FINC 303 - Chapter 1 Homework

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict? -Organizational -Structural -Formative -Agency -Territorial

Agency

Which one of the following statements is correct? -All secondary markets are dealer markets. -All secondary markets are broker markets. -All stock trades between existing shareholders are primary market transactions. -All stock transactions are secondary market transactions. -All over-the-counter sales occur in dealer markets.

All over-the-counter sales occur in dealer markets.

Capital budgeting includes the evaluation of which of the following? -Size of future cash flows only -Size and timing of future cash flows only -Timing and risk of future cash flows only -Risk and size of future cash flows only -Size, timing, and risk of future cash flows

Size, timing, and risk of future cash flows

Levi had an unexpected surprise when he returned home this morning. He found that a chemical spill from a local manufacturer had spilled over onto his property. The potential claim that he has against this manufacturer is that of a(n): -general creditor. -debtholder. -shareholder. -stakeholder. -agent.

stakeholder

The daily financial operations of a firm are primarily controlled by managing the: -total debt level. -working capital. -capital structure. -capital budget. -long-term liabilities.

working capital

Theo's BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts as referred to as -capital structure decisions. -capital budgeting decisions. -working capital management. -operating management. -fixed account structure.

working capital management.

One advantage of the corporate form of organization is the: -taxation of the corporate profits. -unlimited liability for its shareholders. -double taxation of profits. -ability to raise larger sums of equity capital than other organizational forms. -ease of formation compared to other organizational forms.

ability to raise larger sums of equity capital than other organizational forms.

Which one of the following applies to a general partnership? -The firm's operations must be controlled by a single partner. -Any one of the partners can be held solely liable for all of the partnership's debt. -The profits of the firm are taxed as a separate entity. -Each partner's liability for the firm's debts is limited to each partner's investment in the firm. -The profits of a general partnership are taxed the same as those of a corporation.

Any one of the partners can be held solely liable for all of the partnership's debt.

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's: -capital structure. -capital budget. -asset allocation. -working capital. -risk structure.

capital structure

Jenna has been promoted and is now in charge of all external financing. In other words, she is in charge of: -capital structure management. -asset allocation. -risk management. -capital budgeting. -working capital management.

capital structure management.

The Sarbanes-Oxley Act of 2002 has: -reduced the annual compliance costs of all publicly traded firms in the U.S. -decreased senior management's involvement in the corporate annual report. -greatly increased the number of U.S. firms that are going public for the first time. -decreased the number of U.S. firms going public on foreign exchanges. -essentially made officers of publicly traded firms personally responsible for the firm's financial statements.

essentially made officers of publicly traded firms personally responsible for the firm's financial statements.

When conducting a financial analysis of a firm, financial analysts: -cannot use accounting information as it is historical. -rely solely on accounting information. -frequently use accounting information. -ignore accounting information but do use marketing information. -assume the future will be a repeat of the past as reflected in the firm's accounting reports.

frequently use accounting information.

Probably the least effective means of aligning management goals with shareholder interests is: -the potential for a proxy fight by an unhappy segment of shareholders. -basing all management bonuses on performance goals. -holding management salaries steady while increasing stock option grants. -the threat of a takeover of the firm. -automatically increasing management salaries on an annual basis.

automatically increasing management salaries on an annual basis.

Security dealers: -match buyers with sellers. -buy and sell from their own inventory. -operate on a physical trading floor. -operate exclusively in auction markets. -are limited to trading non-listed stocks.

buy and sell from their own inventory.

The primary goal of financial management is most associated with increasing the: -dollar amount of each sale. -traffic flow within the firm's stores. -the fixed costs while lowering the variable costs. -firm's liquidity. -market value of the firm.

market value of the firm.

