Financial Management (Chapter 1)

How many owners does a proprietorship have? a. 1 b. 2 c. More than 2, but less than 100 d. Unlimited number of owners

(a.) 1

Identify a true statement about the membership in a limited liability company. a. A limited liability company (LLC) can have a single owner. b. A limited liability company (LLC) holds its members liable for the negligence of its directors. c. A limited liability company (LLC) should have more than 100 members. d. A limited liability company (LLC) should have minimum five businesses as members

(a.) A limited liability company (LLC) can have a single owner.

Which of the following statements is true of a limited liability partnership (LLP)? a. A limited liability partnership (LLP) permits persons to invest in partnerships without exposure to the personal liability. b. A limited liability partnership (LLP) is required to have general partners equal to three times the number of limited partners. c. A limited liability partnership (LLP) is liable for the negligence and irresponsibility of general partners. d. A limited liability partnership (LLP) requires all the partners to be general partners for the first two years of their investment in partnership.

(a.) A limited liability partnership (LLP) permits persons to invest in partnerships without exposure to the personal liability.

Which of the following specify the rules about the governance of a corporation? a. Bylaws b. Memorandum of Understanding c. Corporate governance d. Corporate charter

(a.) Bylaws

Which of the following statements is true of tax law issues faced by a multinational corporation? a. Differences in tax laws among countries can cause after-tax consequences that differ substantially depending on where a transaction occurs. b. Common tax laws are determined by direct negotiation between the host government and the multinational corporation. c. The tax laws of European countries place constraints on transfer of corporate resources. d. The tax laws are homogenous within Asian countries.

(a.) Differences in tax laws among countries can cause after-tax consequences that differ substantially depending on where a transaction occurs

Which of the following statements is true about multinational corporations? a. Multinational corporations are involved in all the phases of production process. b. Multinational corporations work to maximize the current earning and future risk position. c. Multinational corporations face issues similar to the issues faced when a country operates in a single country. d. Multinational corporations operate in a single country with all the management personnel from different countries.

(a.) Multinational corporations are involved in all the phases of production process.

Which of the following measures a firm's potential for generating future cash flows? a. Net income b. Fluctuations in exchange rates c. Current tax liability d. Dividend payment regulations

(a.) Net income

A hostile takeover results when _____. a. a firm's stock is undervalued relative to its potential b. the managers take actions to maximize stock prices and managerial compensation c. the efficiency in a firm's operations is the result of active participation of stockholders d. the board of directors have highly influential management personnel

(a.) a firm's stock is undervalued relative to its potential

All multinational financial analyses should include _____. a. an analysis of exchange rates and the effects of fluctuating currency values b. an analysis of a nation's power to place constraints on the transfer of corporate resources c. an analysis of distinctive cultural heritages that shape values and influence the role of business in the society d. an analysis of the languages in which the management personnel are fluent in

(a.) an analysis of exchange rates and the effects of fluctuating currency values

In terms of numbers, 70-75 percent of businesses in the United States are operated as _____. a. proprietorships b. S corporations c. limited liability partnerships d. partnerships

(a.) proprietorships

The value of an investment in the stocks of a corporation is based on _____. a. the cash flows the asset is expected to generate during its life b. the retained earnings of the corporation c. the fluctuation in the exchange rate of currency of the subsidiary of the corporate d. the interest rate at which the corporation procures debt for business financing.

(a.) the cash flows the asset is expected to generate during its life

The _____ has direct responsibility for managing the firm's cash and marketable securities, planning how the firm is financed and when funds are raised. a. treasurer b. president c. chief financial officer d. controller

(a.) treasurer

Alpha Inc. has an earnings per share of $12.50 and has 25,000 outstanding shares of common stock. Alpha Inc.'s net income for the current financial year is _____. a. $20,000 b. $312,500 c. $125,000 d. $172,500

(b.) $312,500

An S corporation can have no more than _____ stockholders. a. 500 b. 100 c. 75 d. 50

(b.) 100

Identify a true statement about a corporation. a. A corporation is required to have two general owners and 100 shareholders. b. A corporation offers its owners limited liability. c. A corporation discontinues after the original shareholders sell off their shares. d. A corporation is responsible for the negligence, irresponsibility, or similar acts committed by its owners.

(b.) A corporation offers its owners limited liability.

