FINC 3310 Chapter 1

Businesses are motivated to organize as corporations because stockholders in a corporation have ______ liability for corporate debts.

limited

Agency costs occur when ______ and stockholder interests are not in line with each other.

management

A(n) ______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm.

stakeholder

True or false: A corporation borrows money in its own name.

true

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

Which one of the following applies to a general partnership?

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

Which one of the following is most apt to align management's priorities with shareholders' interests?

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

The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s?

Corporate accounting and financial fraud

Jordan and Carmen created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

Corporation

When are corporate profits taxed?

Individuals pay taxes on corporate dividends. Corporations pay taxes on corporate profits.

Why don't large businesses organize as sole proprietorships or partnerships?

It can be difficult to raise cash for investment in these forms, and that limits the ability of the business to grow.

Which of the following are true of a sole proprietorship?

It is one of the simplest types of businesses to form. A proprietorship has a limited life.

Which one of the following is an advantage of being a limited partner?

Losses limited to capital invested

Is profit maximization the primary objective of a business?

No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.

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

WorldCom Tyco Enron

The threat of ______ motivates managers to make good decisions.

a takeover

The relationship between stockholders and management can best be described as a(n) Blank______ relationship.

agency

The conflict of interest between an agent and a principal is called a(n):

agency problem

An organization must prepare ______ and bylaws when forming a corporation.

articles of incorporation

The New York Stock Exchange is a(n) ______.

auction market

Security dealers:

buy and sell from their own inventory

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

Which term applies to the mixture of debt and equity maintained by a firm?

capital structure

The Sarbanes-Oxley Act requires corporate officers to:

confirm the validity of the financial statements. be responsible for errors in the annual report.

Which corporate officer is responsible for accurate financial accounting of the firm's activities?

controller

The Sarbanes-Oxley Act is intended to strengthen protection against:

corporate accounting fraud and financial malpractice

Which of the following is a disadvantage of sole proprietorships and partnerships?

difficulty of transferring ownership

Which of the following are included in a firm's capital structure?

equity long-term debt

The Sarbanes-Oxley Act of 2002 has:

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

True or false: "Profit maximization" is the goal for the management of a corporation in the short run only.

false

True or false: The Sarbanes-Oxley Act provides incentives for companies to go public in U.S. markets.

false

A partnership in which partners share in gains or losses and carry unlimited liability for all partnership debts is called a ______.

general partnership

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

ilvia is employed as a currency trader in the Japanese yen market. Her job falls into which one of the following areas of finance?

international finance

Working capital includes which of the following?

inventory cash short-term assets

What type of partnership involves both general and limited partners to run the business?

limited partnership

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners?

limited partnership

In a limited partnership, a limited partner's liability for business debts is ______.

limited to their cash contribution to the partnership

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

managers

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

partnership

A limited liability company is taxed like a ______, but retains ______ for owners.

partnership; limited liability

A limited liability company (LLC):

prefers its profits be taxed as personal income to its owners.

Which one of these is an important mechanism used by unhappy stockholders to replace current management?

proxy fight

Which of these have been noted as unintended consequences of the Sarbanes-Oxley Act?

public firms "going dark" and leaving the stock market firms going public outside of the U.S. market eliminating public disclosure for many firms

______ can be used to encourage managers to maximize the value of the stock.

stock options

Who elects the board of directors and ultimately maintains control of the firm?

stockholders

A corporation receives cash from financial markets by selling ______ and ______.

stocks & bonds

Which of the following are considered non-owner stakeholders in a company?

suppliers government employees

A shareholder's liability is limited to which of these?

the amount the shareholder invested in the corporation

The primary goal of financial management is to maximize:

the market value of existing stock

Capital budgeting includes the evaluation of which of the following?

Size, timing, and risk of future cash flows

A limited liability company's owners have ______ liability.

limited

The owners of a corporation are called ______.

shareholders

An employee has a claim on the cash flows of Westlake Machines. This claim is defined as a claim by one of the firm's:

stakeholders

In an over-the-counter market, which of the following is true?

Many dealers are also connected electronically. Most of the buying and selling is done by the dealer.

Which of the following are reasons that the corporation is the most important form of business?

Corporations can enter contracts. Corporations can sue and be sued. Corporations are separate legal entities.

A general partnership has which of the following characteristics?

Each owner has unlimited liability for all firm debts. All the partners share in gains or losses of the partnership.

Corporations in other countries are often called:

joint stock companies limited liability companies public limited companies

When a corporation is formed, it is granted which of the following rights?

legal powers to sue the ability to issue stock

Since Blank______ and ownership are separated, a corporation's life is unlimited.

management

f you hire a real estate company to sell your house, you are most apt to encounter which one of the following?

agency problem

The Sarbanes-Oxley Act:

requires the corporate officers to personally attest that the financial statements are a fair representation of the company's financial results.

One example of a primary market transaction would be the:

sale of 1,000 shares of newly issued stock by Alt Company to Miquel.

An agency issue is most apt to develop when:

the control of a firm is separated from the firm's ownership.

In a for-profit business, owners' equity is equivalent to:

the total value of stock in a corporation

What is the primary objective of an auction market?

to bring buyers and sellers together

According to Figure 1.2, where does cash generated by a corporation typically go?

to pay corporate taxes paid to shareholders and creditors reinvested in the firm

The officer responsible for managing the firm's cash flows is the ______.

treasurer

True or false: In a large corporation, stockholders and managers are usually separate groups.

true

A partnership must have at least ______ owners.

two

Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of ______ management.

working capital

Raleigh BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as:

working capital management.

How does the Sarbanes-Oxley Act primarily work to make sure that companies tell the truth in financial statements?

It makes management personally responsible for the accuracy of a company's financial statements.

Which one of the following statements correctly applies to a sole proprietorship?

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

How is ownership transferred in a corporation?

Ownership is transferred by gifting or selling shares of stock.

Which of the following are defining features of the primary market?

Proceeds from the sale of securities go to the issuing firm. It is the market where initial public offerings are made.

Why would the threat of a takeover motivate a manager to act in stockholders' interest?

Running the firm well and acting in the stockholders' interest makes the firm a less attractive takeover target to begin with.

The federal government taxes which of the following?

corporate earnings and shareholder dividends

Public limited companies and joint stock companies are other names for ______.

corporations

"Increasing shareholder wealth" means increasing the ______.

current common stock value

When one owner or creditor sells to another, the transaction takes place in the ______ market.

secondary

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:

secondary market

How is ownership of a corporation represented?

shares of stock

Vera opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Vera own if she is personally liable for all the store's debts?

sole proprietorship

Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:

stock options