Chapter 1

__________ budgeting is the process of planning and managing a firm's long-term assets. -Capital -Conventional -Optional -Performance-based

Capital

How does the Sarbanes-Oxley Act primarily work to make sure that companies tell the truth in financial statements? -It makes management personally responsible for the accuracy of a company's financial statements. -It has government auditors review all financial statements for potential errors or omissions. -It levies hefty fines for errors.

It makes management personally responsible for the accuracy of a company's financial statements.

How is ownership transferred in a corporation? -Ownership is transferred only with prior approval from the board of directors. -Ownership in a corporation cannot be transferred. -Ownership can be transferred only if the firm is sold. -Ownership is transferred by gifting or selling shares of stock.

Ownership is transferred by gifting or selling shares of stock.

__________ can be used to encourage managers to maximize the value of the stock. -Green mail -Poison pills -Stock splits -Stock options

Stock options

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

True

In large firms, financial activity is usually associated with which top officer? -vice president of production -vice president for marketing -chief financial officer -chief management consultant

chief financial officer

"Increasing shareholder wealth" means increasing the __________. -current common stock value -market value of liabilities -book value of liabilities -current bond value

current common stock value

In a shareholder-manager relationship, who is the agent? -shareholders -both shareholders and managers -managers -Neither shareholders nor managers

managers

A business without separate legal authority formed by two or more people is known as a __________. -sole proprietorship -corporation -partnership -conglomerate

partnership

When one owner or creditor sells to another, the transaction takes place in the __________ market. -primary -rudimentary -underwriting -secondary

secondary

How is ownership of a corporation represented? -bonds -shares of stock -buying a company's products

shares of stock

How is ownership of a corporation represented? -buying a company's products -shares of stock -bonds

shares of stock

A(n) __________ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm. -bondholder -autocrat -shareholder -stakeholder

stakeholder

What is the main goal of financial management? -to maximize expenses -to raise as much capital as possible -to make sure that the managers hold the majority of the shares in the company -to maximize the current share value

to maximize the current share value

A sole proprietor has __________ personal liability for all business debts and obligations. -no -limited -unlimited -little

unlimited

A general partnership has which of the following characteristics? Select all that apply. -Large amounts of cash can be raised easily. -Each owner has unlimited liability for all firm debts. -All the partners share in gains or losses of the partnership. -It is always regulated by a formal partnership agreement.

-Each owner has unlimited liability for all firm debts. -All the partners share in gains or losses of the partnership.

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley? Select all that apply. -Enron -WorldCom -Tyco -Disney

-Enron -WorldCom -Tyco

Business finance is broadly concerned with which of the following? Select all that apply. -How to manage day-to-day finances of the firm? -Which long-term investment to make? -How to finance long-term investments? -How to set up the audit committee?

-How to manage day-to-day finances of the firm? -Which long-term investment to make? -How to finance long-term investments?

Which of the following are defining features of the primary market? -It is the market where initial public offerings are made. -Proceeds from the sale of securities go to the issuing firm. -It is the market where shareholders and bondholders buy and sell to each other. -It only involves seasoned equity offerings.

-It is the market where initial public offerings are made. -Proceeds from the sale of securities go to the issuing firm.

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

-confirm the validity of the financial statements. -be responsible for errors in the annual report.

A good financial decision will do which of the following? Select all that apply. -increase market value of shareholders' equity -increase the cost of capital -increase current dividends per share -increase the value of the firm's existing stock

-increase market value of shareholders' equity -increase the value of the firm's existing stock

Select all that apply. Corporations in other countries are often called: -joint stock companies -limited liability companies -autonomous entities -re-calibrated partnerships -public limited companies

-joint stock companies -limited liability companies -public limited companies

According to Figure 1.2, where does cash generated by a corporation typically go? Select all that apply. -reinvested in the firm -paid to shareholders and creditors -to buy financial assets -to pay corporate taxes

-reinvested in the firm -paid to shareholders and creditors -to pay corporate taxes

A corporation receives cash from financial markets by selling __________ and __________. -land -stocks -finished goods -bonds

-stocks -bonds

What three subjects is the financial manager concerned with? Select all that apply. -working capital management -capital structure -capital budgeting -designing new products

-working capital management -capital structure -capital budgeting

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

False

Is profit maximization the primary objective of a business? -Yes; the entire point of running a business is to make as much money as possible for everyone involved. -It depends; sometimes profit maximization is the most important objective, and sometimes it isn't. -No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.

No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.

True or false: In a large corporation, stockholders and managers are usually separate groups. -True -False

True

Who elects the board of directors and ultimately maintains control of the firm? -workers -management -the board of directors -stockholders

stockholders

The conflict of interest between an agent and a principal is called a(n): -moral agency -moral hazard problem -agency problem -agency relationship

agency problem

The four basic areas of finance include investments, financial institutions, international finance, and __________ finance. (Enter only one word per blank.)

corporate

The federal government taxes which of the following? -corporate earnings and shareholder dividends -corporate earnings but not shareholder dividends -neither corporate earnings nor shareholder dividends -shareholder dividends but not corporate earnings

corporate earnings and shareholder dividends

Public limited companies and joint stock companies are other names for __________. -companies -proprietorships -corporations -partnerships

corporations

A bad financial decision is defined as a decision that __________ shareholder wealth. -decreases -increases -maximizes

decreases

A partnership in which partners share in gains or losses and carry unlimited liability for all partnership debts is called a __________. -corporation -limited liability partnership -general partnership -proprietorship

general partnership

A corporation is a distinct __________ entity and as such can have a name and take advantage of the legal powers of natural persons. -retributive -legal -illegal -patriotic

legal

Businesses are motivated to organize as corporations because stockholders in a corporation have __________ liability for corporate debts. -limited -personal -no -unlimited

limited

What type of partnership involves both general and limited partners to run the business? -sole proprietorship -corporation -general partnership -limited partnership

limited partnership

In a limited partnership, a limited partner's liability for business debts is __________. -$0 -limited to their cash contribution to the partnership -unlimited -limited by their average annual income over the life of the partnership

limited to their cash contribution to the partnership

Since __________ and ownership are separated, a corporation's life is unlimited. -management -taxation -debt -profitability

management

Which of the following is not one of the basic areas of finance? -corporate finance -international finance -personal finance -financial institutions -investments

personal finance

Which one of these is an important mechanism used by unhappy stockholders to replace current management? -Ponzi scheme -prospectus -perpetual debt -proxy fight

proxy fight