Chapter 1

True or false: Cash flows to the firm from the financial markets.

True

A sole proprietorship is a business owned by ______ person(s).

one

Stockholders are entitled to only what is left after employees, suppliers, and creditors are paid, which makes them _____ owners.

residual

______ buy and sell for themselves, at their own risk.

dealers

When one owner of a security sells the security to another person, the transaction takes place in the _________ market

secondary

Organized auction markets include:

the New York Stock Exchange

When a corporation raises funds in the financial markets, the transaction occurs on the _____

primary market

The goal of the for-profit business is to maximize _____ equity.

owners

The possible goal of profit maximization:

-can be achieved by cost-cutting -would probably be the most commonly sighted goal for a business

Corporations in other countries are often called:

-joint stock companies -public limited companies

Which of the following show why a corporation is the most important form of business?

A corporation is a separate legal entity with the ability to acquire and exchange property Corporations can enter into contracts. Corporations can sue and be sued.

The Sarbanes-Oxley Act requires corporate officers to do which of the following?

Accept responsibility for material errors in the annual report Confirm the validity of the annual financial report List any deficiencies in internal controls

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

Agency problem

_________ budgeting is the process of making and managing expenditures on long-term assets.

Capital

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

Capital structure

Which corporate officer is responsible for accurate financial reporting of the firm's activities?

Controller

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

Controller, Treasurer

The federal government taxes which of the following?

Corporate earnings and shareholder dividends

Which of the following is included in working capital?

Current (short-term) assets, Accounts receivable, Accounts payable

A general partnership has which of the following characteristics?

Each owner has unlimited liability for all firm debts., It is difficult to transfer ownership.

What are the two basic classifications under which most potential financial goals fall?

Earning or increasing profits Controlling risk

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

Equity, and Long-term debt

It is sometimes argued that, left to themselves, managers tend to minimize the amount of resources over which they have control.

False

What are the two factors that impact whether managers will act in the best interest of stockholders?

How closely management goals align with stockholder goals and the way managers are compensated

Which of the following can be used to encourage managers to act in the best interests of shareholders?

Managerial compensation tied to performance Better prospects of promotion

How is ownership transferred in a corporation?

Ownership is transferred by gifting or selling shares of stock.

Which of the following are important when considering a partnership?

Personal liability for firm debts, Taxation of partnership income, and Fund raising limitations

Which of the following are typically included in a treasurer's responsibilities?

Responsible for managing the firms' cash and credit, financial planning, and capital expenditures. Also stated as : Managing capital expenditure decisions, Handling cash flows, Making financial plans

The aim of the act known as ______ is to protect investors from corporate abuse.

SOX

In addition to the importance of finance for marketing, accounting, and management careers, finance is also now considered a ______ discipline, especially at the graduate level.

STEM

Which one of the following parties would be the last party to receive payment if a firm were to close? Assume all parties have a legitimate claim on the firm's assets.

Shareholders

Which of the following are considered stakeholders in a company?

Supplier Government Employees

Which of the following, according to the textbook, are possible financial goals for a company?

Survive Avoid financial distress and bankruptcy beat the competition. maximize sets or market share minimize costs maximize profits maintain steady earnings growth

The controller is responsible for which of the following tasks?

Tax payments, Financial accounting

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

The ability to issue stock State citizenship for jurisdictional purposes Legal powers to sue

The liability of a shareholder in a corporation is limited to which of these?

The amount the shareholder invested in the corporation

Which one of these motivates managers to make good decisions?

Threat of a hostile takeover

From the stockholders' perspective, what is the primary purpose of awarding stock options to managers?

To increase shareholders' wealth

What is the main goal of financial management?

To maximize current value per share of existing stock

A benefit corporation is for profit, and has the legal attributes of accountability, _____, and purpose.

Transparency

Under SOX, corporate officers must explicitly declare that the annual report does not contain any false statements or material omissions.

True

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

Tyco, Enron, WorldCom, Adelphia

Which of the following is an important question that must be asked when starting a firm?

What long-term investments should you take on? Where will you get the long-term financing to pay for your investment? How will you manage your everyday financial activities?

