Deck 1: Goals and Governance of the Firm

Question 1

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

Answer 1

III only

Question 2

In the principal-agent framework:

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

Answer 2

A and D

Question 3

A firm's investment decision is also called the:

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

Answer 3

Capital budgeting decision

Question 4

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

Question 5

Limited liability is an important feature of:

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

Question 6

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 7

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 8

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 9

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 10

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

Question 11

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 12

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 13

The following are examples of financial assets except:

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

Question 14

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 15

The following are examples of intangible assets except:

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

Question 16

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

Question 17

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 18

The following are examples of tangible assets except:

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

Question 19

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 20

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 21

The following groups are some of the claimants to a firm's income stream:
I. Shareholders
II. Bondholders
III. Employees
IV. Management
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 22

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 23

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

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

Question 24

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 25

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 26

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 27

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

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

Question 28

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 29

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 30

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

Question 31

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

Question 32

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 33

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 34

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 35

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 36

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 37

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 38

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 39

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 40

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 41

The treasurer's responsibilities include preparation of financial statements.

Question 42

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

Question 43

Briefly explain the functions of financial markets.

Question 44

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

Question 45

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

Question 46

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

Question 47

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 48

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

Question 49

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 50

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 51

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

Question 52

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

Question 53

Briefly discuss principal - agent problems as related to a corporation

Question 54

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

Question 55

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

Question 56

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

Question 57

Briefly explain the term limited liability.

Question 58

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 59

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 60

Briefly discuss the role of the financial managers.

Question 61

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 62

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 63

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

Question 64

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

Question 65

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