Deck 2: Financial Management

Question 1

Which form of business would most likely describe the following, a college student who tutors other students, a retired woman who babysits children, a teenager who mows lawns, and a party clown?

A) Partnership
B) Corporation
C) Sole proprietorship
D) Limited liability company

Answer 1

Corporation

Question 2

Which of the following is not a major form of business organization in the U.S.?

A) Partnership
B) Corporation
C) Sole Proprietorship
D) Public limited company
E) Limited liability company

Answer 2

Public limited company

Question 3

The major forms of business that have unlimited liability would best be described as:

A) sole proprietorships and partnerships.
B) corporations and subchapter s corporations.
C) limited liability partnerships and limited liability companies.

Answer 3

sole proprietorships and partnerships.

Question 4

The major forms of business that have limited liability would best be described as:

A) partnerships.
B) sole proprietorships.
C) corporations and limited liability companies.

Question 5

Your best friend wants to start a car detailing business to pay for college. Which of the following is a disadvantage of sole proprietorships that he should consider?

A) Easy to form
B) Limited liability
C) Limited access to additional funds
D) Business income is taxed once, at the individual's personal level.

Question 6

Your best friend wants to start a car detailing business to pay for college. Which of the following is an advantage of sole proprietorships that he should consider?

A) Easy to form
B) Unlimited life
C) Limited liability
D) Access to capital

Question 7

Flow-through taxation is a characteristic for all but the following forms of business?

A) Partnership
B) Corporation
C) Sole proprietorship
D) Limited liability company

Question 8

Which of the following forms of business have flow-through taxation?

A) Apple Inc.
B) IBM Corporation
C) Deloitte & Touche LLP
D) Microsoft Corporation

Question 9

An advantage of the corporate form of business is its:

A) Limited life
B) Access to capital
C) Unlimited liability

Question 10

An advantage of the partnership form of business is its:

A) Limited life
B) Access to capital
C) Unlimited liability
D) Flow-through taxation

Question 11

Which of the following statements would not be a reason Ford Motor Company uses the corporate form of business?

A) Unlimited life
B) Limited liability
C) Access to capital
D) Business income is taxed once, at the individual owner's level

Question 12

Dentists' offices, accounting firms, law firms, and physician's offices are best described as examples of which major type of business?

A) corporation
B) partnership
C) sole proprietorship

Question 13

Your sister wants to start a tee shirt business on e-Bay with you to help pay for college tuition. Which of the following is a disadvantage of partnerships that you both should consider?

A) Difficult to form
B) Separation of owners and managers
C) Unlimited liability for general partners
D) Income taxed at the business level and the owners' level, when distributed

Question 14

A corporation that elects to be taxed as a partnership is best described as:

A) C corporation
B) limited liability company
C) subchapter S corporation
D) None of these describe corporations that are taxed as partnerships

Question 15

Which of the following forms of business have limited liability for all its owners?

A) Partnership
B) C corporation
C) Sole proprietorship

Question 16

Which of the following forms of business have unlimited liability for all its owner(s)?

A) C corporation
B) Sole proprietorship
C) Limited Partnership

Question 17

Which of the following forms of business partnership interests that are traded in the public market?

A) C corporation
B) Sole proprietorship
C) General partnership
D) Master limited partnership

Question 18

Which of the following forms of business does not have flow-through taxation?

A) Partnership
B) C corporation
C) Sole proprietorship
D) Limited liability company

Question 19

Your sister wants to start a tee shirt business on e-Bay with you to help pay for college tuition. All of the following are advantages to partnerships that you should both consider, except ____________?

A) Easy to form
B) Access to capital
C) Business income is taxed once, at the individual partner's level

Question 20

Your parents inherit $100,000 and want to invest these funds for their retirement. They are very concerned about entering into any form of investment from which they would incur liability. Which of the following investment opportunities would not be appropriate for them?

A) Common stock of McDonald's Corporation
B) General partner of an oil and gas limited partnership
C) Limited partner in a real estate limited liability company
D) Stock of British Petroleum, public limited company (PLC)

Question 21

Your dad inherits $100,000 and wants to invest these funds for their retirement. They are very concerned about business continuity and want to be able to pass on this investment to the next generation of the family. Which of the following investment opportunities would not be appropriate for them?

A) Common stock of McDonald's Corporation
B) Food truck business operating as a sole proprietorship
C) Limited partner in a real estate limited liability company
D) Stock of British Petroleum, public limited company (PLC)

Question 22

The form of business in which all partners share in the management and the profits of the business and the income and the losses from the business are reflected on the individual owners' tax returns is best described as which of the following:

A) Corporation
B) Limited partnership
C) General partnership
D) Master limited partnership

Question 23

Which of the following statements is not true?

A) There is no such thing as limited liability
B) Limited liability means liability only for the initial investment.
C) The general partner has limited liability as the operator of the business.
D) As long as the limited partners are not active in the business, they have the advantage of limited liability.

