Principles of Finance - Chapter One and Smartbook

Limited Liability Companies (LLC)

A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership.

Corporation

A legal "person", separate and distinct from its owners, and it has many of the rights, duties, and privileges of an actual person. Can borrow money and own property, sue/be sued, enter into contracts.

True or false: Ownership in the corporate form is difficult to transfer.

False

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

False

Which of the following is included in working capital?

-Accounts receivable -Current (short-term) assets -Accounts payable

The Sarbanes-Oxley Act requires corporate officers to do which of the following?

-List any deficiencies in internal controls -Accept responsibility for material errors in the annual report -Confirm the validity of the annual financial report

Which of the following are among the most important questions to be asked when a business is started?

-What long-term investments should be made? -Where will long-term financing be obtained to pay for investments? -How will everyday financial activities be handled?

The possible goal of profit maximization _____.

-can be achieved by cost-cutting -would probably be the most commonly sighted goal for a business

Two forms of direct agency costs:

1. Corporate expenditure that benefits management but costs stockholders. 2. Expense that arises from the need to monitor management actions.

Partnership

A business in which two or more persons combine their assets and skills

Sole Proprietorship

A business owned by one person

Joint Stock Companies

A company whose stock is owned jointly by the shareholders.

Which of the following show why a corporation is the most important form of business?

A corporation is a separate legal entity with the ability to acquire and exchange property. Corporations can enter into contracts. Corporations can sue and be sued.

The relationship between stockholders and management can best be described as a(n) ______ relationship.

Agency

The term _____________ costs refers to the costs of the conflict of interest between stockholders and management.

Agency

Restricted Stock Units (RSUs)

Are reported as part of shareholders' equity if payable in shares rather than cash.

The two types of secondary markets include _______________ markets and dealer markets.

Auction

Two kinds of secondary markets:

Auction and Dealer markets

Forming a corporation involves preparing articles of incorporation and a set of ____________.

Bylaws

The rules used by a corporation to regulate its existence are known as _________.

Bylaws

In large firms, financial activity is usually associated with which top officer?

CFO

______ budgeting is the process of making and managing expenditures on long-term assets.

Capital

Three areas of corporate financial management:

Capital budgeting, capital structure, working capital

_____ buy and sell for themselves, at their own risk.

Dealers

What are the two basic classifications under which most potential financial goals fall?

Earning or increasing profits Controlling risk

Which of the following are important when considering a partnership?

Fund raising limitations Taxation of partnership income Personal liability for firm debts

In a _____________ partnership, all the partners share in gains or losses, and all have unlimited liability for all partnership debts, not just some particular share.

General

Which of the following are considered stakeholders in a company?

Government Employees Suppliers

What are the two factors that impact whether managers will act in the best interest of stockholders?

How closely management goals align with stockholder goals and the way managers are compensated

A good financial decision aims at which of the following?

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

A general partnership has which of the following characteristics?

It is difficult to transfer ownership. Each owner has unlimited liability for all firm debts.

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

Managers

The goal of a for-profit business is to ______ existing owners' equity.

Maximize

Which of the following, according to the textbook, are possible financial goals for a company?

Maximize profits Minimize costs Survival

Organized auction markets include:

New York Stock Exchange

A sole proprietorship is a business owned by ______ person(s).

One

Corporate profits are taxed twice, first at the corporate level when they are earned and again at the ____________ level when they are paid out.

Personal

The advantages and disadvantages of a partnership are basically the same as those of a _____.

Proprietorship

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

Proxy fight

What is the main goal of financial management?

To maximize current value per share of existing stock

Working Capital

a firm's short-term assets and liabilities

The ___________ are rules describing how the corporation regulates its existence.

bylaws

A bad financial decision is defined as a decision that ______ owners' equity.

decreases

The need to monitor management actions is an example of a(n) ______ agency cost

direct

Some of the cash flow generated by a firm goes back to the financial markets in the form of ______.

dividends and debt payments

The life of a corporation ______.

is unlimited

A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons.

legal

Because ownership in a corporate is spread over a huge number of shareholders, it can be argued that ___________________ effectively controls the firm.

management

When a corporation raises funds in the financial markets, the transaction occurs on the _____.

primary

A ____________ is the authority to vote someone else's stock.

proxy

The corporate goal involving bankruptcy avoidance, stability, and safety relate to controlling ____________.

risk

When one owner of a security sells the security to another person, the transaction takes place in the _________ market

secondary

Stakeholders

someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.

A ______ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm.

stakeholder

A partnership must have at least _______ owners.

2

Benefit Corporation

A for-profit corporation that seeks to have a material positive impact on society and the environment. This new business form is available by statute in a growing number of states.

Public Limited Companies

Companies who shares are sold to financial institutions and the general public and quoted on the stock exchange

Agency Problem

Conflict of interest between principal and agent in an agency relationship.

The officer responsible for corporate tax reporting is the ______.

Controller

True or false: Under SOX, corporate officers must declare annual reports contain zero omissions.

False

Agency Costs

The costs of the conflict of interest between stockholders and management

Due to the extreme costs of SOX, hundreds of public firms have chosen to "go _________," meaning their shares are no longer traded on the major stock exchanges.

dark

Indirect agency costs are often due to lost ______.

opportunities

Most equity shares of large firms in the U.S. trade on:

organized auction markets

Inventory is a:

part of working capital. current asset.

The owners of a corporation are called ______.

stockholders

A corporation receives cash from financial markets by selling ______ and ______.

stocks bonds

In a large corporation, the financial manager is primarily responsible for:

-financing decisions. -long-term investment decisions. -financial aspects of operations, such as collections of accounts receivables.

A __________ corporation is for profit, and has the legal attributes of accountability, transparency, and purpose.

