Deck 1: Getting Started-Principles of Finance

Question 1

Finance managers need to interact constantly with

A) marketing managers.
B) accounting staff.
C) management information systems staff.
D) all of the above.

Answer 1

D

Question 2

Limited liability companies (LLCs) differ from limited partnerships in that

A) Owners of the LLC are subject to double taxation.
B) Owners of the LLC have unlimited liability for the firm's debt.
C) Owners of the LLC are not liable for the firm's debt.
D) Owners of the LLC may not exceed 12 in number.

Answer 2

C

Question 3

What are the three basic questions addressed by the study of investments?

Answer 3

1. What investments should the firm undertake?
2. How should the firm fund these investments?
3. How can the firm best manage cash flows in its day to day operations?

Question 4

Which of the following is a characteristic of a limited partnership?

A) It allows one or more partners to have limited liability.
B) It requires one or more of the partners to be a general partner to whom the privilege of limited liability does not apply.
C) It prohibits the limited partners from participating in the management of the partnership.
D) All of the above.

Question 5

In terms of organizational costs, which of the following sequences is generally correct, moving from lowest to highest cost?

A) General partnership, sole proprietorship, limited partnership, corporation
B) Sole proprietorship, general partnership, limited partnership, corporation
C) Corporation, limited partnership, general partnership, sole proprietorship
D) Sole proprietorship, general partnership, corporation, limited partnership

Question 6

From a financial point of view, a company that decides to develop new product is making

A) a financing decision.
B) an investment decision.
C) a capital structure decision.
D) a cash flow decision.

Question 7

Which forms of organization are free of initial legal requirements?

A) Sole proprietorship
B) General partnership
C) Corporation
D) Both A and B

Question 8

Which one of the following categories of owners enjoys limited liability?

A) General partners in a limited partnership or limited liability company.
B) Shareholders (common stock) of a corporation
C) Sole proprietors
D) Both A and B

Question 9

Which of the following is NOT true for limited partnerships?

A) Only limited partners can manage the business.
B) One general partner must exist who has unlimited liability.
C) Only the name of general partners can appear in the name of the firm.
D) Limited partners may sell their interest in the company.

Question 10

Working capital management refers to

A) long-term financing decisions.
B) the management of cash flows.
C) investing in product development.
D) capital structure.

Question 11

Which of the following statements best represents what finance is about?

A) How political, social, and economic forces affect corporations
B) Maximizing profits
C) The study of how people and businesses make investment decisions and how to finance those decisions.
D) Reducing risk

Question 12

Which of the following is NOT an advantage of the sole proprietorship?

A) Limited liability
B) No time limit imposed on its existence
C) No legal requirements for starting the business
D) None of the above

Question 13

What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form?

A) Sole proprietorships are subject to double taxation of profits.
B) The cost of formation.
C) Inadequate profit sharing.
D) Owners have unlimited liability.

Question 14

Capital structure refers to the financing of long-term investments.

Question 15

Financial decisions can be difficult because the cost of investments can be estimated with greater confidence than future payoffs.

Question 16

The area of finance that deals with long-term investment decisions is known as

A) capital structure.
B) working capital management.
C) financial strategy.
D) capital budgeting.

Question 17

The personal decision to take a year off from work to obtain a graduate degree in business is primarily a(n)________ decision.

A) social
B) financial
C) ethical
D) investment

Question 18

Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose?

A) Corporation
B) General Partnership
C) Limited liability company
D) Limited partnership

Question 19

The true owners of the corporation are the

A) holders of debt issues of the firm.
B) preferred stockholders.
C) board of directors of the firm.
D) common stockholders.

Question 20

Which of the following types of business forms is least risky to investors?

A) Sole proprietorship
B) Limited partnership
C) General partnership
D) A public corporation

Question 21

The owners of a corporation are liable for the corporation's obligations up to the amount of their investment.

Question 22

In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred.

Question 23

In a general partnership, each partner is liable for the partnership's obligations only up to a percentage of the obligation equal to that partner's percentage of ownership of the partnership.

Question 24

If a limited partner dies or leaves the business, the partnership is dissolved and a new partnership must be formed.

Question 25

General partners have unrestricted transferability of ownership, while limited partners must have the consent of all partners to transfer their ownership.

Question 26

For these types of organization, no distinction is made between business and personal assets.

A) Sole proprietorship
B) General partnership
C) Limited partnership
D) Both A and B

Question 27

Ultimate control in a corporation is vested in the board of directors.

Question 28

There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership.

Question 29

A corporation is owned by

A) shareholders and partners.
B) the shareholders who hold the company's stock.
C) the Board of Directors
D) its Chief Executive Officer.

Question 30

The major sources of financing for corporations are

A) partners contributions.
B) exchanges between shareholders.
C) interest and dividends
D) Debt and equity.

