Finance Chapter 1

A sole proprietorship is owned by a. One person. b. Two or more persons. c. Shareholders. d. Bankers.

A. One Person

What is the most common type (in terms of numbers) of firm in the United States and the world? a.Sole proprietorships b.Partnerships c.Limited partnerships d.Corporations

A. Sole Proprietorships

Which of the following types of firms do not have limited liability? a. Sole proprietorships b.Limited partnerships c.Corporations d.None of the above

A. Sole Proprietorships

What is the bid-ask spread? a. The difference in price available for an immediate sale of a stock and the immediate purchase of that stock b.All of the costs and fees that a stock exchange charges in order to process a transaction c. The rise or fall in the value of a stock between the time it is acquired by an investor and sold by that investor d. The difference in the selling price of a stock between different exchanges

A. The difference in price available for an immediate sale of a stock and the immediate purchase of that stock

Whose interests should a financial manager consider paramount when making a decision? a. The stockholders who have risked their money to become owners of the company b. The employees and associated stakeholders who are employed by the company c. The public who consume the company's goods and services d. The senior management and associated colleagues at the executive level within the company

A. The stockholders who have risked their money to become owners of the company

How do the shareholders of most corporations exercise their control of that corporation? a. By voting on issues that concern them b. By electing members of a board of directors c. By vetting every decision made by the board of directors d. By providing oversight of the day to day running of the corporation

B. By electing members of a board of directors

Which of the following is a primary market transaction? a. You sell 200 shares of IBM stock on the NYSE through your broker. b. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. c. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker-- you just give him cash and he gives you the stock. d. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. e. You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares on the NYSE

B. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.

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 save and invest their money III. Money flows back to savers and investors a. I, II, III b. II, I, III c. III, II, I d. II, III, I

B. II, I, III

Which of the following statements is CORRECT? a. In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. b. Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. c. A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company. d. In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business. Also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. e. A major disadvantage of all partnerships relative to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

B. Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.

Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needs? a. Proprietorship, because of ease of entry. b. S corporation, to gain some tax advantages and also to obtain limited liability. c. Partnership, but only if she needs additional capital. d. Regular corporation, because of the limited liability. e. In this situation, the various forms of organization seem equally desirable.

B. S corporation, to gain some tax advantages and also to obtain limited liability.

Why is a stock exchange like NASDAQ considered a secondary market? a. It trades the second largest volume of shares in the world. b. Shares sold on it are exchanged between investors without any involvement of the issuing corporation. c. The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart d. NASDAQ is called a secondary market because NYSE is considered a primary market.

B. Shares sold on it are exchanged between investors without any involvement of the issuing corporation.

What is the process of double taxation for the stockholders in a C corporation? a. Their shares are taxed when they are both bought and sold. b. The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. c. The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares. d. The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation.

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 statements is CORRECT? a. A hostile takeover is the main method of transferring ownership interest in a corporation. b. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. c. A corporation is a legal entity that is generally created by a state, and it has a life and existence that is separate from the lives of its individual owners and managers. d. Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. e. Although its stockholders are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.

C. A corporation is a legal entity that is generally created by a state, and it has a life and existence that is separate from the lives of its individual owners and managers.

You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a broker, and the trade occurred on the NYSE. This is an example of a. A futures market transaction. b. A primary market transaction. c. A secondary market transaction. d. A money market transaction. e. An over-the-counter market transaction.

C. A secondary market transaction.

In which of the following ways is a limited liability company like a corporation? a. Both types of firm were created and developed first in the United States. b. Both can choose to be considered a partnership for tax purposes. c. All of its owners' liability is restricted to their investment in the firm. d. It is directly managed by the owners of the firm.

C. All of its owners' liability is restricted to their investment in the firm.

Which of the following could explain why a business might choose to organize as a corporation rather than as a sole proprietorship or a partnership? a.Corporations generally face fewer regulations. b.Corporations generally fac e lower taxes. c.Corporations generally find it easier to raise capital. d.Corporations enjoy unlimited liability. e.Statements c and d are correct.

C. Corporations generally find it easier to raise capital

Joe is a general partner in a limited partnership firm, while Jane is a limited partner in that same firm. Which of the following statements regarding their respective relationships to the firm are correct? a.Joe has no management authority within the partnership. b.Jane is legally involved in the managerial decision making of the firm. c.Jane's liability for the firm's debts consists solely of her investment in the firm. d.Withdrawal of Jane from the partnership will dissolve that partnership.

C. Jane's liability for the firm's debts consists solely of her investment in the firm.

Which of the following people may not manage the operations of a firm in which they are part or full owners? a. Stockholders in S corporations b. Stockholders in C corporations c. Limited partners in a limited partnership d. General partners in a limited partnership

C. Limited partners in a limited partnership

Which of the following statements is CORRECT? a. Corporations generally are subject to fewer regulations and more favorable tax treatment than sole proprietorships and partnerships. This is why corporations do most of the business in the United States. b. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers. c. One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm. d. Because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations. e. A good goal for a firm's management is maximization of expected EPS

C. One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm.

Which of the following is not a role of financial institutions? a. Moving funds from savers to borrowers. b. Spreading out risk-bearing. c. Printing money for borrowers. d. Moving funds though time.

