Fin Exam 1

Finance grew out of economics and accounting, and it is generally divided into three areas: ____________ relate to the markets where interest rates and stock and bond prices are determined. a) Capital Markets b) Spot Markets c) Private Markets

Capital Markets

As a result of financial scandals during the past decade, there has been a strong push to improve business ethics. Managers have an obligation to behave ethically, and they must follow the laws and other society-imposed constraints. Most managers recognize that being ethical is ___ with the corporations primary goal. a) Consistant b) Inconsistant c) Irrelevant

Consistant

The basic concepts of financial management are the same for all businesses, regardless of how their organized. However, a firms legal structure affects its operations. The main forms of business organizations are: 1) proprietorships, 2) partnerships, 3) corporations, and 4) limited liability companies (LLCs) and limited liability partnerships (LLPs). However, based on the dollar value of sales, most business is done by ______. a) proprietorships b) partnerships c) corporations d) limited liability companies/partnerships

Corporations

A corporations disadvantages are: 1) Corporate earnings may be subject to ____ taxation and 2) setting up a corporation and filing required state and federal reports is complex. a) No b) Double c) Triple

Double

Select the statement that best completes the following statement: Most managers recognize that being socially responsible is________ a) Important but inconstant with achieving their financial goals. b) Important and generally (but not always consistent) with achieving their financial goals. c) Irrelevant

Important and generally (but not always consistent) with achieving their financial goals.

A partnership has two important advantages: 1) It is easily and inexpensively formed and 2) its income is allocated on a pro rata basis to partners and taxed on a(n) ____ basis so that the partnership avoids higher ___ income taxes. a) Individual b) Corporate

Individual, Corporate

Corporate Raider

Individuals who target corporations because they are undervalued.

Sarbanes-Oxley Act

Law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.

Business Ethics

Study of proper business policies and practices regarding potentially controversial issues, such as corporate governance, insider trading, bribery, discrimination, corporate social responsibilities and fiduciary responsibilities.

Finance prepares students for jobs in banking, investments, insurance, corporations, and government. It is important for all business students, no matter what their major is, to understand finance concepts. In addition, finance is useful to all individuals regardless of their jobs as we encounter finance in our everyday lives, such as decisions regarding consumer loans and mortgages. True or false?

True

If a firm's managers narrowly focused on creating shareholder value, but in the process the company was unresponsive to its employees and customers, hostile to its local community, and indifferent to the effects its actions had on the environment; then in all likelihood society would impose a wide range of costs on the company, and this would ultimately lead to a reduction in shareholder value? True or false?

True

Managers should try to forecast the effects of different decisions on the firm's intrinsic value and then take actions designed to maximize this value. Management should provide information that helps investors make better estimates of the firm's intrinsic value, which will keep the stock price closer to the equilibrium level. However, there are times when management cannot divulge the true situation because doing so would provide information that helps its competitors. True or false?

True

The chief executive officer (or CEO) is the top executive officer, and he or she reports to the board. The chairperson of the board often also serves as the CEO. Most firms also have a chief operating officer (COO) and a chief financial officer (CFO). The COO is often designated as the firm's president and directs asset acquisitions, and investor relations. True or False?

True

Limited Liability Company (LLC)

A popular type of organization that is a hybrid between a partnership and a corporation.

S Corporation

A special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation.

Which of the following helps ensure that managers operate in their stockholders' interest rather than their own personal interest? a) The threat of firing by the board of directors. b) The threat of a hostile takeover possibly resulting in top managers losing their jobs. If the stock price is below its intrinsic value, this threat is magnified. c) Compensation packages designed to provide incentives for management to maximize the long-run stock price. d) All of these help management focused on stockholders' interest as reflected in maximizing the long-run stock price.

All of these help management focused on stockholders' interest as reflected in maximizing the long-run stock price.

Investors in an LLC or LLP have votes in proportion to their own interest. LLCs and LLPs have been gained in popularity, but large companies still find its advantages to be ____ corporations because of advantages in raising capital for growth. a) S b) C

C

LLCs and LLPs have limited liability protection like ____ but are taxed like ___. a) Corporations b) Partnerships

Corporations, Partnerships

Conflicts between stockholders and debt holders arise because stockholders are less willing than debt holders to take on risky projects because stockholders are more "at risk" of losing their investment. True or false?

False

Stocks have market prices, and they also have intrinsic values. If the market price is below the intrinsic value as estimated by marginal investors, and if the intrinsic value remains stable in the future, then there will be a tendency for the stock's price to fall over time. True or false?

