Chapter 1

o Financial institutions-

Businesses that deal primarily in financial matters

o Forming a corporation involves preparing articles of incorporation and a set of ______

Bylaws

o The process of planning and managing a firm's long-term investments is called _______ ________

Capital budgeting

o The relationship between stockholders and management can best be described as a(n) _______ relationship Agency Contradictory Irrelevant Monitoring

• Agency

o The Sarbanes-Oxley act requires corporate officers to: (2) Personally prepare all financial statements Limit their compensation and stock options Be responsible for errors in the annual report Confirm the validity of the financial statements

• Be responsible for errors in the annual report • Confirm the validity of the financial statements

o A bad financial decision is defined as a decision that ______ shareholder wealth Maximizes Decreases Increases

• Decreases

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

• Long-term debt • Equity

o Which corporate officer is responsible for managing the firm's cash? Controller Treasurer Cost accounting manager Sales manager

• Treasurer

o An ______ __________ exists whenever someone hires another to represent his or her interest.

Agency relationship

o There are two kinds of secondary markets

Auction markets Dealer markets

o The stockholders elect the _____ __ ________, who then select the managers.

Board of directors

o Sole proprietorship-

Business owned by one person

o Business finance has three main areas of concern

Capital budgeting Capital structure Working capital management

o A firm's _______ ________ refers to the specific mixture of long-term debt and equity the firm uses to finance its operations

Capital structure

o A _______ __________ is a negotiated sale involving a specific buyer

Private placement

o The treasurer's office is responsible for managing the firm's:

Cash and credit Financial planning Capital expenditures

o If you hire a real estate company to sell your house you are most apt to encounter which one of the following Agency problem Capital structure problem Securities exchange act of 1934 violation Securities act of 1933 violation

• Agency problem

o ________ budgeting is the process of planning and managing a firm's long-term assets Capital Performance based Conventional Optional

• Capital

o In large firms, financial activity is usually associated with which top officer? Chief financial officer Vice president of production Vice president for marketing Chief management consultant

• Chief financial officer

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

• Controller

o Which of the following are reasons that the corporation is the most important form of business?(3) Corporations are separate legal entities Corporations can vote in general elections Corporations can enter contracts Corporations can sue and be sued

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

o "increasing shareholder wealth" means increasing the _________ Current bond value Book value of equity Current common stock value Total value of assets

• Current common stock value

o A general partnership has which of the following characteristics? (2) Large amounts of cash can be raised easily It is expensive to form Each owner has unlimited liability for all firm debts It is difficult to transfer ownership

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

o The controller is responsible for which of the following tasks? (2) Capital expenditures Financial accounting Tax reporting and payments Raising capital

• Financial accounting • Tax reporting and payments

o A treasurer's responsibilities typically include (3) Handling cash flows Managing capital expenditures decision Financial accounting Making financial plans

• Handling cash flows • Managing capital expenditures decision • Making financial plans

o A good financial decision will do which of the following (2) Increase the cost of capital Increase the value of the firm's existing stock Increase market value of shareholders' equity Increase current dividends per share

• Increase the value of the firms existing stock • Increase the market value of shareholder's equity

o A corporation receives cash from financial markets by selling ______ and _______ Stock Land Bonds Finished goods

• Stocks • Bonds

o Which of the following are considered non-owner stakeholders in a company? (3) Suppliers Stockholder Employees Government

• Suppliers • Employees • Government

o What is the primary objectives of an auction market? To earn commission on sales To bring buyers and sellers together To set prices for assets for sale

• To bring buyers and seller together

o Where does cash generated by a corporation typically go?(3) To pay corporate taxes Reinvested in the firm To buy financial assets Paid to shareholders and creditors

• To pay corporate taxes • Reinvested in the firm • Paid to shareholders and creditors

o The financial management function is usually associated with a top officer of the firm, often called the _____ _________ ________ or vice president of finance

Chief financial officer

o Financial topics are grouped into four main areas:

Corporate finance Investments Financial institutions International finance

o A ____________ is a legal "person" separate and distinct from its owners, and it has many of the rights, duties and privileges of an actual person.