C. Printing money for borrowers.

Which of the following is typically the major factor in limiting the growth of a sole proprietorship? a.The organization of such firms tends to become extremely complicated over time. b.It is impossible to transfer control of such a firm to a new owner if the present owner dies or wishes to sell the firm. c.The amount of money that can be raised by the firm is limited by the fact that there is a single owner and that the single owner must make good on all debts. d.Investors have a great deal of control over the day- to-day running of the firm, leading to confusion when conflicts in direction arise.

C. The amount of money that can be raised by the firm is limited by the fact that there is a single owner and that the single owner must make good on all debts.

Which of the following are major duties of a financial manager? I. To make investment decisions II. To make financing decisions III. To manage cash flow from operating activities a. I only b. I and II only c. I and III only d. All of the above

D. All of the above

What is the 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 in bankruptcy. c. A corporation's shares can be freely traded among its shareholders. d. All of the above are advantages that a corporation has over other business form

D. All of the above are advantages that a corporation has over other business form

Which of the following statements is CORRECT? a. If General Electric were to issue new stock this year it would be considered a secondary market transaction since the company already has stock outstanding. b. Capital market transactions only include preferred stock and common stock transactions. c. If an investor sells shares of stock through a broker, then this would be a primary market transaction. d. Both Nasdaq "dealers" and NYSE "specialists" hold inventories of stocks. e. An electronic communications network (ECN) is a physical location exchange.

D. Both Nasdaq "dealers" and NYSE "specialists" hold inventories of stocks.

Over four-fifths of all U.S. business revenue is generated by which type of firm? a.Sole proprietorships b.Partnerships c.Limited partnerships d.Corporations

D. Corporations

Which of the following is NOT a function of the board of directors? a. Determining how top executives should be compensated b. Monitoring the performance of the company c. Answering to shareholders of the company d. Day-to-day running of the company

D. Day-to-day running of the company

Which of the following features of a corporation is LEAST accurate? a. The owners' identity is separate from the corporation. b. The owners of the corporation have limited liability for the corporation's debts. c. Changes in ownership do not result in the dissolution of the corporation. d. Earnings from the corporation are taxed only once

D. Earnings from the corporation are taxed only once

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? a. The financial manager should seek to make investments that do not harm the interests of the stockholders. b. The decisions taken by the financial manager should be solely influenced by the benefit to the company since, by maximizing its fitness, he or she will also maximize the benefits of that company to the shareholders. c. The financial manager should consider the interests and concerns of large shareholders a priority, so the needs of those who hold a controlling interest in the company are met. d. In general, all shareholders will agree that they are better off if the financial manager works to maximize equity value.

D. In general, all shareholders will agree that they are better off if the financial manager works to maximize equity value.

Which of the following need be true for an asset to be considered liquid? a. It pays regular dividends. b. It can be bought and sold at an organized stock market or bourse. c. It is offered for sale on both primary and secondary markets. d. It can be easily bought and sold without affecting the asset's price.

D. It can be easily bought and sold without affecting the asset's price.

The primary goal of a manager of a publicly- owned firm (corporation) interested in serving its stockholders should be to a. Maximize expected total corporate profit. b. Maximize expected EPS. c.Minimize the chances of losses. d.Maximize the stock price per share. e.Maximize expected net income.

D. Maximize the stock price per share.

Money markets are markets for a. Foreign stocks. b. Consumer automobile loans. c. U.S. stocks. d. Short-term debt securities. e.Long-term bonds.

D. Short-term debt securities

Which of the following statements is CORRECT? a. One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners. b. There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of new asset investments a firm makes. c. Bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns. d. Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns. e. Relative to sole proprietorships, corporations generally face fewer regulations, and this makes it easier for corporations to raise capital .

D. Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.

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? a. The owners of a limited liability company have personal obligation for debts incurred by the company. b. The owners in a limited liability company have tax obligations arising from only personal taxes. c. The owners of a limited liability company can withdraw from the company without the company being dissolved. d. The owners of a limited liability company can take an active role in running the company.

D. The owners of a limited liability company can take an active role in running the company.

Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves? a. The control of the corporation's finances should to be in the hands of a disinterested third party. b. The interests of the various owners may conflict with each other. c. The owners may not be U.S. citizens or residents. d. There are often many owners, and they can often change as they buy and sell stock.

D. There are often many owners, and they can often change as they buy and sell stock.

What is the most important duty of a financial officer? a. To ensure that the firm has enough cash on hand to meet its commitments at any given time b. To decide how to pay for investments c. To manage working capital d. To make investment decisions

D. To make investment decisions