FIN: Chapter 1

1) Proceeds from the sale of securities go to the issuing firm 2) It is the market where initial public offerings are made

Which of the following are defining features of the primary market?

Current common stock value

"Increasing shareholder wealth" means increasing the Blank______.

Fintech

What is the term for the combination of technology and finance?

Working Capital

Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of Blank______ management.

No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value

Is profit maximization the primary objective of a business?

True

True or False: A corporation borrows money in its own name

False

True or false: "Profit maximization" is the goal for the management of a corporation in the short run only.

Decreases

A bad financial decision is defined as a decision that Blank______ shareholder wealth.

Partnership

A business without separate legal authority formed by two or more people is known as a ________.

Legal

A corporation is a distinct ________ entity and as such can have a name and take advantage of the legal powers of natural persons.

Stocks; bonds

A corporation receives cash from financial markets by selling ______ and ______.

1) All the partners share in gains or losses of the partnership 2) Each owner has unlimited liability for all firm debts

A general partnership has which of the following characteristics?

Partnership; limited liability

A limited liability company is taxed like a _________, but retains _________ for owners.

Limited

A limited liability company's owners have Blank______ liability.

General Partnership

A partnership in which partners share in gains or losses and carry unlimited liability for all partnership debts is called a ________.

Two

A partnership must have at least Blank______ owners.

It makes management personally responsible for the accuracy of a company's financial statements

How does the Sarbanes-Oxley Act primarily work to make sure that companies tell the truth in financial statements?

Limited to their cash contribution to the partnership

In a limited partnership, a limited partner's liability for business debts is __________.

Shareholders

The owners of a corporation are called ________.

Agency

The relationship between stockholders and management can best be described as a(n) Blank______ relationship.

bring buyers and sellers together

What is the primary objective of an auction market?

Stock Options

______ can be used to encourage managers to maximize the value of the stock.

Increase market value of shareholders' equity Increase the value of the firm's existing stock

A good financial decision will do which of the following? -increase market value of shareholders' equity -increase current dividends per share -increase the value of the firm's existing stock -increase the cost of capital

Unlimited

A sole proprietor has Blank______ personal liability for all business debts and obligations.

Management

Agency costs occur when ______ and stockholder interests are not in line with each other.

Stocks; bonds

Broadly speaking, the investments area deals with financial assets such as ______ and ________

Long term assets

Capital budgeting is concerned with making and managing expenditures on _________.

Chief Financial Officer (VP of Finance)

The financial management function is usually associated with a top officer of the firm, often called the ________ ________________ _________

Maximize

The goal of a "for-profit" business is to Blank______ the value of shareholders' wealth.

Stakeholder

A(n) ______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm.

To pay corporate taxes Reinvested in the firm Paid to shareholders and creditors

According to Figure 1.2, where does cash generated by a corporation typically go?

How many employees will I need?

According to the textbook, which of the following is not one of the three main questions to be addressed if you wanted to start your own business?

Limited

Businesses are motivated to organize as corporations because stockholders in a corporation have _________ liability for corporate debts.

Long-Term Assets

Capital budgeting is concerned with making and managing expenditures on ___________

Secondary

When one owner or creditor sells to another, the transaction takes place in the ______ market.

Suppliers Employees Government

Which of the following are considered non-owner stakeholders in a company?

1) Long term debt Reason: the mix of debt and equity is referred to as a firm's capital structure 2) Equity Reason: the mix of debt and equity is referred to as a firm's capital structure

Which of the following are included in a firm's capital structure?

1) Corporations can enter contracts 2) Corporations can sue and be sued 3) Corporations are separate legal entities

Which of the following are reasons that the corporation is the most important form of business?

1) It is one of the simplest types of businesses to form 2) A proprietorship has a limited life

Which of the following are true of a sole proprietorship?

Enron Tyco WorldCom

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?

Difficulty of transferring ownership

Which of the following is a disadvantage of sole proprietorships and partnerships?

firms going public outside of the U.S. market eliminating public disclosure for many firms public firms "going dark" and leaving the stock market

Which of these have been noted as unintended consequences of the Sarbanes-Oxley Act?

Product Development

Which of these topics is not of especial interest to a financial manager?