Benefit

Which of the following can be used to encourage managers to act in the best interests of shareholders?

Better prospects of promotion Managerial compensation tied to performance

Which term applies to the mixture of debt and equity maintained by a firm?

Capital Structure

The federal government taxes which of the following?

Corporate earnings and shareholder dividends

What are the five main areas of finance?

Corporate finance, Investments, Financial Institutions, International finance, Fintech

Joint stock company is another name for what is referred to as a ___________ in the U.S.

Corporation

The ____________ is the most important form, in terms of size, of business organization in the United States.

Corporation

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?

Enron WorldCom Tyco

It is sometimes argued that, left to themselves, managers tend to minimize the amount of resources over which they have control.

False

In a large corporation, the _____ would be responsible for answering the three main questions that must be asked when starting a firm.

Financial manager

Which of the following are true of a sole proprietorship?

It is the simplest type of business to form. A proprietorship has a limited life.

Corporations in other countries are often called:

Joint stock companies Public limited companies

Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts.

Limited

Which of the following are included in a firm's capital structure?

Long-term debt Equity

Since ________ and ownership are separated, a corporation's life is unlimited.

Management

A business without separate legal authority formed by two or more people is known as a _____.

Partnership

Which one of these provides a manager an incentive to perform well?

Promotions

The relative ease of transferring ownership, the limited liability for business debts, and the unlimited life of the business are why the corporate form is superior to sole proprietorships or partnerships for _____.

Raising cash

Because shareholders get paid last after all other obligations are satisfied, they are often called _____.

Residual Owners

In a corporation, the stockholders elect _____, who then select the managers.

The board of directors

From the stockholders' perspective, what is the primary purpose of awarding stock options to managers?

To increase shareholders' wealth

What is the goal of financial management in a for-profit business?

To make decisions that increase the value of the stock or, more generally, increase the market value of the equity.

True or false: Cash flows to the firm from the financial markets.

True

A sole proprietor has ______ personal liability for all business debts and obligations.

Unlimited

An organization must prepare ______ and bylaws when forming a corporation.

articles of incorporation

The primary responsibility of financial managers is to increase the value of _____.

existing shares of stock

Stockholders in a corporation have _____ liability for corporate debts.

limited

The goal of the for-profit business is to maximize __________ equity.

owner

A limited liability company is taxed like a ______ and its owners have ____ liability.

partnership; limited

Firms that are poorly managed are more attractive as acquisitions. This form of threat known as a _________motivates managers to act in the stockholders' best interests.

takeover

Capital budgeting is concerned with planning and managing a firm's _____.

Long-term investments

Limited Partnership

One or more general partners and one or more limited partners who will not be involved with the business.

How is ownership transferred in a corporation?

Ownership is transferred by gifting or selling shares of stock

An LLC is essentially a hybrid of ________________ and corporation.

Partnership

Secondary Market

Previously issued securities are traded among investors

Agency Relationship

Relationship between stockholders and management

Sarbanes-Oxley Act of 2002 (a.k.a. SOX)

Requires that the CEO and CFO of large companies that have publicly traded stock personally certify that financial reports made to the SEC comply with SEC rules and that info in the reports are accurate.

Stockholders are entitled to only what is left after employees, suppliers, and creditors are paid, which makes them _____ owners.

Residual

The aim of the act known as _____ is to protect investors form corporate abuse.

SOX

Which one of the following parties would be the last party to receive payment if a firm were to close? Assume all parties have a legitimate claim on the firm's assets.

Shareholders

When a corporation is formed, it is granted which of the following rights?

State citizenship for jurisdictional purposes Legal powers to sue The ability to issue stock

______ are frequently used to encourage key managers to maximize the value of the firm's stock.

Stock options

Primary disadvantage of sole proprietorship:

The ability of such businesses to grow can be seriously limited in an inability to raise cash for investment.

The liability of a shareholder in a corporation is limited to which of these?

The amount the shareholder invested in the corporation

The controller is responsible for which of the following tasks?

The controller's office handles cost and financial accounting, tax payments, and management information systems.

Purpose (benefit corporation)

The idea that a benefit corporation must provide a public benefit, either to society as a whole or the environment.

Primary Market

The original sale of securities by governments and corporations

The financial manager acts in the shareholders' best interests by making decisions that increase the value of _____.

The stock

Which one of these motivates managers to make good decisions?

Threat of a hostile takeover

What is the goal of financial management?

To maximize the current value per share of the existing stock.

A benefit corporation is for profit, and has the legal attributes of accountability, _____, and purpose.

Transparency

The officer responsible for managing the firm's cash flows is the ______.

Treasurer

Which of the following positions generally report to the chief financial officer (CFO)?

Treasurer, Controller

Which of the following is not an important question that must be asked when starting a firm?

Which type of operating system should you use for your computers?

Which of the following is not an important question that must be asked when starting a firm? (Select one) -Which type of operating system should you use for your computers? -How will you manage your everyday financial activities? -Where will you get the long-term financing to pay for your investment? -What long-term investments should you take on?

Which type of operating system should you use for your computers?

It is argued that, left to themselves, managers would tend to maximize the amount of resources over which they have control or, more generally, ___________ power or wealth.

corporate

In financial markets, debt and __________ securities are bought and sold.

equity

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

limited to his/her cash contribution to the partnership

A treasurer's responsibilities typically include:

managing the firm's cash and credit, financial planning, and capital expenditures.

Managers who are successful in pursuing _____ will be in greater demand in the labor market and thus command higher salaries.

stockholder goals

Capital Budgeting

the process of planning and managing a firm's long-term investments

Capital Structure

the specific mixture of long-term debt and equity the firm uses to finance its operations