Deck 1: Foundations

Question 1

A collection of securities is called a:

A)basket.
B)conglomerate.
C)portfolio.
D)Any of the above

Answer 1

C

Question 2

A person buying a ____ is called an investor.

A)bond
B)stock
C)mutual fund
D)All of the above

Answer 2

D

Question 3

A financial market is:

A)a place where investors can buy and sell securities.
B)the stock market.
C)regulated by well-defined rules and regulations.
D)All of the above

Answer 3

D

Question 4

Which of the following is not a financial market?

A)Bond market
B)A market in which small business owners buy and sell their companies
C)Stock market
D)All of these are financial markets

Question 5

Companies finance the purchase of assets through:

A)debt financing, the sale of bonds.
B)equity financing, the sale of stock.
C)lease financing.
D)Only a. and b. above
E)All of the above

Question 6

A ____ pools the contributions of many investors and employs a professional manager to select securities that match a particular set of investment goals.

A)mutual fund
B)stock
C)bond
D)real asset

Question 7

The ____ is the largest stock exchange in the world.

A)American Stock Exchange
B)Chicago Stock Exchange
C)New York Stock Exchange
D)Tokyo Stock Exchange

Question 8

Financial assets like stocks and bonds have value because:

A)they represent ownership of companies.
B)people are proud to own them.
C)they provide tangible benefits as do real assets.
D)they give their owners command over future cash flows.

Question 9

The prices that investors pay for securities are determined by:

A)The collateral of the firm's liabilities and the profitability of the firm.
B)The profits of the firm and the stability of those profits.
C)What financial advisors think of the company.
D)The cash flows investors expect to receive from owning them.

Question 10

Financial assets:

A)include cars, houses, and factory equipment.
B)provide some kind of service.
C)have value because of claims to future cash flows.
D)are not legal documents.

Question 11

A loan backed by an asset the lender can sell to pay off the loan if the borrower defaults is called _____.

A)amortized
B)collateralized
C)guaranteed
D)riskless

Question 12

Financial assets:

A)are legal documents.
B)give their owners claims to past cash flows.
C)include stocks and bonds.
D)Both a & c
E)All of the above

Question 13

The principal legal difference between a stockholder and a bondholder is:

A)the stockholder receives interest and the bondholder receives dividends.
B)only the bondholder can attend annual meetings.
C)the bondholder has an ownership interest and the shareholder is a lender.
D)the shareholder has an ownership interest and the bondholder is a lender.

Question 14

Which of the following is not a real asset?

A)Equipment
B)Land
C)Stock
D)None of the above

Question 15

A ____ is licensed to trade securities on behalf of investors.

A)stockbroker
B)securities analyst
C)market maker
D)corporation

Question 16

Which of the following is not one of the three major areas of finance?

A)Accounting
B)Investments and financial markets
C)Financial management of companies
D)The banking system

Question 17

A company can raise money to purchase assets by:

A)borrowing money.
B)issuing stock.
C)using money earned.
D)Both a & b
E)All of the above

Question 18

Financial assets can be distinguished from real assets in that financial assets:

A)are pieces of paper rather than tangible, physical objects.
B)are not intended to provide services like transportation or shelter.
C)have value because they provide their owners with claims to future cash flows.
D)All of the above

Question 19

Which of the following represents a real asset?

A)Land
B)Bonds
C)Stocks
D)Both a & c
E)All of the above

Question 20

Which of the following is true of financial assets?

A)Companies issue financial assets to earn revenue.
B)Investors purchase financial assets to earn a return.
C)The ownership of financial assets cannot be transferred.
D)Investors purchase financial assets because they are virtually risk free.

Question 21

The finance function and the accounting function look at the sale of product to a customer on credit in different ways. Which of the following best describes that difference?

A)Accounting views the sale as a completed transaction to be recorded as revenue while finance views it as incomplete until the cash is received.
B)Finance views the sale as a completed transaction to be recorded as revenue while accounting views it as incomplete until the cash is received.
C)Accounting is more interested in the cash inflows and outflows than finance.
D)Finance is more interested in reporting the appropriate transactions in the proper time period than accounting.

Question 22

If a company buys a machine for $10,000 cash and plans to depreciate it at $1,000 per year for 10 years, the two most important aspects of this transaction to the finance manager (as opposed to the accountant)are:

A)the purchase of the machine and the tax savings from the depreciation expense.
B)recording the purchase of the machine and its depreciation expense.
C)calculating depreciation expense and its compliance with the tax code.
D)the impact on factory capacity due to the equipment purchase.

Question 23

Which of the following is an example of financing?

A)An investor purchases stocks and bonds
B)A company issues stock to raise money to purchase assets
C)An investors buys shares in a mutual fund to earn a return
D)An investor sells stocks and bonds

Question 24

All of the following are characteristics of C Corporations except:

A)unlimited life.
B)limited liability for the stockholders.
C)avoidance of double taxation.
D)ease of raising additional capital for expansion.

