Deck 1: The Goals and Activities of Financial Management

Question 1

There is unlimited liability in a general partnership.

Answer 1

True

Question 2

Profits of sole proprietorships are taxed at corporate tax rates.

Answer 2

False

Question 3

Real capital is composed of long-term plant and equipment.

Answer 3

True

Question 4

A limited partnership limits the profits partners may receive.

Question 5

Financial capital is composed of long-term plant and equipment, as well as other tangible investments.

Question 6

"Credit default swaps" are one of several tools that Congress and the President of the United States have jointly developed to ease the financial crisis that began in 2008.

Question 7

During the 1930s, financial practice revolved around such topics as the preservation of capital, maintenance of liquidity, the reorganization of financially troubled corporations, and bankruptcy.

Question 8

As finance emerged as a new field, much emphasis was placed on mergers and acquisitions.

Question 9

Businesses will increasingly rely on B2B Internet applications to speed up the cash flows through their firms.

Question 10

The Dodd-Frank Act's oversight allowing regulation of banking fees and available products has been considered as not being in the best interests of a free market.

Question 11

The first Nobel Prizes given to finance professors were for their contributions to capital structure theory and portfolio theories of risk and return.

Question 12

The Internet is responsible for many new business models.

Question 13

The Dodd-Frank Act contains the Volcker Rule, which encourages financial institutions to allow for more speculative investments for average investors.

Question 14

Inflation is assumed to be a temporary problem that does not affect financial decisions.

Question 15

In the mid 1950s, finance began to change to a more analytical, decision-oriented approach.

Question 16

The most common partnership arrangement carries limited liability to the partners.

Question 17

The Internet impacts e-commerce by creating a mechanism for improved communications between a business, its customers, and its suppliers.

Question 18

Sole proprietorship means single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs.

Question 19

Recently, the emphasis of financial management has been on the relationship between risk and return.

Question 20

The Internet has accounted for an acceleration of productivity for "old economy" firms.

Question 21

One advantage of the corporate form of organization is that income received by stockholders is not taxable since the corporation already paid taxes on the income distributed.

Question 22

Agency theory examines the relationship between companies and their customers.

Question 23

Dividends paid to corporate stockholders have already been taxed once as corporate income.

Question 24

Institutional investors have had increasing influence over corporations with their ability to vote with large blocks of stock and replace poorly performing boards of directors.

Question 25

The Sarbanes-Oxley Act is primarily intended to increase public scrutiny of private companies that had previously been exempt from many public disclosure requirements.

Question 26

As noted in Finance in Action, initial public offerings have now increased because long-term results are favored by shareholders and institutional investors.

Question 27

Timing is not a particularly important consideration in financial decisions.

Question 28

The formation of a Subchapter S corporation is a way to circumvent the double taxation of a small corporation.

Question 29

A corporation must have more than 75 stockholders to qualify for Subchapter S designation.

Question 30

The higher the profit of a firm, the higher the value the firm is assured of receiving in the market.

Question 31

Profits of a Subchapter S corporation are taxed at corporate tax rates.

Question 32

Agency theory assumes that corporate managers act to increase the wealth of corporate shareholders.

Question 33

Maximizing the earnings of the firm is the goal of financial management.

Question 34

The issues of corporate governance are really agency problems.

Question 35

The Sarbanes-Oxley Act reduced agency conflicts by giving corporate managers greater flexibility to select their preferred candidates to the board of directors.

Question 36

In terms of revenues and profits, the corporation is by far the most important form of business organization in the United States.

Question 37

Because socially desirable goals can impede profitability in many instances, managers should not try to operate under the assumption of wealth maximization.

Question 38

There are some serious problems with the financial goal of maximizing the earnings of the firm.

Question 39

A major focus of the Sarbanes-Oxley Act is to make sure that publicly traded companies accurately present their assets, liabilities, and income in their financial statements.

Question 40

Corporate governance issues have become less important to the financial community during the first decade of the new millennium.

Question 41

New issues are sold in the secondary market.

Question 42

High-quality initial public offerings are usually sold in a primary market, such as the New York Stock Exchange. However, low-quality stocks must usually be sold in secondary markets, such as NASDAQ.

Question 43

Financial management requires both short-term activities as well as long-term planning such as raising funds.

Question 44

Capital markets refer to those markets dealing with short-term securities that have a life of one year or less.

Question 45

Social responsibility and profit maximization are synonymous.

Question 46

Higher return always induces stockholders to invest in a company.

Question 47

If a company has a written code of ethics, they will generally avoid ethical problems.

Question 48

Risk management will be an important factor over the next decade.

Question 49

Social responsibility is an expense and thus should be avoided by financial managers because it will lead to loss of income.

Question 50

The secondary market characteristically has had stable prices over the past 20 years.

Question 51

One of the primary disadvantages of maximizing shareholder value is that it only provides a short-term perspective.

Question 52

Insider trading involves the use of information not available to the general public to make profits from trading in a company's stock.

Question 53

Money markets refer to markets where excess corporate cash is exchanged for foreign currencies that can earn a higher return than domestic money.

Question 54

In the United States, stocks sold on either the New York Stock Exchange or NASDAQ are considered sold in the primary market.

