Fin 3320 CH 1

If an investor had a choice of receiving $1,000 today, or $1,000 in five years, which would the average investor prefer?

$1,000 today because it will be worth more than $1,000 received in five years.

Which of the following types of business forms is the most ideal in terms of attracting new capital?

A public corporation

Which of the following is a characteristic of a limited partnership?

ALL A) It allows one or more partners to have limited liability. B) It requires one or more of the partners to be a general partner to whom the privilege of limited liability does not apply. C) It prohibits the limited partners from participating in the management of the partnership.

Which of the following factors enable a public corporation to grow to a greater extent, and perhaps at a faster rate, than a partnership or a proprietorship?

Access to the capital markets

Which of the following statements is FALSE?

All risk can be diversified away.

Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose?

Corporation

Which of the following reasons is most responsible for corporations being the most important form of business organization in the United States?

Corporations have the ability to raise larger sums of capital than the other forms of business organization.

Financial management is concerned with which of the following?

Creating economic wealth B) Making investment decisions that optimize economic value C) Making business decisions that optimize economic wealth D) Raising capital that is needed for growth

Which of the following statements best represents what finance is about?

Creation and maintenance of economic wealth

Which of the following is a significant disadvantage of a general partnership?

Each partner is fully responsible for the liabilities incurred by the partnership.

T or F A sole proprietorship is the most desirable business form in all circumstances

False

T or F General partners have unrestricted transferability of ownership, while limited partners must have the consent of all partners to transfer their ownership.

False

T or F In a general partnership, each partner is liable for the partnership's obligations only up to a percentage of the obligation equal to that partner's percentage of ownership of the partnership.

False

T or F In a limited partnership, at least one general partner must remain in the association; the privilege of limited liability still applies to this partner.

False

T or F In order to maximize shareholder wealth, a firm must consider historical costs as an integral part of their decision-making.

False

T or F Limited partners may actively manage the business.

False

T or F Owners must register and pay yearly fees to their State of residence when establishing a sole proprietorship.

False

T or F There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership.

False

T or F Ultimate control in a corporation is vested in the board of directors.

False

T or F The goal of profit maximization is equivalent to the goal of maximization of share value.

False

T or F The goal of the firm should be the maximization of profit.

False

TF For markets to be efficient, price adjustments to new information must be correct.

False

TF Only a few financial decisions involve some sort of risk-return tradeoff.

False

TF The financial manager should examine available risk-return trade-offs and make his decision based upon the greatest expected return.

False

How could you compensate an investor for taking on a significant amount of risk?

Increase the expected rate of return

Which of the following is NOT true for limited partnerships?

Limited partners can only manage the business True for limited partnerships:One general partner must exist who has unlimited liability. Only the name of general partners can appear in the name of the firm. Limited partners may sell their interest in the company.

Which of the following goals of the firm is equivalent to the maximization of shareholder wealth?

Maximization of the total market value of the firm's common stock

Which of the following goals is in the best long-term interest of stockholders?

Maximizing of the market value of the existing shareholders' common stock

Why do investors prefer receiving cash sooner rather than later, according to finance theory?

Money received earlier can be reinvested and returns can be increased.

advantages of the sole proprietorship?

No time limit imposed on its existence , No legal requirements for starting the business. NOT an advantage: Limited liability

What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form?

Owners have unlimited liability.

Which of the following is NOT a principle of basic financial management?

Profit is king Principles include: Efficient capital markets , Incremental cash flow counts , Risk/return tradeoff

Which of the following is a characteristic of an efficient market?

Security prices reflect fair value of the firm.

Which one of the following categories of owners enjoys limited liability?

Shareholders (common stock) of a corporation

Which of the following categories of owners have limited liability?

Shareholders of a corporation

For these types of organization, no distinction is made between business and personal assets.

Sole proprietorship and General partnership

Which forms of organization are free of initial legal requirements?

Sole proprietorship and General partnership

In terms of organizational costs, which of the following sequences is generally correct, moving from lowest to highest cost?

