Deck 1: Goals and Governance of the Corporation

Question 1

BP's committing of$500 million to partnership with University of California-Berkeley to develop new sources of energy is a capital budgeting decision.

Answer 1

True

Question 2

Financial assets have value because they are claims on the firm's real assets and the cash that those assets will produce.

Answer 2

True

Question 3

The separation of ownership and management is one distinctive feature of both corporations and sole proprietors.

Answer 3

False

Question 4

The primary goal of any company should be to maximize current period profits.

Question 5

A major disadvantage of partnerships is that they have double taxation of profits.

Question 6

Financial analysts are involved in monitoring and controlling the risk associated with investment projects and financing decisions.

Question 7

A successful investment is one that increases the value of the firm.

Question 8

If a project's value is less than its required investment,then the project is attractive financially.

Question 9

While control of large public companies in the United States is exercised through the board of directors and pressure from the stock market,in many other countries the stock market is less important and control shifts to major stockholders,typically banks and other companies.

Question 10

Real assets can be intangible assets.

Question 11

General partners have limited personal liability for business debts in a limited partnership.

Question 12

Boards of directors are often portrayed as active supporters of top management.

Question 13

The separation of ownership and management is one distinctive feature of corporations.

Question 14

Making good investment and financing decisions is the chieftask of the financial manager.

Question 15

An IOU ("I owe you")from your brother-in-law is a financial asset.

Question 16

The liability of sole proprietors is limited to the amount of their investment in the company.

Question 17

Maximizing profits is the same as maximizing the value of the firm.

Question 18

Pfizer's spending of $7.6 billion in 2006 on research and development of new drugs is a capital budgeting decision but not a financing decision.

Question 19

Capital budgeting decisions are used to determine how to raise the cash necessary for investments.

Question 20

LVMH's issuance ofa 7-year bond in 2005,raising 600 million euros,is a financing decision.

Question 21

The term "capital structure" refers to:

A) the manner in which a firm obtains its long-term sources of funding.
B) the length of time needed to repay debt.
C) whether the firm invests in capital budgeting projects.
D) which specific assets the firm should invest in.

Question 22

The short-term decisions of financial managers are comprised of:

A) capital structure decisions.
B) investment decisions.
C) financing decisions.
D) both investment and financing decisions.

Question 23

Corporations that do not issue financial securities such as stock or debt obligations:

A) will not be able to increase sales.
B) cannot be profitable.
C) may not be able to generate sufficient funds to fulfill their needs.
D) do not face double taxation of their profits.

Question 24

The overall goal of capital budgeting projects should be to:

A) decrease the firm's reliance on debt.
B) increase the firm's sales.
C) increase the firm's outstanding shares of stock.
D) increase the wealth of the firm's shareholders.

Question 25

Insider trading is the purchase or sale of shares based on information that is not available to public investors,and such behavior is accepted by the Securities Exchange Commission.

Question 26

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(n):

A) financing decision.
B) investment decision.
C) capital budgeting decision.
D) capital market decision.

Question 27

Which of the following is not a financing decision?

A) Should the firm borrow money from a bank or sell bonds?
B) Should the firm shut down an unprofitable factory?
C) Should the firm buy or lease a new machine that it is committed to acquiring?
D) Should the firm issue preferred stock or common stock?

Question 28

An example of a firm's financing decision would be:

A) acquiring a competitive firm.
B) determining how much to pay for a specific asset.
C) issuing 10-year versus 20-year bonds.
D) deciding whether or not to increase the price of its products.

Question 29

Which of the following would not be considered a real asset?

A) A corporate bond
B) A machine
C) A patent
D) A factory

Question 30

A financial manager facing a capital budgeting decision must decide whether to:

A) issue stock or debt securities.
B) use the money market or capital market.
C) use primary markets or secondary markets.
D) buy new machinery or repair the old.

Question 31

Ethical decision making in business can be viewed as a long-term investment in reputation.

Question 32

When a corporation decides to issue long-term debt in order to pay for the acquisition of real assets,it has made a:

A) capital budgeting decision.
B) financing decision.
C) money market decision.
D) secondary market decision.

Question 33

Firms can alter their capital structure by:

A) not accepting any capital budgeting projects.
B) investing in intangible assets.
C) issuing stock to repay debt.
D) becoming a limited liability company.

Question 34

Shareholders welcome higher short-term profits even when they damage long-term profits.

Question 35

Which of the following would be considered a capital budgeting decision?

