FIN 302 Ch 1

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

- Equity - Long-term debt

Working capital includes

- cash - short term assets - inventory

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 goes to the issuing firm

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

False

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

Both the treasurer and the controller report to the CFO.

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

Capital structure

Which corporate officer is responsible for accurate financial accounting of the firm's activities?

Controller

Which of the following is a disadvantage of sole proprietorships and partnerships?

Difficulty of transferring ownership

The goal of a "for profit" business is to ______ the value of shareholder wealth.

maximize

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

stakeholder

The controller is responsible for which of the following tasks?

- Financial accounting - Tax reporting and payments

Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of __________ management.

working capital

A good financial decision will do which of the following?

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

Which of the following are true of a sole proprietorship?

- It is one of the simplest types of businesses to form. - A proprietorship has a limited life.

Corporations in other countries are often called:

- Public limited companies - Limited liability company - Joint stock companies

Which of the following are considered non-owner stakeholders in a company?

- Suppliers - Employees - Government

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

- The ability to issue stock - Legal powers to sue

Which of the following are reasons that the corporation is the most important form of business?

- Corporations are separate legal entities. - Corporations can sue and be sued. - Corporations can enter contracts.

When are corporate profits taxed?

- Corporations pay taxes on corporate profits. - Individuals pay taxes on corporate dividends.

A general partnership has which of the following characteristics?

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

In an over-the-counter market, which of the following is true?

- Most of the buying and selling is done by the dealer. - Many dealers are also connected electronically.

According to Figure 1.2, where does cash generated by a corporation typically go?

- Paid to shareholders and creditors - Reinvested in the firm - To pay corporate taxes

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

- Tyco - WorldCom - Enron

A good financial decisions will do

- increase value of firms existing stock - increase shareholders equity

The federal government taxes which of the following?

Corporate earnings and shareholder dividends

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?

Agency problem

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

False

The Sarbanes-Oxley Act is intended to strengthen protection against:

corporate accounting fraud and financial malpractice

Why don't large businesses organize as sole proprietorships or partnerships?

It can be difficult to raise cash for investment in these forms, and that limits the ability of the business to grow.

Is profit maximization the primary objective of a business?

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

How is ownership transferred in a corporation?

Ownership is transferred by gifting or selling shares of stock.

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

Proxy fight

Why would the threat of a takeover motivate a manager to act in stockholders' interest?

Running the firm well and acting in the stockholders' interest makes the firm a less attractive takeover target to begin with.

How is ownership of a corporation represented?

Shares of stock

_______ ______ can be used to encourage managers to maximize the value of the stock.

Stock options

What is the primary objective of an auction market?

To bring buyers and sellers together

What is the main goal of financial management?

To maximize current share value

Which corporate officer is responsible for managing the firm's cash?

Treasurer

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

articles of incorporation

The New York Stock Exchange is a(n) _____.

auction market

Public limited companies and joint stock companies are other names for __________.

corporations

which are the following are reasons that the corporation is the most important form of business?

corps can enter contacts corps can sue and be sued the corp is a separate legal entity with the ability to acquire and exchange property

"Increasing shareholder wealth" means increasing the _________.

current common stock value

A bad financial decision is defined as a decision that ______ shareholder wealth.

decreases

A partnership in which partners share in gains or losses, and carry unlimited liability for all partnership debts, is called a:

general partnership

A sole proprietorship is a business that _______.

is owned by one person

A limited liability company's owners have ______ liability.

limited

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

limited

What type of partnership involves both general and limited partners to run the business?

limited partnership

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

limited to their cash contribution to the partnership

Agency costs occur when _________ and stockholder interests are not in line with one another.

management

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

A limited liability company is taxed like a _________, but retains ________ ________ for owners.

partnership; limited liability

What is NOT one of the 4 basic areas of finance

personal finance

When one owner or creditor sells to another, the transaction takes place in the _________ market

secondary

The owners of a corporation are called ______.

shareholders

Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:

stock options

Who elects the board of directors, and ultimately maintains control of the firm?

stockholders

The primary responsibility for financial managers is to increase the value of

the existing shares of stock

In a for-profit business, owners' equity is equivalent to:

the total value of stock in a corporation

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

treasurer

A corporation borrows money in its own name.

true

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

true

A partnership must have at least _______ owners.

two

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

unlimited

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

Managers

The Sarbanes-Oxley Act requires corporate officers to:

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

Which of these have been noted as unintended consequences of the Sarbanes-Oxley Act?

- eliminating public disclosure for many firms - public firms "going dark" and leaving the stock market - firms going public outside of the U.S. market

Working capital includes which of the following?

- short-term assets - inventory - cash

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

- stocks - bonds

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.

The threat of ______ motivates managers to make good decisions.

a takeover

The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.

agency

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

agency

The conflict of interest between an agent and a principal is called a(n)

agency problem.