Corporation

o The controller's office handles:

Costs Financial accounting Tax payments Management information systems

o The goal of ________ __________ is to maximize the current value per share of the existing stock.

Financial management

o The term _______ _______ refers to a firm's short-term assets, such as inventory, and its short-term liabilities, such as money owed to suppliers.

Working capital

o Business finance is broadly concerned with which of the following (3) How to finance long-term investments How to manage day-to-day finances of the firm Which long-term investment to make Where to build production facilities

• How to finance long-term investments • How to manage day-to-day finances of the firm • Which long-term investment to make

o According to the textbook, which of the following is not one of the three main question to be addressed if you wanted to start you own business? How many employees will I need? What long-term investments should be made? Where will long-term financing be obtained to pay for investments? How will everybody financial activities be handled?

• How many employees will I need?

o Corporations in other countries are often called: (3) Joint stock companies Public limited companies Autonomous entities Limited liability company Re-calibrated partnerships

• Joint stock companies • Public limited companies • Limited liability company

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

• Legal

o A limited liability company's owners have _____ liability No liability Narrowly defined limited Limited Unlimited

• Limited

o Since _______ and ownership are separated, a corporations life is unlimited Profitability Management Taxation Debt

• Management

o A sole proprietorship has _______ personal liability for all business debts and obligations Limited Unlimited Little No

• Unlimited

o What three questions are the financial manager concerned with? Designing new products Working capital management Capital structure Capital budgeting

• Working capital management • Capital structure • Capital budgeting

o Which of the following companies were involved in corporate scandals tha led to Sarbanes-Oxley? (3) WorldCom Enron Disney Tyco

• WorldCom • Enron • Tyco

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

• Ownership is transferred by gifting or selling shares of stocks

o A business without separate legal authority formed by two or more people is known as a _____ Partnership Sole proprietorship Conglomerate Corporation

• Partnership

o Which of the following is NOT one of the basic areas of finance? Corporate finance Investments Personal finance Financial institutions International finance

• Personal Finance

o A limited liability company (LLC): Is a hybrid between a sole proprietorship and a partnership Prefers its profits be taxed as personal income to its owners That meets the IRS criteria to be an LLC will be taxed like a corporation Provides limited liability for some, but not all, of its owners Cannot be created for professional service firms, such as accountants and attorneys

• Prefers its profits be taxed as personal income to its owners

o Which of the following are defining features of the primary market? (2) It is the market where shareholders and bondholders buy and sell to each other Proceeds from the sale of securities goes to the issuing firm It only involves seasoned equity offerings It is the market where initial public offerings are made

• Proceeds from the sale of securities goes to the issuing firm • It is the market where initial public offering are made

o 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

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

• Secondary

o Working capital includes which of the following? (3) Short-term assets Inventory Cash Equipment

• Short-term assets • Inventory • Cash

o A(n) _______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm Autocrat Stakeholder Shareholder Bondholder

• Stakeholder

o Which of the following positions generally report to the Chief Financial Officer? (2) Chief executive officer Treasurer Controller Director of marketing

• Treasurer • Controller

o The mechanism by which unhappy stockholders can act to replace existing management is called a _____ _____

Proxy fight

o A ______ _______ involves selling securities to the general public.

Public offering

o Partnership-

Similar to a proprietorship except it has more than one person

o Control of the firm ultimately rests with the ____________

Stockholders

o True or false: in a large corporation, shareholders and managers are usually separate groups

True

o The owner of a sole proprietorship keeps all the profits however, the owner has ________ ________ for business debts

Unlimited liability

o Some of the most important questions include:

What determines the price of a financial asset, such as a share of stock? What are the potential risks and rewards associated with investing in financial assets? What is the best mixture of the different types of financial assets to hold?

o Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of __________ management Working capital Total asset Accounts receivable Fixed asset

• Working capital