A) Planning to issue common stock rather than issuing preferred stock
B) Deciding to expand into a new line of products, at a cost of $5 million
C) Repurchasing shares of common stock
D) Issuing debt in the form of long-term bonds

Question 36

Investors usually give some companies with good track records the benefit of the doubt when the companies' performance fails to meet the market expectation.

Question 37

The best criterion for success in a capital budgeting decision would be to:

A) minimize the cost of the investment.
B) maximize the number of capital budgeting projects.
C) maximize the difference between cash inflows and cost.
D) finance all capital budgeting projects with debt.

Question 38

Major banks and securities firms protect their reputations by emphasizing their long history and their responsible behavior when seeking new customers.

Question 39

Long-term financing arrangements occur in the:

A) money markets.
B) capital markets.
C) secondary markets.
D) tertiary markets.

Question 40

Which of the following represents a financing decision?

A) A decision to borrow $10 million through a bank loan
B) A decision to invest in the common stock of another corporation
C) A decision to buy a new mainframe computer
D) A decision to pay $1 million of accounts payable

Question 41

In a partnership form of organization,income tax liability,if any,is incurred by:

A) the partnership itself.
B) the partners individually.
C) both the partnership and the partners.
D) neither the partnership nor the partners.

Question 42

"Double taxation" refers to:

A) all partners paying equal taxes on profits.
B) corporations paying taxes on both dividends and retained earnings.
C) paying taxes on profits at the corporate level and dividends at the personal level.
D) the fact that marginal tax rates are doubled for corporations.

Question 43

When a corporation fails,the maximum that can be lost by an investor protected by limited liability is:

A) the amount of the initial investment.
B) the amount of the profit on the investment.
C) the amount necessary to pay the corporation's debts.
D) the amount of the investor's personal wealth.

Question 44

Which of the following would correctly differentiate general partners from limited partners in a limited partnership?

A) General partners have more job experience.
B) General partners have an ownership interest.
C) General partners are subject to double taxation.
D) General partners have unlimited personal liability.

Question 45

Which of the following statements is generally not true for an investor who faces unlimited liability on an investment?

A) The investor owns stock in the firm.
B) The investor has no partners.
C) The investor is subject to double taxation.
D) The investor is responsible for managing the firm.

Question 46

Which of the following is not an advantage to incorporating a business?

A) Easier access to financial markets
B) Limited liability
C) Becoming a permanent legal entity
D) Profits taxed at the corporate level and the shareholder level

Question 47

A corporation is considered to be closely held when:

A) only a few shareholders exist.
B) the market value of the shares is stable.
C) it operates in a small geographic area.
D) management also serves as the board of directors.

Question 48

When the management of a business is conducted by individuals other than the owners,the business is more likely to be a:

A) corporation.
B) sole proprietorship.
C) partnership.
D) general partner.

Question 49

Which of the following is least likely to be discussed in the articles of incorporation?

A) The maximum number of shares that can be issued
B) The purpose of the business
C) The price range of the shares of stock
D) The number of members of the board of directors

Question 50

In the case of a professional corporation,________ has/have limited liability.

A) only the professionals
B) only the business
C) both the professionals and the business
D) neither the professionals nor the business

Question 51

Which of the following are real assets?

A) A patent
B) A share of stock issued by Bank of New York
C) An IOU ("I owe you") from your brother-in-law
D) A mortgage loan taken out to help pay for a new home

Question 52

A board of directors is elected as a representative of the corporation's:

A) top management.
B) stakeholders.
C) shareholders.
D) customers.

Question 53

The legal "life" of a corporation is:

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

Question 54

One common reason for partnerships to convert to a corporate form of organization is that the partnership:

A) faces rapidly growing financing requirements.
B) wishes to avoid double taxation of profits.
C) has issued all of its allotted shares.
D) agreement expires after ten 10 years.

Question 55

Unlimited liability is faced by the owners of:

A) corporations.
B) partnerships and corporations.
C) sole proprietorships and partnerships.
D) all forms of business organization.

Question 56

Which of the following would be considered an advantage of the sole proprietorship form of organization?

A) Wide access to capital markets
B) Unlimited liability
C) A pool of expertise
D) Profits taxed at only one level

Question 57

Which of the following statements best distinguishes the difference between real and financial assets?

A) Real assets have less value than financial assets.
B) Real assets are tangible; financial assets are not.
C) Financial assets represent claims to income that is generated by real assets.
D) Financial assets appreciate in value; real assets depreciate in value.

Question 58

The stockholders in a sole proprietorship are represented by:

A) the owner of the firm.
B) the general partner of the firm.
C) the board of directors of the firm.
D) no one; sole proprietorships have no stockholders.

