FIN300 CH1

01.03 - All else equal, in which of the following forms of business would the possibility of an agency problem be the greatest?

A U.S. corporation in which individual stockholders own extremely small proportions of the company.

1.2 Which of the following statements about the corporate form of business organization is correct?

A corporation has the legal authority to act like a person when conducting business.

1.2 Which of the following is true of a general partner of a limited liability partnership (LLP)?

A general partner of a limited liability partnership (LLP) is fully personally liable for all business debts.

1.2 Identify the correct statement about a limited liability partnership (LLP).

A general partner of a limited liability partnership is personally liable for all business debts.

01.03 - Which of the following statements is true of a hostile takeover?

A hostile takeover is most likely to occur when a firm's stock is undervalued relative to its potential.

1.2 Identify a true statement about a limited liability company (LLC).

A limited liability company (LLC) offers the limited personal liability associated with a corporation.

1.2 Identify a true statement about a limited liability company (LLC).

A limited liability company can have more than one type of stock (ownership interest) outstanding.

01.5 Which of the following is true of corporations that operate in several different countries?

A nation may expropriate the assets of multinational corporations without compensation.

1.2 Which of the following represents a difference between an S corporation and a limited liability company (LLC)?

An S corporation has no more than 100 stockholders, whereas an LLC can have more than 100 owners (members).

01.03 - Paying Payroll Service (PPS) recently declared bankruptcy. The price of PPS's stock has dropped from approximately $10 per share one year ago to $1 today. You can imagine that stockholders are not happy that the value of their stock has dropped so significantly. At the same time the financial position of the firm was deteriorating, PPS executives increased their salaries and perquisites substantially. Nothing they did violated any laws or was considered an unethical act. We would most likely describe this situation as _____.

An agency problem

01.03 - Identify the internal factor that influences the stock price of a firm.

Capital Structure

01.5 Which of the following is true of a firm that tries to coordinate and control the worldwide operations of its subsidiaries?

Cash flows in different subsidiaries are denominated in different currencies.

1.1 The accounting and tax departments are the responsibility of the _____.

Controller

01.03 - The proper goal of the financial manager should be to maximize the firm's expected profit, because this will add the most wealth to each of the individual shareholders (owners) of the firm.

False

01.03 - To properly maximize the value of the firm, the financial manager should execute his or her duties independent of the cash flow decisions made by other senior managers.

False

01.04 - In a competitive marketplace, "good ethics" is a wonderful idea but an impractical standard, because there are simply too few benefits to be gained from maintaining high business ethics.

False

01.04 - No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to effectively compete, even if those cost-increasing actions yield significant benefits to the firm.

False

01.5 Cultural differences do not impact the multinational corporations as they expand into different geographic regions.

False

01.5 Nations do not have the sovereignty to takeover (expropriate) the assets of a firm without compensation.

False

1.1 The finance function is relatively independent of most other corporate functions. Marketing decisions, for example, might affect the firm's need for funds but are not affected by conditions in financial markets or other financing issues.

False

1.2 A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited liability for business, which limits personal losses to what the proprietor has invested in the company.

False

1.2 The disadvantages associated with a proprietorship are similar to those of a partnership. A major difference between these two forms of business organization is that a partnership requires a legal agreement that commits the partners' personal assets, which means that partnerships have little difficulty raising large amounts of capital (similar to corporations).

False

1.1 Which of the following functions deals with the management of money?

Financial Services

1.1 The treasurer of a company is a key subordinate of the _____.

Financial Vice President

01.5 Which of the following statements is correct?

Financial institutions in other countries generally are less regulated than in the United States.

1.1 Identify a true statement about the financial services provided by organizations.

Financial services organizations help individuals and companies determine how to invest money to achieve their financial goals.

1.1 Which of the following is true of financial institutions?

Managers of financial institutions should have an understanding of factors that cause interest rates and other returns in the financial markets to rise and fall.

01.03 - Which of the following actions should be taken by managers to avoid takeover threats?

Managers should take action to maximize stock prices.

01.5 Which of the following is true of stockholders in continental Europe?

Many stockholders assign banks their proxy votes for the directors of the companies.

01.03 - Which of the following statements is correct?

Maximizing the income statement item "net income" might not be the best goal for a corporation if the managers are interested in maximizing the economic welfare of the firm's stockholders (that is, the firm's stock price).

01.03 - Which of the following should be the primary goal pursued by the financial manager of a firm?

Maximizing the market value of the firm's stock

1.2 Which of the following statements is correct?

Under partnership law, if any partner is unable to meet his or her pro rata claim in the event the partnership goes bankrupt, the remaining partners must make good on the unsatisfied claims.

