Question 1

Which type of business organization has all the respective rights and privileges of a legal person?

Accepted Answer

Corporations are treated as separate legal entities, meaning they can own property, enter into contracts, sue, and be sued, just like an individual person. This is distinct from other business structures like sole proprietorships and partnerships, where the business and the owners are legally considered the same entity.

Question 2

Which one of the following statements concerning a partnership is true?

Accepted Answer

A partnership typically terminates at the death of any partner, unless there's an agreement in place among the partners that specifies otherwise. This characteristic distinguishes partnerships from corporations, where ownership can be transferred and the entity continues despite changes in ownership or management.

Question 3

Which of the following statements is false concerning limited partnerships?

Accepted Answer

Limited partners are not responsible for all debts of the partnership; their liability is limited to the amount of their investment in the partnership.

Question 4

The best definition of derivative securities is:

Accepted Answer

Derivative securities are financial instruments whose value is dependent on the price movements of another, underlying asset. This includes options, futures, and swaps, where their value is derived from assets like stocks, bonds, commodities, currencies, interest rates, and market indexes.

Question 5

An entity wherein one or more owners may elect to actively manage the firm while other owners choose limited liability instead of management responsibility is called a:

Accepted Answer

A limited partnership allows some owners to have limited liability while others manage the firm.

Question 6

Which one of the following is a disadvantage of a partnership?

Accepted Answer

Partnerships often face growth limitations due to their inability to raise investment capital as easily as larger corporations can. This is because they may not have access to public markets to sell equity or debt as corporations do.

Question 7

A business created as a distinct legal entity composed of one or more individuals or entities is called a:

Accepted Answer

A corporation is a legal entity that is separate and distinct from its owners, who are known as shareholders. This structure allows the corporation to own assets, incur liabilities, and conduct business in its own name, apart from the individuals who own it.

Question 8

Robert Fischer is one of the owners of a firm which generated $18,000 in taxable income last year. Robert did not have to pay any personal tax on his share of the firm's income. Robert must be a partial owner of a:

Accepted Answer

The answer of Robert Fischer is one of the owners...

Question 9

Which statement best describes hedge funds:

Accepted Answer

Hedge funds are indeed largely unregulated and privately managed, focusing on sophisticated investors and employing aggressive strategies not allowed for mutual funds.

Question 10

The area of corporate finance concerned purchasing and selling stocks and bonds is called:

Accepted Answer

Investments in corporate finance specifically refer to the area concerned with purchasing and selling stocks and bonds. This involves decisions on investment portfolios, risk assessment, and strategies to maximize returns from these financial instruments.

Question 11

A sole proprietorship is best defined as a business owned by:

Accepted Answer

A sole proprietorship is a business owned by a single individual who is personally responsible for all the debts and obligations of the business, meaning they have unlimited liability.

Question 12

Limited liability may be a characteristic of each of the following form(s) of organization EXCEPT a ________________.

Accepted Answer

Sole proprietorships do not offer limited liability; the owner is personally responsible for all debts and obligations of the business.

Question 13

A business that is a distinct legal entity is a:

Accepted Answer

A corporation is a distinct legal entity separate from its owners, providing limited liability protection, the ability to raise capital through stock sales, and perpetual existence.

Question 14

Which one of the following actions by a financial manager is most aligned with the goal of financial management?

Accepted Answer

The primary goal of financial management is to maximize shareholder wealth, which is directly aligned with increasing the value of the company's stock. Improving the efficiency of the company to increase stock value (D) directly contributes to this goal.

Question 15

It is easiest to raise capital for a project under which form of business organization?

Accepted Answer

Corporations have the easiest time raising capital because they can issue stock to a large number of investors and have access to more capital markets than other forms of business organizations.

Question 16

Working capital management:

Accepted Answer

Working capital management focuses on the management of a firm's short-term assets and liabilities, including the oversight of cash requirements, inventory, accounts receivable, and accounts payable to ensure the company can meet its short-term obligations and operate efficiently.

Question 17

Which of the following are advantages of the corporate form of ownership?

Accepted Answer

Limited personal liability means that shareholders are not personally responsible for the debts of the corporation beyond their investment in the company. The ability to raise capital is enhanced through the sale of stock, making these two significant advantages of the corporate form of ownership.

Question 18

Which form of business structure faces the greatest agency problems?

Accepted Answer

Corporations face the greatest agency problems due to the separation of ownership and management. Shareholders (owners) often have little control over the managers (agents) who make decisions on their behalf, leading to potential conflicts of interest.

Question 19

A business formed by two or more individuals who each have unlimited liability for business debts is called a:

Accepted Answer

A general partnership is a business arrangement where two or more individuals agree to share in all assets, profits, and financial and legal liabilities of a business. Unlike corporations or limited liability companies, partners in a general partnership have unlimited liability, meaning their personal assets can be used to cover the business debts and liabilities.

Question 20

An individual who places an order to buy 1000 shares of IBM stock:

Accepted Answer

This individual is participating in the secondary market, where previously issued securities are bought and sold among investors. Private placements and IPOs involve the initial sale of securities to investors, and hiring a dealer or being listed as a private dealer is not a requirement for buying shares in the secondary market.

Quiz 1: Introduction to Corporate Finance