Finance LearnSmart Chapter 1 - Principles of Finance

What is the main goal of financial management? To maximize profits To maximize market share To minimize expenses To maximize shareholder wealth

To maximize shareholder wealth

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

Which of the following show why a corporation is the most important form of business? Corporations can vote in general elections Corporations can sue and be sued Corporations can enter into contracts A corporation is a separate legal entity with the ability to acquire and exchange property

Corporations can sue and be sued Corporations can enter into contracts A corporation is a separate legal entity with the ability to acquire and exchange property

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

Enron WorldCom Tyco

T/F: The Sarbanes-Oxley Act provides incentives for companies to go public in US markets

False

A limited liability company is taxed like a ___ and its owners have ___ liability partnership; unlimited partnership; limited corporation; limited corporation; unlimited

partnership; limited

In a large corporation, the financial manager is primarily responsible for: Personnel decisions in the plant Financing decisions Overseeing the management of the plant Financial aspects of operations, such as collections of accounts receivables Long-term investment decisions

Financing decisions Financial aspects of operations, such as collections of accounts receivables Long-term investment decisions

A good financial decision will do which of the following? Increase market value of shareholders' equity Increase the value of the firm's existing stock Increase current dividends per share Increase the cost of capital

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

A sole proprietorship is a business that ___. Provides limited personal liability to its owner Is owned by one person Is similar to a limited partnership Is organized with bylaws

Is owned by one person

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

Limited to their cash contribution to the partnership

Which of the following are included in a firm's capital structure? Long term debt Current assets Net sales Equity

Long term debt Equity

Since ___ and ownership are separated, a corporation's life is unlimited. Management Taxation Debt Profitability

Management

The goal of a for-profit business is to ____ existing owners' equity

Maximize

A business without separate legal authority formed by two or more people is known as a ___

Partnership

Which one of these provides a manager an incentive to perform well? Promotions Lack of takeover threats Agency problems Low pay

Promotions

Which one of these is an important mechanism used by unhappy stockholders to replace current management? Ponzi scheme Proxy fight Prospectus Perpetual debt

Proxy fight

Corporations in other countries are often called: Public limited companies Autonomous entities Re-calibrated partnerships Joint stock companies

Public limited companies Joint stock companies

___ are frequently used to encourage key managers to maximize the value of the firm's stock Stock splits Stock dividends Cash dividends Stock options

Stock options

The Sarbanes-Oxley Act requires corporate officers to do which of the following? Accept responsibility for material errors in the annual report Confirm the validity of the annual financial report Limit their compensation and stock options List any deficiencies in internal controls

Accept responsibility for material errors in the annual report Confirm the validity of the annual financial report List any deficiencies in internal controls

_______ budgeting is the process of making and managing expenditures on long-term assets Performance-based Conventional Optional Capital

Capital

A corporation is a distinct ___ entity and as such can have a name and take advantage of the legal powers of natural persons Retributive Patriotic Illegal Legal

Legal

Since ownership in a corporation can be dispersed over a huge number of stock holders, it can be argued that ___ effectively controls the firm The largest shareholder No one Management The federal government

Management

Because shareholders get paid last after all other obligations are satisfied, they are often called: Residual Owners Creditors Preferred Shareholders Stakeholders

Residual Owners

The owners of a corporation are called ___

Shareholders

What is the main goal of financial management? To minimize expenses To maximize market share To maximize profits To maximize shareholder wealth

To maximize shareholder wealth

The officer responsible for managing the firm's cash flow is the: Controller Treasurer Auditor Information Systems Manager

Treasurer

The costs incurred due to a conflict of interest between stockholders and management are called ___ Hidden costs Agency costs Sunk costs Opportunity costs

Agency costs

The conflict of interest between an agent and a principal is called a(n) ___. Agency problem Moral hazard problem Agency relationship Moral agency

Agency problem

An organization must prepare ___ and bylaws when forming a corporation Articles of Incorporation A legal will A partnership agreement An indenture agreement

