Intermediate Financial Management- Chapter 1

Which one of the following is a financial asset? A. A corporate bond B. A machine C. A patent D. A factory

A. A corporate bond

Which of the following is a real asset? A. A patent B. A share of stock issued by Bank of New York C. An IOU ("I owe you") from your brother-in-law D. A mortgage loan taken out to help pay for a new home

A. A patent

Which one of the following is a real asset? A. A patent B. A personal IOU C. A checking account balance D. A share of stock

A. A patent

In which of the following organizations would agency problems be least likely to occur? A. A sole proprietorship B. A partnership C. A corporation D. A closely held corporation

A. A sole proprietorship

Which one of these best defines the objective of a well-functioning financial market? A. Establishing accurate security prices B. Creating higher security prices C. Eliminating short-selling profits D. Increasing shareholder value by any means possible

A. Establishing accurate security prices

Which one of these statements is correct? A. Financial managers have a fiduciary duty to stockholders. B. Financial managers are concerned only with funds that flow to investors. C. The chief financial officer generally reports directly to the corporate treasurer. D. The corporate controller is primarily responsible for overseeing a firm's cash functions.

A. Financial managers have a fiduciary duty to stockholders.

n a firm having both a treasurer and a controller, which of the following would most likely be handled by the controller? A. Internal auditing B. Credit management C. Banking relationships D. Insurance

A. Internal auditing

Which of the following appears to be the most appropriate goal for corporate management? A. Maximizing market value of the company's shares B. Maximizing the company's market share C. Maximizing the current profits of the company D. Minimizing the company's liabilities

A. Maximizing market value of the company's shares

Which one of these determines the minimum acceptable rate of return on a capital investment? A. The available alternative investment opportunities B. The profit margin of the existing firm C. The rate of return on the firm's outstanding shares D. The rate of return on risk-free debt securities

A. The available alternative investment opportunities

Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm? A. Treasurer B. Controller C. Chief Operating Officer D. Board of directors

A. Treasurer

When managers' compensation plans are tied in a meaningful manner to the profits of the firm, agency problems: A. can be reduced. B. will be created. C. are shifted to other stakeholders. D. are eliminated entirely from the firm.

A. can be reduced.

When the management of a business is conducted by individuals other than the owners, the business is most likely to be a: A. corporation. B. sole proprietorship. C. partnership. D. general partner.

A. corporation.

A firm decides to pay for a small investment project through a $1 million increase in short-term bank loans. This is best described as an example of a(n): A. financing decision. B. investment decision. C. capital budgeting decision. D. capital expenditure decision.

A. financing decision.

A corporation is considered to be closely held when: A. only a few shareholders exist. B. the market value of the shares is stable. C. it operates in a small geographic area. D. management also serves as the board of directors.

A. only a few shareholders exist.

A block holder is commonly defined as an investor who: A. owns 5 percent or more of a firm's outstanding shares. B. invests in more than one firm within the same industry. C. is another corporation. D. is also one of the firm's managers or directors.

A. owns 5 percent or more of a firm's outstanding shares.

When a corporation fails, the maximum that can be lost by an individual shareholder is: A. the amount of their initial investment. B. the amount of their share of the profits. C. their proportionate share required to pay the corporation's debts. D. the amount of their personal wealth.

A. the amount of their initial investment.

A common problem for closely held corporations is: A. the lack of access to substantial amounts of capital. B. the restriction that shareholders receive only one vote each. C. the separation of ownership and management. D. an abundance of agency problems.

A. the lack of access to substantial amounts of capital.

The term "capital structure" refers to: A. the manner in which a firm obtains its long-term sources of funding. B. the length of time needed to repay debt. C. whether or not the firm invests in capital budgeting projects. D. the types of assets a firm acquires.

A. the manner in which a firm obtains its long-term sources of funding.

Short selling involves selling a security: A. you do not own. B. that you have owned for less than one year. C. at a price below current market value. D. for less than you originally paid to purchase it.

