Managerial Finance Ch.1

The ______ are rules describing how the corporation regulates its existence.

Bylaws

It is argued that, left to themselves, managers would tend to maximize the amount of resources over which they have control or, more generally, ______ power or wealth.

Corporate

(T/F) It is sometimes argued that, left to themselves, managers tend to minimize the amount of resources which they have control.

False

(T/F) Ownership in the corporate form is difficult to transfer.

False

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

False Due to the cost and regulation of Sarbanes-Oxley, many companies turn to foreign markets to go public

In a large corporation, the ______ would be responsible for answering the three main questions that must be asked when starting a firm.

Financial Manager

The five main areas of finance are corporate finance, investments, financial institutions, international finance, and _____

Fintech

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

Managers, shareholders are the principals and managers are the agents.

(T/F) Under SOX, corporate officers must explicitly declare that annual report does not contain any false statements or material omissions.

True

(T/F) Under SOX, corporate officers must explicitly declare that the annual report does not contain any false statements or material omissions.

True

Select all that apply The possible goal of profit maximization: a. would probably be the most commonly cited goal for a business b. should always be a short-term goal c. can be achieved by cost-cutting d. avoids maximizing the sales

a and c Profit maximization would probably be the most commonly cited goal for a business and can be achieved by cost-cutting.

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

a and d It is simplest type of business to form and it has a limited life

Which of the following, according to the textbook, are possible financial goals for a company? a. Survival b. minimize costs c. incur bankruptcy d. maximize profits

a, b, and d Survival, minimize costs, and maximize profits

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

a, b, and d World Com, Tyco, and Enron were involved in corporate scandals that led to Sarbanes-Oxley

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

a, c, and d Legal powers to sue, state citizenship for jurisdictional purposes, and the ability to issue stock

The relationship between stockholders and management can best be described as a _____ relationship. a. agency b. irrelevant c. mentoring d. contradictory

a. Agency

The aim of the act known as _____ is to protect investors from corporate abuse. a. SOX b. EXON c. STEM d. TiMid

a. SOX

An organization must prepare ______ and bylaws when forming a corporation. a. articles of incorporation b. a legal will c. A partnership agreement d. An indenture agreement

a. articles of incorporation

Which term applies to the mixture of debt and equity maintained by a firm? a. capital structure b. capital budget c. net working capital d. cash management

a. capital structure

The officer responsible for corporate tax reporting is the _____ a. controller b. treasurer c. ombudsman d. CEO

a. controller

The federal government taxes which of the following? a. Corporate earnings and shareholder dividends b. Neither corporate earnings nor shareholder dividends c. Shareholder dividends but not corporate earnings d. Corporate earnings but not shareholder dividends

a. corporate earnings and shareholder dividends

A corporation is a direct _____ entity and as such can have a name and take advantage of the legal powers of natural persons. a. legal b. illegal c. retributive d. patriotic

a. legal

Since ________ and ownership are separated, a corporation's life is unlimited. a. management b. taxation c. profitability d. debt

a. management

Indirect agency costs are often due to lost _____ a. opportunities b. causes c. objectives d. goals

a. opportunities

Most equity shares of large firms in the U.S. trade on: a. organized auction markets b. bond markets c. options exchanges d. commodities markets

a. organized auction markets

A limited liability company is taxed like a ______ and its owners have _____ liability. a. partnership, limited b. corporation, unlimited c. corporation, limited d. partnership, unlimited

a. partnership, limited

When a corporation raises funds in the financial markets, the transaction occurs on the _____. a. primary market b. options market. c. offering market. d. secondary market

a. primary market

When one owner of a security sells the security to another person, the transaction takes place in the _________ market a. secondary b. underwriting c. primary d. rudimentary

a. secondary When one owner or creditor sells to another, the transaction takes place in the secondary market. In the primary market, the corporation is the seller.

