FIN CH1
Why are so many businesses structured as sole proprietorships when the corporate form of business offers more advantages?
A significant advantage of the sole proprietorship is that it is inexpensive and easy to form. If the sole proprietor has limited capital to start with, it may not be desirable to spend part of that capital forming a corporation. Also, limited liability for business debts may not be a significant advantage if the proprietor has most of his or her personal assets tied up in the business already. Finally, for a typical small firm, having an unlimited life for the business has no real advantage since the heart and soul of the business is the person who founded it, thereby effectively limiting the life of the business to that of its founder.
How might agency problems arise in partnerships?
Agency conflicts typically arise when there is a separation between the ownership and the management of a business. In a general partnership, especially if the partnership is small, there is less of a chance of an agency conflict if all the partners are involved with the business on a regular basis. However, in a limited partnership, the opportunity exists for an agency problem to arise between the general and the limited partners.
Which one of the following statements is generally correct?
Auction markets match buy and sell orders.
From a liability point of view, what is the difference between investing in a sole proprietorship and a general partnership?
Both a sole proprietor and a general partner have unlimited liability for the firm's debts. However, as a sole proprietor you should be totally aware of all the business dealings of the firm. In a general partnership, you may or may not handle the financial transactions and thus are accepting the responsibility for actions taken not only by yourself, but those of your partners.
2.0 Which one of the following statements is correct?
Both sole proprietorship and partnership income is taxed as individual income.
Which one of the following statements is correct?
Corporations can raise large amounts of capital generally easier than partnerships can.
Which of the following individuals have unlimited liability based on their ownership interest? I. general partner II. sole proprietor III. stockholder IV. limited partner
I and II only
The articles of incorporation: I. describe the purpose of the firm. II. are amended periodically. III. set forth the number of shares of stock that can be issued. IV. detail the method that will be used to elect corporate directors
I and III only
Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002? I. increased foreign stock exchange listings of U.S. stocks II. decreased compliance costs III. increased privatization of public corporations IV. increased public disclosure by all corporations
I and III only
Which of the following parties are considered stakeholders of a firm? I. employee II. long-term creditor III. government IV. common stockholder
I and III only
Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. I. compensation based on the value of the stock II. stock option plans III. threat of a company takeover IV. threat of a proxy fight
I, II, III, and IV
Which of the following should a financial manager consider when analyzing a capital budgeting project? I. project start up costs II. timing of all projected cash flows III. dependability of future cash flows IV. dollar amount of each projected cash flow
I, II, III, and IV
Which of the following accounts are included in working capital management? I. accounts payable II. accounts receivable III. fixed assets IV. inventory
I, II, and IV only
Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. ability to raise capital IV. unlimited firm life
I, III, and IV only
Which of the following are cash flows from a corporation into the financial markets? I. repayment of long-term debt II. payment of government taxes III. payment of loan interest IV. payment of quarterly dividend
I, III, and IV only
Which of the following represent cash outflows from a corporation? I. issuance of securities II. payment of dividends III. new loan proceeds IV. payment of government taxes
II and IV only
Which of the following apply to a partnership that consists solely of general partners? I. double taxation of partnership profits II. limited partnership life III. active involvement in the firm by all the partners IV. unlimited personal liability for all partnership debts
II, III, and IV only
Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment?
II, III, and IV only
2.0 Which one of the following statements concerning a sole proprietorship is correct?
It is easy to create a sole proprietorship
Which one of the following statements concerning NASDAQ is FALSE?
NASDAQ is an auction market.
Public offerings of debt and equity must be registered with which one of the following?
Securities and Exchange Commission
Which one of the following statements concerning stock exchanges is correct?
Some large companies are listed on NASDAQ.
How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial intent of that Act?
Some of the key requirements of Sarbanes-Oxley are: the prohibition of personal loans from the company to its officers, an annual report by management of the internal control and financial reporting within the firm along with an independent auditor's assessment of that report, a review and sign off by the corporate officers of the annual financial statements, and the responsibility for the accuracy of the financial reports placed directly on senior management of the firm. While firms that have opted to remain publicly-owned are complying with these requirements, they are paying a cost to do so. This cost has caused other firms to "go dark" or to opt for listing on a foreign exchange rather than a U.S. exchange. While some of the results do match the intent of the Act, the costs, "going dark", and foreign listings were most likely not intended by the supporters of the Act
Compare and contrast the NYSE with NSADAQ
The NYSE is an auction market where sell orders are matched with buy orders. The NYSE has a physical trading floor located on Wall Street in New York City. NASDAQ is a dealer market which is solely electronic and therefore has no physical trading floor. Dealers buy and sell for their own inventory. The listing requirements of the NYSE are more stringent than those of NASDAQ and thus the NYSE tends to list larger firms with smaller firms being listed on NASDAQ. Note however, that larger firms can, and do, opt to remain on NASDAQ even though they qualify for NYSE listing.