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

agency

A ______ corporation is for profit, and has the legal attributes of accountability, transparency, and purpose.

benefit

Forming a corporation involves preparing articles of incorporation and a set of

bylaws

The _______ are rules describing how the corporation regulates its existence.

bylaws

The rules used by a corporation to regulate its existence are known as

bylaws

The officer responsible for corporate tax reporting is the

controller

It is argued that, left to themselves, managers would tend to maximize the amount of resources over which they have control or, more generally, ______ power or wealth.

corporate

In a ________ partnership, all the partners share in gains or losses, and all have unlimited liability for all partnership debts, not just some particular share.

general

A good financial decision aims at which of the following?

increase market value of shareholders' equity increase the value of the firm's shares.

A sole proprietorship is a business that _______.

is owned by one person

The life of a corporation ______.

is unlimited

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

legal

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

limited

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 his/her cash contribution to the partnership

In a _________ partnership, one or more general partners will run the business and have unlimited liability, but there will be one or more _____________ partners who will not actively participate in the business.

limited; limited

Capital budgeting is concerned with planning and managing a firm's

long-term investments

Because ownership in a corporate is spread over a huge number of shareholders, it can be argued that _____ effectively controls the firm.

management

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

management

Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ______ effectively controls the firm.

management

Indirect agency costs are often due to lost ______.

opportunities

Inventory is a:

part of working capital, and current asset.

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

partnership

An LLC is essentially a hybrid of _____ and corporation.

partnership

An LLC is essentially a hybrid of ______ and corporation.

partnership

A limited liability company is taxed like a ______ and its owners have ____ liability.

partnership; limited

Corporate profits are taxed twice, first at the corporate level when they are earned and again at the ______ level when they are paid out.

personal

A _____ is the authority to vote someone else's stock.

proxy

The relative ease of transferring ownership, the limited liability for business debts, and the unlimited life of the business are why the corporate form is superior to sole proprietorships or partnerships for

raising cash

The relative ease of transferring ownership, the limited liability for business debts, and the unlimited life of the business are why the corporate form is superior to sole proprietorships or partnerships for _____.

raising cash

The corporate goal involving bankruptcy avoidance, stability, and safety relate to controlling _____.

risk

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

stakeholder

______ are frequently used to encourage key managers to maximize the value of the firm's stock.

stock options

Managers who are successful in pursuing _____ will be in greater demand in the labor market and thus command higher salaries.

stockholder goals

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

stocks bonds

Firms that are poorly managed are more attractive as acquisitions. This form of threat known as a ______ motivates managers to act in the stockholders' best interests.

takeover

In a corporation, the stockholders elect _____, who then select the managers.

the board of directors

A partnership must have at least _______ owners.

two

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

unlimited

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

Proxy fight

Because shareholders get paid last after all other obligations are satisfied, they are often called _____.

residual owners

The owners of a corporation are called

stockholders

The financial manager acts in the shareholders' best interests by making decisions that increase the value of _____.

the stock

True or false: Ownership in the corporate form is difficult to transfer.

False

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

False

Which of the following are true of a sole proprietorship?

A proprietorship has a limited life., and It is the simplest type of business to form.

The two types of secondary markets include _____ markets and dealer markets.

auction

The need to monitor management actions is an example of a(n) _____ (direct/indirect) agency cost.

direct

Some of the cash flow generated by a firm goes back to the financial markets in the form of ______.

dividends and debt payments

In financial markets, debt and _____ securities are bought and sold.

equity

Most equity shares of large firms in the U.S. trade on:

organized auction markets

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

Chief financial officer

When a corporation raises funds in the financial markets, the transaction occurs on the _____.

primary market

Which one of these provides a manager an incentive to perform well?

promotions

The advantages and disadvantages of a partnership are basically the same as those of a

proprietorship

The five main areas of finance are

corporate finance, investments, financial institutions, international finance, and Fintech

The _______ is the most important form, in terms of size, of business organization in the United States.

corporation

Joint stock company is another name for what is referred to as a ______ in the United States.

corporation or corporations

Due to the extreme costs of SOX, hundreds of public firms have chosen to "go ______," meaning their shares are no longer traded on the major stock exchanges.

dark

A bad financial decision is defined as a decision that ______ owners' equity.

decreases

In a large corporation, the financial manager is primarily responsible for:

financial aspects of operations, such as collections of accounts receivables. financing decisions. long-term investment decisions.

In a large corporation, the _____ would be responsible for answering the three main questions that must be asked when starting a firm.

financial manager