A. you do not own

Which one of the following would be considered a capital budgeting decision? A. Planning to issue common stock rather than issuing preferred stock B. Deciding to expand into a new line of products, at a cost of $5 million C. Repurchasing shares of common stock D. Issuing debt in the form of long-term bonds

B. Deciding to expand into a new line of products, at a cost of $5 million

Which one of the following statements more accurately describes the controller than the treasurer? A. Reports directly to the chief executive officer B. Monitors capital expenditures to make sure that they are not misappropriated C. Responsible for investing the firm's spare cash D. Responsible for arranging any issue of common stock

B. Monitors capital expenditures to make sure that they are not misappropriated

Which of the following is a capital budgeting decision? A. Should the firm borrow money from a bank or sell bonds? B. Should the firm shut down an unprofitable factory? C. Should the firm buy or lease a new machine that it is committed to acquiring? D. Should the firm issue preferred stock or common stock?

B. Should the firm shut down an unprofitable factory?

How may a reduction in cash dividends be in the best interests of current shareholders? A. A reduction of cash dividends is always in the best interests of current shareholders. B. The firm will have available cash to increase current investment and future profits. C. Reduced dividends increase managerial compensation, thus increasing managers' motivation. D. A reduction of cash dividends cannot be in the best interests of current shareholders.

B. The firm will have available cash to increase current investment and future profits.

A corporate director: A. is selected by and can be removed by management. B. can be voted out of power by the shareholders. C. has a lifetime appointment to the board. D. is selected by a vote of all corporate stakeholders.

B. can be voted out of power by the shareholders.

In a large corporation, budget preparation would most likely be conducted by the: A. treasurer. B. controller. C. chief financial officer. D. financial manager.

B. controller.

Agency problems can best be characterized as: A. dislike of firm's bondholders by its equityholders. B. differing incentives between managers and owners. C. spending of corporate resources. D. friction between managers and employees.

B. differing incentives between managers and owners.

Ethical decision making by management has a payoff for shareholders in terms of: A. improved capital structure. B. enhanced firm reputation value. C. increased managerial benefits. D. higher current dividend payments.

B. enhanced firm reputation value.

Investment banks like Morgan Stanley or Goldman Sachs: A. collect deposits and relend the cash to corporations and individuals. B. help companies sell their securities to investors. C. design and sell insurance policies for businesses. D. lend to corporations and investors in commercial real estate.

B. help companies sell their securities to investors.

A firm's reputation: A. has no value. B. is an important firm asset. C. is irrelevant to shareholders. D. can be easily restored once damaged.

B. is an important firm asset.

Ethical decision making in business: A. reduces the firm's profits. B. requires adherence to implied rules as well as written rules. C. is not in the best interests of shareholders. D. is less important than good capital budgeting decisions.

B. requires adherence to implied rules as well as written rules.

Corporate raiders will be looked upon most favorably if they: A. divide up large profitable entities. B. take actions that increase current shareholder wealth. C. create value for themselves through their actions. D. change the capital structure of a firm by increasing its debt.

B. take actions that increase current shareholder wealth.

In a partnership form of organization, income tax liability, if any, is incurred by: A. the partnership itself. B. the partners individually. C. both the partnership and the partners. D. neither the partnership nor the partners.

B. the partners individually.

Which one of these is not considered to be a security? A. Shares of GE stock B. A bond traded in the financial market C. A mortgage loan issued and held by a bank D. A convertible bond issued to the public

C. A mortgage loan issued and held by a bank

Which one of the following forms of compensation is most apt to align the interests of managers and shareholders? A. A fixed salary B. A salary that is linked to current company profits C. A salary that is paid partly in the form of the company's shares D. A salary that is linked to the company's market share

C. A salary that is paid partly in the form of the company's shares

Which of these duties are responsibilities of the corporate treasurer? A. Financial statements and taxes B. Cash management and tax reporting C. Cash management and banking relationships D. Raising capital and financial statements

C. Cash management and banking relationships

Which of the following groups is least likely to be considered a stakeholder of the firm? A. Government B. Customers C. Competitors D. Employees

C. Competitors

Which of the following statements best distinguishes the difference between real and financial assets? A. Real assets have less value than financial assets. B. Real assets are tangible; financial assets are not. C. Financial assets represent claims to income that is generated by real assets. D. Financial assets appreciate in value; real assets depreciate in value.

