Chapter 1

Which of the following are true of a sole proprietorship?

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

Business finance is broadly concerned with which of the following (select all that apply)?

1. Which long-term investment to make 2. How to manage day-to-day finances of the firm 3. How to finance long-term investments

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

Agency

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

Agency Problem

The four basic areas of finance include investments, financial institutions, international finance, and ________________ finance.

Corporate

The federal government taxes which of the following?

Corporate earnings and shareholder dividends

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

False

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

Legal

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

Managers

A corporation borrows money in its own name.

True

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

True

A partnership must have at least _______ owners.

Two (2)

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

agency problem

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

auction market

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

corporate accounting fraud and financial malpractice

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

decreases

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

limited to their cash contribution to the partnership

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

long-term assets

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

partnership

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

Debt

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

General Partnership

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 many employees will I need?

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.

How is ownership transferred in a corporation?

Ownership is transferred by gifting or selling shares of stock.

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

Personal finance

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

Proxy fight

The owners of a corporation are called ______.

Shareholders

How is ownership of a corporation represented?

Shares of stock

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

The amount the shareholder invested in the corporation

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

The existing shares of stock

What is the primary objective of an auction market?

To bring buyers and seller together

What is the main goal of financial management?

To maximize current share value

Which corporate officer is responsible for managing the firm's cash?

Treasurer

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

secondary

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

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

stocks & bonds

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

unlimited

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

stockholders

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

Stock Options

A general partnership has which of the following characteristics?

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

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

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

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

1. Enron 2. Tyco 3. WorldCom

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

1. Equity 2. Long-term debt

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

1. Government 2. Employees 3. Suppliers

A good financial decision will do which of the following?

1. Increase the value of the firm's existing stock 2. Increase market value of shareholders' equity

When are corporate profits taxed?

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

Corporations in other countries are often called:

1. Public limited companies 2. Limited liability company 3. Joint stock companies

The Sarbanes-Oxley Act requires corporate officers to:

1. be responsible for errors in the annual report 2. confirm the validity of the financial statements

What three subjects is the financial manager concerned with?

1. capital structure 2. capital budgeting 3. working capital management

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

1. pay corporate taxes 2. reinvest in firm 3. Paid to shareholders + creditors

In large firms, financial activity is usually associated with which top officer?

CFO

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

Capital

Which term applies to the mixture of debt and equity maintained by a firm?

Capital structure

In large firms, financial activity is usually associated with which top officer?

Chief Financial Officer (CFO)

Public limited companies and joint stock companies are other names for __________.

Corporations

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.

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

Limited

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

Limited Liability Partnerships

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

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

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

1. The ability to issue stock 2. Legal powers to sue

Which of the following positions generally report to the chief financial officer (CFO)?

1. Treasurer 2. Controller