False

A proprietorship has three important advantages: 1) It is easily and inexpensively formed, 2) It is subject to ____ government regulations, and 3) it is subject to lower income taxes than are ____. a) few b) no c) many ______________________ d) corporations e) partnerships

Few, Corporations

Finance grew out of economics and accounting, and it is generally divided into three areas: ____________, also called corporate finance, focuses on decisions about acquiring assets, raising capital, and running the firm so it maximizes its value. a) Financial Management b) Merger Analysis c) Capital Markets

Financial Management

Finance grew out of economics and accounting, and it is generally divided into three areas: ____________ involve decisions concerning stocks and bonds that include security analysis, portfolio theory, and market analysis. These areas are closed interconnected. a) Mergers b) Investments c) Distributions

Investments

The basic concepts of financial management are the same for all businesses, regardless of how their organized. However, a firms legal structure affects its operations. The main forms of business organizations are: 1) proprietorships, 2) partnerships, 3) corporations, and 4) limited liability companies (LLCs) and limited liability partnerships (LLPs). In terms of numbers, most businesses are ______. a) proprietorships b) partnerships c) corporations d) limited liability companies/partnerships

Proprietorships

The basic concepts of financial management are the same for all businesses, regardless of how their organized. However, a firms legal structure affects its operations. The main forms of business organizations are: 1) proprietorships, 2) partnerships, 3) corporations, and 4) limited liability companies (LLCs) and limited liability partnerships (LLPs). Businesses are frequently started as ____ and then convert to _____ when their growth results in disadvantages outweighing advantages. a) proprietorships b) partnerships c) corporations d) limited liability companies/partnerships

Proprietorships, Corporations

The primary financial goal of a corporation is _______, which involves maximizing the long-run value of the firms stock and requires taking a long-run view of a firms operations. To achieve their financial goals, firms must develop products that consumers want, produce the products efficiently, sell them at _____ prices, and observe laws relating to corporate behavior. a) shareholder wealth maximization b) earnings wealth maximization c) earnings growth maximization ____ a) low b) high c) competitive

Shareholder wealth maximization, competitive

Stockholder Wealth Maximization

The primary financial goal for managers of publicly owned companies implies that decisions should be made to maximize the long-run value of the firm's common stock.

A corporation has the following advantages: 1) ____ life, 2) ownership that is easily transferred through exchange of stock, 3) _____ liability, and 4) can _____ raise large amounts of capital to operate large businesses. a) Limited b) Unlimited _____ a) Limited b) Unlimited _____ a) easily b) difficult

Unlimited, limited, easily

Intrinsic Value

An estimate of a stock's 'true' value based on accurate risk and return data. This can be estimated, but not measured precisely.

Marginal Investor

An investor whose views determine the actual stock price.

Proprietorship

An unincorporated business owned by one individual.

Partnership

An unincorporated business owned by two or more persons.

A stocks intrinsic value is an estimate of a stocks 'true' value based on accurate risk and return data. It can be estimated but not measured precisely. When a stocks actual market price is equal to its intrinsic value, the stock is in ____. The ___ investors views determine a firms actual stock price. a) imbalance b) stagnation c) equilibrium ___ a) marginal b) analyst c) active

Equilibrium, Marginal

Limited Liability Partnership (LLP)

Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture. It provides personal asset protection from business debts and liabilities but is taxed as a partnership.

Equilibrium

The situation in which the actual market price equals the intrinsic value, so investors are different between buying and selling a stock.

Market Price

The stock value based on perceived but possibly incorrect information as seen by the marginal investor.

However, a proprietorship also has three important limitations: 1) A proprietorship has ___ personal liability for the business' debts. 2) The life of the business is limited to the life of the individual who created it and 3) A proprietorship has difficulty obtaining large sums of capital so proprietorships are used primarily for small businesses. a) Limited b) Unlimited c) No

Unlimited

A partnership has four important disadvantages: 1) ____ personal liability, 2) ____ life, 3) difficulty of transferring ownership and 4) difficulty of raising large amounts of capital. a) Limited b) Unlimited

Unlimited, limited

Which of the following is NOT an advantage of the corporate form of organization versus partnerships and proprietorship? a) More favorable tax treatment. b) Ability to attract large amounts of capital. c) Liquidity of investors' holdings in the business. d) Ease of transferring ownership among investors. e) Limited liability.

Ability to attract large amounts of capital.

Hostile Takeover

The acquisition of a company over the opposition of its management.

If a company practices "good business ethics", then it will treat its customers, employees, and stockholders "fairly", and this will cause it to have a good reputation. Such behavior may increase costs and thus hurt profits in the short run, but this is often offset by long-run benefits in the form of customer loyalty, more dedicated employees, and stockholders who will support management in the event of of a downturn in the business. True or false?

True

Another word for intrinsic value is: a) True value b) Fair market price c) Exchange rate neutral d) Nominal price

True Value

Corporation

A legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability.