Finance 351 / Chapter 1 review
Which term applies to the mixture of debt and equity maintained by a firm?
Capital structure
In a shareholder-manager relationship, who is the agent? - Both shareholders and managers - Neither shareholders nor managers - Managers - Shareholders
Managers
A ______ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm. - bondholder - mortgage holder - stakeholder - shareholder
Stakeholder
Which of the following are considered stakeholders in a company? - Suppliers - Government - Employees - Competitor
Suppliers Government Employees
From the stockholders' perspective, what is the primary purpose of awarding stock options to managers?
To increase shareholders' wealth
What is the main goal of financial management?
To maximize current value per share of existing stock
True or false: Cash flows to the firm from the financial markets.
True
a __________ corporation is for profit, and has the legal attributes of accountability, transparency, and purpose.
benefit
It is argued that, left to themselves, managers would tend to maximize the amount of resources over which they have control or, more generally, _____________ power or wealth.
corporate
Joint stock company is another name for what is referred to as a ________ in the United States.
corporation
The need to monitor management actions is an example of a(n) _________ agency cost.
direct
In financial markets, debt and ________________ securities are bought and sold.
equity
True or false: It is sometimes argued that, left to themselves, managers tend to minimize the amount of resources over which they have control.
false
Indirect agency costs are often due to lost ______.
opportunities
The goal of the for-profit business is to maximize __________ equity.
owners'
An LLC is essentially a hybrid of __________ and corporation.
partnership
A __________ is the authority to vote someone else's stock.
proxy
A benefit corporation is for profit, and has the legal attributes of accountability, _____, and purpose.
transparency
When a corporation is formed, it is granted which of the following rights? - Legal powers to sue - State citizenship for jurisdictional purposes - The ability to issue stock - Corporate life of up to 100 years
- Legal powers to sue - State citizenship for jurisdictional purposes - The ability to issue stock
Most equity shares of large firms in the U.S. trade on: - options exchanges - bond markets - organized auction markets - commodities markets
- Organized auction markets
How is ownership transferred in a corporation? - Ownership is transferred by gifting or selling shares of stock. - Ownership is transferred only with prior approval from the board of directors. - Ownership can be transferred only if the firm is sold. - Ownership in a corporation cannot be transferred.
- Ownership is transferred by gifting or selling shares of stock.
A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons. - retributive - illegal - patriotic - legal
- legal
In a limited partnership, a limited partner's liability for business debts is ______. - $0 - unlimited - limited by his/her average annual income over the life of the partnership - limited to his/her cash contribution to the partnership
- limited to his/her cash contribution to the partnership
Capital budgeting is concerned with planning and managing a firm's _____. - long-term liabilities - current assets - long-term investments - current liabilities
- long-term investments
Since ________ and ownership are separated, a corporation's life is unlimited. - taxation - debt - profitability - management
- management
A treasurer's responsibilities typically include:
- oversees cash management - credit management - capital expenditures - financial planning.
The advantages and disadvantages of a partnership are basically the same as those of a _____. - taxable effect - proprietorship - limited ownership - corporation
- proprietorship
When one owner of a security sells the security to another person, the transaction takes place in the _________ market - primary - secondary - underwriting - rudimentary
- secondary
A corporation receives cash from financial markets by selling ______ and ______.
- stocks - bonds
The primary responsibility of financial managers is to increase the value of _____. - their total compensation package. - future profits - current earnings - the existing shares of stock
- the existing shares of stock
In large firms, financial activity is usually associated with which top officer?
Chief financial officer
Which corporate officer is responsible for accurate financial reporting of the firm's activities?
Controller
true or false: It is sometimes argued that, left to themselves, managers tend to minimize the amount of resources over which they have control.
False
Inventory is a:
current asset and part of working capital
The credit manager is responsible for:
decisions regarding which customers should receive credit.
A bad financial decision is defined as a decision that ______ owners' equity.
decreases
The goal of a for-profit business is to ______ existing owners' equity.
maximize
Managers who are successful in pursuing _____ will be in greater demand in the labor market and thus command higher salaries. - stockholder goals - employee turnover - capital projects
stockholder goals
The owners of a corporation are called ______.
stockholders or shareholders
Which of the following are included in a firm's capital structure?
