FIN 7020 - Exam 1 - Chapter 1 - MATT STRATTON

Which of the following statements about a limited partnership are correct? I- A limited partner can sell his or her interest without dissolving the partnership II- A general partner can easily transfer his or her partnership interest III- A limited partner is not involved in the day-to-day operations of the partnership IV- A limited partnership continues if a general partner died a- I and III b- I, II and III c- II and III d- All of them

a- I and III

What is the difference between primary and secondary markets?

Primary markets are for raising capital by selling new securities. Secondary markets facilitate the trading of existing securities. In primary markets, securities are issued by the entity (company or government). In secondary markets, trading occurs without the issuer's involvement.

Simple vs Compound Interest

Simple interest: Interest earned only on the original principal amount invested; that is, the interest received each year does not earn interest during any subsequent year. Compound interest: Interest earned on both the initial principal and the interest reinvested from prior periods.

What is the liability differences between a SP, Partnership, and a Corp?

Sole Proprietorship: Unlimited Liability Partnership: General = full liability, Limited = financial liability only Corporation: Limited Liability

What is the primary goal of financial management?

The main goal of financial management is to maximize shareholder wealth by maximizing the stock price.

Any situation where a potential conflict can arise between the firm's owners and its managers is referred to as: a- Agency problem b- Managerial problem c- Control issue d- Personal conflict

a- Agency problem

The agency problem arises mostly in situations where there is a separation of: a- Marketing and financial management b- Treasury and controller functions c- Company ownership and company management d- Capital budgeting and investment decision

c- Company ownership and company management

The major advantage of being a limited partner in a limited partnership is the ability to: a- be taxed on any profits separately from your personal income b- actively manage the firm without having an unlimited liability c- invest in a partnership while limiting your losses to the amount you invested d- dissolve the partnership if you are not satisfied with the management team

c- invest in a partnership while limiting your losses to the amount you invested

Advantages and Disadvantages of a Sole Proprietorship

Advantages Easiest to start Least regulated A single owner keeps all the profits Taxed once as personal income Disadvantages Limited to the life of the owner Equity capital is limited to the owner's personal wealth Unlimited liability Difficult to sell ownership interest

Advantages and Disadvantages of a Corporation

Advantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate)

Advantages and Disadvantages of a Partnership

Advantages Two or more owners More capital available Relatively easy to start Income taxed once as personal income Disadvantages Unlimited liability (General partnership vs Limited partnership**) Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership

What is the Agency Problem? What is Agency Cost?

Agency Problem: A conflict of interest where one party is expected to act in another's best interests. An agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders is supposed to make decisions that will maximize shareholder wealth even though it is in the manager's best interest to maximize their own wealth. Agency Cost: A type of internal cost that a principal may incur as a result of the agency problem. They include the costs of any inefficiencies that may arise from employing an agent to take on a task, along with the costs associated with managing the principal-agent relationship and resolving differing priorities.

What is the liability difference between a general partnership vs a limited partnership?

General partners have full management control of the business and also have unlimited financial liability for their financial obligations. Limited partners have little or no involvement in management, but their liability is limited to the amount of their investment in the LP.

Which of the following statements are true for a partnership? I- Income generated is taxed only once at the partners level II- Partners generally have an unlimited liability. III- Partnerships can easily raise money on the capital markets a- I only b- I and II only c- II and III only d- I, II, and III

b- I and II only

Which of the following statements are true for a general partnership? I- Each partner can be responsible for 100 percent of the partnership debts regardless of his ownership. II- Each partner receives only a proportionate share of the profits III- Profits are taxed at the partnership level and at the partners' level IV- Creditors can go after anyone of the partners to seek payment a- I, and II only b- I, II and IV only c- I, II and III only d- All of them

b- I, II and IV only

Which of the following are characteristics of a dealer market? I- Trading is carried out electronically over a network II- Trading is carried out on the trading floor of a stock exchange III- The market maker ensures the liquidity of the market IV- Trading takes place at anytime in the day a- I and II only b- I, and IV only c- I, II and III only d- All of them

b- I, and IV only

Which of the following actions best represents the primary goal of a financial manager? a- Increasing sales while decreasing the operating costs. b- Increasing the market value of the equity by improving the efficiency operations. c- Increasing the size of the company by acquiring some of the firm's competitors. d- Increasing liquidity and reducing the level of long-term debt.

b- Increasing the market value of the equity by improving the efficiency operations.

The market for trading securities after the initial public offering is known as: a- Primary market b- Secondary market c- Listed market d- Flea market

b- Secondary market

The control of a corporation ultimately lies with the: a- Chief executive officer b- Chairman of the board c- Company president d- Company shareholders

d- Company shareholders

The business entity that is regarded as a "Legal Person" is a: a- Limited partnership b- General partnership c- Proprietorship d- Corporation

d- Corporation

A sole proprietor: a- earns income which is subject to double taxation b- can generally raise equity on the capital market to finance his or her business activities c- incurs significant legal cost to set-up the business entity d- assumes personal liability for all the debts of the business

d- assumes personal liability for all the debts of the business