Question 59

Which of the following would not be considered a financial asset?

A) A patent
B) A personal IOU
C) A checking account balance
D) A share of stock

Question 60

Financial markets are used for trading:

A) both real assets and financial assets.
B) the goods and services produced by a firm.
C) securities, such as shares of IBM.
D) the raw materials used in manufacturing.

Question 61

A financial analyst in a corporation may be involved in:

A) proposing a new investment project.
B) collecting payments from customers.
C) managing investment of the company's cash.
D) purchasing the firm's plant and equipment.

Question 62

Corporations are referred to as public companies when their:

A) shareholders have no tax liability.
B) shares are held by the federal or state government.
C) stock is publicly traded.
D) products or services are available to the public.

Question 63

In a large corporation,budget preparation would most likely be conducted by the:

A) treasurer.
B) controller.
C) chief financial officer.
D) financial manager.

Question 64

Profit maximization is not a well-defined corporate objective because:

A) it leaves open the question of which year's profits.
B) higher profits does not necessarily mean a better rate of return.
C) profits can be changed by using different accounting rules.
D) all of these.

Question 65

Ethical decision making in business:

A) reduces the firm's profits.
B) requires adherence to implied rules as well as written rules.
C) is not in the best interests of shareholders.
D) is less important than good capital budgeting decisions.

Question 66

Which of the following appears to be the most appropriate goal for corporate management?

A) Maximizing market value of the company's shares
B) Maximizing the company's market share
C) Maximizing the current profits of the company
D) Minimizing the company's liabilities

Question 67

One corporate activity that is specifically reserved for the board of directors is the:

A) declaration of dividends.
B) custody of records.
C) preparation of budgets.
D) day-to-day operation of the firm.

Question 68

The first step in determining managerial objectives is to:

A) develop appropriate compensation policies.
B) eliminate agency problems.
C) serve the needs of the customer.
D) select an appropriate capital structure.

Question 69

Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm?

A) Treasurer
B) Controller
C) Chief Operating Officer
D) Board of directors

Question 70

Which of the following statements more accurately describes the controller than the treasurer?

A) Likely to be the only financial executive in small firms
B) Monitors capital expenditures to make sure that they are not misappropriated
C) Responsible for investing the firm's spare cash
D) Responsible for arranging any issue of common stock

Question 71

Ethical decision making by management has a payoff for shareholders in terms of:

A) improved capital structure.
B) enhanced reputation value.
C) increased managerial benefits.
D) higher dividend payments.

Question 72

Corporate managers are expected to make corporate decisions that are in the best interest of:

A) top corporate management.
B) the corporation's board of directors.
C) the corporation's shareholders.
D) all corporate employees.

Question 73

Investment banks like Merrill Lynch or Goldman Sachs:

A) collect deposits and relend the cash to corporations and individuals.
B) help companies sell their securities to investors.
C) design and sell insurance policies for businesses.
D) lend to corporations and investors in commercial real estate.

Question 74

A chief financial officer would typically:

A) report to the treasurer, but supervise the controller.
B) report to the controller, but supervise the treasurer.
C) report to both the treasurer and controller.
D) supervise both the treasurer and controller.

Question 75

A managerial objective to increase market share is more likely to be successful in the long run if the firm is:

A) selling shares in the secondary market.
B) the low-cost producer in the industry.
C) managed by the board of directors.
D) investing in capital budgeting projects.

Question 76

WorldCom's failure to report $3.8 billion of operating expenses is an example of:

A) an effort to conform to changed accounting rules.
B) an attempt to maximize the value of the shareholders' investment in the firm.
C) an effort to serve the needs of the customer.
D) an attempt to increase the company's market value in an unethical way.

Question 77

The primary goal of corporate management should be to:

A) maximize the number of shareholders.
B) maximize the firm's profits.
C) minimize the firm's costs.
D) maximize the shareholders' wealth.

Question 78

How may a reduction in cash dividends be in the best interests of current shareholders?

A) A reduction of cash dividends is always in the best interests of current shareholders.
B) The firm will have available cash to increase current investment and future profits.
C) Reduced dividends increase managerial compensation, thus increasing their motivation.
D) A reduction of cash dividends cannot be in the best interests of current shareholders.

Question 79

In a firm having both a treasurer and a controller,which of the following would most likely be handled by the controller?

A) Internal auditing
B) Credit management
C) Banking relationships
D) Insurance

Question 80

A common problem for closely held corporations is:

A) lack of access to substantial amounts of capital.
B) that shareholders receive only one vote each.
C) the separation of ownership and management.
D) an abundance of agency problems.