- Equity - long-term debt The mix of debt and equity is referred to as a firm's capital structure.
A good financial decision aims at which of the following? - Increase the value of the firm's existing stock - Increase the market value of shareholders' equity - Increase the current dividends per share - Increase the cost of capital
- Increase the value of the firm's existing stock - Increase the market value of shareholders' equity
If you hire a real estate company to sell your house, you are most apt to encounter which one of the following? - Capital structure problem - Securities Exchange Act of 1934 violation - Agency problem - Securities Act of 1933 violation
Agency problem
________ budgeting is the process of making and managing expenditures on long-term assets.
Capital
The federal government taxes which of the following? - Neither corporate earnings nor shareholder dividends - Shareholder dividends but not corporate earnings - Corporate earnings and shareholder dividends - Corporate earnings but not shareholder dividends
Corporate earnings and shareholder dividends
Which of the following is included in working capital? - Current (short-term) assets - Retained earnings - Accounts payable - Long-term debt - Accounts receivable
Current (short-term) assets Accounts payable Accounts receivable short-term assets (such as cash and inventory) and liabilities (such as money owed to suppliers)
True or false: Finance is mainly important to study if you are planning a career in finance.
False
In a _________ partnership, all the partners share in gains or losses, and all have unlimited liability for all partnership debts, not just some particular share.
General
What are the two factors that impact whether managers will act in the best interest of stockholders?
How closely management goals align with stockholder goals and the way managers are compensated
according to the textbook, What are the possible financial goals for a company?
Maximize profits Minimize costs Survival
The officer responsible for corporate tax reporting is the ______.
controller
Because ownership in a corporate is spread over a huge number of shareholders, it can be argued that ____________ effectively controls the firm.
management
The corporate goal involving bankruptcy avoidance, stability, and safety relate to controlling __________.
risk
A sole proprietor has ______ personal liability for all business debts and obligations.
unlimited
Which of the following are true of a sole proprietorship? - A sole proprietor can issue stock to raise capital. - It is easy to transfer ownership. - A proprietorship has a limited life. - It is the simplest type of business to form.
- A proprietorship has a limited life. - It is the simplest type of business to form.
The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.
agency
Forming a corporation involves preparing articles of incorporation and a set of ________.
bylaws
Corporations in other countries are often called: - public limited companies. - joint stock companies. - autonomous entities. - re-calibrated partnerships.
public limited companies. joint stock companies.
The relative ease of transferring ownership, the limited liability for business debts, and the unlimited life of the business are why the corporate form is superior to sole proprietorships or partnerships for _____.
raising cash
Stockholders are entitled to only what is left after employees, suppliers, and creditors are paid, which makes them _____ owners.
residual
Because shareholders get paid last after all other obligations are satisfied, they are often called _____.
residual owners
Which of the following can be used to encourage managers to act in the best interests of shareholders? - Better prospects of promotion - A larger organization and more employees - Executive perks - Managerial compensation tied to performance
- Better prospects of promotion - Managerial compensation tied to performance
Which of the following shows why a corporation is the most important form of business? - Corporations can sue and be sued. - A corporation is a separate legal entity with the ability to acquire and exchange property. - Corporations can vote in general elections. - Corporations can enter into contracts.
- Corporations can sue and be sued. - A corporation is a separate legal entity with the ability to acquire and exchange property. - Corporations can enter into contracts.
A general partnership has which of the following characteristics? - It is difficult to transfer ownership. - Large amounts of cash can be raised easily. - Each owner has unlimited liability for all firm debts. - It is expensive to form.
- It is difficult to transfer ownership. - Each owner has unlimited liability for all firm debts.
