Finance- Ch.1 Introduction

Which statements are true about partnerships? (pick 3) Check all that apply: A.) All profits from a partnership are passed through to the partners for paying taxes. B.) A partnership is easy to set up. C.) Partnerships make it easy to raise large amounts of capital. D.) Partners have unlimited liability.

A.) All profits from a partnership are passed through to the partners for paying taxes. B.) A partnership is easy to set up. D.) Partners have unlimited liability. Partnerships cannot easily raise large amounts of capital since ownership stakes are not easily tradable (unlike the shares of a corporation).

Which statements are true? (pick 3) Check all that apply: A.) Corporations and LLCs limit the owners' liability. B.) LLCs are best for taking venture capital. C.) A general partnership can have many owners. D.) C-corporations are subject to double taxation.

A.) Corporations and LLCs limit the owners' liability. C.) A general partnership can have many owners. D.) C-corporations are subject to double taxation. Companies that want to take investments from many shareholders are best organized as corporations.

Which statements are true? (pick 4) Check all that apply: A.) It is impossible to sell a part of your ownership stake in a sole proprietorship. B.) A sole proprietorship offers limited liability. C.) A sole proprietorship is easy to set up. D.) All profits from a sole proprietorship are passed through to the owner for paying taxes. E.) A sole proprietorship is subject to few government regulations.

A.) It is impossible to sell a part of your ownership stake in a sole proprietorship. C.) A sole proprietorship is easy to set up. D.) All profits from a sole proprietorship are passed through to the owner for paying taxes. E.) A sole proprietorship is subject to few government regulations. As a sole proprietor, you have unlimited liability for the debt of the business.

What are advantages of a corporation over a partnership? (pick 3) Check all that apply: A.) Limited liability B.) Unlimited life C.) Easier fundraising D.) Lower taxes

A.) Limited liability B.) Unlimited life C.) Easier fundraising Most corporate earnings are subject to double taxation: the corporation has to pay corporate income taxes on its taxable income and then shareholders have to pay taxes again on the remaining cash that is distributed to shareholders in the form of dividends.

The goal of financial management is to _____. A.) maximize the market value of equity (shareholder wealth) B.) maximize profit C.) maximize market share D.) maximize revenue

A.) maximize the market value of equity (shareholder wealth) The goal of financial management is to maximize the market value of the existing owners' equity. For public companies, this is the same as maximizing the stock price, or shareholder wealth maximization.

The best way to maximize shareholders' (or owners') wealth is to A.) work within the confines of the law and ethical conventions B.) take ethical shortcuts as long as the behavior is not illegal C.) maximize profits by paying the lowest wages possible D.) ignore environmental effects where the rules are unclear E.) maximize profits by charging high prices and reducing the quality of the product

A.) work within the confines of the law and ethical conventions A company that breaks the law would be fined and might get shut down. Even if the company operates at the margin of what is legally acceptable, it might face lawsuits and additional regulation, while consumers might boycott its products. Squeezing employees by paying the lowest wages makes it hard to attract talented employees and keep them motivated. Selling low-quality products harms the company's reputation and brand and will lead to lower sales in the future. Therefore, the best way to maximize shareholder wealth is to behave ethically and follow the law, while treating employees and customers as valuable assets.

Which of these problems does corporate finance deal with? (pick 3) Check all that apply: A.) How much to pay to employees B.) How to finance long-term investments C.) How to manage short-term finances D.) Which long-term investments to make

B.) How to finance long-term investments C.) How to manage short-term finances D.) Which long-term investments to make Compensation is primarily a strategic or human resources decision. Deciding how to finance long-term investments is a capital structure decision, how to manage short-term finances is working capital management, and deciding which long-term investments to make is a capital budgeting decision.

Shareholders are ____ and managers are ____ in the shareholder-manager relationship. A.) agents; principals B.) principals; agents C.) agents; agents D.) principals; principals

B.) principals; agents Shareholders are the principals who hire managers as their agents to act on their behalf.

A corporation's life is _____. A.) limited, since corporations are considered persons under U.S. law B.) unlimited, since management and ownership are separate C.) limited, since no company can survive forever D.) unlimited, since companies cannot die

B.) unlimited, since management and ownership are separate Since management is separate from ownership, it is easy to replace both managers and owners, thus allowing the corporation to live on forever in theory. Ownership can be transferred simply by selling one's shares.

What is the value of a dollar received now compared to a dollar received in the future? A.) The future dollar is worth more, because of inflation. B.) They have the same value. C.) The current dollar is worth more, because it can be invested now. D.) The current dollar is worth less, because it hasn't been invested yet.

C.) The current dollar is worth more, because it can be invested now. A current dollar is worth more than a future dollar because inflation erodes the purchasing power of the future dollar, and the current dollar can be invested and earn interest between now and the future date.

A limited liability company can have _____ and its owner(s) has/have _____ liability. A.) only one owner; unlimited B.) only one owner; limited C.) multiple owners; limited D.) multiple owners; unlimited

C.) multiple owners; limited An LLC can have one or more owners. The LLC can choose to be taxed like a partnership or a corporation. It's different from a partnership in that its owners have limited liability.

The problems stemming from a conflict of interest between shareholders and executives are called _____ problems. A.) opportunity B.) coordination C.) incompatibility D.) agency

D.) agency Agency problems are due to a conflict of interest in a principal-agent relationship. The agents (executives) have an incentive to make decisions that are in their own best interest, but not necessarily in the best interest of the principals (shareholders) who hired them.