Proxy Fight

Which one of these is an important mechanism used by unhappy stockholders to replace current management?

Stockholders

Who elects the board of directors and ultimately maintains control of the firm?

Cash Manager & Credit Manager Capital Expenditures & Financial Planning

Who/what does the Treasurer oversee?

Very demanding and competitive

Why are investment-related careers not suitable for all?

It can be difficult to raise cash for investment in these forms, and that limits the ability of the business to grow.

Why don't large businesses organize as sole proprietorships or partnerships?

Running the firm well and acting in the stockholders' interest makes the firm a less attractive takeover target to begin with.

Why would the threat of a takeover motivate a manager to act in stockholders' interest?

Inventory Cash Short-term assets

Working capital includes which of the following?

Capital

______ budgeting is the process of planning and managing a firm's long-term assets.

The amount the shareholder invested in the corporation

A shareholder's liability is limited to which of these?

Shares of stock

How is ownership of a corporation represented?

Agency Problem

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?

Stockbroker Portfolio management Security analysis

List 2 potential career paths related to investments

A takeover

The threat of ______ motivates managers to make good decisions.

1) Corporate Finance 2) Investments 3) Financial Institutions 4) International Finance 5) Fintech

Traditionally, financial topics are grouped into what five main areas?

True

True or false: In a large corporation, stockholders and managers are usually separate groups.

False

True or false: The Sarbanes-Oxley Act provides incentives for companies to go public in U.S. markets.

Articles of Incorporation Reason: forming a corporation involves preparing articles of incorporation and a set of bylaws

An organization must prepare Blank______ and bylaws when forming a corporation.

Treasurer & Controller

The CFO or VP of Finance manages the jobs of what 2 positions?

The total value of stock in a corporation

In a for-profit business, owners' equity is equivalent to:

Managers

In a shareholder-manager relationship, who is the agent?

Most of the buying and selling is done by the dealer Many dealers are also connected electronically

In an over-the-counter market, which of the following is true?

1) Careers in marketing (budgets, analyzing costs/benefits) 2) Accountants are often required to make financial decisions as well as perform traditional accounting duties 3) Careers in management require business strategy, which requires financial strategy 4) Fintech is an area in finance that focuses on STEM side: banking fintech, blockchain & cryptocurrency, insurance, robo-advising & stocktrading, budgeting apps, etc. 5) To make personal financial decisions

List 3 reasons why finance is important to know

Stock options

Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:

1) What long-term investments should you take on? 2) Where will you get the long-term financing to pay for your investments? Will you bring in other owners, or will you borrow the money? 3) How will you manage your everyday financial activities, such as collecting from customers and paying suppliers?

No matter what type of business you start, what 3 questions will you have to answer in some form?

Auction

The New York Stock Exchange is a(n) Blank______.

Corporate accounting fraud and financial malpractice

The Sarbanes-Oxley Act is intended to strengthen protection against:

be responsible for errors in the annual report confirm the validity of the financial statements

The Sarbanes-Oxley Act requires corporate officers to: Multiple select question. limit their compensation and stock options. personally prepare all financial statements. confirm the validity of the financial statements. be responsible for errors in the annual report.

Agency Problem

The conflict of interest between an agent and a principal is called a(n):

Agency

The costs incurred due to a conflict of interest between stockholders and management are called Blank______ costs.

Corporate earnings and shareholder dividends

The federal government taxes which of the following?

The existing shares of the stock

The goal of the financial management is to increase the value of ______.

1) What determines the price of a financial asset, such as a share of stock? 2) What are the potential risks and rewards associated with investing in financial assets? 3) What is the best mixture of financial assets to hold?

What 3 important questions pertain to the subject of investments?

Financial Institutions

What area of finance refers to businesses that deal primarily in financial matters, such as banks and insurance companies?

A company that uses the internet, mobile phones, software, and/or cloud services to provide a financial service

What does Fintech encompass?

Limited partnership

What type of partnership involves both general and limited partners to run the business?

Tax Manager & Cost Accounting Manager Financial Accounting Manger & Data Processing Manager

What/who does the "Controller" oversee?

1) Corporations pay taxes on corporate profits 2) Individuals pay taxes on corporate dividends

When are corporate profits taxed?