Which one 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. - Government - Chief executive officer - Bondholders - Shareholders
- Shareholders
Which of the following are important when considering a partnership? - Taxation of partnership income - Future dividend policy - Fund raising limitations - Personal liability for firm debts
- Taxation of partnership income - Fund raising limitations - Personal liability for firm debts
Which one of these motivates managers to make good decisions? - Threat of a hostile takeover - Lack of interference from the government authorities - Complacent board of directors - Complacent shareholders
- Threat of a hostile takeover
Which of the following is not an important question that must be asked when starting a firm? - How will you manage your everyday financial activities? - Where will you get the long-term financing to pay for your investment? - Which type of operating system should you use for your computers? - What long-term investments should you take on?
- Which type of operating system should you use for your computers?
An organization must prepare ______ and bylaws when forming a corporation. - articles of incorporation - a legal will - a partnership agreement - an indenture agreement
- articles of incorporation
The possible goal of profit maximization _____. - avoids maximizing the sales - can be achieved by cost-cutting - would probably be the most commonly sighted goal for a business - should always be a short-term goal
- can be achieved by cost-cutting - would probably be the most commonly sighted goal for a business
Some of the cash flow generated by a firm goes back to the financial markets in the form of ______. - products and services - taxes and other payments to the government - reinvested cash flows - dividends and debt payments
- dividends and debt payments
In a large corporation, the _____ would be responsible for answering the three main questions that must be asked when starting a firm. - technology manager - marketing manager - accounting manager - financial manager
- financial manager
In a corporation, the stockholders elect _____, who then select the managers. - the board of directors - finance directors - the CEO - the CFO
- the board of directors
What are the two basic classifications under which most potential financial goals fall? - Enhancing dividends - Controlling risk - Earning or increasing profits - Cutting costs
Controlling risk Earning or increasing profits
______ are frequently used to encourage key managers to maximize the value of the firm's stock. - Stock options - Stock splits - Cash dividends - Stock dividends
Stock options
The liability of a shareholder in a corporation is limited to which of these? - The percentage of corporate debt that equals the shareholders' ownership percentage - The corporation's current liabilities - The amount the shareholder invested in the corporation - The corporation's outstanding long-term debt
The amount the shareholder invested in the corporation
The relationship between stockholders and management can best be described as a(n) ______ relationship.
agency
The term __________ costs refers to the costs of the conflict of interest between stockholders and management.
agency
The ________ are rules describing how the corporation regulates its existence.
bylaws
The rules used by a corporation to regulate its existence are known as _________.
bylaws
Joint stock company is another name for what is referred to as a _________ in the United States.
corporation
The _______ is the most important form, in terms of size, of business organization in the United States.
corporation
True or false: Ownership in the corporate form is difficult to transfer.
false
The life of a corporation ______.
is unlimited
Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts.
limited
In a ________ partnership, one or more general partners will run the business and have unlimited liability, but there will be one or more limited partners who will not actively participate in the business.
limited
In a limited partnership, one or more general partners will run the business and have unlimited liability, but there will be one or more ________ partners who will not actively participate in the business.
limited
Stockholders in a corporation have _____ liability for corporate debts. - up to $5,000 of - up to $1,000 of - unlimited - limited
limited
Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ______ effectively controls the firm. - management - no one - the federal government - the largest shareholder
management
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
Corporate profits are taxed twice, first at the corporate level when they are earned and again at the ________ level when they are paid out.
personal
When a corporation raises funds in the financial markets, the transaction occurs on the _____. - options exchange - primary market - offering market - secondary market
primary market
Which one of these provides a manager an incentive to perform well? lack of takeover threats promotions
promotions
Which one of these is an important mechanism used by unhappy stockholders to replace current management? - Prospectus - Perpetual debt - Ponzi scheme - Proxy fight
proxy fight
Firms that are poorly managed are more attractive as acquisitions. This form of threat known as a _______________ motivates managers to act in the stockholders' best interests.
takeover
Organized auction markets include: - mutual funds - the NASDAQ - the New York Stock Exchange - exchange traded funds
the New York Stock Exchange
The financial manager acts in the shareholders' best interests by making decisions that increase the value of _____.
the stock
The officer responsible for managing the firm's cash flows is the ______.
treasurer
A partnership must have at least _______ owners.
two
