FIN322 Exam 1

Which of the following are not part of "current assets?"

Accounts payable

A potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

________ arise from the divergent objectives between owners and managers.

Agency problems

The limitations of the profit maximization goal include:

All the above are limitations

Capital budgeting includes the evaluation of which of the following

Amount, timing and risk of future cash flows

All else equal, in which of the following forms of business would the possibility of an agency problem be the greatest?

An U.S. corporation that is publicly traded.

The shareholders of Weil's Markets would benefit if the firm were to be acquired by Better Foods. Weil's board of directors, however, rejects the acquisition offer. This is an example of

An agency conflict

Which one of the following applies to a general partnership?

Any one of the partners can be held solely liable for all the debts of the partnership

The term balance sheet is used because the following accounting identity must always hold:

Assets = Liabilities + Owners' Equity

Which one of the following statements concerning the balance sheet is correct?

Assets are listed in descending order of liquidity.

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

Balance Sheet

Which of the following financial statements includes information about a firm's assets, equity, and liabilities?

Balance sheet

_______ markets deal in long-term securities having maturities greater than one year.

Capital

The _________ is designed to finance long-term investments, making possible the construction of factories, office buildings, highways, bridges, schools, homes, and apartments.

Capital market

There are three major factors that determine the market value of a company's share of stock.

Cash flows, Timing of Cash flows, and risk taken to generate cash flows

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm 75/25. Which type of entity did they create if they have no personal liability for the firm's debts?

Corporation

Major components of a firm's balance sheet include:

Current assets

The goal of financial management is to increase

Current market value per share

The process of converting an exchange from a mutual ownership structure to a stock owned is known as what?

Demutualization

____ is defined as the systematic allocation of the cost of an asset over more than one time period.

Depreciation

The income statement begins with revenue and subtracts various operating expenses until arriving at ___________.

EBIT

Which of the following is usually cited as a disadvantage of issuing new common stock as a method of financing?

If the firm currently has more equity than its optimal capital structure dictates and it issues more equity, then the average cost of capital will most likely rise.

The accounting statement that measures revenues, expenses, and net income of a firm over a period of time is called the:

Income Statement

Which of the following is not an advantage of going public?

It allows a firm's founders to diversify their holdings, It increases the liquidity of the stock, It establishes a value for the firm, It makes it easier to raise new equity capital in the future

Shareholder wealth is measured by the ____ of the shareholders' common stock holdings.

Market value

The primary goal of a publicly owned corporation is to

Maximize shareholder wealth

What is the primary goal of financial management?

Maximize shareholder wealth

Which of the following should be the primary goal pursued by the financial manager of a firm?

Maximize the market value of the firm's stock.

The primary goal of a publicly-owned firm interested in serving its stockholders should be to

Maximize the stock price per share

________ markets deal in short-term securities having maturities of one-year or less.

Money

The _______ is designed for the making of short-term loans where individuals and institutions with temporary surpluses of funds meet borrowers who have temporary cash shortage.

Money Markets

Which of the following is considered an organized stock exchange?

New York Stock Exchange (NYSE)

Which of the following statements about the corporate form of business organization is incorrect?

One of the most important features of the corporate form of business organization is that stockholders have limited liability.

The facilities needed to conduct over-the-counter market transactions include all of the following except:

Physical stock exchange to sell and buy stocks

If a corporation that has been in business for many years (for example IBM) wants to raise funds by issuing new common stock, its stock will be sold in the

Primary Market

The market for trading newly issued securities is known as the

Primary market

Which of the following are not part of a firm's income statement?

Property, plant, and equipment

One example of a primary market transaction would be:

Sale of 1,000 shares of a newly issued stock by Alt Company to Michael

A corporate stock that was issued last year would now trade in the ___________ market.

Secondary

Trading in securities previously issued takes place in the

Secondary market

You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the

Secondary market

The primary objective of the firm is:

Shareholder wealth maximization

Large, well-known public companies can reduce the time required to register and issue securities by using a(n)

Shelf registration.

Money markets are markets for

Short-term debt securities.

Margie opened a used bookstore and is both 100 percent owner and the store's manager. Which type of business entity does Margi own if she is personally liable for all the store's

Sole proprietorship

Which of the following transactions takes place in secondary markets?

Stock sold by an insurance company to adjust its portfolio of assets'.

Which of the following is not a benefit of financial intermediation?

Tax-free returns.

Compared to corporations, what is the primary disadvantage of partnerships as forms of business organizations?

The owners of a partnership—that is, the partners—have unlimited liability when it comes to business obligations whereas the owners of a corporation have limited liability.

A major advantage of using the maximization of shareholder wealth as the primary goal of the firm is that this goal includes

The timing and risk of the expected benefits to be received

Which of the following mechanisms is not used by shareholders to get managers to act in shareholder's best interests?

