FINAN 5050 Chapter 1, Finan 5050 Chapter 2 (Midterm 1)

Financial markets and intermediaries: A)increase risks for businesses. B)channel savings to real investment. C)prevent the transportation of cash across time .D)generally reduce the liquidity of securities.

B)channel savings to real investment.

Which one of the following would be considered a capital budgeting decision? A)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 C)planning to issue common stock rather than issuing preferred stock D)repurchasing shares of common stock

B)deciding to expand into a new line of products, at a cost of $5 million

Which one of the following can best be characterized as an agency problem? A)differing opinions among directors as to the merits of paying a higher dividend. B)differing incentives between managers and owners. C)persistently late delivery times by a major supplier. D)geological problems in the company's new gold mine.

B)differing incentives between managers and owners.

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

B)increase their access to funds.

An individual can save and invest in a corporation by lending money to it or by purchasing additional shares. A)True B)False

A)True

The markets for long-term debt and equity are called capital markets. A)True B)False

A)True

The reinvestment of cash back into the firm's operations is an example of a flow of savings to investment. A)True B)False

A)True

A company can pay for its expansion in all the following ways except: A)by purchasing bonds in the secondary market. B)by using the earnings generated from its sale of obsolete equipment. C)by persuading a director's mother to make a personal loan to the company. D)by plowing back part of its profits.

A)by purchasing bonds in the secondary market.

Long-term financing decisions commonly occur in the: A)capital markets. B)secondary markets. C)option markets. D)money markets.

A)capital markets.

A bond differs from a share of stock in that a bond: A)has a maturity date. B)has more risk. C)has guaranteed returns. D)represents a claim on the firm.

A)has a maturity date.

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

A)maximize the shareholders' wealth.

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

A)maximize the value added to the firm.

Which one of the following is least liquid? A)real estate B)U.S. Treasury bonds C)bank deposit D)foreign currency

A)real estate

Corporate financing comes ultimately from: A)savings by households and foreign investors .B)cash generated from the firm's operations. C)the financial markets and intermediaries. D)the issue of shares in the firm.

A)savings by households and foreign investors

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

A)take actions that increase current shareholder wealth.

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 personal wealth. C)the amount of their share of the profits. D)their proportionate share required to pay the corporation's debts.

A)the amount of their initial investment.

The term "capital structure" refers to: A)the mix of long-term debt and equity financing. B)whether or not the firm invests in capital budgeting projects. C)the types of assets a firm acquires. D)the length of time needed to repay debt.

A)the mix of long-term debt and equity financing.

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

A)the partners individually.

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

D)a sole proprietorship

Only large companies can go through financial markets to obtain financing. A)True B)False

B)False

Previously issued securities are traded among investors in the primary markets. A)True B)False

B)False

The opportunity cost of capital is the expected rate of return that shareholders can obtain in the financial markets on investments with the same risk as the firm's capital investments. A)True B)False

B)False

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

B)a corporate bond

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

B)can be reduced.

The opportunity cost of capital: A)is always less than 10%. B)is the minimum acceptable rate of return on a project. C)is the interest rate that the firm pays on a loan from a financial institution. D)is the maximum acceptable rate of return on a project.

B)is the minimum acceptable rate of return on a project.

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

B)issuing 10-year versus 20-year bonds.

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

B)issuing stock to repay debt

Which of the following is a disadvantage to incorporating a business? A)becoming a permanent legal entity B)profits taxed at the corporate level and the shareholder level C)easier access to financial markets D)limited liability

B)profits taxed at the corporate level and the shareholder level

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

B)shareholders.

Reinvestment" means: A)new investment in new operations. B)the reinvestment of earnings into new projects. C)new investment by new shareholders. D)additional investment in existing operations.

B)the reinvestment of earnings into new projects.

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)a capital expenditure decision. B)an investment decision. C)a financing decision. D)a capital budgeting decision.

C)a financing decision.

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

C)a patent

Which of the following is not a function of financial markets? A)allow individuals to diversify their risk. B)provide convenient ways to make large payments. C)allow individuals to purchase a range of goods online. D)provide funds to companies that wish to expand.

C)allow individuals to purchase a range of goods online.

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

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

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

C)increase the wealth of the firm's shareholders

Short-term financing transactions commonly occur in the:A)secondary markets. B)capital markets C)money markets. D)primary markets.

C)money markets.

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

C)permanent, regardless of current ownership.

When corporations need to raise funds through stock issues, they rely on the: A)secondary market. B)tertiary market C)primary market. D)centralized NASDAQ exchange.

C)primary market.

A primary market would be utilized when: A)investors buy or sell existing securities B)a commission must be paid on the transaction. C)securities are initially issued. D)shares of common stock are exchanged.

C)securities are initially issued.

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

C)the corporation's shareholders.

he primary difference between common stock and preferred stock is: A)preferred stock can pay dividends while common stock cannot. B)common stock tends to underperform preferred stock in the stock market. C)preferred stock represents ownership in a corporation while common stock does not. D)common stock has voting rights while preferred stock does not.

D)common stock has voting rights while preferred stock does not.

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

D)corporation.

When Patricia sells her General Motors common stock at the same time that Brian purchases the same amountof GM stock in the secondary market, GM receives: A)the dollar value of the transaction. B)only the par value of the common stock .C)the dollar amount of the transaction, less brokerage fees. D)nothing.

D)nothing.

Which one of the following gives a corporation its permanence?A)multiple owners B)corporation taxation C)limited liability D)separation of ownership and control

D)separation of ownership and control

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

D)stock is publicly traded.

The primary distinction between securities sold in the primary and secondary markets is: A)the riskiness of the securities. B)the profitability of the issuing corporation. C)the price of the securities. D)whether the securities are new or already exist.

D)whether the securities are new or already exist.