Fin Ch. 1
It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.
False
Partnerships are the most common type of business firms in the world
False
Raising new capital by issuing bonds is an example of a commercial banking activity.
False
The fact that corporationsʹ shares are easily traded within the market has a net effect of acting as a disincentive for managers to favor the interests of shareholders over their own interests.
False
The shares of private corporations are traded on a stock market.
False
if broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85.
False
4) Which of the following should be true for an asset to be considered liquid?
It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.
Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct?
Janeʹs liability for the firmʹs debts consists solely of her investment in the firm.
What is the term for the applicable price that I will pay, if I have to buy a stock?
The buyer of a stock pays the ask price when he buys the stock.
On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction?
The transaction was between the corporation and investors.
Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors
True
Stock markets provide liquidity for a firmʹs shares.
True
The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly
True
The principal goal of a financial manager is to maximize the wealth of the stockholders.
True
What are the main differences between a partnership and a sole proprietorship?
While a sole proprietor has the same identity as its single owner, a partnership of general partners has the same identity as its partners. Each general partner is responsible for the decisions taken by that partner as well as any other general partner.
How do the shareholders of most corporations exercise their control of that corporation?
by electing members of a board of directors
What is the most common way that agency conflict problems are addressed in most corporations?
by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders
The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case?
by raising the companyʹs equity by encouraging new owners to take a stake in the company
A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.
hostile takeover
What is the bid-ask spread?
the difference in price available for an immediate sale of a stock and the immediate purchase of the stock
In which of the following relationships is an agency conflict problem LEAST likely to arise?
the relationship between a driver and the passengers in a car regarding the safe driving of that car
Whose interests should a financial manager consider paramount when making a decision?
the stockholders who have risked their money to become owners of the company
What is the most important duty of a firmʹs financial officer?
to make investment decisions
Which of the following is NOT an advantage of a sole proprietorship?
unlimited liability
Which of the following features of a corporation is LEAST accurate?
Earnings from a corporation are taxed only once.
Financial decisions require that you weigh alternatives in strictly monetary terms
False
In most corporations, the owners exercise direct control of a corporation.
False
An S corporation earns $9.10 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $5.00 dividend?
A) $9.10 × 36% = $3.28
How is a corporation different from most of the other forms of business organizations?
A corporation has a separate legal identity from those of its owners. This separation gives the owners limited liability for the actions of the corporation. The down side is the process of double taxation for each dollar earned by the corporation, once when it is earned by the corporation and subsequently when it is passed on to the owners.
What are the main differences between a limited partnership and a limited liability corporation
A limited partnership is required to have at least one general partner. A limited liability corporation is similar to a limited partnership but without the general partner.
What is the major advantage corporations have over other business entities?
A) It is easier for a corporation to raise capital than other forms of businesses. B) A corporation is treated as a separate legal entity for tax and legal purposes. C) A corporationʹs shares can be freely traded among its shareholders. !!!D) All of the above are advantages that a corporation has over other business forms.
Which of the following is unique for an S corporation?
A) The profits and losses of an S corporation are not taxed at the corporate level, but shareholders must include these profits and losses on their individual tax returns. B) The shareholders of an S corporation must include the firmʹs profit and losses in their individual income taxes even if no money is distributed to them. C) There is a maximum limit on the number of shareholders for an S corporation. !!!D) None of the above statements is unique.
Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend paymentof$25,000,000 paidproportionallytoitsshareholders,howmuchofthisamount would Helen receive, disregarding tax?
B) Helen will receive 10.2 % of the dividend payment proportional to her ownership: 0.102 × 25,000,000 = $2,550,000
Put the following steps of the financial cycle in the correct order. I. Money flows to companies who use it to fund growth through new products. II. People invest and save their money. III. Moneyflowsbacktosaversandinvestors.
B) II, I, and III
What is the process of double taxation for the stockholders in a C corporation?
B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them.
Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers?
Bill chooses to pursue a risky investment for the companyʹs funds because his compensation will substantially rise if it succeeds.
Which of the following organization forms has the most revenue?
C corporation
A C corporation earns $4.30 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $3.00 dividend?
C) Corporate tax = $4.30 × 35% = $1.51 ; Personal tax = $3.00 × 20% = $0.60 Total = $1.51 + $0.60 = $2.11
A C corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $6.00 dividend?
C) Corporate tax = $8.30 × 39% = $3.24 , Personal tax = $6 × 15% = $0.90 Total = $3.24 + $0.90 = $4.14
You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation announces a profit of $6 per share, of which it retains $1 for reinvestment and distributes the rest as dividend payments. Given that the personal tax rate is 35%, how much tax must you pay per share?
C) Tax paid by shareholder of S corporation = 5 × 0.35 = $1.75
Which of the following people may not manage the operations of a firm in which they are part or full owners?
C) limited partners in a limited partnership
Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp. retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments. If the corporate tax rate was 35% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings received after-tax by a holder of 100,000 shares of Valiant Corp.?