C. Financial assets represent claims to income that is generated by real assets.

Which one of these statements correctly applies to a limited partnership? A. All partners share the daily management duties. B. All partners enjoy limited personal liability. C. General partners have unlimited personal liability. D. Taxes are imposed at both the firm and the personal level on profits earned.

C. General partners have unlimited personal liability.

Which one of these statements is correct? A. A dollar received next year has the same value as a dollar received today. B. Risky cash flows are more valuable than certain cash flows. C. Smart investment decisions create more value than smart financing decisions. D. Corporate governance is irrelevant.

C. Smart investment decisions create more value than smart financing decisions.

Which of the following is least likely to be discussed in the articles of incorporation? A. How the firm is to be financed B. The purpose of the business C. The price range of the shares of stock D. How the board of directors is to be structured

C. The price range of the shares of stock

In the case of a limited liability partnership, ________ has/have limited liability. A. only some of partners B. only the managing partner C. all of the partners D. none of the partners

C. all of the partners

Corporations that issue financial securities such as stock or debt obligations to the public do so primarily to: A. increase sales. B. become profitable. C. increase their access to funds. D. avoid double taxation of their profits.

C. increase their access to funds.

An example of a firm's financing decision would be: A. acquiring a competitive firm. B. determining how much to pay for a specific asset. C. issuing 10-year versus 20-year bonds. D. deciding whether or not to increase the price of its products.

C. issuing 10-year versus 20-year bonds.

Firms can alter their capital structure by: A. not accepting any new capital budgeting projects. B. investing in intangible assets. C. issuing stock to repay debt. D. becoming a limited liability company.

C. issuing stock to repay debt.

The best criterion for success in a capital budgeting decision would be to: A. minimize the cost of the investment. B. maximize the number of capital budgeting projects. C. maximize the value added to the firm. D. finance all capital budgeting projects with debt.

C. maximize the value added to the firm.

A corporate board of directors should provide support for the top management team: A. under all circumstances. B. in all decisions related to cash dividends. C. only when the board approves of management's actions. D. if shareholders are pleased with the firm's performance.

C. only when the board approves of management's actions.

"Double taxation" refers to: A. all partners paying equal taxes on profits. B. corporations paying taxes on both dividends and retained earnings. C. paying taxes on profits at the corporate level and dividends at the personal level. D. the fact that marginal tax rates are doubled for corporations.

C. paying taxes on profits at the corporate level and dividends at the personal level.

A board of directors is elected as a representative of the corporation's: A. top management. B. stakeholders. C. shareholders. D. customers.

C. shareholders.

A manager's compensation plan that offers financial incentives for increases in quarterly profitability may create agency problems in that: A. the managers are not motivated by personal gain. B. the board of directors may claim the credit. C. short-term, not long-term profits become the focus. D. investors desire stable profits.

C. short-term, not long-term profits become the focus

Unlimited liability is faced by the owners of: A. corporations. B. partnerships and corporations. C. sole proprietorships and general partnerships. D. all forms of business organization.

C. sole proprietorships and general partnerships.

Corporations are referred to as public companies when their: A. shareholders have no tax liability. B. shares are held by the federal or state government. C. stock is publicly traded. D. products or services are available to the public.

C. stock is publicly traded.

Corporate managers are expected to make corporate decisions that are in the best interest of: A. top corporate management. B. the corporation's board of directors. C. the corporation's shareholders. D. all corporate employees.