Question 25

Accounting is:

A)focused on cash flow.
B)the language of finance.
C)an outgrowth of economics.
D)Both a & b

Question 26

The primary advantage of the proprietor form of business over the corporate form is :

A)ease of raising capital (money.)
B)avoidance of double taxation.
C)unlimited life.
D)limited liability.

Question 27

All of the following are characteristics of proprietorships except:

A)ease of formation.
B)income treated as part of the sole proprietor's income for tax purposes.
C)ease of raising additional money for expansion.
D)unlimited life.

Question 28

Raising money and handling financial relationships with outsiders is a function of the:

A)controller.
B)treasury department.
C)accounting department.
D)All of the above

Question 29

Financial theory stems primarily from:

A)mathematics.
B)finance.
C)economics.
D)accounting.

Question 30

Stockholders own corporations. Which of the following is inconsistent with that role:

A)attend annual shareholder meetings as a forum for voicing discontent.
B)receive annual reports that detail the past, present, and future direction of the firm.
C)share in the firm's profits.
D)receive interest on the amount loaned to the company.

Question 31

A proprietor who operates his/her own business can incorporate and become the only shareholder. This action might be taken to provide the owner with the limited liability of the corporate form. Which of the following best describes the impact of incorporation in this situation on the limited liability issue?

A)The owner has achieved the full protection of limited liability.
B)The owner can protect his/her personal assets unless fraud is involved in the conduct of the business.
C)The owner has achieved the full protection of limited liability except for default on borrowed funds.
D)The owner has in reality achieved very little in the way of limited liability protection.

Question 32

Historically, the field of finance was limited to:

A)accounting.
B)raising money.
C)activities of investors.
D)financial management.

Question 33

The price that investors are willing to pay for a firm's securities can best be described by which of the following statements?

A)If a company is performing poorly, investors will not buy that company's securities.
B)If a company is performing well, investors will buy the company's stock at almost any price because the price of the stock should increase.
C)Since the value of a company's securities depends largely on future cash flows, investors will consider the company's performance in estimating the future cash flows that will come from owning its securities.
D)Since risk is difficult to assess for any particular company, investors don't usually consider risk when deciding how much to pay for a company's securities.

Question 34

Finance has its theoretical roots in ____, but requires a practical understanding of ____.

A)accounting, economics
B)accounting, the stock market
C)mathematics, accounting
D)economics, accounting

Question 35

The functions of the finance department include all of the following activities except:

A)paying employees and vendors.
B)selling products to customers.
C)receiving payments from customers.
D)selling stock.
E)paying dividends.

Question 36

Which of the following apply to an S-type corporation?

A)Double taxation of earnings
B)Taxation similar to a partnership
C)Can be owned by another corporation
D)None of the above

Question 37

Responsibilities of the finance department include, but are not limited to:

A)managing the company's money.
B)providing financial input to general business decisions.
C)looking over everyone else's shoulder to make sure they're using money effectively.
D)All of the above

Question 38

The principal financial advantage of the corporate form of organization is:

A)ease of transferability of ownership.
B)accumulation of earnings for retention in the business.
C)limited liability.
D)ease of raising money through selling stock.

Question 39

Assume that pre-tax profit of $50,000 has been earned by a business, and the owner/proprietor wants to withdraw all of the after-tax profit for personal use. Assume the tax rate for a C corporation is 34%, while the rate for a person is 27%. The after-tax earnings available under the corporate and proprietorship forms are:

A)for a corporation, $33,000; for a proprietorship, $36,500.
B)for a corporation, $23,760; for a proprietorship, $36,500.
C)for either a corporation or a proprietorship, $36,500.
D)for either a corporation or a proprietorship, $23,760.

Question 40

The executive in charge of the finance department is the company's:

A)CEO.
B)COO.
C)CFO.
D)CIO.

Question 41

What does it mean for a new business loan to be collateralized?

A)Should the business fail, the loan is simply not repaid.
B)The lender may sell a specific asset to recover the loan.
C)The borrower does not pay interest on the loan.
D)The borrower only pays interest when the entire loan is due.

Question 42

The primary financial goal of a corporation is to maximize:

A)shareholders wealth.
B)earnings per share.
C)stock price.
D)Both a & c
E)All of the above

Question 43

The following is true of financial assets:

A)companies issue financial assets in order to raise capital (money).
B)investors purchase financial assets in order to earn a return on funds they don't    currently need.
C)they differ from real assets in that they are pieces of paper as opposed to physical objects.
D)All of these are true.

Question 44

The term "buying a bond" is misleading because:

A)bonds are not available to the general public.
B)a bond can only be bought with assets other than money.
C)bonds represent a debt relationship so a bond buyer is actually lending money.
D)bonds are not owned, only held in trust for a buyer's beneficiaries.

Question 45

Which of the following is a stakeholder of a corporation?

A)The stock exchange where the corporation is listed
B)The currency exchange for foreign corporations
C)Competitors of the corporation
D)Suppliers of the corporation

Question 46

The agency problem exists primarily in companies of which:

A)ownership is widely dispersed.
B)common stock is closely held.
C)management has stock ownership.
D)Both a & c

Question 47

____ is a growing practice in which people concern themselves with the activities of the issuing business.

A)Agency control
B)Morality analysis
C)Socially responsible investing
D)Wealth maximization

Question 48

Which statement is true?