1.2 Everything else equal, including firm size, dollar sales, type of product sold, and so forth, the primary difference between proprietorship and partnership business forms is that _____.

a partnership has more owners than a proprietorship

1.1 The investment function of finance helps in _____.

determining the values, risks, and returns associated with such financial assets as stocks and bonds

01.5 In many countries, the terms under which companies compete, the actions that must be taken or avoided, and the terms of trade of various transactions are determined by _____.

direct negotiation between the host government and the multinational corporation

01.03 - Stock price maximization requires _____.

efficient, low-cost plants that produce high-quality goods and services

01.04 - The 11 sections (titles) in the Sarbanes-Oxley Act of 2002 _____.

establish standards for accountability and responsibility in reporting financial information

01.04 - The Sarbanes-Oxley Act of 2002 requires a publicly-traded corporation to _____.

have a committee that consists of outside directors to oversee the firm's audits

1.2 If a limited liability company (LLC) is taxed like a partnership, _____.

income passes through to the owners

1.2 A limited partner in a limited liability partnership (LLP) is _____.

liable for only the amount invested in the partnership

1.2 It is possible to limit the liability faced by some of the partners in a partnership form of business by establishing a _____.

limited liability partnership (LLP)

01.03 - The primary goal of a publicly-owned firm interested in serving its stockholders should be to _____.

maximize the stock price per share

01.03 - The primary goal of a financial manager should be to _____.

maximize the value of the firm's stock

01.03 - The management's primary goal is stockholder wealth maximization, which, translates into _____.

maximizing the value of the firm as measured by the price of its common stock

01.03 - Institutional investors can ensure that a corporation pursues goals that are in their best interest by _____.

monitoring its financial performance to ensure that managers pursue the goal of wealth maximization

01.5 Industrial groups that exist in foreign countries are _____.

organizations that tie together all the functions of production and sales from start to finish

1.2 In the United States, the most common form of business is the _____, and the form of business that generates most of the sales and profits is the _____.

proprietorship; corporation

1.1 The success of financial institutions requires an understanding of _____.

regulations that affect these financial institutions

01.03 - Actions that help a firm increase the price of its stock also _____.

require the development of products that consumers want and need

1.1 The success of financial institutions depends on _____.

the understanding of the factors that cause interest rates and other returns in the financial markets to rise and fall

01.03 - Managers of firms that use alternative accounting techniques to inflate current earnings are likely to generate long-term benefits to the shareholders of the firm.

False

01.03 - Financial managers should seek the combination of assets, liabilities, and capital that generate the largest expected projected income in the current accounting period.

False

01.03 - Having the manager's compensation tied to the company's performance increases the agency problem that corporations face.

False

01.5 The term multinational corporation is used to describe a firm that operates in two or more countries.

True

01.03 - Which of the following mathematical expressions computes earnings per share (EPS)?

Earnings per share = Net Income ÷ Number of outstanding shares of common stock

01.03 - Which of the following statements is true of earnings per share?

Earnings per share is often used as an indication of the firm's potential for generating future cash flows.

01.5 The prices at which the currency of one country can be converted into the currencies of other countries are known as _____.

Exchange rates

01.03 - As hostile takeovers are most likely to occur when a firm's stock is overvalued, the managers have a strong incentive to undervalue the firm's stock relative to its potential.

False

01.03 - Identify the external factor that affects the value of a firm's stock.

General level of economic activity

01.04 - Identify the correct statement about business ethics.

Good business ethics attract and keep employees of the highest caliber.

01.04 - Which of the following statements concerning a firm's quest to maximize wealth is correct?

If the government did not mandate socially responsible corporate actions, such as those relating to product safety and fair hiring practices, most firms in competitive markets probably would not pursue such policies voluntarily.

1.2 Which of the following statements is correct?

In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms.

01.5 Which of the following statements is true?

Institutional differences among countries can cause significant problems in coordination of subsidiaries.

01.03 - Which of the following actions is consistent with social responsibility and is not necessarily inconsistent with stockholder wealth maximization?

Investing in a smokestack filter to reduce sulphur-dioxide emissions to decrease the tax being levied on the firm by the state for pollution it produces each year.

01.5 Which of the following is true of the greater concentration of ownership in non-U.S. firms than in U.S. firms?

It permits greater monitoring and control by individuals or groups than the more dispersed ownership structures of U.S. firms.

1.2 Which of the following forms of business offers limited personal liability to owners as well as the choice to be taxed as either a corporation or as a partnership?

Limited Liability Company

01.03 - Which of the following statements is true of agency problems?

One of the best means to control agency problems is to require the managers and other important decision-makers of the firm to also be owners of the firm.

