Chapter 1 - Introduction to Corporate Finance

M.C. - Which of the following are advantages of the corporate form of business ownership? 1. Limited liability for firm debt. 2. Double taxation. 3. Ability to raise capital. 4. Unlimited firm life.

1, 3, and 4

M.C. - Which of the following represent cash outflows from a corporation? 1. Issuance of securities. 2. Payment of dividends. 3. New loan proceeds. 4. Payment of government taxes.

2, 4

What long-term investments should a firm take on?

Capital Budgeting - property, plant, equipment

Where to get long-term financing for the investment?

Capital Structure - longterm liabilities and equity

T/F - A major disadvantage of partnerships is that they have double taxation of profits.

False

T/F - Capital budgeting decisions are used to determine how to raise the cash necessary for investments.

False

T/F - General partners have limited personal liability for business debts in a limited partnership.

False

T/F - Maximizing profits is the same as maximizing the value of the firm.

False

T/F - Shareholders welcome higher short-term profits even when they damage long-term profits.

False

T/F - Sole proprietorship face the same agency problems as those associated with corporations.

False

T/F - The liability of sole proprietors is limited to the amount of their investment in the company.

False

T/F - The primary goal of any company should be to maximize current period profits.

False Should be to maximize the current value per share of the existing stock.

What is the ultimate goal of financial management?

To maximize current value per share of the existing stock

T/F - Facebook's decision to spend $700 million to acquire Instagram is an investment decision.

True

T/F - The separation of ownership and management is one distinctive feature of corporations.

True

How to manage the everyday financial activities of the firm?

Working Capital Management - current assets and current liabilities

M.C. - A business created as a distinct legal entity and treated as a legal "person" is: a. Corporation b. Sole proprietorship c. General partnership d. Limited partnership

a. Corporation

M.C. - Which one of the following is a capital budgeting decision? a. Determining how many shares of stock to issue b. Deciding whether or not to purchase a new machine for the production line c. Deciding how to refinance a debt issue that is maturing d. Determining how much inventory to keep on hand

b. Deciding whether or not to purchase a new machine for the production line

M.C. - Which of the following is a working capital management decision? a. Determining the amount of equipment needed to complete a job b. Determining whether to pay cash for a purchase or use the credit offering c. Determining the amount of long-term debt required to complete a project d. Determining the number of shares of stock to issue to fund an acquisition

b. Determining whether to pay cash for a purchase or use the credit offering

M.C. - Which of the following statements is correct? a. A general partnership is legally the same as a corporation. b. Income from both sole proprietorships and partnerships is taxed as individual income. c. Partnerships are the most complicated type of business to perform. d. All business organizations have bylaws. e. Only firms organized as sole proprietorships have limited lives.

b. Income from both sole proprietorships and partnerships is taxed as individual income.

M.C. - Which of the following best states the primary goal of financial management? a. Maximize current dividends per share. b. Maximize the current value per share. c. Increase cash flow and avoid financial distress. d. Minimize operational costs while maximizing firm efficiency. e. Maintain steady growth while increasing current profits.

b. Maximize the current value per share.

M.C. - Which one of the following is a primary market transaction? a. Sale of currently outstanding stock by a dealer to an individual investor. b. Sale of a new share of stock to an individual investor. c. Stock ownership transfer from one shareholder to another shareholder. d. Gift of stock from one shareholder to another shareholder. e. Gift of stock by a shareholder to a family member.

b. Sale of a new share of stock to an individual investor.

M.C. - A business owned by a solitary individual who has unlimited liability for its debt is called a: a. Corporation b. Sole proprietorship c. General partnership d. Limited partnership

b. Sole proprietorship

M.C. - Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? a. Articles of incorporation b. Corporate Breakdown c. Agency problem d. Bylaws

c. Agency Problem

M.C. - Why should financial managers strive to maximize the current value per share of the existing stock? a. Doing so guarantees the company will grow in size at the maximum possible rate. b. Doing so increases employee salaries. c. Because they have been hired to represent the interests of the current shareholders. d. Because this will increase the current dividends per share. e. Because managers often receive shares of stock as part of their compensation.

c. Because they have been hired to represent the interests of the current shareholders.

M.C. - Which of the following statements is correct? a. The majority of firms in the U.S. are structured as corporations. b. Corporate profits are taxable income to the shareholders when earned. c. Corporations can raise large amounts of money generally easier than partnerships can. d. Stockholders face no potential losses related to their corporate investment.

c. Corporations can raise large amounts of money generally easier than partnerships can.

M.C. - A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a: a. Corporation b. Sole proprietorship c. General partnership d. Limited partnership

c. General partnership

M.C. - Which of the following statements concerning a sole proprietorship is correct? a. A sole proprietorship is designed to protect the personal assets of the owner. b. The profits of a sole proprietorship are subject to double taxation. c. The owner of a sole proprietorship is personally responsible for all of the company's debts. d. There are very few sole proprietorships remaining in the U.S. today.

c. The owner of a sole proprietorship is personally responsible for all of the company's debts.

M.C. - Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction: a. took place in the primary market b. occurred in a dealer market c. was facilitated in the secondary market d. involved a proxy e. was a private placement

c. was facilitated in the secondary market

M.C. - Which form of business structure is most associated with agency problems? a. Sole proprietorship b. General partnership c. Limited partnership d. Corporation

d. Corporation

M.C. - Which of the following is a capital structure decision? a. Determining which one of two projects to accept b. Determining how to allocate investment funds to multiple projects c. Determining the amount of funds needed to finance customer purchases d. Determining how much debt should be assumed to fund a project e. Determining how much inventory will be needed to support a project

d. Determining how much debt should be assumed to fund a project

M.C. - Which one of the following is an agency cost? a. Accepting an investment opportunity that will add value to the firm. b. Increasing the quarterly dividend. c. Investing in a new project that creates firm value. d. Hiring outside accountants to audit the company's financial statements. e. Closing a division of the firm that is operating at a loss.

d. Hiring outside accountants to audit the company's financial statements.

M.C. - Which one of the following statements concerning a sole proprietorship is correct? a. The life of a sole proprietorship is potentially unlimited. b. A sole proprietor can generally raise large sums of capital quite easily. c. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. d. A sole proprietorship is taxed the same as a C corporation. e. It is easy to create a sole proprietorship.

e. It is easy to create a sole proprietorship.

M.C. - A stakeholder is: a. a person who owns shares of stock b. any person who has voting rights based on stock ownership of a corporation c. a person who initially founded a firm and currently has a management control over that firm d. a creditor to whom a firm currently owes money e. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm

e. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm

M.C. - Corporate dividends are: a. tax-free income because they represent a repayment of the cost to purchase corporate shares. b. not taxed as shareholders pay taxes on corporate income when it is earned. c. tax-free since the corporation pays tax on that income when it is earned. d. taxed at both the corporate and personal level when the dividends are paid. e. taxable as personal income when received by shareholders even though that income was taxed at the corporate level.

e. taxable as personal income when received by shareholders even though that income was taxed at the corporate level.