Identify a true statement about political risk. a. A multinational corporation determines the term of trade on various transactions in the marketplace. b. A nation is free to place constraints on the transfer of corporate resources. c. A political risk is variable and can be changed by negotiation. d. A political risk is the result of distinctive cultural heritages within geographic regions.

(b.) A nation is free to place constraints on the transfer of corporate resources.

Identify a true statement about financial institutions. a. Financial institutions are required to fulfill the disclosure requirements specified by the Sarbanes Oxley Act. b. Financial institutions are an integral part of the general financial services marketplace. c. Financial institutions are responsible to maintain positive cash flow position for investors. d. Financial institutions are regulated by the investors.

(b.) Financial institutions are an integral part of the general financial services marketplace

Which of the following well-known companies is a member of an industrial group that would be called a chaebol? a. Mitsubishi b. Hyundai c. Toshiba d. Toyota

(b.) Hyundai

Omega Inc. is considering two projects for investment. The first project is not very risky and is expected to increase EPS by $1. Another project is very risky and is expected to increase earnings by $1.20 per share. Which of the statements justifies Omega's decision to invest in first project? a. Omega Inc. expects high dividend income from investment in one of these projects. b. Omega Inc. is risk averse and wants to invest in safe project. c. Omega Inc. aims to maximize its investment returns by investing in one of these projects. d. Omega Inc. has surplus cash reserves from which it wants to earn high returns.

(b.) Omega Inc. is risk averse and wants to invest in safe project.

Which of the following statements is true of risk averse stockholders? a. They are willing to invest in corporations that have a longer cash flow generation period. b. They are willing to invest in corporations with more certain future cash flows. c. They are willing to invest in corporations which reinvest their earnings and pay no dividend to stockholders. d. They are willing to invest in corporations with low cash reserves and high investment in debts.

(b.) They are willing to invest in corporations with more certain future cash flows.

The financial service function performed by a financial institution refers to the _____. a. certification of the financial reports of the investors b. investment of money to help individuals and companies achieve their financial goals c. evaluation of capital budgeting decisions of the portfolio companies by investors d. hiring of an external auditing firm to oversee the audit of companies in investment portfolio

(b.) investment of money to help individuals and companies achieve their financial goals

Coordination of the finance function and the marketing function is critical to the success of a company, especially a small, newly formed firm because _____. a. it ensures that capital structure decisions increase the retained earnings of the company b. it is necessary to ensure that sufficient cash is generated to survive c. it results in the accurate prediction of changes in the entire industry by the management d. it ensures managers are provided enough incentives

(b.) it is necessary to ensure that sufficient cash is generated to survive

The Sarbanes-Oxley Act of 2002 requires a publicly traded corporation to have a committee that consists of _____ to oversee the firm's audits. a. majority shareholders b. outside directors c. internal auditors d. chief executive officer

(b.) outside directors

The three principal forms of business organization are _____. a. partnership, business association, and corporation b. proprietorship, partnership, and corporation c. corporation, limited association, and multinational limited corporation d. multinational limited corporation, proprietorship, and partnersh

(b.) proprietorship, partnership, and corporation

Investors purchase the stock of a corporation because _____. a. they expect the corporation to pay their personal liabilities b. they expect to earn an acceptable return on the money they invest c. they want to make the day-to-day decisions of the corporation d. they want the corporation to work in an environment-friendly manner

(b.) they expect to earn an acceptable return on the money they invest

Which of the following is a reason for profit-motivated, free-enterprise economies to be more successful than socialistic and communistic economic systems? a. The general partners participate in the management of the business in profit-motivated, free-enterprise economies. b. The partners of firms in a profit-motivated economy are also responsible for the negligence, irresponsibility, or similar acts committed by any other partner of the firm. c. Actions that help a firm in a profit-motivated economy to increase the price of its stock are also beneficial to the society at large. d. In a profit-motivated economy, ownership interests are divided into shares of stock, which can be transferred easily.

(c.) Actions that help a firm in a profit-motivated economy to increase the price of its stock are also beneficial to the society at large.

Identify a reason for the passing of the Sarbanes-Oxley Act of 2002 by Congress. a. Investors felt that the confidential information about the firm should be shared with them. b. Investors felt that they should be the regulators of employment, selling, and marketing practices of the firm. c. Investors felt that they should be involved in strategic investment and expansion plans of the firm. d. Investors felt that executives were pursuing interests that, too often, resulted in large gains for themselves and large losses for stockholders.

