FIN 303 - Chapter 1: The Financial Manager and the Firm

Identify whether the following transactions are primary market or secondary market translations 1) Jim Hendry bought 300 shares of IBM through his brokerage account. a) Primary b) Secondary 2) Peggy Jones bought $5,000 of General Motors bonds from another investor. a) Primary b) Secondary 3) Hathaway Insurance Company bought 500,000 shares of Trigen Corp. when the company issued stock. a) Primary b) Secondary

1) b) Secondary 2) b) Secondary 3) a) Primary

C-Corporations do not have their income subject to double taxation. True or False?

False

Which of the following statements is CORRECT? a) Capital market instruments include both long-term debt and common stocks. b) If your uncle in New York sold 100 shares of Apple through his broker to an investor in New York, this would be a primary market transaction. c) An example of a primary market transaction would be inheriting 1000 shares of GE from your grandfather. d) Money market instruments are illiquid and have high default risk.

a) Capital market instruments include both long-term debt and common stocks.

Which of the following is considered a hybrid organizational form? a) Limited liability partnership b) Sole proprietorship c) Partnership d) Corporation

a) LLP

One reason for the existence of agency problems between managers and stockholders is that: a) Management is separate from ownership b) Managers know how to manage the firm better than stockholders c) Stockholders have unreasonable expectations about managerial performance d) None of the above

a) Management is separate from ownership

Net working capital is the: a) difference between current assets and current liabilities b) difference between shareholders' equity and long-term debt c) difference between total assets and total liabilities d) difference between total assets and current assets

a) difference between current assets and current liabilities

A benefit of the corporate from of business is the... a) limited liability of owners b) flow-through taxation c) tax exemption of dividends d) easiness to start

a) limited liability of owners

Which of the following organizational forms is subject to the Securities and Exchange Commission (SEC) regulations? a) Private corporation b) Public corporation c) Sole proprietorship d) Partnership

b) Public corporation

From the owner's perspective, which of the following should be the goal of a firm? a) Revenue maximization b) Stockholder's wealth maximization c) Tax minimization d) Profit maximization

b) Stockholder's wealth maximization

If you just purchased a share of IBM through a New York Stock Exchange-based transaction, you participated in: a) none of the above b) a secondary market transaction c) a futures market transaction d) a primary market transaction

b) a secondary market transaction

If a firm needs to adjust its liquidity position, then it would participate in: a) the auction market b) the money market c) the bond market d) the stock market

b) the money market

________ has (have) a legal responsibility to represent stockholder's interest. a) A chairman b) A CEO c) A corporation's board of directors d) All of the above

c) A corporation's board of directors

Which of the following is an example of frivolous agency cost a) Investment in Land & Buildings b) Providing lunch for employees c) Excessive perks d) Hiring external auditors to certify accounting statements despite having internal auditors

c) Excessive perks

What is not a characteristic of a shareholder? a) Expects to receive dividends b) Expects to receive a capital gain on their investment c) Expects to receive interest d) Expects to have rights as defined in the corporation's charter and bylaws.

c) Expects to receive interest

Which organizational form is best suited for a firm to sell its securities to the market? a) Sole proprietorship b) Private corporation c) Public corporation d) Partnership

c) Public corporation

Which of the following business organizational form(s) subject(s) the owner(s) to unlimited liability? a) Sole proprietorship b) General partnership c) Corporation d) Both sole proprietorship and general partnership

d) Both sole proprietorship and general partnership

Which of the following business organizational form(s) is/are the easier one(s) to raise capital? a) Both sole proprietorship and partnership b) Partnership c) Sole proprietorship d) Corporation

d) Corporation

Which organizational form best enables the owners of a firm to monitor the professional conduct of each other owners of the firm? a) Private corporation b) Public corporation c) Sole proprietorship d) Partnership

d) Partnership

One of the best ways to reduce agency conflict is by... a) having managers report to the board of directors b) hiring outside monitors to keep track of the managers' decisions c) instituting severe penalties for bad decisions d) designing an effective compensation package

d) designing an effective compensation package

The most common reason that corporate firms use the futures and options markets is: a) to make deposits b) none of the above c) to take risk d) to hedge risk

d) to hedge risk