Chapter 1

Which one of the following statements is correct? A. NASDAQ has more listed stocks than does the NYSE. B. The NYSE is a dealer market. C. NASDAQ is an auction market. D. NASDAQ has the most stringent listing requirements of any U.S. exchange. E. The trading floor for NASDAQ is located in Chicago.

A. NASDAQ has more listed stocks than does the NYSE.

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? A. Sole proprietorship B. Limited partnership C. Corporation D. Joint stock company E. General partnership

A. Sole proprietorship

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's: A. capital structure. B. capital budget. C. asset allocation. D. working capital. E. risk structure.

A. capital structure.

What are some advantages and Disadvantages of operating as a public corporation?

Advantages: 1. *Limited Liability*/ Not exceeding the investment amount 2. *Easier to raise capital*/ more channels of finding capital 3. *Easier to transfer ownership* 4. *Unlimited life* Disadvantages: 1. *Double taxation*: Corporate tax and personal tax (Dividend income) 2. *Agency problem* - conflicts of interest- separation between managers and stockholders

The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s? A. Increased stock market volatility B. Corporate accounting and financial fraud C. Increased executive compensation D. Increased foreign investment in U.S. stock markets E. Increased use of tax loopholes

B. Corporate accounting and financial fraud

An auction market: A. is an electronic means of exchanging securities. B. has a physical trading floor. C. handles primary market transactions exclusively. D. is also referred to as an OTC market. E. is dealer-based.

B. has a physical trading floor.

What are the pros and cons of enacting SOX in 2002

Pros: 1. Assurance of accuracy and transparency of a firm's accounting/financial statements to strengthen the protection against corporate fraud 2. Hold CEO/CFO accountable for the content of financial statements to fairly represent a firm's financial results without false statements or material osmission CONS: 1. Cost of complying with SOX is proportionally more for smaller firms 2. firms are inclined to delist from U.S exchange and re-list to foreign exchanges

Corporate shareholders: A. are proportionately liable for the firm's debts. B. are protected from all financial losses. C. have the ability to change the corporation's bylaws. D. receive tax-free distributions since all profits are taxed at the corporate level. E. have basically no control over the actual corporation.

C. have the ability to change the corporation's bylaws.

One example of a primary market transaction would be the: A. sale of 100 shares of stock by Maria to her best friend. B. purchase by Theo of 5,000 shares of stock from his father. C. sale of 1,000 shares of newly issued stock by Alt Company to Miquel. D. sale by Terry of 50,000 shares of stock to his brother. E. sale of 5,000 shares of stock owned by a corporate CEO to his son.

C. sale of 1,000 shares of newly issued stock by Alt Company to Miquel.

The primary goal of financial management is to maximize: A. current profits. market share. B. current dividends. C. the market value of existing stock. D. revenue growth.

C. the market value of existing stock.

Proxy fight

Can be initiated by active shareholders to solicit voting rights from other shareholders in an attempt to remove an incompetent incumbent manager or to demand higher dividends, share buyback, etc.

Probably the least effective means of aligning management goals with shareholder interests is: A. the potential for a proxy fight by an unhappy segment of shareholders. B. basing all management bonuses on performance goals. C. holding management salaries steady while increasing stock option grants. the threat of a takeover of the firm. D. automatically increasing management salaries on an annual basis.

D. automatically increasing management salaries on an annual basis.

Capital budgeting includes the evaluation of which of the following? A. Size of future cash flows only B. Size and timing of future cash flows only C. Timing and risk of future cash flows only D. Risk and size of future cash flows only E. Size, timing, and risk of future cash flows

E. Size, timing, and risk of future cash flows

IPO (initial public offering)

It is the first time for a firm to sell stocks to its investors

The Primary market

Where a firm sells *NEWLY* issued securities (Bonds or Stocks) to raise capital

The Secondary market

Where transactions traded (Buy or Sell) among investors. A firm will *NOT* receive any capital from second market

What is capital structure (Financing mix)? What are different sources of capital?

_______ refers to proportion of financial capital funded by various sources, like cash, long debt or/ and equity.

What are the three most basic decisions managers must make?

1. Capital budgeting 2. Capital Structure 3. Working capital management these decisions determine which productive assets to buy, how to pay for or finance these purchases, and how to manage the day-to-day financial matters so the company can pay its bills

Seasoned offering

A firm, with existing share outstanding, seeks to raise capital by selling additional NEW shares to investors. Its pricing is relatively easier because the current stock price can be used an indicator

Stock option

gives employees an option to buy specific number of shares at a specific price. The higher stock price is, the more valuable the stock option will be

What are agency conflicts? and what are mechanisms to align managers' interest with shareholders' interests

this occurs when the goals of the principals (stockholders) are not aligned with the goals of the agents (Managers). Management is often more concerned with pursuing its own self-interest , and so the maximization of shareholders value is pushed to the side. Mechanisms: 1. Employee stock options 2. performance based cash bonus 3. Proxy fight and a takeover threat