Question 24

A business organization which has limited liability, is a distinct legal entity, is immortal, and may have issues of control would best be described as a:

A) corporation.
B) partnership.
C) sole proprietorship.
D) limited liability partnership.

Question 25

The Bumble Bee Corporation had income before taxes of $1 million. Bumble Bee paid taxes at a flat rate of 30% and paid 40 percent of its earnings to its shareholders in the form of cash dividends. If its shareholders are taxed at the rate of 15 percent on dividend income, the effective tax rate on the income generated by Bumble Bee, considering both corporate and individual taxation, is closest to:

A) 30.0%
B) 31.8%.
C) 34.2%.
D) 45.0%.

Question 26

The Madison Corporation had income before taxes of $1 million. Madison paid taxes at a flat rate of 35% and paid 40 percent of its earnings to its shareholders in the form of cash dividends. If its shareholders are taxed at the rate of 15 percent on dividend income, the effective tax rate on the income generated by Madison, considering both corporate and individual taxation, is closest to:

A) 37.1%.
B) 38.9%.
C) 50.0%.

Question 27

The Window Corporation had income before taxes of $1 million. Window paid taxes at a flat rate of 35% and paid 30 percent of its earnings to its shareholders in the form of cash dividends. If its shareholders are taxed at the rate of 15 percent on dividend income, the effective tax rate on the income generated by Window, considering both corporate and individual taxation, is closest to:

A) 35.000%
B) 36.575%.
C) 37.925%.
D) 50.000%.

Question 28

Compare the effective tax rate of the following: A sole proprietorship ($25,000 in income, all of the income is paid out, and the individual's tax rate is 38%) to a corporation (the same $25,000 in income, with all of the income paid out in dividends and a corporate tax rate of 35%. Individual tax rate is 38%). What is the effective tax rate of the sole proprietorship? What is the effective tax rate of the corporation? $\begin{array}{llcc}& \text {Sole Proprietorship} & \text { Corporation} \\\end{array}$

A) $\begin{array}{llcc}&&& 38 \% & &&&&& 35 \% \\\end{array}$
B) $\begin{array}{llcc}&&& 35 \% &&&&&&38 \% \\\end{array}$
C) $\begin{array}{llcc}& &&35 \%&&&&&& 59.7 \% \\\end{array}$
D) $\begin{array}{llcc} &&& 35 \% &&&&&& 61.6 \%\end{array}$

Question 29

Compare the effective tax rate of the following: A sole proprietorship ($100,000 in income, all of the income is paid out, and the individual's tax rate is 28%) to a corporation (the same $100,000 in income, with all of the income paid out in dividends and a corporate tax rate of 30%. Individual tax rate is 28%). What is the effective tax rate of the sole proprietorship? What is the effective tax rate of the corporation?

$\begin{array}{llcc}& \text {Sole Proprietorship }& \text { Corporation} \\\end{array}$

A) $\begin{array}{llcc}&&&30 \% &&&&&&&28 \% \\\end{array}$
B) $\begin{array}{llcc}&&& 28 \% &&&&&&& 30 \% \\\end{array}$
C) $\begin{array}{llcc}&&& 28 \% &&&&&&& 49.8 \% \\\end{array}$
D) $\begin{array}{llcc}&&& 28 \% &&&&&&&49.6 \% \end{array}$

Question 30

The goal of the business enterprise is to maximize:

A) net profit.
B) net income.
C) economic profit.

Question 31

The goal of the business enterprise is to maximize:

A) net income.
B) economic profit.
C) earnings before interest and taxes.

Question 32

The goal of the business enterprise is to maximize:

A) revenues.
B) total assets.
C) owners' wealth.
D) the book value of shareholders' equity.

Question 33

Which of the following is most likely considered an externality with respect to a business entity?

A) Maximizing the value of shareholders' wealth.
B) Managers using company assets for personal use.
C) Closing a plant, laying-off a significant portion of a town's population.

Question 34

Which of the following takes into account takes into account the opportunity cost of funds?

A) Net profit
B) Economic profit
C) Accounting profit

Question 35

In the agency relationship between shareholders and management,

A) shareholders are agents of the managers.
B) managers are agents of the shareholders.
C) neither managers nor shareholders are agents.

Question 36

An issue or conflict that arises due to potential divergence of interest between managers, shareholders, and creditors is best described as a(n):

A) agency problem.
B) business problem
C) personal problem.
D) employment problem.

Question 37

Which of the following statements about weighted average cost of capital is not true?

A) It is the marginal cost of funds
B) It measures profits and returns and is preferred by managers.
C) It is calculated as the weighted average of the costs of debt, preferred equity, and common equity.
D) Shareholders compare it to return on a project to determine if their money is best being used by the company or should be paid out to shareholders.

Question 38

If the management of a company cannot invest in investment projects that return more than what the suppliers of capital require, the company should:

A) invest the funds in risk-free securities.
B) put the funds to work as best as possible.
C) pay out the funds to be reinvested by shareholders.

