Chapter 1: management

Krit Corp. is a U.S. manufacturing company based in the Midwest. As an investor, Eleanor bought 175 shares of stock in Krit Corp. The stock price of Krit Corp. is currently trading at $30.00 per share. Eleanor's total wealth in Krit Corp. is: $6,500.00 $5,250.00 $583.33 $175.00

$5,250.00

The owners of a corporation are the _________. The primary goal of the corporate management team is to __________ the shareholders' wealth by _________ the __________ over the long run.

1. Shareholders of the company 2. Maximize 3. Maximizing 4. company's stock price

Business #1: Sean and his uncle started a software development company. Without his uncle's knowledge, Sean illegally used another company's code to meet the needs of a client. The resulting lawsuit closed the business and bankrupted both Sean and his uncle. This is an example of: A partnership A corporation An LLP/LLC A proprietorship

A partnership

In 2002, in response to an outbreak of corporate scandals and unethical financial and accounting behavior, Congress passed the Sarbanes-Oxley Act. Which of the following is a major provision of this legislation? A publicly traded corporation must have a board of directors that includes outside directors to oversee the firm's annual audit. Publicly traded corporations with sales of at least $50 million or total assets of at least $100 million are exempt from possible prosecution for the preparation of fraudulent financial statements.

A publicly traded corporation must have a board of directors that includes outside directors to oversee the firm's annual audit.

Based on your understanding of the differences between U.S. and foreign businesses, which of the following statements is correct? Check all that apply. Among the possible examples of political risk are, on a large scale, threatened or actual wars and coups, acts of terror, and acts of expropriation and eminent domain. On a smaller scale, it could include changes in regulations, such as the imposition of a tax or prohibition on the sale of an item. One argument supporting the use of the closed ownership structure is that it provides greater opportunities for oversight and control by the firm's individual and institutional shareholders (as compared to the more open ownership structures used by U.S. corporations). The success of the Japanese keiretsu (for example, Mitsubishi and Toyota) and Korean chaebol (for example, Hyundai) have led to the creation of a large number of similar organizations in the United States.

Among the possible examples of political risk are, on a large scale, threatened or actual wars and coups, acts of terror, and acts of expropriation and eminent domain. On a smaller scale, it could include changes in regulations, such as the imposition of a tax or prohibition on the sale of an item. One argument supporting the use of the closed ownership structure is that it provides greater opportunities for oversight and control by the firm's individual and institutional shareholders (as compared to the more open ownership structures used by U.S. corporations).

Business #2: Carlo, Sean, and Jose own an accounting firm in San Francisco. All share in the profits of the firm proportionately and file taxes only at an individual level. According to their agreement, none of the owners will be held personally liable for the firm's debts. This is an example of: A partnership A corporation An LLP/LLC A proprietorship

An LLP/LLC

What types of assets should be purchased to support new projects and generate future cash flows?

Capital budgeting

The corporations of ___________ tend to exhibit __________ ownership structures, such that their shares are more concentrated in the portfolios of families, banks, or other large corporations.

Continental europe and asia closed

Most executives believe that they and their firms behave in an ethical manner and that it is in their best interests to do so. How can a firm's ethical conduct increase its long-term profitability? Ethical corporate behavior attracts customers, employees, and communities who appreciate and support being treated ethically. Good ethics programs are developed from the bottom of the organization up to the firm's leadership. This is because lower-level workers do all the actual work and are in the best position to specify the rules of how the work should be conducted.

Ethical corporate behavior attracts customers, employees, and communities who appreciate and support being treated ethically.

Ethical corporate behavior and the Sarbanes-Oxley Act Most executives believe that they and their firms behave in an ethical manner and that it is in their best interests to do so. How can a firm's ethical conduct increase its long-term profitability? Ethical corporate behavior is always more costly, because it generally results in more constrained and expensive behaviors. Ethical corporate behavior reduces unnecessary legal expenses and the need to pay fines.

Ethical corporate behavior reduces unnecessary legal expenses and the need to pay fines.

Reading the newspaper this morning, you found an article that mentions a woman named Zhi who used to live down the street from you. Zhi was recently hired by the First State Bank to assist in the evaluation and forecasting of future financial and economic conditions in the communities served by the bank. In which area of finance does Zhi work? Investments Managerial finance Financial services Financial markets and institutions

Financial markets and institutions

treasurer

In larger organizations, this officeholder supervises the firm's credit and inventory managers, as well as the director of capital budgeting, and reports to the firm's chief financial officer.

If the stock price of Krit Corp. increases in the next two years, Eleanor's wealth in Krit Corp. will ________. Increase Decrease

Increase

Attitude toward risk

Investor factor

Finance

It deals with obtaining the right amount of money from the right sources at the right time, where "right" is determined by how the amounts, sources, and times affect the value of the individual or organization.