(c.) Investors felt that they should be involved in strategic investment and expansion plans of the firm.

Which of the following is a reason for the greatest potential of agency problems in large corporations? a. Large corporations' earnings are subject to double taxation. b. Large corporations are required to file a corporate charter with the secretary of state. c. Large corporations have widely dispersed ownership. d. Large corporations draw bylaws that specify how the corporation will be governed.

(c.) Large corporations have widely dispersed ownership.

_____ are more likely when managers make decisions that are in their own best interests rather than the best interests of the owners of a firm. a. Illegal trades b. Separation issues c. Takeovers d. Consolidation problems

(c.) Takeovers

Which of the following is true of the liability of a limited partner in a limited liability partnership? a. The limited partner's liability is unlimited for acts of negligence of the general partners. b. The limited partner's liability is limited to the amount of his/her share of the retained earnings of the business. c. The limited partner's liability is limited to the amount of his/her investment in the business. d. The limited partner's liability is unlimited in respect of contingent liabilities of the partnership.

(c.) The limited partner's liability is limited to the amount of his/her investment in the business.

Which of the following statements is true of corporations considered open? a. Their major stock investors include families, banks, and other corporations. b. Their decisions are influenced by banks because many shareholders assign these banks their proxy votes. c. Their stocks are widely dispersed among a large number of different investors. d. Their major stockholders are involved in the firms' daily operations.

(c.) Their stocks are widely dispersed among a large number of different investors.

The primary difference between a proprietorship and a partnership as a form of business is _____. a. the owner of a proprietorship has unlimited liability for the debts of the business, whereas the owners of a partnership have limited liability b. a proprietorship has more owners that a partnership c. a partnership has more owners than a proprietorship d. a partnership can be converted into a corporation, whereas a proprietorship must be converted into a partnership before it can be converted into a corporation

(c.) a partnership has more owners than a proprietorship

Large foreign firms generally _____. a. do not have stockholders b. have about the same number of stockholders than U.S. firms that are the same size c. have fewer stockholders than U.S. firms that are the same size d. have more stockholders than U.S. firms that are the same size

(c.) have fewer stockholders than U.S. firms that are the same size

The primary goal of the financial manager of a firm should be to _____. a. maximize the firm's net income b. minimize the expenses incurred by the firm c. maximize stockholder wealth (stock price) d. maximize his/her paycheck

(c.) maximize stockholder wealth (stock price)

The primary goal of the management of a corporation is stockholder wealth maximization, which translates into _____. a. maximizing the earnings per share b. maximizing the dividend payout c. maximizing the price of its common stock d. maximizing the inflow of cash

(c.) maximizing the price of its common stock

A domestic corporation that has no more than _____ type(s) of stock outstanding can elect to file taxes as an S corporation. a. three b. ten c. one d. five

(c.) one

The controller is responsible for _____. a. managing the firm's cash and marketable securities b. overseeing the corporate pension fund c. the activities of the accounting and tax departments d. planning how the firm is financed

(c.) the activities of the accounting and tax departments

Corporate governance refers to _____. a. the regulations businesses must follow that have been established by the U.S. Senate b. managerial compensation (incentives) packages that a firm offers c. the set of rules that a firm follows when conducting business, which identify who is accountable for financial decisions d. agency problems that could possibly exist in a firm

(c.) the set of rules that a firm follows when conducting business, which identify who is accountable for financial decisions

To be successful, a financial institution is required to _____. a. maintain positive cash flow position of investors b. reduce the fluctuations in currency rates c. understand the cause of rise and fall of interest rates d. ensure maximum dividend payment to investors

(c.) understand the cause of rise and fall of interest rates

Identify a true statement about corporate governance. a. A firm should include rules about the corporate governance in the corporate charter. b. A firm following a set of rules for corporate governance has to pay fines and penalties more frequently. c. A firm following corporate governance results in maximum managerial incentives for its managers. d. A firm following corporate governance policies enables all the stakeholders to better understand their rights and responsibilities

(d.) A firm following corporate governance policies enables all the stakeholders to better understand their rights and responsibilities

Which of the following must be filed by a limited liability company (LLC) with the state in which the business is set up? a. Memorandum of Understanding b. Corporate charter c. Corporate governance bylaws d. Articles of organization

(d.) Articles of organization

Which of the following statements is true of the agency relationship between stockholders and managers? a. Managers are required to maximize earnings in the current period. b. Managers are required to ensure fair marketing and selling practices only. c. Managers are appointed to execute the decisions taken by the principals. d. Managers are appointed to work to maximize principals' wealth.

