FIN3403 Chapter 1 quiz

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? A. Agency problem. B. Legal liability. C. Articles of incorporation. D. Corporate breakdown. E. Bylaws.

A. Agency problem.

The decision to issue additional shares of stock is an example of which one of the following? A. Capital structure decision. B. Controller's duties. C. Capital budgeting. D. Net working capital decision. E. Working capital management.

A. Capital structure decision.

Why should financial managers strive to maximize the current value per share of the existing stock? A.Because they have been hired to represent the interests of the current shareholders. B. Because managers often receive shares of stock as part of their compensation. C. Doing so guarantees the company will grow in size at the maximum possible rate. D. Doing so increases employee salaries. E. Because this will increase the current dividends per share.

A.Because they have been hired to represent the interests of the current shareholders.

A stakeholder is:

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

Which one of the following statements is generally correct?

Auction markets match buy and sell orders.

A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: A. Must continue to provide audited financial statements to the public. B. Can provide less information to its shareholders than it did prior to "going dark.". C. Can continue publicly trading its stock but only on the exchange on which it was previously listed. D. Must continue to provide a detailed list of internal control deficiencies on an annual basis. E. Ceases to exist.

B. Can provide less information to its shareholders than it did prior to "going dark.".

Which one of the following terms is defined as the management of a firm's long-term investments? A. Capital structure. B. Capital budgeting. C. Financial allocation. D. Working capital management. E. Agency cost analysis.

B. Capital budgeting.

Which one of the following business types is best suited to raising large amounts of capital? A. General partnership. B. Corporation. C. Limited partnership. D. Limited liability company. E. Sole proprietorship.

B. Corporation.

Which type of business organization has all the respective rights and privileges of a legal person? A. Limited partnership. B. Corporation. C. Limited liability company. D. Sole proprietorship. E. General partnership.

B. Corporation.

Corporate bylaws: A. Must be amended should a firm decide to increase the number of shares authorized. B. Determine how a corporation regulates itself. C. Describe the intended life and purpose of the organization. D. Define the name by which the firm will operate. E. Cannot be amended once adopted.

B. Determine how a corporation regulates itself.

A business created as a distinct legal entity and treated as a legal "person" is called a: A. General partnership. B. Unlimited liability company. C. Corporation. D. Sole proprietorship. E. Limited partnership.

C. Corporation.

Which one of the following is a working capital management decision? A. Determining the amount of long-term debt required to complete a project. B. Determining the amount of equipment needed to complete a job. C. Determining whether to pay cash for a purchase or use the credit offered by the supplier. D. Determining the number of shares of stock to issue to fund an acquisition. E. Determining whether or not a project should be accepted.

C. Determining whether to pay cash for a purchase or use the credit offered by the supplier.

Which form of business structure is most associated with agency problems?

Corporation.

Which one of the following is an unintended result of the Sarbanes-Oxley Act? A. More detailed and accurate financial reporting. B. Increased responsibility for corporate officers. C. Increased management awareness of internal controls. D. Corporations delisting from major exchanges. E. Identification of internal control weaknesses.

D. Corporations delisting from major exchanges.

Which of the following parties are considered stakeholders of a firm? I. Employee II. Long-term creditor III. Government IV. Common stockholder A. IV only. B. II, III, and IV only. C. I only. D. I and III only. E. II and IV only.

D. I and III only.

Which one of the following grants an individual the right to vote on behalf of a shareholder? A. Indenture agreement. B. Stock option. C. Stock audit. D. Proxy. D. Bylaws.

D. Proxy.

Which one of the following is an agency cost? A. Accepting an investment opportunity that will add value to the firm. B. Investing in a new project that creates firm value. C. Increasing the quarterly dividend. D. Closing a division of the firm that is operating at a loss. E. Hiring outside accountants to audit the company's financial statements.

E. Hiring outside accountants to audit the company's financial statements.

Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Which form of business entity should they consider to replace their general partnership assuming they wish to remain the only two owners of their business? Whichever organization they select, they wish to be treated equally.

Limited liability company.

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:

Limited partner.

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?

Maximum loss limited to the capital invested.

Which of the following represent cash outflows from a corporation?

Payment of dividends & Payment of government taxes.

Which one of the following is a primary market transaction?

Sale of a new share of stock to an individual investor.

Public offerings of debt and equity must be registered with which one of the following?

Securities and Exchange Commission.

A business owned by a solitary individual who has unlimited liability for its debt is called a:

Sole proprietorship

The controller of a corporation generally reports directly to the:

Vice President of Finance

Which one of the following is defined as a firm's short-term assets and its short-term liabilities?