A friend, Savannah, helps her company decide whether to fund new projects with debt or equity capital. In what area of finance does Savannah work?

Managerial Finance

Five years ago, Caesar created a plant-care business that grew, stocked, and maintained fresh plants in office buildings throughout Raleigh. Over time, The Green Zone Inc. (TGZ) has grown from a proprietorship into a corporation, now reaching far beyond Raleigh. To finance and support this growth, TGZ issued shares that were sold to TGZ employees, Caesar's family members, and selected outsiders. Caesar is TGZ's chairman of the board of directors and CEO, but he is no longer the largest shareholder. At the latest annual meeting, two mutually exclusive proposals were placed on the ballot for discussion and vote. The first was put forth by Caesar and TGZ's management team, and the second was proposed by a small group of other shareholders. Both groups are adamantly opposed to the other group's proposal, even though both proposals would likely have the same effect on TGZ's value and riskiness. Does an agency conflict exist between TGZ's management and the small group of opposing shareholders?

No; although an agency relationship exists between TGZ's management—including Caesar as TGZ's chairman and CEO and the firm's shareholders—there is no agency conflict, because no expropriation or wasting of the shareholders' wealth has occurred.

Does an agency conflict exist between TGZ's management and the small group of opposing shareholders? No; Jamal was the original owner of TGZ, so he would always be sensitive to the concerns of the firm's current owners (shareholders) and would not engage in an agency conflict. No; although an agency relationship exists between TGZ's management—including Jamal as TGZ's chairman and CEO and the firm's shareholders—there is no agency conflict, because no expropriation or wasting of the shareholders' wealth has occurred. Yes; any conflict or disagreement between the firm's managers and its shareholders constitutes an agency conflict. Yes; an agency relationship exists, and an agency relationship always gives rise to agency conflicts, regardless of the actual behavior of the participants.

No; although an agency relationship exists between TGZ's management—including Jamal as TGZ's chairman and CEO and the firm's shareholders—there is no agency conflict, because no expropriation or wasting of the shareholders' wealth has occurred.

Which of the following actions will help ease agency conflicts and better align managers' objectives with the firm's shareholder wealth? Pay the manager a large base salary with a huge stock option package that matures on a single date. Pay the manager a combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth.

Pay the manager a combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth.

Businesses can be classified into the following forms: proprietorship, partnership, corporation, limited liability company (LLC), and limited liability partnership (LLP). Different forms of businesses have different characteristics. Which of the following characteristics belong to a partnership? Check all that apply.

Profits and liability distributed according to a formal or informal agreement Personal assets possibly used to settle the debts of the business

In 2002, in response to an outbreak of corporate scandals and unethical financial and accounting behavior, Congress passed the Sarbanes-Oxley Act. Which of the following is a major provision of this legislation? A publicly traded corporation can refuse to provide requested additional information regarding the procedures used to prepare and report the firm's financial statements. The CEO and the CFO must both individually sign and certify the accuracy of the firm's financial statements before these statements are submitted to the Securities and Exchange Commission.

The CEO and the CFO must both individually sign and certify the accuracy of the firm's financial statements before these statements are submitted to the Securities and Exchange Commission.

Which of the following are sound business reasons U.S. and foreign companies expand internationally? Check all that apply. The desire for the company to sound more important and powerful than would be the case if the company only operated domestically The desire to create an organization that is easier to operate and manage than a business that operates solely within the borders of one country The desire to enter new markets and engage with new customers The desire to relocate to places where the firm's costs of production will be higher

The desire to enter new markets and engage with new customers

limited liability

This attribute of the corporate form of organization limits an owner's potential losses to the purchase price of the owner's shares.

business ethics

This collection of principles, practices, and procedures is used to influence the behavior of employees toward the firm's stakeholders.

Shareholder Wealth Maximization

This goal of financial management is superior to other possible goals, since it considers the timing and risks associated with the cash flows expected from management's decisions.

value

This is the worth of a good or service as established by the discounted and current value of the item's cash flows.

limited parner

This member of a partnership has the privilege of not having personal assets at risk in the event of the failure of the partnership.

corporation

This state-created entity is authorized to conduct business and offer its owners an investment with an unlimited life.

double taxation of dividends

This tax situation currently applies to corporations and their owners but not to sole proprietorships, partnerships, or their owners.

stakeholder

This term describes the individuals and groups whose needs and wants should be identified and addressed in order to generate higher returns for the firm and ensure its viability.