Corporate tax paid on $3.4 earnings = $3.4 × 0.35 = 1.190 earnings after-tax = 3.4 - 1.190 = $2.210 earnings distributed as dividends = $2.210 - $1 = $1.2100 taxes paid on dividends by a shareholder = 1.2100 × 0.125 = 0.1513 after-tax dividends per share = 1.2100 - 0.1513 = $1.0588 hence a holder of 100,000 shares receives 1.0588 × 100,000 = $105,875
21) An S corporation earns $6.00 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $2.00 dividend?
D) $6.00 × 39% = $2.34
Stella places a market order with her broker to buy 1,000 shares of OneWorld Corp. The broker buys 1,000 shares at $15.80 each, and sells them to Stella at $15.95 each. He also charges a commission of $12.00. What is bid-ask spread in this case?
D) (15.95 - 15.80 ) × 1,000 = $150
Which of the following best describes why the Valuation Principle is a key concept in making financial decisions?
D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly
A C corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00 per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the after-tax amount an individual would receive from the dividend?
D) Personal tax = $4 × 15% = $0.60 ; Total = $4.00 - $0.60 = $3.40
Which of the stock markets listed below is the smallest, as judged by trading volume?
Deutsche Börse
A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met?
In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.
Why is the stock price of a company an indication of the performance of the companyʹs senior managers?
In general, people want to invest in a well-managed corporation, which will drive up the price of shares.
Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property?
It is a legally defined, artificial entity that is separate from its owners.
In which of the following ways is a limited liability company like a corporation?
Its ownersʹ liability is restricted to their investment.
What is the principal guiding factor for the financial manager of a firm?
Maximizing stockholder wealth is the paramount guiding factor for a firmʹs financial manager.
A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations?
New models will require a lot of money to develop and bring to market before they generate any revenue.
Which of the following is a measure of the aggregate price level of collections of pre-selected stocks?
S&P 500
Why is a stock exchange like NASDAQ considered a secondary market?
Shares sold on it are exchanged between investors without any involvement of the issuing corporation.
A companyʹs board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employeesʹ diligence and industry. What general principle is being argued by the board of directors?
Some activities that decrease shareholdersʹ wealth may have intangible benefits which increase the strength of the company overall.
Which of the following is typically the major factor in limiting the growth of sole proprietorships?
The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts
What are the main differences between the NYSE and NASDAQ stock markets?
The NYSE has a physical location, a geographical address where traders gather to trade, but NASDAQ is an electronic market. Moreover, while the NYSE has one specialist in each stock, NASDAQ has multiple market makers serving the functions of both matching buyers and sellers and trading on their own account
Briefly discuss the issues in the agency conflict problem.
The agency conflict problem arises out of the principal-agent relationship existing between the shareholders and managers of a corporation. Although managers are required to put the shareholders interest ahead of their own, in practice they tend to put their own interest ahead of the shareholdersʹ interests.
Explain some of the measures taken to reduce the agency conflict problem.
The agency conflict problem can be reduced by taking measures that align the managers interests with those of the shareholders. For example, incentive-based compensation, such as employee stock options, helps align the interests of these two constituents.
What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership?
The owners of a limited liability company can take an active role in running the company.
What is the term for the applicable price that the seller gets when he sells a stock on the exchange
The seller gets the bid price when he sells a stock on the exchange.
What is the general relation of the two types of prices quoted for a stock on a exchange?
The two prices are bid price and ask price. The ask price is higher than the bid price to deter a buyer from buying a stock and selling it back immediately, assuming everything else remains unchanged.
What are the terms for the two types of prices quoted for a stock on an exchange?
The two quotes associated with a stock quoted on the exchange are bid price and ask price.
Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves?
There are often many owners, and they can often change as they buy and sell stock.
Why is it difficult to determine the market price of a private corporationʹs shares at any point in time?
There is no organized market for its shares.
Which of the following is NOT a reason why a firmʹs financial managers must take great care when making investment decisions?
These investment decisions determine the corporationʹs mix of debt and equity.
A limited liability company is essentially ________.
a limited partnership without a general partner
Which of the following is a major duty of a financial manager? I. To make investment decisions II. To make financing decisions III. To manage cash flow from operating activities
all of the above
A factory owner wants his workers to produce as many widgets as they can so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case?
by supplying incentives so the agents act in the way principal desires
A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case?
by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors
Over four-fifths of all U.S. business revenue is generated by which type of firms
corporations
Which of the following is NOT a function of the board of directors?
day-to-day running of the company
Investments by wealthy individuals and endowments is a major source of money for each of the following EXCEPT ________.
mutual funds
A sole proprietorship is owned by ________.
one person
Which of the following would be more typically the responsibility of a controller rather than a treasurer?
overseeing accounting and tax functions
3) Which of the following types of firms does NOT have limited liability
sole proprietorships
What is the most common type of firms in the United States and the world
sole proprietorships
Which of the following is NOT a role of financial institutions?
spreading out risk-bearing
In most corporations, to whom does the chief financial officer report?
the chief executive officer