Question 31

The term stockholder is equivalent to

A) general partner.
B) creditor.
C) shareholder.
D) stakeholder.

Question 32

Which of the following is a significant disadvantage of a general partnership?

A) The cost of forming it is high.
B) Each partner is fully responsible for the liabilities incurred by the partnership.
C) There is a risk associated with the industry in which it operates.
D) Forming the business is very complex.

Question 33

In a limited partnership, at least one general partner must remain in the association; the privilege of limited liability still applies to this partner.

Question 34

The sole proprietorship is the same as the individual for liability purposes.

Question 35

Owners must register and pay yearly fees to their State of residence when establishing a sole proprietorship.

Question 36

Limited partners may actively manage the business.

Question 37

The life of a corporation is not dependent upon the status of the investors.

Question 38

A limited partner is liable

A) for only his or her own share of the partnership's debts.
B) for his or her own share of the partnership's debts and contingently liable for the other partners shares.
C) only up to the amount invested by that partner.
D) for none of the partnership's debts.

Question 39

In a general partnership, all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm.

Question 40

Which of the following forms of business organization is the dominant economic force in the United States?

A) The sole proprietorship
B) The general partnership
C) The limited partnership
D) The joint venture
E) The corporation

Question 41

If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should

A) positively affect profits.
B) increase the market value of the firm's common stock.
C) either increase or have no effect on the value of the firm's common stock.
D) accomplish all of the above.

Question 42

Which of the following goals of the firm is equivalent to the maximization of shareholder wealth?

A) Profit maximization
B) Risk minimization
C) Maximization of the total market value of the firm's common stock
D) None of the above

Question 43

Profit maximization is not an adequate goal of the firm when making financial decisions because

A) it does not necessarily reflect shareholder wealth maximization.
B) it ignores the risk inherent in different projects that will generate the profits.
C) it ignores the timing of a project's returns.
D) all of the above are correct.

Question 44

Maximization of shareholder wealth as a goal is superior to accounting profit maximization because

A) it considers the time value of the money.
B) following the shareholder wealth maximization goal will ensure high stock prices.
C) accounting profits are not the same as cash flows.
D) A and C.

Question 45

What does the agency problem refer to?

A) The conflict that exists between the board of directors and the employees of the firm.
B) The problem associated with financial managers and Internal Revenue agents.
C) The conflict that exists between stockbrokers and investors.
D) The problem that results from potential conflicts of interest between the manager of a business and the stockholders.

Question 46

Most criticism of the Sarbanes-Oxley Act focuses on

A) the excessive cost of compliance.
B) inadequate penalties for violations.
C) diminished competitiveness of U.S. corporations in international markets.
D) decreased confidence in financial reporting.

Question 47

Which of the following goals is in the best long-term interest of stockholders?

A) Profit maximization
B) Risk minimization
C) Maximizing of the market value of the existing shareholders' common stock
D) Maximizing sales revenues

Question 48

Which of the following best describes the goal of the firm?

A) The maximization of the total market value of the firm's common stock
B) Profit maximization
C) Risk minimization
D) None of the above

Question 49

The goal of maximize shareholder wealth inevitably conflicts with socially responsible behavior on the part of corporation.

Question 50

The goal of profit maximization ignores the timing of profit.

Question 51

The goal of profit maximization is equivalent to the goal of maximization of share value.

Question 52

Managers of corporations need to act in an ethical manner

A) because ethics violations will be punished by the law.
B) because a business must be trusted by investors, customer and the public if it is to succeed.
C) because business managers must answer to a higher authority.
D) because ethical behavior is its own justification.

Question 53

One of the problems associated with profit maximization is that it ignores the timing of a project's return.

Question 54

If managers do not pursue the goal of maximizing shareholder wealth

A) they concentrate on more important matters like growing market share.
B) they can focus more on social responsibilities.
C) they are likely to lose their jobs.
D) they can focus more on long-term profitability.

Question 55

Serious ethical violations by corporations such as Enron led to the passage of

A) The Dodd-Frank Act.
B) the Insider Trading Act of 1988.
C) The Sarbanes-Oxley Act.
D) All of the above.

Question 56

The goal of the firm should be the maximization of profit.

Question 57

In regard to the agency problem, ________ are the principal owners of a corporation.

A) shareholders
B) managers
C) employees
D) suppliers

Question 58

The Sarbanes-Oxley was passed in

A) 1933 to separate commercial banking from investment banking.
B) 2002 after the ENRON bankruptcy exposed unethical behavior by the company's executives and accountants.
C) 2008 after the collapse of the subprime mortgage market.
D) 2010 to protect consumers from financial fraud.