Describe the key advantages associated with the corporate form of organization.
The advantages of the corporate form of organization are the ease of transferring ownership, the owners' limited liability for business debts, the ability to raise large amounts of capital, and the potential for an unlimited life for the organization.
What concerns might a loan officer have when loaning funds to a sole proprietorship that he or she might not have when loaning funds to a corporation?
The existence and viability of a sole proprietor is dependent upon one individual. Should that individual die, the entity would cease to exist. Likewise, should the owner lose interest in the business or become ill, the business might also cease to exist. With a corporation, the company ownership could be sold in any one of those situations such that the business entity would continue to exist.
Which one of the following statements is correct concerning the NYSE?
The listing requirements for the NYSE are more stringent than those of NASDAQ.
Which one of the following statements concerning a sole proprietorship is correct?
The owner of a sole proprietorship is personally responsible for all of the company's debts.
Give some examples of ways in which manager's goals can differ from those of shareholders
The primary goal of a financial manager should be to maximize the current value of the outstanding stock. This goal focuses on enhancing the returns to stockholders who are the owners of the firm. However, managers frequently are more concerned with their personal benefits from employment, the prestige of their position, and the perks to which they feel entitled. There are numerous examples, some of which are excessive compensation packages, large corporate offices, excessive staffing, and first-class travel and conference locations, to name a few
List and briefly describe the three general areas of responsibility for a financial manager.
The three basic areas are: 1. capital budgeting: the identification of investment opportunities that have a positive net value 2. capital structure: the mix of long-term debt and equity used to finance a firm's operations 3. working capital management: the daily control of a firm's short-term assets and short-term liabilities
Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure?
The treasurer reports to the vice president of finance.
Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?
agency problem
A stakeholder is:
any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm
Why should financial managers strive to maximize the current value per share of the existing stock?
because they have been hired to represent the interests of the current shareholders
A firm which opts to "go dark" in response to the Sarbanes-Oxley Act
can provide less information to its shareholders than it did prior to "going dark".
Which one of the following terms is defined as the management of a firm's long-term investments?
capital budgeting
Which one of the following terms is defined as the mixture of a firm's debt and equity financing?
capital structure
The decision to issue additional shares of stock is an example of which one of the following?
capital structure decision
Which form of business structure is most associated with agency problems?
corporation
Which one of the following business types is best suited to raising large amounts of capital?
corporation
Which type of business organization has all the respective rights and privileges of a legal person?
corporation
A business created as a distinct legal entity and treated as a legal "person" is called a:
corporation.
A business owned by a solitary individual who has unlimited liability for its debt is called a:
corporation.
Which one of the following is an unintended result of the Sarbanes-Oxley Act?
corporations delisting from major exchanges
Which one of the following is a capital budgeting decision?
deciding whether or not to purchase a new machine for the production line
Corporate bylaws:
determine how a corporation regulates itself
Which one of the following is a capital structure decision?
determining how much debt should be assumed to fund a project
Which one of the following is a working capital management decision?
determining whether to pay cash for a purchase or use the credit offered by the supplier
A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:
general partnership.
A limited partnership:
has a greater ability to raise capital than a sole proprietorships.
Which one of the following is an agency cost?
hiring outside accountants to audit the company's financial statements
Which one of the following functions should be the responsibility of the controller rather than the treasurer?
income tax returns
Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?
increase in the market value per share
Which one of the following actions by a financial manager is most apt to create an agency problem?
increasing current profits when doing so lowers the value of the firm's equity
Which one of the following is least likely to be an agency problem?
increasing the market value of the firm's shares
A general partner:
is personally responsible for all the partnership debts
Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Which form of business entity should they consider to replace their general partnership assuming they wish to remain the only two owners of their business? Whichever organization they select, they wish to be treated equally.
limited liability company
A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:
limited partner.
Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?
limited partnership
The Sarbanes-Oxley Act of 2002 is a governmental response to:
management greed and abuses.
Decisions made by financial managers should primarily focus on increasing which one of the following?
market value per share of outstanding stock
Which one of the following best states the primary goal of financial management?
maximize the current value per share
Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?
maximum loss limited to the capital invested
Which one of the following grants an individual the right to vote on behalf of a shareholder?
proxy
Which one of the following is a means by which shareholders can replace company management?
proxy fight
Which one of the following is a primary market transaction?
sale of a new share of stock to an individual investor
Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is listed on the NYSE. This trade occurred in which one of the following?
secondary, auction market
Which one of the following parties has ultimate control of a corporation?
shareholders
Which one of the following characteristics applies to a limited liability company?
taxed similar to a C corporation
The controller of a corporation generally reports directly to the
vice president of finance
Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:
was facilitated in the secondary market.
Which one of the following is defined as a firm's short-term assets and its short-term liabilities?
working capital
