FIN: Ch 1 Introduction to Corporate Finance

A general partnership has which of the following characteristics?

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

which of the following are important when considering a partnership?

-Fund raising limitations - Taxation of partnership income -Personal liability for firm debts

Which of the following are among the most important questions to be asked when a business is started?

-How will everyday financial activities be handled? -Where will long-term financing be obtained to pay for investments? - What long-term investments should be made?

When a corporation is formed, is is granted which of the following rights

- The ability to issue stock - Legal powers to sue - State citizenship for jurisdictional purposes

Which of the following show why a corporation is the most important form of business?

-A corporation is a separate legal entity with the ability to acquire and exchange property -Corporations can enter into contracts -Corporations can sue and be sued

Which of the following is true about a sole proprietorship?

-A proprietorship has a limited life -It is the simplest type of business to form

Which of the following can be used to encourage managers to act in the best interests of shareholders?

-Better prospects of promotion -Managerial compensation tied to performance -Stock options and bonuses

A partnership must have at least _______ owners.

two

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

Increase the value of the firm's existing stock Increase market value of shareholders' equity

The goal of a for-profit business is to ____________ existing owners' equity.

maximize

Select all that apply Business finance is broadly concerned with which of the following? How to set up the audit committee How to manage day-to-day finances of the firm Which long-term investment to make How to finance long-term investments

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

In a larger corporation, the financial manager is primarily responsible for:

- Long-term investment decisions - Financing decisions - Financial aspects of operations, such as collections of accounts receivables

The financial goal of profit maximization is associated with which of the following?

-Maintenance deferment -Cost-cutting -Critical inventory reduction

Which of the following, according to the textbook, are possible financial goals for a company?

-Minimize costs -Maximize profits -Survival

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

Chief financial officer (or vice president of finance)

The officer responsible for corporate tax reporting is the ____________.

Controller

Select all that apply Which of the following are reasons that the corporation is the most important form of business? Corporations can sue and be sued. Corporations are separate legal entities. Corporations can enter contracts. Corporations can vote in general elections

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

What are the two basic classification under which most potential financial goals fall?

Earning or increasing profits and Controlling risk

Which companies were involved in corporate scandals that led to Sarbanes-Oxley?

Enron WorldCom Tyco Adelphia

True or False: "Profit maximization" is the goal for the management of a corporation in short-run only.

False

T or F: Shareholders are the ONLY stakeholders in a firm as they are the owners.

Fasle

Who is considered non-owner stakeholders in a company?

Government Employees Customers Suppliers

Is profit maximization the primary objective of a business?

No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.

How is ownership transferred in a corporation?

Ownership is transferred by gifting or selling shares of stock.

A business without separate legal authority formed by two or more people is know as a _________.

Partnership

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

Personal finance

When a corporation raises funds in the financial markets, the transaction occurs on the:

Primary Market

Which of these topics is not of especial interest to a financial manager? Product Development Capital Budgeting Capital Structure Working Capital Management

Product Development

Which one of these is an important mechanism used by unhappy stockholders to replace current management?

Proxy fight

Corporations in other countries are often called:

Public limited companies Limited liability companies Joint stock companies

When one owner or creditor sells to another, the transaction takes place in the _____________ market.

Secondary

The owners of a corporation are called ___________.

Shareholders

Which 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.

Shareholders

How is ownership of a corporation represented?

Shares of stock

_______ ______ can be used to encourage managers to maximize the value of the stock.

Stock options

_______ are frequently used to encourage key managers to maximize the value of the firm's stock.

Stock options

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

The amount the shareholder invested in the corporation

The primary responsibility of financial managers is to increase the value of __________.

The existing shares of stock

Which on of these motivates managers to make good decisions?

Threat of a hostile takeover

What is the main goad of financial management?

To maximize shareholder wealth

According to Figure 1.2, where does cash generated by a corporation typically go?

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

The officer responsible for managing the firm's cash flows is the ___________.