1.1 Which of the following is true of financial services provided by persons working in banks, insurance companies, and brokerage firms?

Persons working in banks, insurance companies, and brokerage firms help individuals and companies determine how to invest money to achieve their financial goals.

1.2 Which of the following statements is true of corporate bylaws?

Procedures for electing corporate directors are contained in corporate bylaws.

1.2 Which of the following is a disadvantage of the corporate form of business?

Setting up a corporation is more complex and time-consuming than setting up a proprietorship or a partnership.

01.04 - Which of the following is true of the Sarbanes-Oxley Act of 2002?

The act requires a publicly-traded corporation to hire an external auditing firm that renders an unbiased opinion concerning the firm's financial statements.

01.5 Which of the following is a reason for a company to go international?

The company is manufacturing the finished product in their country at a very high production cost.

01.5 Which of the following statements is true of the concentrated organizational structures of non-U.S. firms?

The concentrated organizational structures of non-U.S. firms result from the universal banking relationships that exist outside the United States.

1.2 The corporate charter is a document filed with the secretary of the state in which a firm is incorporated that provides information about the corporation, including its name, address, directors, and amount of capital stock.

True

1.2 Two key limitations of the proprietorship form of business involve potential difficulty in raising the necessary capital and the presence of unlimited personal liability for business debts.

True

01.04 - The 11 "titles" in the Sarbanes-Oxley Act of 2002 establish standards for accountability and responsibility in reporting financial information for publicly-traded corporations. Which of the following activities does the act provide that a corporation must abide by?

The corporation must provide additional information about the procedures used to construct and report financial statements.

01.5 Which of the following statements concerning the complexity of the manager's task in a multinational corporation is correct?

The currency values of different countries in which a multinational corporation operates often experience fluctuations.

1.2 Which of the following is a feature of an S Corporation?

The income of an S Corporation is taxed the same as income earned by proprietorships and partnerships.

1.2 Identify a true statement about an S corporation.

The income of an S Corporation passes through the company to the owners.

1.1 Which of the following is true of the investment function of finance?

The investment function focuses on the values, risks, and returns associated with financial assets such as stocks and bonds.

01.04 - Which of the following is an example of ethical behavior of the management of a corporation?

The management takes steps to adhere to laws and regulations relating to product safety.

1.2 Compared to corporations, what is the primary disadvantage of partnerships as a form of business organization?

The owners of a partnership, that is, the partners, have unlimited liability when it comes to business obligations whereas the owners of a corporation have limited liability.

01.03 - Which of the following statements is correct?

The potential for agency problems is greatest when individual stockholders own extremely small proportions of the companies and managers have little, if any, of their own wealth tied up in these companies.

01.03 - Which of the following statements is correct?

The riskiness of projected EPS can impact the firm's value.

1.1 Which of the following statements is correct? Assume everything else equal.

The sooner cash is received, the more valuable it is.

1.2 Which of the following statements is correct?

There are more partnerships and proprietorships than corporations in the United States, but corporations produce more goods and services than do other forms of business.

1.1 The credit manager is supervised by the _____.

Treasurer

01.03 - A financial manager's task is to make decisions concerning the acquisition and use of funds for the greatest benefit of the firm.

True

01.03 - If a firm raises its product prices beyond reasonable levels, it will generally lose some of its market share.

True

01.03 - If a firm's managers want to maximize stock price, it is in their best interests to operate efficient, low-cost plants, develop new and safe products that consumers want, and maintain good relationships with customers, suppliers, creditors, and the communities in which they operate.

True

01.03 - In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken over by companies with policies that are more aligned with stockholder interests.

True

01.03 - In general, the role of a financial manager is to plan for the acquisition and use of funds so as to maximize the value of the firm.

True

01.03 - Incentive compensation plans are used to attract and retain top managerial talent as well as to align the interests of management with shareholders.

True

01.03 - The riskiness inherent in a firm's earnings per share (EPS) depends on both, the types of projects the firm takes on and the manner in which the projects are financed.

True

01.5 Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash flows denominated in the parent company's home currency.

True

01.5 Industrial groups are organizations comprised of companies in different industries with common ownership interests, which include firms necessary to sell and manufacture products.

True

01.5 Because financial institutions in other countries are generally less regulated than those in the United States, they generally _____.

can provide businesses a greater variety of services than U.S. banks can

01.04 - The Sarbanes-Oxley Act of 2002 requires the chief executive officer of a publicly-traded corporation to _____.

certify financial reports that are submitted to the Securities and Exchange Commission

1.1 Financial services refer to functions provided by organizations that _____.

deal with the management of mon