Deck 1: Goals and Governance of the Firm

Question 1

Finance, generally, deals with:
I. Money; II) Markets;
III. People

A) I only
B) I and II only
C) I and III only
D) I, II and III

Answer 1

I, II and III

Question 2

The following are examples of the United States-based corporations except:
I. Boeing; II) Microsoft;
III. Bank of America;
IV. Sony

A) I only
B) I and II only
C) I, II, and III only
D) IV only

Answer 2

IV only

Question 3

As a legal entity a corporation can perform the following functions except:
I. borrow money; II) lend money;
III. sue and be sued;
IV. vote

A) I and II only
B) I, II, and III only
C) IV only
D) I, II, III and IV

Answer 3

IV only

Question 4

Conflicts of interest between shareholders and managers of a firm result in:

A) Principal-agent problem
B) Increased agency costs
C) Both A and B
D) Managers owning the firm

Question 5

The treasurer usually oversees the following functions of a corporation except:
I. Preparation of financial statements; II) Investor relationships;
III. Cash management;
IV.
Raising new capital

A) I only
B) I and II only
C) II, III and IV only
D) III only

Question 6

The following are examples of financial assets except:

A) Common stock
B) Bank loan
C) Preferred stock
D) Buildings

Question 7

Corporations, potentially, have infinite life because:

A) it is a legal entity
B) of separation of ownership and management
C) it has limited liability
D) none of the above

Question 8

The controller usually oversees the following functions of a corporation:
I. Preparation of financial statements; II) Internal accounting;
III. Cash management and
IV. Taxes

A) I, II and IV only
B) III only
C) I and II only
D) II and III

Question 9

Shareholders of a corporation may be, among others:
I. Individuals; II) Pension Funds;
III. Insurance Companies

A) I only
B) I and II only
C) II only
D) I, II and III

Question 10

A firm's investment decision is also called the:

A) Financing decision
B) Liquidity decision
C) Capital budgeting decision
D) None of the above

Question 11

This book is mainly about:

A) financial decisions made by households
B) financial decisions made by corporations
C) financial decisions made by governments
D) none of the above

Question 12

In the principal-agent framework:

A) Shareholders are the principals
B) Managers are the principals
C) Managers are the agents
D) A and D

Question 13

The following are important functions of financial markets:
I. Source of financing; II) Provide liquidity;
III. Reduce risk;
IV. Source of information

A) I only
B) I and II only
C) I, II, III, and IV
D) IV only

Question 14

The following are examples of tangible assets except:

A) Machinery
B) Factories
C) Trademarks
D) Offices

Question 15

The following are examples of intangible assets except:

A) Building
B) Trademarks
C) Patents
D) Technical expertise

Question 16

The treasurer is usually responsible the following functions of a corporation:
I. Tax obligations; II) Investor relationships;
III. Cash management;
IV. raising new capital

A) I only
B) I and II only
C) II, III and IV only
D) I, II, III and IV

Question 17

The Chief Financial Officer (CFO) of a corporation oversees:

A) Treasurer's functions
B) Controller's functions
C) Both A and B
D) None of the above

Question 18

Limited liability is an important feature of:

A) Sole proprietorships
B) Partnerships
C) Corporations
D) All of the above

Question 19

Generally, a corporation is owned by the:
I. Managers; II) Board of Directors;
III. Shareholders

A) I only
B) II and III
C) III only
D) I, II and III

Question 20

The following are examples of foreign-based corporations except:
I. British Petroleum; II) General Electric;
III. Sony;
IV. Volkswagen

A) I only
B) II only
C) II and III only
D) I, II, & IV only

Question 21

Agency costs are incurred by a corporation because:

A) managers may not attempt to maximize the value of the firm to shareholders
B) shareholders incur monitoring cost
C) separation of ownership and management
D) all of the above

Question 22

The financial goal of a corporation is to:

A) Minimize stockholder wealth
B) Maximize profit
C) Maximize value of the corporation to the stockholders
D) Decrease job security

Question 23

Costs associated with the conflicts of interest between the bondholders and the shareholders of a corporation are called:

A) Legal costs
B) Bankruptcy costs
C) Administrative costs
D) Agency costs

Question 24

Which of the following is not a common function of the firm's chief financial officer?