C. the corporation's shareholders.

One continuing problem with managerial incentive compensation plans is that: A. the plans increase agency problems. B. managers prefer guaranteed salaries. C. their effectiveness is difficult to evaluate. D. the plans do not reward shareholders.

C. their effectiveness is difficult to evaluate.

Which one of these is a capital budgeting decision? A. Deciding between issuing stock or debt securities B. Deciding whether or not the firm should go public C. Deciding if the firm should repurchase some of its outstanding shares D. Deciding whether to buy a new machine or repair the old machine

D. Deciding whether to buy a new machine or repair the old machine

Which of the following is least likely to represent an agency problem? A. Lavish spending on expense accounts B. Plush remodeling of the executive suite C. Excessive avoidance of taxes D. Executive incentive compensation plans

D. Executive incentive compensation plans

Which one of the following would correctly differentiate general partners from limited partners in a limited partnership? A. General partners have more job experience. B. General partners have an ownership interest. C. General partners are subject to double taxation. D. General partners have unlimited personal liability.

D. General partners have unlimited personal liability.

Which one of these is a disadvantage of the corporate form of business? A. Access to capital B. Unlimited personal liability for owners C. Limited firm life D. Legal requirements

D. Legal requirements

Which form of organization provides limited liability for the firm but yet allows the professionals working within that firm to be sued personally? A. Limited liability partnership B. Limited liability company C. Sole proprietorship D. Professional corporation

D. Professional corporation

Which of the following is a disadvantage to incorporating a business? A. Easier access to financial markets B. Limited liability C. Becoming a permanent legal entity D. Profits taxed at the corporate level and the shareholder level

D. Profits taxed at the corporate level and the shareholder level

Which one of the following gives a corporation its permanence? A. Multiple owners B. Limited liability C. Corporation taxation D. Separation of ownership and control

D. Separation of ownership and control

The short-term decisions of financial managers are comprised of: A. capital structure decisions only. B. investment decisions only. C. financing decisions only. D. both investment and financing decisions.

D. both investment and financing decisions.

Financial managers should only accept investment projects that: A. increase the current profits of the firm. B. can increase the firm's market share. C. earn a higher rate of return than the firm currently earns on its existing projects. D. earn a higher rate of return than shareholders can get by investing on their own.

D. earn a higher rate of return than shareholders can get by investing on their own.

Agency problems can least be controlled by: A. establishing good internal controls and procedures. B. designing compensation packages that align manager's goals with those of the shareholders. C. corporate governance. D. electing senior managers to the board of directors.

D. electing senior managers to the board of directors.

Sole proprietorships resolve the issue of agency problems primarily by: A. avoiding excessive expense accounts. B. discharging those who violate the rules. C. allowing owners to share the cost of their actions with others. D. forcing owners to bear the full cost of their actions.

D. forcing owners to bear the full cost of their actions.

The overall goal of capital budgeting projects should be to: A. decrease the firm's reliance on debt. B. increase the firm's sales. C. increase the firm's outstanding shares of stock. D. increase the wealth of the firm's shareholders.

D. increase the wealth of the firm's shareholders.

The primary goal of corporate management should be to: A. maximize the number of shareholders. B. maximize the firm's profits. C. minimize the firm's costs. D. maximize the shareholders' wealth.

D. maximize the shareholders' wealth.

The legal "life" of a corporation is: A. coincidental with that of its CEO. B. equal to the life of its board of directors. C. permanent, as long as shareholders don't change. D. permanent, regardless of current ownership.

D. permanent, regardless of current ownership.

A financial analyst in a corporation may be involved with all of the following EXCEPT: A. analyzing a new investment project. B. monitoring risk. C. managing investment of the company's cash. D. purchasing the firm's plant and equipment.

D. purchasing the firm's plant and equipment.

A chief financial officer would typically: A. report to the treasurer, but supervise the controller. B. report to the controller, but supervise the treasurer. C. report to both the treasurer and controller. D. supervise both the treasurer and controller.

D. supervise both the treasurer and controller.