Based on your understanding of the differences between U.S. and foreign businesses, which of the following statements is correct? Check all that apply. Since English is the language of business, it is not necessary for American businesspeople to learn to speak a foreign language. Universal banking, which exists outside the United States, allows banks to provide financial services to firms in such a manner that the banks and their corporate customers become very interconnected. These services and linkages may even eliminate the need for these customers to issue new shares (and further dilute existing ownership positions) to finance future growth. Over the past two decades, many American firms either opened or moved their customer- and technical- support call centers from the U.S. to lower-cost countries (for example, India) in order to reduce their labor costs. Recently, however, many firms (for example, Dell, US Airways, Netflix, and so forth) have moved their centers back to the United States in order to better address the language and political/cultural concerns of their customers. This is an example of the added cultural and language considerations that become relevant when a firm "goes international."

Universal banking, which exists outside the United States, allows banks to provide financial services to firms in such a manner that the banks and their corporate customers become very interconnected. These services and linkages may even eliminate the need for these customers to issue new shares (and further dilute existing ownership positions) to finance future growth. Over the past two decades, many American firms either opened or moved their customer- and technical- support call centers from the U.S. to lower-cost countries (for example, India) in order to reduce their labor costs. Recently, however, many firms (for example, Dell, US Airways, Netflix, and so forth) have moved their centers back to the United States in order to better address the language and political/cultural concerns of their customers. This is an example of the added cultural and language considerations that become relevant when a firm "goes international."

Ethics deals with questions of right or wrong behavior. Which of the following behaviors involves ethical—as opposed to unethical—decision making? While interviewing prospective applicants for a manager-trainee position, the company's recruiter makes sexually suggestive remarks to the applicants and recommends hiring only the good-looking candidates. While planning for an upcoming company audit, a manager insists on hiring an external auditing firm to audit the company's financial statements. While riding in a taxi, a loan officer with the Fifth County Bank finds a briefcase containing the confidential and proprietary lending policies of a competing bank. Instead of returning the briefcase, she keeps the competing bank's information and distributes it at the next loan application review meeting. While considering the purchase of an expensive piece of equipment, a firm's purchasing manager recommends that the purchase be made from his cousin's firm rather than from one of two other vendors offering the identical equipment at lower prices.

While planning for an upcoming company audit, a manager insists on hiring an external auditing firm to audit the company's financial statements.

Last week, an investigative reporter for a major metropolitan newspaper discovered that the doctors conducting clinical trials of a new cancer treatment drug are also the principal shareholders in Cancer Solutions Inc. (CSI). CSI is the company developing and attempting to market the drug. Upon being interviewed by federal authorities, the doctors acknowledged their conflict of interest but reported that they were sold the shares at a 75% discount by CSI's chief financial officer. The CFO was concerned that CSI might not be able to meet its annual performance objectives and in turn pay his anticipated multimillion-dollar bonus. Does an agency conflict exist between CSI's CFO and the company's shareholders?

Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood of receiving his annual bonus.

Michael and Primalia equally own and manage A New Beginning (ANB), a store that sells preowned clothing and furniture. Michael is responsible for ANB's back-office activities, and Primalia staffs the store and makes deliveries to customers. Both have equal decision-making authority and, under the terms of their partnership agreement, both are prohibited from making personal purchases using company funds without prior approval of the other partner. Michael, without Primalia's knowledge, used the company's bank account recently to purchase a new sports car. Michael has acknowledged that the car will not be used to support the business. Is this a potential agency conflict between Michael and Primalia? No; Michael and Primalia are both authorized to spend ANB's money, so no conflict of interest can occur. No; Michael and Primalia co-own and co-manage ANB and have a partnership agreement that makes them equal, so an agency conflict cannot exist. Yes; Michael is misappropriating some of Primalia's wealth by unilaterally purchasing a nonbusiness asset using ANB's funds. Yes; it should have been Primalia who purchased the car.

Yes; Michael is misappropriating some of Primalia's wealth by unilaterally purchasing a nonbusiness asset using ANB's funds.

A collection of business firms, usually with a financial institution at the lead, designed to provide the integrated production and sale of the organization's products is called ____________.

an industrial group

Should Tampa Trucking Company open new retail locations in Phoenix and Austin?

capital budgeting

Should Wellington Industries purchase a new delivery truck, or should it simply repair the truck it currently owns?

capital budgeting

How should a firm finance its assets?

capital structure

Should National Transmissions Inc. issue new bonds?

capital structure

The stock market is approaching its year-to-date high value, so should Houston Horticulture Company consider selling new stock or new bonds to pay for its planned market expansion?

capital structure

Wellington Industries is evaluating its use of debt and equity capital. Some members of the finance team think the company would be better served by issuing new debt and using the proceeds to buy back shares of its common stock. What type of managerial decision is this? Dividend policy Capital structure Capital budgeting

capital structure

How much of Newcastle Coal Company's current earnings should be paid out as dividends, as opposed to being retained by the firm?