Working capital.

Which of the following should a financial manager consider when analyzing a capital budgeting project? I. Project start-up costs. II. Timing of all projected cash flows. III. Dependability of future cash flows. IV. Dollar amount of each projected cash flow. A. I, II, and IV only. B. I, II, III, and IV. C. I and IV only. D. I, II, and III only. E. II, III, and IV only.

B. I, II, III, and IV.

Which one of the following is a capital structure decision? A. Determining how much inventory will be needed to support a project. B. Determining how to allocate investment funds to multiple projects. C. Determining the amount of funds needed to finance customer purchases of a new product. D. Determining how much debt should be assumed to fund a project. E. Determining which one of two projects to accept.

D. Determining how much debt should be assumed to fund a project.

Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002? I. Increased foreign stock exchange listings of U.S. stocks. II. Decreased compliance costs. III. Increased privatization of public corporations. IV. Increased public disclosure by all corporations. A. II, III, and IV only. B. I, III, and IV only. C. II and IV only. D. I and III only. E. I, II, and III only.

D. I and III only. I. Increased foreign stock exchange listings of U.S. stocks. III. Increased privatization of public corporations.

Which of the following are advantages of the corporate form of business ownership? I. Limited liability for firm debt. II. Double taxation. III. Ability to raise capital. IV. Unlimited firm life. A. I, II, III, and IV. B. I and II only. C. II, III, and IV only. D. I, III, and IV only. E. III and IV only.

D. I, III, and IV only.

Which one of the following best states the primary goal of financial management? A. Increase cash flow and avoid financial distress. B. Maintain steady growth while increasing current profits. C. Minimize operational costs while maximizing firm efficiency. D. Maximize the current value per share. E. Maximize current dividends per share.

D. Maximize the current value per share.

Which one of the following is a capital budgeting decision?

Deciding whether or not to purchase a new machine for the production line.

The articles of incorporation:

Describe the purpose of the firm & Set forth the number of shares of stock that can be issued.

Decisions made by financial managers should primarily focus on increasing which one of the following? A.Size of the firm. B.Growth rate of the firm. C.Gross profit per unit produced. D.Total sales. E.Market value per share of outstanding stock.

E.Market value per share of outstanding stock.

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:

General partnership.

Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. I. Compensation based on the value of the stock. II. Stock option plans. III. Threat of a company takeover. IV. Threat of a proxy fight.

I, II, III, and IV

Which of the following individuals have unlimited liability based on their ownership interest? I. General partner II. Sole proprietor III. Stockholder IV. Limited partner A. II and IV only. B. I and II only. C. I, II, and III only. D. I, II, and IV only. E. II only.

B. I and II only.

Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A. Capital structure. B. Cost analysis. C. Cash management. D. Working capital management. E. Capital budgeting.

A. Capital structure.

Which one of the following actions by a financial manager is most apt to create an agency problem? A. Increasing current profits when doing so lowers the value of the firm's equity. B. Refusing to expand the company if doing so will lower the value of the equity. C. Refusing to borrow money when doing so will create losses for the firm. D. Refusing to lower selling prices if doing so will reduce the net profits. E. Agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales.

A. Increasing current profits when doing so lowers the value of the firm's equity.

Which one of the following statements concerning a sole proprietorship is correct? A. It is easy to create a sole proprietorship. B. A sole proprietor can generally raise large sums of capital quite easily. C. The life of a sole proprietorship is potentially unlimited. D. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. E. A sole proprietorship is taxed the same as a C corporation.

A. It is easy to create a sole proprietorship.

Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt? A. Limited partnership. B. General partnership. C. Sole proprietorship. D. Joint stock company. E. Corporation.

A. Limited partnership.

Which one of the following is a means by which shareholders can replace company management? A. Proxy fight. B. Stock options. C. Agency play. D. Sarbanes-Oxley Act. E. Promotion.

A. Proxy fight.

Which one of the following statements is correct? A. Partnerships are the most complicated type of business to form. B. Income from both sole proprietorships and partnerships is taxed as individual income. C. All business organizations have bylaws. D. A general partnership is legally the same as a corporation. E. Only firms organized as sole proprietorships have limited lives.

B. Income from both sole proprietorships and partnerships is taxed as individual income.

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management? A. Increase in the number of shares outstanding. B. Increase in the market value per share. C. Decrease in the net working capital. D. Increase in the amount of the quarterly dividend. E. Decrease in the per unit production costs.