A)The finance department has an oversight responsibility for the effective management of the money other departments spend.
B)The Vice President of Finance is usually a position very different from that of a CFO.
C)The finance department will oversee the selling of stock, but not the paying of dividends.
D)Individual departments determine the feasibility of projects, while the finance department is only concerned with the funding of the project.

Question 49

____ generally involves the use of power by one group to gain a benefit at the expense of others.

A)Unethical behavior
B)Shareholder wealth maximization
C)Limited liability
D)A personal guarantee

Question 50

What is double taxation?

A)It is when two separate tax authorities tax the same corporation.
B)It is a situation that only affects sole proprietorships.
C)It occurs when the business owner pays himself or herself a salary.
D)It occurs when earnings are taxed once at the corporate level and then taxed a second time as personal income.

Question 51

Which entity is most directly responsible for the accounting within the firm?

A)Treasurer
B)Controller
C)CFO
D)CEO

Question 52

Which is not a legitimate form of business organization?

A)Partnership
B)C-type corporation
C)T-type corporation
D)LLC

Question 53

Companies generally create liabilities that exceed assets by:

A)borrowing money they cannot repay.
B)issuing additional stock.
C)losing a lawsuit.
D)a and c

Question 54

The maximization of shareholders wealth is measured by increases in:

A)profits.
B)earnings.
C)stock price.
D)sales.

Question 55

Large corporations tend to be:

A)partnerships.
B)T-type corporations.
C)C-type corporations.
D)sole proprietorships.

Question 56

Which of the following is (are)effective in controlling the agency problem?

A)Tie a large part of managements' compensation to company profit
B)Offer numerous perquisites
C)Employ auditors to periodically review company books
D)Both a and c

Question 57

Which is not a financial asset?

A)Stock
B)Bond
C)Shares in a mutual fund
D)Savings account

Question 58

Lenders protect themselves from conflicts of interest with shareholders through:

A)cooperative agreements signed by shareholders and lenders.
B)limiting the amount of funds bondholders lend.
C)loan agreements that prohibit companies from undertaking excessive risk.
D)offering lenders a share of profits.

Question 59

Suppose pre-tax earnings are $100,000.00 and the corporate tax rate is 42%. How much additional money can a business owner receive by declaring the earnings as personal income which is taxed at a rate of 31%?

A)$11,000.00
B)$42,000.00
C)$31,000.00
D)$3,200.00

Question 60

If a company uses a bond issue to raise capital, the financing is an example of:

A)equity financing.
B)debt financing.
C)lease financing.
D)debt and equity financing.

Question 61

The CFO is the person primarily responsible for judging the financial viability of projects proposed by other executives.

Question 62

Responsibilities of the chief financial officer are similar to the responsibilities of the corporate controller when associated with the financial decision making process.

Question 63

The Treasurer is usually the executive in charge of the finance department in a large corporation.

Question 64

Another name for a financial asset like a stock or a bond is a security.

Question 65

Investing in stock represents partial ownership of a corporation and gives the investor the potential for future cash flows from earnings distribution and stock price appreciation if the business prospers.

Question 66

The stock market is really the entire network of investors, brokers, and exchanges all connected together.

Question 67

The essence of finance is the process of raising capital (money), exclusively through the sale of bonds.

Question 68

Security analysis may be conducted by:

A)only investors themselves.
B)only professional analysts.
C)investors and professional analysts.
D)None of these are correct.

Question 69

C-corporations issue real assets, such as debt, in order to raise money.

Question 70

Firms typically invest in real assets such as plant and equipment because of the services they provide.

Question 71

Limited liability may not be an advantage of the corporate form for owner-operated small businesses because:

A)a negligent worker can escape liability for his own acts.
B)lenders usually demand personal guarantees from the owners of small businesses.
C)stockholders participate in the business itself.
D)All of these are correct.

Question 72

A portfolio is a collection of securities.

Question 73

The following position(s)and/or department(s)is/are in the finance department under the CFO:

A)Treasurer
B)Controller
C)Accounting department
D)All of these are correct.

Question 74

In firms of moderate size or larger, the finance department is typically relieved of the "watchdog" responsibility of monitoring the efficient use of money by other departments.

Question 75

Because it historically provides a positive return, common stock is typically classified as a real asset.

Question 76

To "finance" an asset is:

A)to lend money to buyers so they can improve their portfolios.
B)to sell the asset for more than market value.
C)to raise money in order to acquire the asset.
D)All of these are correct.

Question 77

Financial assets are valuable because they give owners rights to future cash flows.

Question 78

A stockbroker is licensed to trade securities on behalf of investors.

Question 79

Assets pledged to guarantee a loan are:

A)factored.
B)collateral.
C)hypothecated.
D)assumed.

Question 80

Investments in financial assets can be made directly by buying shares in a mutual fund.