Question 59

Profit maximization does not adequately describe the goal of the firm because

A) profit maximization does not require the consideration of risk.
B) profit maximization ignores the timing of a project's return.
C) maximization of dividend payout ratio is a better description of the goal of the firm.
D) A and B.

Question 60

The Sarbanes-Oxley Act of 2002

A) protects managers of publicly held corporations from frivolous lawsuits for unethical behavior.
B) prohibits managers of publicly held corporations from personally profiting from non-public information.
C) holds those who influence corporate decisions legally accountable for unethical conduct.
D) allows corporate accountants greater latitude in the application of generally accepted accounting principles.

Question 61

A reputation for unethical behavior can negatively affect the value of a company's stock.

Question 62

How could you compensate an investor for taking on a significant amount of risk?

A) Increase the expected rate of return
B) Raise more debt capital
C) Offer stock at a higher price
D) Increase sales

Question 63

Which of the following factors is most important in investment decisions?

A) The change in earnings before taxes.
B) The change in gross sales revenue.
C) The change in net income.
D) The change in after-tax cash flow.

Question 64

Which of the following should be considered when assessing the financial impact of business decisions?

A) The amount of projected earnings
B) The risk-return tradeoff
C) The timing of projected earnings; i.e., when they are expected to occur
D) All of the above

Question 65

The Sarbane-Oxley Act addresses insider trading by members of Congress.

Question 66

Which of the following is a characteristic of an efficient market?

A) Small number of individuals
B) Opportunities exist for investors to profit from publicly available information.
C) Security prices reflect fair value of the firm.
D) Immediate response occurs for new public information.

Question 67

Consider the timing of the profits of the following certain investment projects: Profit
L S
Year 1 $ 0 $ 3000
Year 2 $ 3000 $ 0

A) Project S is preferred to Project L.
B) Project L is preferred to Project S.
C) Projects S and L are equally desirable.
D) A goal of profit maximization would favor Project S only.

Question 68

Which of the following is most likely to motivate executives to maximize shareholder wealth?

A) Tying bonuses to cost reductions and meeting budget goals.
B) Offering them relatively high salaries.
C) Tying annual bonuses to increases in annual profits.
D) Compensating them with stock options that can only be exercised after five years.

Question 69

If one security has a greater risk than another security, how will investors respond?

A) They will require a lower rate of return for the investment that has greater risk.
B) They would be indifferent regarding their expectation of rates of return for either investment.
C) They will require a higher rate of return for the investment that has greater risk.
D) None of the above.

Question 70

In measuring value, the focus should be on

A) cash flow.
B) accounting profits.
C) time value of money.
D) earnings per share.

Question 71

Investors choose to invest in higher risk investments because these investments offer higher

A) expected returns.
B) inflation.
C) actual returns.
D) future consumption.

Question 72

Consider cash flows for Projects X and Y such as: Project X Project Y
Year 1 $3000 $ 0
Year 2 $ 0 $3000
A rational person would prefer receiving cash flows sooner because

A) the money can be reinvested.
B) the money is nice to have around.
C) the investor may be tired of a particular investment.
D) the investor is indifferent to either proposal.

Question 73

Consider the following equally likely project outcomes: Profit
X Y
Pessimistic prediction $ 0 $500
Expected outcome $ 500 $500
Optimistic prediction $1000 $500

A) Investors will prefer project X because it potentially offers a higher profit.
B) Investors will reject both projects because the profit is too low.
C) Investors will prefer project Y because the expected return is the same as for project X but the outcome is certain.
D) Since Projects X and Y have the same expected outcomes of $500, investors will view them as identical in value.

Question 74

If an investor had a choice of receiving $1,000 today, or $1,000 in five years, which would the average investor prefer?

A) $1,000 in five years because they are not good at saving money.
B) $1,000 today because it will be worth more than $1,000 received in five years.
C) $1,000 in five years because it will be worth more than $1,000 received today.
D) Investors would be indifferent to when they would receive the $1,000.
E) None of the above.

Question 75

In finance, we assume that investors are generally

A) neutral to risk.
B) averse to risk.
C) fond of risk.
D) none of the above.

Question 76

Foregoing the earning potential of a dollar today is referred to as the

A) time value of money.
B) opportunity cost concept.
C) risk/return tradeoff.
D) creation of wealth.

Question 77

Why do investors prefer receiving cash sooner rather than later, according to finance theory?

A) Incremental profits are greater than accounting profits.
B) Money received earlier can be reinvested and returns can be increased.
C) Tax considerations are important when investing.
D) Diversification leads to increased value.

Question 78

The agency problem arises due to the separation of ownership and control in a corporation.

Question 79

Briefly discuss the incentives for financial managers to conduct their business in an ethical manner.

Question 80

Investors prefer $1 today versus $1 in the future due to

A) time value of money.
B) response to incentives.
C) the need for immediate gratification.
D) A and B.