A) Hiring CEO
B) Hiring controller
C) Investing capital
D) Paying dividends

Question 25

A major advantage of the Sarbanes-Oxley Act of 2002 (SOX) is:

A) good investor protection
B) increase in compliance costs
C) that it constrains managers' ability to run the firm
D) that it may discourage development of human capital in the firm

Question 26

The following are some of the actions shareholders can take if the corporation is not performing well:

A) Replace the board of directors in an election.
B) Force the board of directors to change the management team.
C) Sell their shares of stock in the corporation.
D) Any of the above

Question 27

The mixture of debt and equity, used to finance a corporation is also known as:

A) Capital budgeting
B) Capital structure
C) Investing
D) Treasury

Question 28

The following are examples of tangible assets except:
I. Machinery; II) Office buildings;
III. Warehouse;
IV. Training for employees

A) I only
B) I and II only
C) IV only
D) I, II, and III only

Question 29

Managers' actions are monitored by:

A) The board of directors
B) Commercial banks that have loaned funds to the firm
C) The Wall Street analysts
D) All of the above

Question 30

The following are examples of real assets:
I. Machinery; II) Office buildings;
III. Warehouse;
IV. Common stock

A) I, II, and III only
B) I and II only
C) IV only
D) I only

Question 31

Of the following list, which is a stakeholder?
I. Employee; II) Customer;
III. Community;
IV. Supplier

A) I, II and IV only
B) III only
C) I and II only
D) All

Question 32

The sale of financial assets is also referred to as the:

A) Capital decision
B) CFO decision
C) Financing decision
D) Investment decision

Question 33

The idea of "maximizing shareholder value" is widely accepted in:
I. U.S.A.; II) U.K;
III. Germany;
IV. France; V) Japan

A) I only
B) I and II only
C) III, IV and V only
D) I, II, III, IV and V

Question 34

The purchase of real assets is also referred to as the:

A) Capital decision
B) CFO decision
C) Financing decision
D) Investment decision

Question 35

The Sarbanes-Oxley Act of 2002 (SOX) was passed largely in response to:

A) the corporate accounting scandals of the previous years
B) the increase in the budget deficits
C) the increase in the trade deficits
D) none of the above

Question 36

Major disadvantages of the Sarbanes-Oxley Act of 2002 (SOX) are the following except:

A) good investor protection
B) increase in compliance costs
C) that it constrains managers' ability to run the firm
D) that it may discourage development of human capital in the firm

Question 37

The financial goal of a corporation is to:

A) Maximize profits
B) Maximize sales
C) Maximize the value of the firm for the shareholders
D) Maximize managers' benefits

Question 38

The following groups are some of the claimants to a firm's income stream:
I. Shareholders; II) Bondholders;
III. Employees;
IV. Management and V) Government

A) I and II only
B) I, II, and III only
C) I, II, III and IV only
D) I, II, III, IV and V

Question 39

The idea that "firms should be run for stakeholders welfare " is accepted in:
I. U.S.A.; II) U.K;
III. Germany;
IV. France; V) Japan

A) I only
B) I and II only
C) III, IV and V only
D) I, II, III, IV and V

Question 40

The board of directors is ultimately responsible for all large investment decisions.

Question 41

Briefly explain the sequence flow of cash between financial markets and the firm.

Question 42

Briefly explain the term limited liability.

Question 43

Briefly explain the functions of financial markets.

Question 44

A firm's overall value belongs entirely to the shareholders.

Question 45

What items of good corporate governance serve to mitigate the tension between owners and managers?

Question 46

Managers, Shareholders, and lenders of firm have identical information about the value of the firm.

Question 47

Explain the term "corporation."

Question 48

Explain why "maximization of shareholders' wealth" is the appropriate goal of the firm.

Question 49

Briefly explain some of the institutional arrangements that ensure that managers work toward increasing the value of a firm.