(d.) Managers are appointed to work to maximize principals' wealth.

Identify a reason for difficulty for an executive trained in one country to operate effectively in another country. a. The terms of trade are determined by direct negotiation between the host country and the multinational corporation. b. A nation is free to place constraints on the transfer of corporate resources. c. A homogenous legal system is followed by a corporate and its subsidiaries. d. The after-tax consequences resulting from differences in tax laws in different countries.

(d.) The after-tax consequences resulting from differences in tax laws in different countries.

Which of the following can result in constraints on the transfer of corporate resources and even to take for public use, the assets of a firm without compensation? a. The political and economic institutions, and institutional differences among countries in which the multinational corporate operates b. The distinctive cultural heritages among countries in which the multinational corporate operates c. The exchange rate fluctuation in different currencies in which the multinational corporate operates d. The political risk in the nation in which the multinational corporation operates

(d.) The political risk in the nation in which the multinational corporation operates

Cash flows in various parts of a multinational corporate system are often denominated in different currencies which results in _____. a. determining a currency exchange rate by direct negotiation between the host government and the multinational corporation b. constraints on the transfer of corporate resources by the host nation c. different market value per share in different countries d. a multinational financial analysis of exchange rates and the effects of fluctuating currency value

(d.) a multinational financial analysis of exchange rates and the effects of fluctuating currency value

One of the major functions of the investments area of finance is to _____. a. increase the certainty of expected cash flows of the investors b. make capital budgeting decisions for the firm c. determine the portion of dividend to be paid to investors out of the declared dividend d. determine the optimal mix of securities that should be held in a portfolio of investments

(d.) determine the optimal mix of securities that should be held in a portfolio of investments

A firm's value is ultimately a function of _____. a. the dividend policy decisions and the future expansion plans shared with the investors b. the sales turnover and the cash flows generated in the current year c. the capital structure decisions and capital budgeting decisions d. the cash flows it is expected to generate in the future and the rate of return demanded by investors

(d.) the cash flows it is expected to generate in the future and the rate of return demanded by investors

If any partner is unable to meet his or her pro rata claim in the event the partnership goes bankrupt, _____. a. the remaining partners carry on the partnership business b. the remaining partners divide the partnership capital and retained earnings among themselves c. the remaining partners settle the partnership debt from the business assets only d. the remaining partners must make good on the unsatisfied claims

(d.) the remaining partners must make good on the unsatisfied claims

Treasurer

In larger organizations, this officeholder supervises the firm's credit and inventory managers, as well as the director of capital budgeting, and reports to the firm's chief financial officer.

Finance

It deals with obtaining the right amount of money from the right sources at the right time, where "right" is determined by how the amounts, sources, and times affect the value of the individual or organization.

Limited Liability

This benefit is conferred by the corporate form of organization in which an investor's personal responsibility for the debts of the business are limited to the amount the investor has invested in the firm.

Business Ethics

This collection of principles, practices, and procedures is used to influence the behavior of employees toward the firm's stakeholders.

Corporation

This entity, which is legally separate from its managers and owners, is authorized by a state to conduct business.

Shareholder Wealth Maximization

This goal of financial management is measured by the effect of a decision or an action on the price of the firm's common stock.

Value

This is the worth of a good or service as established by the discounted and current value of the item's cash flows.

Limited Partner

This partner is not allowed to participate in the day-to-day management of the partnership.

Double Taxation Of Dividends

This tax situation currently applies to corporations and their owners but not to sole proprietorships, partnerships, or their owners.

Stakeholder

This term describes individuals and groups, both internal and external to the company, whose support is critical to the success of the organization.

Which of the following is a reason for firms to "go international"? a. To resolve regulatory and political hurdles b. To teach employees the cultures of different countries c. To seek new markets d. To stabilize exchange rate fluctuations

c. To seek new markets

Which of the following is a form of industrial group found in Asian countries? a. limited liability company (LLC) b. S corporation c. limited liability partnership (LLP) d. keiretsu

d. keiretsu