Question 39

Jeffrey R. Immelt, CEO of General Electric, earned $3,300,000 in base salary, $5,800,000 in cash bonus, and $4,713,000 in stocks granted in 2007. The compensation of Mr. Immelt is an example of which of the following:

A) insider trading.
B) monitoring cost.
C) compensation scheme to encourage him to act in the best interest of shareholders.

Question 40

Which of the following in not a primary concern from the point of view of a company's management?

A) Minimize risk
B) Market value of equity
C) Maximize earnings per share
D) Maximize accounting return on investment

Question 41

The framework for analyzing long-term investment or asset decisions is best described by the following:

A) Cost of capital
B) Working capital
C) Internal rate of return
D) Capital budgeting or capital expenditure

Question 42

When we talk about capital structure, this refers to:

A) the cash, inventory, and accounts receivable.
B) mix of debt and equity to finance an enterprise.
C) the investment in plant, property and equipment.

Question 43

Which of the following would most likely not be a financing decision?

A) The Coca Cola company buys Pepsi.
B) Pfizer buys back $500,000 in common stock.
C) Rosetta Stone does a public offering of its stock.
D) McDonald's issues $40,000,000 in corporate bonds.

Question 44

Which of the following would not likely be considered an investment decision?

A) Bank of America acquired Merrill Lynch
B) LEGOLAND opened a new park in Orlando
C) Facebook completes a public offering of its stock
D) James Madison University bought a former hospital to turn into classrooms

Question 45

The mix of debt and equity that is used to finance a business enterprise is best described as the enterprise's:

A) assets.
B) working capital.
C) capital structure.
D) capital expenditures

Question 46

The uncertainty associated with the use of debt to finance a business enterprise is best described as:

A) financial risk.
B) business risk.
C) operating risk.

Question 47

Which of the following is associated with how a company finances its assets?

A) financial risk.
B) business risk.
C) operating risk.

Question 48

Corporations are not specific to the U.S.

Question 49

Income is taxed at only one level, the owners' individual income, for corporations.

Question 50

If limited liability is your primary concern, one should not become a limited partner?

Question 51

If limited liability is your primary concern, one should not become a general partner?

Question 52

At least one general partner is required for all partnerships?

Question 53

The difference between general and limited partnerships is that general partnerships include only general partners, while limited partnerships include both limited and general partners.

Question 54

The difference between a limited partnership and a master limited partnership is that the limited partnership interests of the master limited partnership can be traded publicly.

Question 55

ABC partnership has $500,000 in income before taxes. The partnership pays out all of its income to the partners. If individual income tax rates are 33% and the corporate tax rate is 30%, the effective tax rate of the partnership is 33%.

Question 56

A limited liability company is a combination of some of the best features of both the partnership and sole proprietorship forms of business.

Question 57

Any company may become a limited liability company.

Question 58

The share of revenue from corporations in the U.S. is significantly higher than the share of revenues from sole proprietorships and partnerships.

Question 59

A stockholder is any party affected by the decisions and actions of an entity.

Question 60

For a given company, economic profit will always be greater than accounting profit.

Question 61

A stakeholder is any party affected by the decisions and actions of an entity.

Question 62

A stakeholder is any party affected by the decisions and actions of an entity.

Question 63

The goal of management of a company is to enhance the owners' wealth.

Question 64

In the agency relationship that involves a company's management and its shareholders, the shareholders are the agents.

Question 65

The weighted average cost of capital is a marginal cost.

Question 66

The cost of providing stock options to motivate managers is an example of an indirect agency cost.

Question 67

Corporate governance is a set of policies and procedures that are intended to promote for the best interests of the shareholders.

Question 68

Costs associated with producing financial statements and annual reports for investors and shareholders are examples of indirect agency costs.

Question 69

The interests of managers and shareholders are usually fundamentally the same.

Question 70

Weighted average cost of capital (WACC) is calculated as the weighted average of the costs of a firm's different sources of capital, such as debt, preferred equity, and common equity.

Question 71

Incentive plans are used to affiliate the best interests of CEOs and senior managers with those of shareholders.

Question 72

The set of processes and procedures established to manage the organization in the best interests of its owners is best described as an operating agreement.

Question 73

The interests of CEOs and business managers can still be considered aligned with shareholders even if on the downside CEOs and managers do not suffer along with shareholders.

Question 74

Stock options do not properly align the interests of CEOs and business managers with shareholders.

Question 75

Finance people believe that the market for corporate control, not managerial incentives, ascertains that shareholder value creation is the company's objective.

Question 76

Finance people believe that managerial incentives, not the market for corporate control ascertains that shareholder value creation is the company's objective.

Question 77

Agency costs may arise because managers may not act in the best interests of shareholders or because they must be induced to act optimally.

Question 78

The investment in plant, property, and equipment are examples of operating assets.

Question 79

Cash, inventory, and accounts receivable are examples of working capital.

Question 80

Interest-bearing obligations of an enterprise are equity capital.