The officer responsible for managing the firm's cash flows is the _____ a. treasurer b. controller c. auditor d. information systems manager

a. treasurer

The term _____ costs refers to the costs of the conflict of interest between shareholders and management.

agency

The two types of secondary markets include ______ markets and dealer markets.

auction

Corporations in other countries are often called: a. recalibrated partnerships b. joint stock companies c. public limited companies d. autonomous entities

b and c Joint stock companies and public limited companies

What are the two basic classifications under which most potential financial goals fall? a. cutting costs b. Earning or increasing profits c. controlling risk d. enhancing dividends

b and c Earning or increasing profits and controlling risk.

(M/C) Inventory is a: a. long-term liability b. part of working capital c. current asset d. fixed asset e. current liability

b and c Inventory is part of working capital and a current asset

Which of the following are included in a firm's capital structure? a. current assets b. equity c. net sales d. long-term debt

b and d Capital structure is the mixture of debt and equity maintained by a firm.

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

b, c, and d Corporations can sue and be sued, can enter into contracts, and is a separate legal entity with the ability to acquire and exchange property.

Which of the following are important when considering a partnership? a. future dividend policy b. fund raising limitations c. personal liability for firm debts d. taxation of partnership income

b, c, and d Fund raising limitations, personal liability for firm debts, taxation of partnership income

Which of the following is included in working capital? a. retained earnings b. current (short-term) assets c. accounts receivable d. accounts payable e. long-term debt

b, c, and d Current assets, accounts receivable, and accounts payable Working capital includes all short-term assets and liabilities.

Which of the following are considered stakeholders in a company? a. competitor b. employees c. suppliers d. government

b, c, and d employees, suppliers, and government. A stakeholder is someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.

Which of the following are typically included in a treasurer's responsibilities? a. financial accounting b. managing capital expenditure decisions c. handling cash flows d. making financial plans

b, c, d, The treasurer is responsible for managing capital expenditure decisions, handling cash flows, and making financial plans.

_______ buy and sell for themselves, at their own risk. a. Auctioneers b. Dealers c. Agents d. representatives

b. Dealers

The rules used by a corporation to regulate its existence are known as _____ a. restatement of facts b. bylaws c. a legal settlement d. articles of incorporation

b. bylaws

A bad financial decision is defined as a decision that ______ owner's equity. a. increases b. decreases c. does not affect d. maximizes

b. decreases

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

b. is owned by one person

Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts. a. unlimited b. limited c. personal d. no

b. limited

A business without separate legal authority formed by two or more people is known as a _____. a. corporation b. partnership c. conglomerate d. sole proprietorship

b. partnership

Which one of these provides a manager an incentive to perform well? a. low pay b. promotions c. agency problems d. lack of takeover threats

b. promotions

Which one of these is an important mechanism used by unhappy stockholders to replace current management? a. prospectus b. proxy fight c. ponzi scheme d. perpetual debt

b. proxy fight

The relative ease of transferring ownership, the limited liability for business debts, and the unlimited life of the business are why the corporate form is superior to sole proprietorships or partnerships for _____. a. selling goods b. raising cash c. personal relations

b. raising cash

Which one of the following parties would be the last party to receive payment if a firm were to close? Assume all parties have a legitimate claim on the firm's assets. a. government b. shareholders c. CEO d. bondholders

b. shareholders The last parties to receive a payment if a firm were to close are its shareholders

Which one of these motivates managers to make good decisions? a. complacent board of directors b. threat of a hostile takeover c. lack of interference from the government authorities d. complacent shareholders

b. threat of a hostile takeover

A _____ corporation is for profit, and has the legal attributes of accountability, transparency, and purpose.

benefit

Forming a corporation involves preparing articles of incorporation and a set of _____

bylaws.

Which of the following positions generally report to the CFO? a. CEO b. Director of marketing c. controller d. treasurer

c and d controller and treasurer report to the CFO

Inventory is a: a. fixed asset b. long-term liability c. current asset d. current liability e. part of working capital

c, and e Inventory is a current asset and part of working capital.