Treasurer

True or false: In a large corporation, stockholders and managers are usually separate groups. True False

True

True or false? A corporation borrows money in its own name.

True

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?

Tyco, Enron, and WorldCom

An organization must prepare ______ and bylaws when forming a corporation. Multiple choice question. articles of incorporation a legal will a partnership agreement an indenture agreement

articles of incorporation

A corporation receives cash from financial markets by selling ______ and ______.

bonds stocks

A corporation receives cash from financial markets by selling __________ and __________.

bonds and stocks

The Sarbanes-Oxley Act is intended to strengthen protection against:

corporate accounting fraud and financial malpractice

Public limited companies and joint stock companies are other names for __________.

corporations

"Increasing shareholder wealth" means increasing the _________.

current common stock value

A bad financial decision is defined as a decision that ______ owners' equity.

decreases

A bad financial decision is defined as a decision that ______ shareholder wealth.

decreases

Some of the cash flow generated by a firm goes back to the financial markets in the form of ____________.

dividends and debt payments

A sole proprietorship is a business that _______. is similar to a limited partnership is owned by one person provides limited personal liability to its owner is organized with bylaws

is owned by one person

A corporation is a distinct __________ entity and as such can have a name and take advantage of the legal powers of natural persons.

legal

Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts.

limited

Businesses are motivated to organize as corporations because stockholders in a corporation have ___________ liability for corporate debts.

limited

Since ___________ and ownership are separated, a corporation's life is unlimited.

management

Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ___________ effectively controls the firm.

management

A sole proprietorship is a business owned by _____________ person(s).

one

Most equity shares of large firms in the US trade on:

organized auction markets

Inventory is a

part of working capital and a current asset

A business without separate legal authority formed by two or more people is known as a _____.

partnership

A limited liability company is taxed like a __________ and its owners have _____________ liability

partnership; limited

Because shareholders get paid last after all other obligations are satisfied, they are often called:

residual owners

When one owner or creditor sells to another, the transaction takes place in the _________ market

secondary

When one owner or creditor sells to another, the transaction takes place in the _____________ market.

secondary

The owners of a corporation are called ______.

shareholders

A(n) ______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm.

stakeholder

Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:

stock options

The goal of the financial management is to increase the value of _____.

the existing shares of stock

A sole proprietor has ______ personal liability for all business debts and obligations.

unlimited

The Sarbanes-Oxley Act requires corporate officers to do which of the following?

-Confirm the validity of the annual financial report -Accept responsibility for material errors in the annual report -List any deficiencies in internal controls

Which of the following are considered stakeholders in a company?

Employees, the Government, and Suppliers Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm

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

Managers

The rules used by a corporation to regulate its existence are know as ______________.

bylaws

If you hire a real estate company to sell your house, you are most apt to encounter what?

Agency problem

Which of the following positions generally report to the chief financial officer (CFO)?

Controller and Treasurer (The CFO reports to the CEO)

The federal government taxes which of the following?

Corporate earnings and shareholder dividends

In a limited partnership, a limited partner's liability for business debts is ________.

Limited to their cash contribution to the partnership

Which of the following are defining features of the primary market? Select all that apply. It is the market where shareholders and bondholders buy and sell to each other It is the market where initial public offerings are made 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

When a corporation is formed, it is granted which of the following rights? (Select all that apply.) Legal powers to sue Citizenship for casting vote in presidential election of the country The ability to issue stock Corporate life of up to 100 years

Legal powers to sue The ability to issue stock

Which of the following are included in a firm's capital structure?

Long-term debt and Equity

Capital budgeting is concerned with planning and managing a firm's _________.

Long-term investments

The relationship between stockholders and management can best be described as a(n) ______ relationship.

agency

The costs incurred due to a conflict of interest between stockholders and management are called ______________.

agency costs

The conflict of interest between an agent and a principal is called a(n) ________________.

agency problem

The conflict of interest between an agent and a principal is called a(n)

agency problem.