FIN301 practice ch.1

corporation

A business created as a distinct legal entity composed of one or more individuals or entities is called a

general partnership

A business formed by two or more individuals who each have unlimited liability for business debts is called a

sole proprietorship

A business owned by a single individual is called a

the agency problem

A conflict of interest between the stockholders and management of a firm is called

terminates at the death of any general partner

A partnership

any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm

A stakeholder is

the costs of any conflicts of interest between stockholders and management

Agency costs refer to

I and II only

Capital structure decisions include consideration of the: I. amount of long-term debt to assume. II. cost of acquiring funds. III. current assets and liabilities. IV. net working capital.

the current stockholders are the owners of the corporation

Financial managers should strive to maximize the current value per share of the existing stock because

shareholder election of a board of directors who select management. the threat of a takeover by another firm. compensation contracts that tie compensation to corporate success.

Managers are encouraged to act in shareholders' interests by

they are easily and cheaply setup. the proprietorship life is limited to the business owner's life. all business taxes are paid as individual tax.

Sole proprietorships are predominantly started because

the capital structure decision

The decision of which lender to use and which type of long-term loan is best for a project is part of

market value of the existing owners' equity.

The decisions made by financial managers should all be ones which increase the

working capital management

The management of a firm's short-term assets and liabilities is called

capital structure

The mixture of debt and equity used by a firm to finance its operations is called

maximize the current value per share of the existing stock

The primary goal of financial management is to

capital budgeting

The process of planning and managing a firm's long-term investments is called

corporation

Which form of business structure faces the greatest agency problems?

I, III, 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, II, and IV only

Which of the following are disadvantages of a partnership? I. limited life of the firm II. personal liability for firm debt III. greater ability to raise capital than a sole proprietorship IV. lack of ability to transfer partnership interest

I, II and III only

Which of the following help convince managers to work in the best interest of the stockholders? I. compensation based on the value of the stock II. stock option plans III. threat of a proxy fight IV. threat of conversion to a partnership

agreeing to expand the company at the expense of stockholders' value

Which one of the following actions by a financial manager creates an agency problem?

corporation

Which one of the following business types is best suited to raising large amounts of capital?

deciding whether or not to open a new store

Which one of the following is a capital budgeting decision?

preferred stockholder

Which one of the following parties is considered a stakeholder of a firm?

The life of the firm is limited to the life span of the owner

Which one of the following statements concerning a sole proprietorship is correct?

The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts

Which one of the following statements concerning a sole proprietorship is correct?

The largest firms are usually corporations

Which one of the following statements is correct concerning corporations?

Both sole proprietorships and partnerships are taxed in a similar fashion

Which one of the following statements is correct?

corporation

Which type of business organization has all the respective rights and privileges of a legal person?

is concerned with the upper portion of the balance sheet

Working capital management

I, III, and IV only

Working capital management includes decisions concerning which of the following? I. accounts payable II. long-term debt III. accounts receivable IV. inventory