Sole proprietorship, general partnership, limited partnership, corporation

Which of the following would be most likely to align the interests of managers and shareholders?

Stock options

Which of the following should be considered when assessing the financial impact of business decisions?

The amount of projected earnings B) The risk-return tradeoff C) The timing of projected earnings; i.e., when they are expected to occur D) The amount of the investment in a given project

Which of the following forms of business organization is the dominant economic force in the United States?

The corporation

Briefly discuss mechanisms that can be used to align the interests of shareholders and managers.

The key is to align the interests of management to the interests of the shareholders. For instance, if management receives stock options, they have incentive to see the price of the stock go up. The board of directors can actively monitor management. Outsiders such as bankers monitor the firm, helping shareholders. If the company significantly underperforms, the stock price can fall and outsiders can take over the company.

Which of the following best describes the goal of the firm?

The maximization of the total market value of the firm's common stock

What does the agency problem refer to?

The problem that results from potential conflicts of interest between the manager of a business and the stockholders.

Compare and contrast primary market and secondary market transactions as it relates to the flow of funds in the transactions

The proceeds from the sale in the primary market go to the corporation issuing the security. The proceeds from the sale in the secondary market go to the previous owner of the stock, not the corporation. In a secondary market transaction, there is no effect on the corporation whose stock is sold

Which of the following is true regarding an initial public offering?

The security is sold for the first time to the public. The corporation gets proceeds from the investor.

If one security has a greater risk than another security, how will investors respond?

They will require a higher rate of return for the investment that has greater risk.

T or F In a general partnership, all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm.

True

T or F In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred.

True

T or F The life of a corporation is not dependent upon the status of the investors.

True

T or F The owners of a corporation are liable for the corporation's obligations up to the amount of their investment.

True

T or F Ethical dilemmas frequently exist in finance.

True

T or F The sole proprietorship is the same as the individual for liability purposes.

True

T or f The goal of profit maximization ignores the timing of profit.

True

TF Financial management is concerned with the maintenance and creation of wealth.

True

TF Even though diversification can reduce risk, it also makes it more difficult to measure a project's or an asset's risk.

True

TF In an efficient market, prices will quickly adjust to new information.

True

IBM issuing new shares of common stock would be classified as:

a new seasoned issue.

A limited liability company (LLC) is:

able to retain limited liability for owners. a cross between a partnership and a corporation.

Purchasing a security of a company that is issuing their stock for the first time publicly would be considered:

an initial public offering.

In finance, we assume that investors are generally

averse to risk

In measuring value, the focus should be on:

cash flow.

The true owners of the corporation are the:

common stockholders.

Difficulty in finding profitable projects is due to

competitive markets

Investors choose to invest in higher risk investments because these investments offer higher:

expected returns.

If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should:

increase the market value of the firm's common stock.

Corporations receive money from investors with:

initial public offerings. seasoned new issues. primary market transactions.

The Goal of the Financial Manager

it considers uncertainty. it considers the time value of the money.

Profit maximization is not an adequate goal of the firm when making financial decisions because:

it does not necessarily reflect shareholder wealth maximization. B) it ignores the risk inherent in different projects that will generate the profits. C) it ignores the timing of a project's returns.

The goal of the firm should be

maximization of shareholder wealth

Foregoing the earning potential of a dollar today is referred to as the:

opportunity cost concept.

Profit maximization does not adequately describe the goal of the firm because:

profit maximization does not require the consideration of risk. profit maximization ignores the timing of a project's return.

In regard to the agency problem, ________ are the principal owners of a corporation.

shareholders

Investors prefer $1 today versus $1 in the future due to:

time value of money. B) opportunity cost. C) agency problems.

T or F One of the problems associated with profit maximization is that it ignores the timing of a project's return.

true

T or F The corporation is the most effective form of organization in terms of raising capital.

true

TF For the risk-averse financial manager, the more risky a given course of action, the higher the expected return must be.

true

TF The agency problem arises due to the separation of ownership and control in a corporation

true

tf Shareholder wealth is measured by the market value of the firm's common stock.

true

Diversification increases when ________ decreases.

variability B) return C) risk