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following? a. Securities Exchange Act of 1934 violation b. Capital structure problem c. Agency problem d. Securities Act of 1933 violation

c. Agency problem

What are the two factors that impact whether managers will act in the best interest of stockholders? a. How mangers are compensated and how much vacation is provided to employees b. Whether SOX is used and to what extent poor employee conduct is reprimanded c. How closely management goals align with stockholder goals and the way managers are compensated d. How closely management is micromanaged and the way mangers are compensated

c. How closely management goals align with stockholder goals and the way managers are compensated

From the stockholders' perspective, what is the primary purpose of awarding stock options to managers? a. To satisfy the requirements of the SEC b. To increase bondholders' wealth c. To increase shareholder's wealth d. To increase manager's wealth

c. To increase shareholder's wealth The primary purpose of awarding stock options to managers is to give them the incentive to make decisions that increase shareholder's wealth, because they are shareholders.

From the stockholders' perspective, what is the primary purpose of awarding stock options to managers? a. To satisfy the requirements of the SEC b. To increase bondholder's wealth c. To increase shareholder's wealth d. To increase managers' wealth

c. To increase shareholders' wealth

Some of the cash flow generated by a firm goes back to the financial markets in the form of ______. a. reinvested cash flows b. taxes and other payments to the government c. dividends and debt payments d. products and services

c. dividends and debt payments

Some of the cash flow generated by a firm goes back to the financial markets in the form of ______. a. taxes and other payments to the government b. products and services c. dividends and debt payments d. reinvested cash flows

c. dividends and debt payments

In a large corporation, the ____ would be responsible for answering the three main questions that must be asked when starting a firm. a. technology manager b. marketing manager c. financial manager d. accounting manager

c. financial manager

Capital budgeting is concerned with planning and managing a firm's ______ a. current liabilities b. current assets c. long-term investments d. long-term liabilities

c. long-term investments

Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ______ effectively controls the firm. a. the largest shareholder b. the federal government c. management d. no one

c. management

The goal of a for-profit business is to _______ existing owners' equity. a. maintain b. minimize c. maximize d. dilute

c. maximize

When a corporation raises funds in the financial markets, the transaction occurs on the ______ a. secondary market b. options exchange c. primary market d. offering market

c. primary market The transaction takes place on the primary market - the corporation is not typically involved in options exchange trades on its own stock

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

c. the amount the shareholder invested in the corporation

In a corporation, the stockholders elect _____, who then select the managers a. the CFO b. the CEO c. the board of directors d. finance directors

c. the board of directors

A benefit corporation is for profit, and has the legal attributes of accountability, ______, and purpose a. taxation b. cooperation c. transparency

c. transparency

Joint stock company is another name for what is referred to as a _____ in the United States

corporation

___________ budgeting is the process of making and managing expenditures on long-term assets. a. Performance-based b. Optional c. Conventional d. Capital

d. Capital

Which of the following is NOT an important question that must be asked when starting a firm? a. How will you manage your everyday financial activities? b. Where will you get the long-term financing to pay for your investment? c. What long-term investments should you take on? d. Which type of operating system should you use for your computers?

d. Which type of operating system should you use for your computers?

The advantages and disadvantages of a partnership are basically the same as those of a ______ a. corporation b. taxable effect c. limited ownership d. proprietorship

d. proprietorship

Stockholders are entitled to only what is left after employees, suppliers, and creditors are paid, which makes them ______ owners. a. liable b. unlimited c. unaffected d. residual

d. residual

What is the main goal of financial management? a. to minimize expenses b. to maximize share of the stock holdings of managers of the company c. to maximize profits d. to maximize current value per share of existing stock

d. to maximize current value per share of existing stock

Due to the extreme costs of SOX, hundreds of public firms have chosen to "go _______" meaning their shares are no longer traded on the major stock exchanges.

dark

The need to monitor management auctions is an example of a(n) _____ agency cost.

direct

In a _____ partnership, all the partners share in gains or losses, and all have unlimited liability for all partnership debts, not just some particular share.

general

In a _____ partnership, one or more general partners will run the business and have unlimited liability, but there will be one or more _____ partners who will not actively participate in the business.

limited, limited

An LLC is essentially a hybrid of ___________ and corporation.

partnership

Corporate profits are taxed twice, first at the corporate level when they are earned and again at the _______ level when they are paid out.

personal