FINAN 815 Ch 1 SmartBook

How is ownership transferred in a corporation?

Ownership is transferred by gifting or selling shares of stock.

Since ______ and ownership are separated, a corporation's life is unlimited.

management

What is the main goal of financial management?

To maximize current share value

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

auction market

The Sarbanes-Oxley Act requires corporate officers to:

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

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

the amount the shareholder invested in the corporation

A shareholder's liability is limited to which of these? Multiple choice question. the percentage of corporate debt that equals the shareholder's ownership percentage the corporation's current liabilities the corporation's outstanding long-term debt the amount the shareholder invested in the corporation

the amount the shareholder invested in the corporation

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

the total value of stock in a corporation.

What is the primary objective of an auction market?

to bring buyers and sellers together

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

False

True or false: A corporation borrows money in its own name.

True

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

agency

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

agency

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following? Multiple choice question. capital structure problem Securities Exchange Act of 1934 violation Securities Act of 1933 violation agency problem

agency problem

The four basic areas of finance include investments, financial institutions, international finance, and _____ finance. (Enter only one word per blank.)

corporate

Who elects the board of directors and ultimately maintains control of the firm? Multiple choice question.

stockholders

A general partnership has which of the following characteristics?

All the partners share in gains or losses of the partnership. Reason: Correct. In a general partnership, all the partners share in gains or losses, and all have unlimited liability for all partnership debts, not just some particular share. Large amounts of cash can be raised easily. Reason: Incorrect. In a general partnership, the cash raised is limited to that provided by the partners. It is always regulated by a formal partnership agreement. Reason: Incorrect. A general partnership is easy and inexpensive to form. It can even be an oral agreement. Each owner has unlimited liability for all firm debts. Reason: Correct. In a general partnership, all the partners share in gains or losses, and all have unlimited liability for all partnership debts, not just some particular share.

is profit maximization the primary objective of a business?

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

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

managers

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

long-term liabilities Reason: Incorrect. Managing expenditures on long-term assets is known as capital budgeting. Decisions about current liabilities, long-term liabilities, and shareholders' equity are called capital structure decisions. current assets Reason: Incorrect. Managing expenditures on long-term assets is known as capital budgeting. Managing current assets is part of the function of working capital management. current liabilities Reason: Incorrect. Managing expenditures on long-term assets is known as capital budgeting. Decisions about current liabilities, long-term liabilities, and shareholders' equity are called capital structure decisions. long-term assets Reason: Correct. The process of planning and managing a firm's long-term investments is called capital budgeting.

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

maximize

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

partnership

A partnership must have at least _______ owners.

2

Which of the following are reasons that the corporation is the most important form of business? Multiple select question. Corporations can vote in general elections. Corporations are separate legal entities. Corporations can enter contracts. Corporations can sue and be sued.

Corporations are separate legal entities. Corporations can enter contracts. Corporations can sue and be sued.

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

Decreases

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?

How will everyday financial activities be handled? Reason: Incorrect. Working capital management Where will long-term financing be obtained to pay for investments? Reason: Incorrect. Capital structure decisions How many employees will I need? Reason: Correct. What long-term investments should be made? Reason: Incorrect. Capital budgeting decisions

Which of the following are defining features of the primary market? Multiple select question. It only involves seasoned equity offerings. It is the market where initial public offerings are made. It is the market where shareholders and bondholders buy and sell to each other. Proceeds from the sale of securities go to the issuing firm.

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

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

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

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

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

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

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

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

Stock options

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

True

The threat of ______ motivates managers to make good decisions.

a takeover

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

agency problem.

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

capital structure Reason: Incorrect. Capital structure is a topic of key importance to a financial manager, per the text. product development Reason: Correct. capital budgeting Reason: Incorrect. Capital budgeting is a topic of key importance to a financial manager, per the text. working capital management Reason: Incorrect. Working capital management is a topic of key importance to a financial manager, per the text.

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

corporation Reason: Incorrect. Both general and limited partners are part of the management structure within a limited partnership. limited partnership Reason: Correct. Both general and limited partners are part of the management structure within a limited partnership. general partnership Reason: Incorrect. Both general and limited partners are part of the management structure within a limited partnership. sole proprietorship Reason: Incorrect. Both general and limited partners are part of the management structure within a limited partnership.

The owners of a corporation are called ______.

shareholders

When are corporate profits taxed? Multiple select question. Individuals pay taxes on corporate dividends. Corporations pay taxes on all money coming in. Corporations pay taxes on corporate profits. Corporations don't pay taxes.

Individuals pay taxes on corporate dividends. Corporations pay taxes on corporate profits.

Which of the following are true of a sole proprietorship?

It is one of the simplest types of businesses to form. Reason: Correct. A sole proprietorship is simple to form. It requires no formal charter, and few government regulations must be satisfied in most industries. A sole proprietor can issue stock to raise capital. Reason: Incorrect. A sole proprietorship's equity is limited to the proprietor's personal wealth. A proprietorship has a limited life. Reason: Correct. A sole proprietorship is limited to the life of the proprietor. The owner has limited liability for business debts. Reason: Correct. The owner of a sole proprietorship has unlimited liability for business debts.

The federal government taxes which of the following? Multiple choice question. corporate earnings but not shareholder dividends shareholder dividends but not corporate earnings corporate earnings and shareholder dividends neither corporate earnings nor shareholder dividends

corporate earnings and shareholder dividends Reason: Correct. For corporations, shareholders (owners) are taxed on their dividends after the income has been taxed to the corporation. Sole proprietors and partners, who are also owners, are taxed on the income of the company rather than on withdrawals from the company. Hence, the income is taxed only once, at the personal level.

When a corporation is formed, it is granted which of the following rights?

corporate life of up to 100 years Reason: Incorrect. The life of a corporation is unlimited. citizenship for casting vote in presidential election of the country Reason: Incorrect. legal powers to sue Reason: Correct. the ability to issue stock Reason: Correct.

"Increasing shareholder wealth" means increasing the ______.

current common stock value

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

difficulty of transferring ownership double taxation unlimited life of the business separation of ownership and management

One of the important questions in the area of investments includes the potential risks and reward associated with investing in ______assets.

financial

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

general partnership Reason: Correct. A partnership with these characteristics is a general partnership. corporation Reason: Incorrect. A partnership with these characteristics is a general partnership. limited liability partnership Reason: Incorrect. A partnership with these characteristics is a general partnership. proprietorship Reason: Incorrect. A partnership with these characteristics is a general partnership.

Which of the following are considered non-owner stakeholders in a company? Multiple select question. government stockholders employees suppliers

government employees suppliers

A sole proprietorship is a business that _______.

is owned by one person

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

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

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

legal

A limited liability company's owners have ______ liability. Multiple choice question. unlimited narrowly defined limited limited no liability

limited

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

limited

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

limited to their cash contribution to the partnership

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

partnership; limited liability

Which of the following is not one of the basic areas of finance?

personal finance Reason: Correct. While personal finance is important, it is not considered one of the basic areas of finance. corporate finance Reason: Incorrect. This is one of the basic areas of finance. international finance Reason: Incorrect. This is one of the basic areas of finance. financial institutions Reason: Incorrect. This is one of the basic areas of finance. investments Reason: Incorrect. This is one of the basic areas of finance.

Which one of these is an important mechanism used by unhappy stockholders to replace current management? Multiple choice question. Ponzi scheme proxy fight perpetual debt prospectus

proxy fight

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

secondary

How is ownership of a corporation represented?

shares of stock

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

stakeholder

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

stock options.