Threat of takeover.

Everything else equal, including firm size, dollar sales, type of product sold, and so forth, the primary difference between the proprietorship and partnership business forms is that

a partnership has more owners than a proprietorship.

Production equipment is classified as

a tangible fixed asset.

Paying Payroll Service (PPS) recently declared bankruptcy. The price of PPS's stock has dropped from approximately $10 per share one year ago to $1 today. You can imagine that stockholders are not happy that the value of their stock has dropped so significantly. At the same time the financial position of the firm was deteriorating, PPS executives increased their salaries and perquisites substantially. Nothing they did violated any laws or was considered an unethical act. We would most likely describe this situation as __________.

an agency problem.

When a corporation wants to raise funds by issuing new stocks or bonds, it generally uses the services of

an investment banker.

A current asset is:

an item currently owned by the firm that will convert to cash within the next 12 months

An agreement for the sale of securities in which the investment bank handling the transaction gives no guarantee that the securities will be sold is a(n) __________.

best efforts arrangement

A _______ option gives the _________ the right to _________ a fixed number of shares at a specified price for a certain amount of time.

call; owner; buy

Highly liquid assets:

can be sold quickly at close to full value.

Firms that compile financial statements according to GAAP:

can still manipulate their earnings to some degree.

All of the following are external factors that influence the stock prices of the firm except

capital structure

A corporation that is owned by a few individuals who are typically associated with the firm's management is a __________ corporation.

closely held

The success of a firm is linked to its stakeholders. This group includes:

community neighbors, suppliers, and employees

Agency problems may give rise to costs that ____ the market value of firms.

decrease

Noncash expenses that firms may report in their income statement include:

depreciation and amortization

Deferred taxes may occur due to the use of

different depreciation methods for taxes and financial reporting

The _________ the risk of receiving future cash flows, the _____ will be present value of those cash flows.

greater, lower

The financial statement summarizing a firm's accounting performance over a period of time is called the:

income statement

Which of the following represents an attempt to measure the net results of the firm's operations (revenue versus expenses) over a given period of time.

income statement

A firm's liquidity level decreases when:

inventory is purchased with cash.

Depreciation:

is a noncash expense that is recorded on the income statement

In a limited partnership, the limited partners may limit their:

liability

A major advantage of the corporate form of business over both sole proprietorships and partnerships is the

limited liability

Asset accounts on the balance sheet are listed in the order of:

liquidity

Capital markets are markets for

long-term debt securities.

The most widely accepted objective of the firm is to

maximize shareholder wealth

The primary goal of a financial manager should be to

maximize the value of the firm's stock

Treasury bills, which represent debt of the U.S. government, have maturities less than one year. As a result, in which type of financial market do outstanding, or already issued, Treasury bills trade?

money market

Shareholders' equity is equal to:

net fixed assets minus long-term debt plus net working capital.

Money markets deal in securities having maturities of _______; capital markets deal in securities having maturities ________.

one year or less, greater than one year

Securities not listed on exchanges are said to be traded:

over the counter

Paid-in surplus is classified as:

owners' equity.

All of the following are intangible assets listed on the balance sheet EXCEPT:

plant, property & equipment

Total stockholders' equity consists of:

preferred stock, common stock, capital paid in excess of par and retained earnings

The objective of maximizing shareholder wealth, as measured by the market value of the firm's stock

provides a way to consider the risk of the returns being offered

An income statement prepared according to GAAP:

records expenses based on the matching principle.

Net income increases when:

revenue increases.

The major factors that determine the market value of the company's shares of stock include the _________.

risk and timing of cash flows

The major factors that determine the market value of a company's shares of stock include the ____.

risk of its cash flows and the timing of its cash flows

Gross profit is equal to

sales minus cost of goods sold

The recognition principle states that:

sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

A corporate stock that was issued last year would now trade in the __________ market

secondary

If you wanted to purchase previously issued shares of stock from another investor you would find the shares in the

secondary market.

There is often a divergence between the shareholder wealth maximization goal and the actual goals pursued by management. The primary reason for this is ____.

separation of ownership and control

Long-term debts of the firm are liabilities:

that do not come due for at least 12 months

The matching principle states that:

the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

A major disadvantage of a sole proprietorship is the fact that

the owner has unlimited personal liability

The market for newly issued stock by firms that were private is normally called

the primary market.

The U.S, financial markets are said to be highly informationally efficient. This means

the quickly reflect information relevant to determining stock value

_________ equals the number of shares outstanding times the market price per share

total shareholder wealth

An agreement for the sale of securities in which the investment bank guarantees the sale by purchasing the securities from the issuer and then sells the securities in the primary is a(n) __________.

underwritten arrangement