B. Increase in the market value per share.

The Sarbanes-Oxley Act of 2002 is a governmental response to: A. The terrorists attacks on 9/11/2001. B. Management greed and abuses. C. Decreasing corporate profits. D. A weakening economy. E. Deregulation of the stock exchanges.

B. Management greed and abuses.

Which one of the following is defined as a firm's short-term assets and its short-term liabilities? A. Capital structure. B. Working capital. C. Net capital. D. Investment capital. E. Debt.

B. Working capital

Which of the following apply to a partnership that consists solely of general partners? I. Double taxation of partnership profits. II. Limited partnership life. III. Active involvement in the firm by all the partners. IV. Unlimited personal liability for all partnership debts. A. I, II, and IV only. B. II only. C. II, III, and IV only. D. II and III only. E. I and II only.

C. II, III, and IV only. II. Limited partnership life. III. Active involvement in the firm by all the partners. IV. Unlimited personal liability for all partnership debts.

Which one of the following statements is correct concerning the NYSE? A. Any corporation desiring to be listed on the NYSE can do so for a fee. B. The NYSE is the largest dealer market for listed securities in the United States. C. The listing requirements for the NYSE are more stringent than those of NASDAQ. D.The NYSE is an OTC market functioning as both a primary and a secondary market. E. The publicly traded shares of a NYSE-listed firm must be worth at least $250 million.

C. The listing requirements for the NYSE are more stringent than those of NASDAQ.

Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure? A. The chief operations officer reports to the vice president of production. B. The chief executive officer reports to the president. C. The treasurer reports to the vice president of finance. D. The vice president of finance reports to the chairman of the board. E. The controller reports to the president.

C. The treasurer reports to the vice president of finance.

Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment? A. I, II, and III only. B. II and III only. C. I and IV only. D. I, II, III, and IV. E. II, III, and IV only.

E. II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment?

Which one of the following statements is correct? A. Corporate profits are taxable income to the shareholders when earned. B. The majority of firms in the U.S. are structured as corporations. C. Stockholders face no potential losses related to their corporate investment. D. Corporate shareholders elect the corporate president. E. Corporations can raise large amounts of capital generally easier than partnerships can.

E. Corporations can raise large amounts of capital generally easier than partnerships can.

Which one of these is a working capital management decision? A. Determining the best method of producing a product. B. Determining the number of employees needed to work during a particular shift. C. Determining when to replace obsolete equipment. D. Determining if a competitor should be acquired. E. Determining the minimum level of cash to be kept in a checking account.

E. Determining the minimum level of cash to be kept in a checking account.

Which of the following accounts are included in working capital management? I. Accounts Payable II. Accounts Receivable III. Fixed Assets IV. Inventory A. I and II only. B. I and III only. C. II and IV only. D. II, III, and IV only. E. I, II, and IV only.

E. I, II, and IV only.

Which one of the following functions should be the responsibility of the controller rather than the treasurer? A. Daily cash deposit. B. Equipment purchase analysis. C. Payment to a vendor. D customer credit approval. E. Income tax returns.

E. Income tax returns.

Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is listed on the NYSE. This trade occurred in which one of the following? A. Primary, dealer market. B. Primary, auction market. C. Secondary, dealer market. D. Secondary, OTC market. E. Secondary, auction market.

E. Secondary, auction market.

Financial managers should primarily focus on the interests of: A. The board of directors. B. Stakeholders. C. The vice president of finance. D. Their immediate supervisor. E. Shareholders.

E. Shareholders.

Which one of the following parties has ultimate control of a corporation? A. Board of directors. B. Chief executive officer. C. Chief operating office. D. Chairman of the board. E. Shareholders.

E. Shareholders.

Which one of the following statements concerning stock exchanges is correct? A. The exchange with the strictest listing requirements is NASDAQ. B. NASDAQ is a broker market. C. The NYSE is a dealer market. D. Most debt securities are traded on the NYSE. E. Some large companies are listed on NASDAQ.

E. Some large companies are listed on NASDAQ.

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction: A. Involved a proxy. B. Was a private placement. C. Took place in the primary market. D. Occurred in a dealer market. E. Was facilitated in the secondary market.

E. Was facilitated in the secondary market.

Which of the following are cash flows from a corporation into the financial markets? I. Repayment of long-term debt. II. Payment of government taxes. III. Payment of loan interest. IV. Payment of quarterly dividend.

I, III, and IV only

Which one of the following characteristics applies to a limited liability company?

Taxed similar to a partnership.