Question 55

Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide.

Question 56

Many companies have cross-listed their stock on multiple international stock exchanges and more than several hundred foreign companies have listed their shares on the New York Stock Exchange.

Question 57

Although NASDAQ is a secondary market, some of the firms traded there, such as Microsoft, are large enough to move to the primary market if they so desire.

Question 58

The primary market includes the sale of securities by way of initial public offerings.

Question 59

Existing securities are traded in the secondary market.

Question 60

Money markets refer to those markets dealing with short-term securities having a life of one year or less.

Question 61

Professors Harry Markowitz and William Sharpe received their Nobel Prize in Economics for their contributions to the

A)options pricing model.
B)theories of working capital management.
C)theories of risk-return and portfolio management.
D)theories of international capital budgeting.

Question 62

A corporation is

A)owned by stockholders who enjoy the privilege of limited liability.
B)easily divisible between owners.
C)a separate legal entity with perpetual life.
D)All of the options

Question 63

Which of the following is NOT addressed by the Dodd-Frank Act?

A)Liquidation of non-bank financial companies such as insurance companies.
B)Limits upon speculative investing by federally insured banks.
C)Written certifications of financial statements by the CEO and CFO.
D)Registration of hedge funds with the SEC.

Question 64

Agency problems are least likely to arise in which organizational form?

A)Sole proprietorship
B)Limited partnership
C)Corporation
D)Subchapter S corporation

Question 65

Many companies such as Tyco, Enron, and WorldCom that suffered financial distress in the late 1990s and early 2000s

A)committed fraud.
B)had failed corporate governance oversight.
C)went bankrupt.
D)All of the options are true.

Question 66

Professor Merton Miller received the Nobel Prize in Economics for his work on

A)dividend policy.
B)investment theory.
C)working capital management.
D)capital structure theory.

Question 67

Proper risk-return management means that

A)the firm should take as few risks as possible.
B)the firm must determine an appropriate trade-off between risk and return.
C)the firm should earn the highest return possible.
D)the firm should value future profits more highly than current profits.

Question 68

Agency theory examines the relationship between the

A)shareholders of the firm and the firm's investment banker.
B)owners of the firm and the managers of the firm.
C)board of directors and large institutional investors.
D)shareholders and the firm's transfer agent.

Question 69

The partnership form of an organization

A)avoids the double taxation of earnings and dividends found in the corporate form of organization.
B)usually provides limited liability to the partners.
C)has unlimited life.
D)simplifies decision making.

Question 70

Agency theory would imply that conflicts are more likely to occur between management and shareholders when

A)the company is owned and operated by the same person.
B)management acts in the best interests of maximizing shareholder wealth.
C)the chairman of the board is also the chief executive officer (CEO).
D)the board of directors exerts strong and involved oversight of management.

Question 71

Agency theory deals with the issue of

A)when to hire an agent to represent the firm in negotiations.
B)the legal liabilities of a firm if an employee, acting as the firm's agent, injures someone.
C)the limitations placed on an employee acting as the firm's agent to obligate or bind the firm.
D)the conflicts that can arise between the viewpoints and motivations of a firm's owners and managers.

Question 72

With an S corporation

A)income is taxed as direct income to stockholders.
B)stockholders have the same liability as members of a partnership.
C)the number of stockholders is unlimited.
D)the life of the corporation is limited.

Question 73

Which of the following did not contribute to the financial crisis?

A)The use of market-to-market accounting standards
B)Solid credit ratings from the ratings agencies
C)The extension of credit to high-risk borrowers
D)The merger of JPMorgan Chase and Bear Stearns
E)All of the options contributed to the financial crisis.

Question 74

One of the major advantages of a sole proprietorship is

A)that the owner has limited liability.
B)that stock in the proprietorship can be easily transferred.
C)that it is exempt from many tax rules that would otherwise apply when employees are hired by the firm.
D)low operating costs.

Question 75

Corporate governance is the

A)relationship and exercise of oversight by the board of directors of the company.
B)relationship between the chief financial officer (CFO) and institutional investors.
C)operation of a company by the chief executive officer (CEO) and other senior executives on the management team.
D)governance of the company by the board of directors with a focus on social responsibility.

Question 76

One of the major disadvantages of a sole proprietorship is

A)that there is unlimited liability to the owner.
B)the simplicity of decision making.
C)low organizational costs.
D)low operating costs.

Question 77

What is the primary goal of financial management?

A)Increased earnings
B)Maximizing cash flow
C)Maximizing shareholder wealth
D)Minimizing risk of the firm

Question 78

An S corporation

A)is similar to a partnership in that it carries unlimited liability.
B)is a separate legal entity that is treated like a normal corporation.
C)has all the organizational benefits of a corporation and its income is only taxed once.
D)All of the options

Question 79

In the past, the study of finance has included

A)mergers and acquisitions.
B)raising capital.
C)bankruptcy.
D)All of the options

Question 80

Credit swaps are

A)an insurance product designed to protect financial institutions from customers who default on their loans.
B)securities with a maturity of less than one year.
C)the result of a leveling off or slowing down of price increases.
D)market trades in previously issued securities.