Corporate Finance - Chapter 1

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

Capital

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

Managers

How is ownership transferred in a corporation?

Ownership is transferred by gifting or selling shares of stock

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

Proxy Fight

A good financial decision will do which of the following? a) Increase the cost of capital b) Increase the value of the firm's existing stock c) Increase current dividends per share d) Increase market value of shareholders' equity

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

A limited liability company's owners have ______ liability.

limited

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

limited to their cash contribution to the partnership

The threat of ______ motivates managers to make good decisions.

a takeover

Which of the following are reasons that the corporation is the most important form of business? a) Corporations can enter contracts b) Corporations can vote in general elections c) Corporations are separate legal entities d) Corporations can sue and be sued

a) Corporations can enter contracts c) Corporations are separate legal entities d) Corporations can sue and be sued

Which of the following are included in a firm's capital structure? a) Equity b) Long-term debt c) Net sales d) Current assets

a) Equity b) Long-term debt

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

False

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

Agency

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

Agency Problem

The federal government taxes which of the following?

Corporate earnings and shareholder dividends

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

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

Decreases

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

Difficulty of transferring ownership

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

False

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

Financial

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

Maximize

The goal of the financial management is to increase the value of ________.

the existing shares of stock

A ____________ is similar to a proprietorship, except that there are two or more owners.

Partnership

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

Personal Finance

When one owner of creditor sells to another, the transaction takes place in the _______ market.

Secondary

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

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

Stock Options

A corporation received cash from financial markets by selling ______ and _______.

Stocks, Bonds

What is the main goal of financial management?

To maximize current share value

Which corporate officer is responsible for managing the firm's cash?

Treasurer

True or False: A corporation borrows money in its own name.

True

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

Working Capital

A treasurer's responsibilities typically include: a) Financial accounting b) Handling cash flows c) Making financial plans d) Managing capital expenditure decisions

b) Handling cash flows c) Making financial plans d) Managing capital expenditure decisions

The Sarbanes-Oxley Act requires corporate officers to: a) limit their compensation and stock options b) confirm the validity of the financial statements c) be responsible for errors in the annual report d) personally prepare all financial statements

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

A general partnership has which of the following characteristics? a) It is always regulated by a formal partnership agreement b) Large amounts of cash can be raised easily c) All the partners share in gains and losses of the partnership d) Each owner has unlimited liability for all firm debts

c) All the partners share in gains and losses of the partnership d) Each owner has unlimited liability for all firm debts

A sole proprietorship is a business that _____.

is owned by one person

Corporations in other countries are often called: a) Limited Liability Company b) Autonomous Entities c) Joint Stock Companies d) Re-Calibrated Partnerships e) Public Limited Companies

a) Limited Liability Company c) Joint Stock Companies e) Public Limited Companies

Business finance is broadly concerned with which of the following (select all that apply)? a) How to finance long-term investments b) How to manage day-to-day finances of the firm c) Which long-term investment to make d) How to set up the audit committee

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

What three questions are the financial manager concerned with?

Capital Budgeting Capital Structure Working Capital Management

In an over-the-counter market, which of the following is true? a) Most of the buying and selling is done by the dealer b) Many dealers are also connected electronically c) Only stocks are bought and sold d) An OTC market is also called an auction market

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

Working capital includes which of the following? a) Short-term assets b) Cash c) Equipment d) Inventory

a) Short-term assets b) Cash d) Inventory

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley? a) Tyco b) Disney c) Enron d) WorldCom

a) Tyco c) Enron d) WorldCom

Which of the following are considered non-owner stakeholders in a company? a) employees b) stockholder c) government d) suppliers

a) employees c) government d) suppliers

When a corporation is formed, it is granted which of the following rights? a) Legal powers to sue b) Citizenship for casting vote in presidential election of the country c) The ability to issue stock d) Corporate life of up to 100 years

a) Legal powers to sue c) The ability to issue stock