FIN 3715 Chapter 1 Test Questions

1.1 Why Study Finance

1.1

1.2 THE FOUR TYPES OF FIRMS

1.2

A sole proprietorship is owned by ________. A) one person B) two or more persons C) shareholders D) bankers

A

What is the most common type of firms in the United States and the world? A) sole proprietorships B) partnerships C) limited partnerships D) corporations

A

Which of the following types of firms does NOT have limited liability? A) sole proprietorships B) limited partnerships C) corporations D) none of the above

A

Whose interests should a financial manager consider paramount when making a decision? A) the stockholders who have risked their money to become owners of the company B) the employees and associated stakeholders who are employed by the company C) the public who consume the companyʹs goods and services D) the senior management and associated colleagues at the executive level within the company

A

A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations? A) Profits from the sales of popular models will be lost when returned to the shareholders in the form of dividends. B) New models will require a lot of money to develop and bring to market before they generate any revenue. C) The company will have built up debts which must be repaid in order to bring the current models to market. D) Equity must be raised to finance the development of new models to replace the existing models.

B

A limited liability company is essentially ________. A) a limited partnership without limited partners B) a limited partnership without a general partner C) just another name for a limited partnership D) just another name for a corporation

B

How do the shareholders of most corporations exercise their control of that corporation? A) by voting on issues that concern them B) by electing members of a board of directors C) by vetting the decisions of the board of directors D) by providing oversight of the day-to-day running of the corporation

B

The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case? A) by increasing the debt burden carried by the company B) by raising the companyʹs equity by encouraging new owners to take a stake in the company C) by decreasing the ratio of equity to debt held by the company D) by increasing the value of shares held by the existing owners of the company

B

What is the process of double taxation for the stockholders in a C corporation? A) Their shares are taxed when they are both bought and sold. B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. C) The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares. D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation.

B

Which of the following is NOT an advantage of a sole proprietorship? A) single taxation B) ease of setup C) unlimited liability D) no separation of ownership and control

C

In which of the following ways is a limited liability company like a corporation? A) It was created and developed first in the United States. B) It can choose to be considered a partnership for tax purposes. C) Its ownersʹ liability is restricted to their investment. D) It is directly managed by the owners.

C

Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct? A) Joe has no management authority within the partnership. B) Jane is legally involved in the managerial decision making of the firm. C) Janeʹs liability for the firmʹs debts consists solely of her investment in the firm. D) Withdrawal of Jane from the partnership will dissolve the partnership

C

Which of the following is NOT a reason why a firmʹs financial managers must take great care when making investment decisions? A) These investment decisions determine whether the firm will add value for its owners. B) These investments determine the long-term directions in which the company may move. C) These investment decisions determine the corporationʹs mix of debt and equity. D) These investment decisions typically involve substantial costs which must be carefully weighed against their potential benefits.

C

Which of the following is typically the major factor in limiting the growth of sole proprietorships? A) The organizational structure of such firms tends to become extremely complicated over time. B) It is extremely difficult to transfer control of such firms to a new owner if the present owner dies or wishes to sell the firm. C) The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts. D) Investors have a great deal of control over the day-to-day running of such firms, leading to confusion when conflicts in direction arise

C

Which of the following organization forms has the most revenue? A) S corporation B) limited partnership C) C corporation D) limited liability company

C

Which of the following people may not manage the operations of a firm in which they are part or full owners? A) stockholders in S corporations B) stockholders in C corporations C) limited partners in a limited partnership D) general partners in a limited partnership

C

A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met? A) The financial manager should seek to make investments that do not harm the interests of the stockholders. B) The decisions taken by the financial manager should be solely influenced by the benefit to the company since, by maximizing its fitness, he or she will also maximize the benefits of that company to the shareholders. C) The financial manager should consider the interests and concerns of large shareholders a priority so the needs of those who hold a controlling interest in the company are met. D) In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment

D

Over four-fifths of all U.S. business revenue is generated by which type of firms? A) sole proprietorships B) partnerships C) limited partnerships D) corporations

D

What is the major advantage corporations have over other business entities? A) It is easier for a corporation to raise capital than other forms of businesses. B) A corporation is treated as a separate legal entity for tax and legal purposes. C) A corporationʹs shares can be freely traded among its shareholders. D) All of the above are advantages that a corporation has over other business forms.

D

What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership? A) The owners of a limited liability company have personal obligation for debts incurred by the company. B) There is no separation between the company and its owners in a limited liability company. C) The owners of a limited liability company can withdraw from the company without the company being dissolved. D) The owners of a limited liability company can take an active role in running the company

D

What is the most important duty of a firmʹs financial officer? A) to ensure that the firm has enough cash on hand to meet its commitments at any given time B) to decide how to pay for investments C) to manage working capital D) to make investment decisions

D

Which of the following best describes why the Valuation Principle is a key concept in making financial decisions? A) It shows how to assign monetary value to intangibles such as good health and well -being. B) It allows fixed assets and liquid assets to be valued correctly. C) It gives a good indication of the net worth of a person, item, or company and can be used to estimate any changes in that net worth. D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.

D

Which of the following features of a corporation is LEAST accurate? A) The ownersʹ identity is separate from a corporation. B) The owners of a corporation are not liable for any obligations the corporation enters into. C) Changes in ownership do not result in the dissolution of the corporation. D) Earnings from a corporation are taxed only once

D

Which of the following is a major duty of a financial manager? I. To make investment decisions II. To make financing decisions III. To manage cash flow from operating activities A) I only B) I and II only C) I and III only D) all of the above

D

Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves? A) It is best for the control of the finances of a corporation to be in the hands of a disinterested third party. B) The interests of the various owners may conflict with each other. C) The owners may not be U.S. citizens or residents. D) There are often many owners, and they can often change as they buy and sell stock.

D

Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property? A) The number of owners, and hence the spread of risk among these owners, is not limited. B) Its owners are liable for any obligations it enters into. C) The state in which a corporation is incorporated provides safeguards against any wrongdoing by the corporation. D) It is a legally defined, artificial entity that is separate from its owners.

D

Financial decisions require that you weigh alternatives in strictly monetary terms

FALSE

In most corporations, the owners exercise direct control of a corporation.

FALSE

It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.

FALSE

Partnerships are the most common type of business firms in the world.

FALSE

The fact that corporationsʹ shares are easily traded within the market has a net effect of acting as a disincentive for managers to favor the interests of shareholders over their own interests

FALSE

Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors.

TRUE

The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly.

TRUE

The principal goal of a financial manager is to maximize the wealth of the stockholders

TRUE