You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the: -dealer market. -over-the-counter market. -secondary market. -primary market. -tertiary market.

secondary market

Which one of the following parties can sell shares of ABC stock in the primary market? -ABC company -Any corporation, other than the ABC company -Any institutional shareholder -Any private individual shareholder -Only officers and directors of ABC company

ABC company

Which one of the following statements is correct? -NASDAQ has more listed stocks than does the NYSE. -The NYSE is a dealer market. -NASDAQ is an auction market. -NASDAQ has the most stringent listing requirements of any U.S. exchange. -The trading floor for NASDAQ is located in Chicago.

NASDAQ has more listed stocks than does the NYSE.

Which one of the following statements is correct? -All of the major stock exchanges are U.S. based. -The NYSE was created by the National Association of Securities Dealers in the early 1930s. -The Chicago Stock Exchange is a dealer market. -OTC markets have a physical trading floor generally located in either New York City or Chicago. -The primary purpose of the NYSE is to match buyers with sellers.

The primary purpose of the NYSE is to match buyers with sellers.

Which one of the following situations is most apt to create an agency conflict? -Compensating a manager based on his or her division's net income -Giving all employees a bonus if a certain level of efficiency is maintained -Hiring an independent consultant to study the operating efficiency of the firm -Basing management bonuses on the length of employment -Laying off employees during a slack period

Basing management bonuses on the length of employment

Which one of the following functions should be assigned to the corporate treasurer rather than to the controller? -Data processing -Cost accounting -Tax management -Cash management -Financial accounting

Cash management

Which one of the following is most apt to align management's priorities with shareholders' interests? -Holding corporate and shareholder meetings at high-end resort-type locations preferred by managers -Compensating managers with shares of stock that must be held for a minimum of three years -Paying a special management bonus on every fifth year of employment -Increasing the number of paid holidays that long-term employees are entitled to receive -Allowing employees to retire early with full retirement benefits

Compensating managers with shares of stock that must be held for a minimum of three years

Working capital management includes which one of the following? -Deciding which new projects to accept -Deciding whether to purchase a new machine or fix a currently owned machine -Determining which customers will be granted credit -Determining how many new shares of stock should be issued -Establishing the target debt-equity ratio

Determining which customers will be granted credit

Which one of the following is a capital structure decision? -Determining the optimal inventory level -Establishing the preferred debt-equity level -Selecting new equipment to purchase -Setting the terms of sale for credit sales -Determining when suppliers should be paid

Establishing the preferred debt-equity level

Which one of the following is a working capital decision? -How should the firm raise additional capital to fund its expansion? -What debt-equity ratio is best suited to the firm? -What is the cost of debt financing? -Should the firm borrow money for five or for ten years? -How much cash should the firm keep in reserve?

How much cash should the firm keep in reserve?

Maria is the sole proprietor of an antique store that is located in a rented warehouse. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and apply the proceeds to the debt II. Sell the lighting fixtures from the building and apply the proceeds to the debt III. Withdraw funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt -I only -III only -I and II only -I, II, and III only -I, III, and IV only

I, III, and IV only

Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002? -Decrease the number of corporations that can be publicly traded -Increase the protections against corporate fraud -Limit secondary issues of corporate securities -Increase the dividends paid to shareholders -Increase the number of firms that "go dark"

Increase the protections against corporate fraud

Which one of the following is an advantage of being a limited partner? -Nontaxable share of any profits -Control over the daily operations of the firm -Losses limited to capital invested -Unlimited profits without risk of incurring a loss -Active market for ownership interest

Losses limited to capital invested

Which one of the following statements correctly applies to a sole proprietorship? -The business entity has an unlimited life. -The ownership can easily be transferred to another individual. -The owner enjoys limited liability for the firm's debts. -Debt financing is easy to arrange in the firm's name. -Obtaining additional equity is dependent on the owner's personal finances.

Obtaining additional equity is dependent on the owner's personal finances.

Limited liability companies are primarily designed to: -allow a portion of their owners to enjoy limited liability while granting the other portion of their owners control over the entity. -provide the benefits of the corporate structure only to foreign-based entities. -spin off a wholly owned subsidiary. -allow companies to reorganize themselves through the bankruptcy process. -provide limited liability while avoiding double taxation.

provide limited liability while avoiding double taxation.