dividend policy

If the managers of European Satellite Corporation decided to retain 75% of this year's after-tax earnings and use the funds to purchase additional assets, what type of managerial decision are they making? Capital structure Dividend policy Capital budgeting

dividend policy

Should Amalgamated Football League Inc. continue to pay a dividend of $1.25 per share (as it has for the past four years), or should it increase the dividend to $1.35 per share? Type of Decision

dividend policy

Should a company decrease its dividend from $0.75 per share to $0.60 per share?

dividend policy

Focuses on participants and conditions in the financial marketplace (for example, interest rates and financial regulations)

falls under Financial Markets and Institutions

Works for a firm that accepts deposits and makes loans to customers

falls under Financial Markets and Institutions

Works for a not-for-proft business organization that accepts deposits and makes loans to members with some type of common affiliation (for example, location, employer, and so forth)

falls under Financial Markets and Institutions

Focuses on the management of money for (or by) firms and individuals

falls under Financial Services

Helps individuals manage their money in order to meet their financial objectives

falls under Financial Services

Works for an organization that assists companies in raising, managing, and spending their money in order to achieve their goals

falls under Financial Services

Assists individuals in determining the optimal composition of their investment portfolios

falls under Investments

Assists individuals in selecting the securities that they might want to add to their securities portfolios

falls under Investments

Focuses on the decisions made by firms and individuals regarding their financial asset portfolios

falls under Investments

Assists in the determination of whether a company should purchase new equipment or recondition its old equipment and then helps determine how the firm will pay for it

falls under Managerial (Business) Finance

Assists in the management of a firm's short-term assets and liabilities, and works to ensure that they have sufficient cash on hand to pay their current obligations as they become due

falls under Managerial (Business) Finance

Focuses on the decisions that firms make regarding their operations and cash flows

falls under Managerial (Business) Finance

It is reasonable to assume that the government's objectives and level of involvement in the product and financial markets are the same in all countries. For example, across the entire world, there is only one method and set of rules for financial accounting.

false

Business strategy and normal operations

firm factor

Capital budgeting decisions

firm factor

Capital structure decisions and dividend decisions

firm factor

In the late 1980s and early 1990s, Congress passed legislation making it more difficult for outside investors to stage hostile takeovers. This legislation likely _______ conflicts between managers and stockholders. Increased Reduced

increased

Miguel, a friend of yours from high school, recently called. He asked if you could explain to him how the value of his portfolio would change because he held the stock of a company that was just charged with fraud and other wrongdoing by the Securities and Exchange Commission. Which area of finance is Miguel asking about? Financial services Financial markets and institutions Managerial finance Investments

investments

Age and lifestyle

investor factor

Preference for saving or spending

investor factor

Katz Investment Group's stock price is currently trading at $35 per share. The consensus among market analysts is that the stock should trade for $30 per share, given the amount, timing, and riskiness of the company's dividends. Is Katz Investment Group more or less likely to receive a hostile takeover bid? More likely Less likely

less likely

For the past 40 years, companies have attempted to attract, retain, and encourage managers by developing attractive compensation packages. These compensation packages have also been intended to reduce potential agency conflicts between these managers and the firm's shareholders. In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the ___________ value of the company's common stock price.

long-term

Economic and financial market conditions

market factor

Governmental laws and regulations

market factor

The firm's competitive environment

market factor

Great Fortunes Baking Company's stockholders are mostly individual investors, and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Great Fortunes Baking Company's stock, direct shareholder intervention would be ________ likely to motivate the firm's management.

more

Five years ago, Jamal created a plant-care business that grew, stocked, and maintained fresh plants in office buildings throughout Portland. Over time, The Green Zone Inc. (TGZ) has grown from a proprietorship into a corporation, now reaching far beyond Portland. To finance and support this growth, TGZ issued shares that were sold to TGZ employees, Jamal's family members, and selected outsiders. Jamal is TGZ's chairman of the board of directors and CEO, but he is no longer the largest shareholder. At the latest annual meeting, two mutually exclusive proposals were placed on the ballot for discussion and vote. The first was put forth by Jamal and TGZ's management team, and the second was proposed by a small group of other shareholders. Both groups are adamantly opposed to the other group's proposal, even though both proposals would likely have the same effect on TGZ's value and riskiness.

see next ones for corresponding questions

True or False: A small number of institutional investors are often able and motivated to bring direct shareholder pressure on a firm's management in an effort to reduce potential agency conflicts.

true

True or False: Capital budgeting, capital structure, and dividend policy decisions are important to managers and shareholders because their consequences can affect the amount, timing, and riskiness of the cash flows produced by the firm and its securities. True False

true

International firms must effectively manage several additional phenomena and complexities that are not explicitly applicable to purely domestic companies. Based on your understanding of the differences between purely domestic businesses and international companies, evaluate whether the following statement is true or false:

true or false questions ahead