Articles of Incorporation

A corporation receives cash from financial markets by selling ___ and ___ Finished goods Bonds Land Stocks

Bonds Stocks

The rules used by a corporation to regulate its existence are known as ___ Bylaws Restatement of facts A legal settlement Articles of Incorporation

Bylaws

Which corporate officer is responsible for accurate financial reporting of the firm's activities? Corporate secretary Credit manager Treasurer Controller

Controller

Which of the following positions generally report to the chief financial officer (CFO)? Director of Marketing Controller Treasurer Chief Executive Officer (CEO)

Controller Treasurer

The financial goal of profit maximization is associated with which of the following? Cost-cutting Maintenance deferment Only beneficial long-term effects Critical inventory reduction

Cost-cutting Maintenance deferment Critical inventory reduction

Some of the cash flow generated by a firm goes back to the financial markets in the form of: Taxes and other payments to the government Dividends and debt payments Reinvested cash flows Products and services

Dividends and debt payments

What are the two basic classifications under which most potential financial goals fall? Enhancing dividends Earning or increasing profits Cutting costs Controlling risks

Earning or increasing profits Controlling risks

A general partnership has which of the following characteristics? It is expensive to form It is difficult to transfer ownership Large amounts of cash can be raised easily Each owner has unlimited liability for all firm debts

It is difficult to transfer ownership Each owner has unlimited liability for all firm debts

When a corporation is formed, it is granted which of the following rights? Legal powers to sue The ability to issue stock State citizenship for jurisdictional purposes Corporate life of up to 100 years

Legal powers to sue The ability to issue stock State citizenship for jurisdictional purposes

Businesses are motivated to organize as corporations because stockholders in a corporation have ___ liability for corporate debts Limited Unlimited Personal No

Limited

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

Managers

Which of the following, according to the textbook, are possible financial goals for a company? Incur bankruptcy Minimize costs Survival Maximize profits

Minimize costs Survival Maximize profits

Indirect agency costs are often due to lost ___. Opportunities Causes Objectives Goals

Opportunities

Most equity shares of large firms in the US trade on: Bond markets Organized auction markets Option exchanges Commodities markets

Organized auction markets

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

Ownership is transferred by gifting or selling shares of stock

Inventory is a: Part of working capital Current liability Current asset Fixed asset Long term liability

Part of working capital Current asset

Which of the following are important when considering a partnership? Personal liability for firm debts Future dividend policy Taxation of partnership income Fund raising limitations

Personal liability for firm debts Future dividend policy Fund raising limitations

When one owner or creditor sells to another, the transaction takes place in the ___ market Underwriting Primary Rudimentary Secondary

Secondary

Which of the following parties would be the last party to receive payment if a firm were to close? Shareholders Government Bondholders Chief Executive Officer

Shareholders

The liability of a shareholder in a corporation is limited to which of these? The percentage of corporate debt that equals the shareholders' ownership percentage The corporation's current liabilities The amount the shareholder invested in the corporation The corporation's outstanding long-term debt

The amount the shareholder invested in the corporation

Which of the following can be used to encourage managers to act in the best interests of the shareholders? The threat of termination Executive perks Stock options and bonuses Managerial compensation tied to performance A larger organization and more employees

The threat of termination Stock options and bonuses Managerial compensation tied to performance

Which one of these motivates managers to make good decisions? Complacent shareholders Complacent board of directors Threat of a hostile takeover Lack of stock options

Threat of a hostile takeover

Which of the following are among the most important questions to be asked when a business is started? Where will long-term financing be obtained to pay for investments? What long-term investments should be made? How much vacation will I be able to take if I own my own business? How will everyday financial activities be handled?

Where will long-term financing be obtained to pay for investments? What long-term investments should be made? How will everyday financial activities be handled?

True or false: Shareholders are the only stakeholder in a firm as they are the owners

False

Which of the following are true of a sole proprietorship? A proprietorship has a limited life It is the simplest type of business to form A sole proprietor can issue stock to raise capital It is easy to transfer ownership

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