Question 50

Real assets of a corporation are claims on their financial assets.

Question 51

A corporation has a legal existence of its own and is based on "articles of incorporation."

Question 52

The treasurer's responsibilities include preparation of financial statements.

Question 53

In large firms, there is usually a Chief Financial Officer (CFO) who oversees both the treasurer and controller's work.

Question 54

Briefly discuss the role of the financial managers.

Question 55

Briefly discuss principal - agent problems as related to a corporation

Question 56

Since the investment and financing decisions are analyzed separately, the financial manager can completely ignore investors and financial markets when analyzing capital investment projects.

Question 57

The controller's responsibilities include banking relations and cash management.

Question 58

Briefly explain the advantages of a corporation as a form of business organization.

Question 59

What function does the Securities and Exchange Commission play in protecting investors?

Question 60

Briefly explain the term "Agency costs" as related to a corporation.

Question 61

Mr. Smith has an income of $40,000 this year and $60,000 next year. He can invest in a project that costs $30,000 this year, which generates an income of $36,000 next year. The market interest rate is 10%. What will be his consumption next year, if Mr. Smith invests in the project and consumes $50,000 this year?

A) $40,000
B) $52,000
C) $60,000
D) None of the above

Question 62

Briefly explain how individuals can adjust their preferences for current and future consumption.

Question 63

Briefly explain the major provisions of the Sarbanes-Oxley Act of 2002 (SOX).

Question 64

Mr. Thomas has $100 income this year and zero income next year. The market interest rate is 10% per year. Mr. Thomas also has an investment opportunity in which he can invest
$50 this year and receive $80 next year. Suppose Mr. Thomas consumes $50 this year and invests in the project. What will be his consumption next year?

A) $55
B) $80
C) $50
D) None of the above

Question 65

Briefly explain different views taken in different countries about the corporation's goals.

Question 66

Mr. Dell has $100 income this year and zero income next year. The market interest rate is
10% per year. Mr. Dell also has an investment opportunity in which he can invest $50 this year and receive $80 next year. Suppose Mr. Dell consumes $50 this year and invests in the project. What is the NPV of the investment opportunity?

A) $5
B) $22.73
C) $0 (zero)
D) None of the above.

Question 67

Mr. Free has $100 dollars income this year and zero income next year. The market interest rate is 10% per year. If Mr. Free consumes $30 this year, and invests the rest in the market, what will be his consumption next year?

A) $50
B) $100
C) $77
D) $55

Question 68

The line that connects the maximum that one can consume this year (now) and the maximum one can consume next year:

A) Has a slope of (1 + r)
B) Has a slope of -(1 + r)
C) Has a slope of r
D) Has a slope of 1/r

Question 69

Ms. Venus has $100 income this year and $110 next year. The market interest rate is 10% per year. Suppose Ms. Venus consumes $60 this year. What will be her consumption next year?

A) $154
B) $170
C) $120
D) None of the above

Question 70

Ms. Newcastle has $60,000 income this year and $40,000 next year. The market interest rate is 10% per year. Suppose Ms. Newcastle wishes to consume $62,000 next year. What will be her consumption this year?

A) $60,000
B) $40,000
C) $70,000
D) $19,000

Question 71

Briefly explain the advantages and disadvantages of Sarbanes-Oxley Act of 2002 (SOX).

Question 72

Mr. Bird has $100 income this year and zero income next year. The market interest rate is
10% per year. Mr. Bird also has an investment opportunity in which he can invest $50 today and receive $80 next year. Suppose Mr. Bird consumes $30 this year and invests in the project. What will be his consumption next year?

A) $88
B) $102
C) $80
D) $100

Question 73

What are the main purposes of the Sarbanes-Oxley Act of 2002 (SOX).

Question 74

Briefly explain the reasons for enacting the Sarbanes-Oxley Act of 2002.

Question 75

Ms. Anderson has $60,000 income this year and $40,000 next year. The market interest rate is 10% per year. Suppose Ms. Anderson consumes $80,000 this year. What will be her consumption next year?

A) $60,000
B) $30,000
C) $70,000
D) $18,000