of stock.

b) Distributed profits may experience double taxation.

Which one of the following best states the primary goal of financial management? a) Maximize current dividends per share b) Maximize the current value per share c) Avoid financial distress d) Maximize profit e) Maintain steady growth while increasing current profits

b) Maximize the current value per share

Which one of the following would cause a cash outflow from a corporation? a) Issuing new securities b) Paying dividends c) Taking out a loan from a bank d) Receiving a tax refund from the government e) Assigning common stock to employees

b) Paying dividends

Which one of the following questions involves a capital budgeting decision? a)How many shares of stock should the firm issue? b) Should the firm purchase a new machine for the production line?c) Should the firm borrow money to acquire new equipment? d) How much inventory should the firm keep on hand? e) How much money should be kept in the checking account?

b) Should the firm purchase a new machine for the production line?

A firm owned by a single person who has unlimited liability for the firm's debt is called a: a) corporation. b) sole proprietorship. c) general partnership. d) limited partnership. e) limited liability company.

b) sole proprietorship.

Which form of business would be the best choice if it were necessary to raise large amounts of capital? a) Sole proprietorship b) Limited liability company c) Corporation d) General partnership e) Limited partnership

c) Corporation

Which one of the following questions is a working capital management decision? a) Should the company issue new shares of stock or borrow money? b) Should the company refurbish its equipment or replace it? c) How much inventory should the company keep on hand? d) Should the company close one of its current stores? e) How much money should the company borrow to buy a new building?

c) How much inventory should the company keep on hand?

Abigail, Blake and Camila plan to launch a business. Abigail will fund the venture but wants to limit her liability to her initial investment. She has no interest in the daily operations. Blake will contribute his full efforts on a daily basis but has limited funds to invest in the business. Camila will be involved as a consultant and manager and will also contribute funds. Blake and Camila are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to minimize the initial costs of organizing the business. Which form of business entity should these individuals adopt? a) Sole proprietorship b) Joint stock company c) Limited partnership d) General partnership e) Corporation

c) Limited partnership

Which one of the following statements is correct concerning the NYSE? a) The publicly traded shares of an NYSE-listed firm must be worth at least $250 million. b) The NYSE is the largest dealer market for listed securities in the United States. c) The listing requirements for the NYSE are more stringent than those of Nasdaq. d) Any corporation desiring to be listed on the NYSE can do so for a fee. e) The NYSE is an OTC market functioning as both a primary and a secondary market.

c) The listing requirements for the NYSE are more stringent than those of Nasdaq.

A firm owned by two or more people who each have unlimited liability for all of the firm's debts is called a: a) corporation. b) sole proprietorship. c) general partnership. d) limited partnership. e) limited liability company.

c) general partnership.

Eduardo sold 500 shares of Northcutt Corporation stock on the New York Stock Exchange. This transaction: a) took place in the primary market. b) occurred in a dealer market. c) occurred in the secondary market. d) involved a proxy. e) was a private placement.

c) occurred in the secondary market.

In a typical corporate organizational structure: a) the vice president of finance reports to the chair of the board. b) the chief executive officer reports to the president. c) the controller reports to the chief financial officer. d) the treasurer reports to the president. e) the chief operations officer reports to the vice president of production.

c) the controller reports to the chief financial officer.

Which one of the following questions involves a capital structure decision? a) Which one of two project proposals should the firm implement?b) How should the firm allocate its limited available funds among acceptable projects? c) How much funding should be allocated to financing customer purchases of a new product? d) How much debt should the firm incur to fund a project? e) How much inventory will be needed to support a project?

d) How much debt should the firm incur to fund a project?

Deciding which long-term investment a firm should make is a ______ decision. a) working capital management b) capital constraints c) cost of capital d) capital budgeting e) capital structure

d) capital budgeting

Agency problems are most likely to be associated with: a) sole proprietorships. b) general partnerships. c) limited partnerships. d) corporations. e) limited liability companies.

d) corporations.

Determining the number of shares of stock to issue is an example of a ______ decision. a) capital rationing b) net working capital c) capital budgeting d) capital allocation e) capital structure

e)

Which of the following actions would be most likely to decrease agency costs for the firm? a) Increase employees' salaries to exceed the salaries paid by competitors b) Pay all employees based on the amount of revenue generated by the firm c) Prohibit employees from becoming shareholders of the firm d) Pay bonuses to employees only if profits increase from one year to the next e) Reward high performing employees with shares of stock

e) Reward high performing employees with shares of stock

Shareholders can replace company management by implementing: a) stock options. b) promotions. c) the Sarbanes-Oxley Act. d) an agency play. e) a proxy fight.

e) a proxy fight.

Corporate dividends represent: a) tax-free income for the recipient because they are distributions of pretax income. b) tax-free income for the recipient because they are distributions of aftertax income. c) pretax income from the corporation which becomes taxable income for the recipient. d) taxable income for both the corporation and the shareholder, whether or not dividends are paid to shareholders. e) aftertax income from the corporation which becomes taxable income for the recipient.

e) aftertax income from the corporation which becomes taxable income for the recipient.

A firm's mixture of debt and equity financing is the result of its ______ decisions. a) working capital management b) cash management c) cost analysis d) capital budgeting e) capital structure

e) capital structure

Corporate bylaws: a) must be amended should a firm decide to increase the number of shares authorized. b) cannot be amended once adopted. c) define the name by which the firm will operate. d) describe the intended life and purpose of the organization. e) determine how a corporation regulates itself.

e) determine how a corporation regulates itself.

The growth of both sole proprietorships and partnerships is frequently limited by the firm's: a) double taxation. b) bylaws. c) inability to raise cash. d) limited liability. e) agency problems.

inability to raise cash.