Question 1

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

Accepted Answer

Capital budgeting or capital expenditure is the framework used for analyzing long-term investment or asset decisions. It involves the process of deciding whether to invest in projects and assets that have a long-term impact on the company's financial performance, such as purchasing new machinery, expanding operations, or acquiring another company.

Question 2

When we talk about capital structure, this refers to:

Accepted Answer

Capital structure refers to the mix of debt and equity used by a company to finance its overall operations and growth.

Question 3

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

Accepted Answer

Financing decisions typically involve ways in which a company manages its capital structure, including the issuance of stocks or bonds, and stock buybacks. The purchase of another company, such as Coca Cola buying Pepsi, is more related to investment or strategic business decisions rather than financing decisions.

Question 4

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

Accepted Answer

Investment decisions typically involve the allocation of capital to assets or projects expected to generate future returns, such as acquisitions, expansions, or capital expenditures. A public offering of stock by Facebook is a financing decision, where the company decides on ways to raise capital, in this case through equity, rather than deciding on how to invest existing capital.

Question 5

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

Accepted Answer

Capital structure refers to the mix of debt and equity that a business uses to finance its operations and growth. It is a key aspect of a company's financial strategy, influencing its risk and return profile.

Question 6

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

Accepted Answer

Financial risk specifically refers to the additional uncertainty and potential for financial loss that a company faces when it uses debt as a means of financing its operations. This is because the company must meet its debt obligations regardless of its financial performance, which can increase the risk of default.

Question 7

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

Accepted Answer

Financial risk is associated with how a company finances its assets, specifically relating to the use of debt financing and the potential for default.

Question 8

Corporations are not specific to the U.S.

Accepted Answer

Corporations exist in many countries around the world, each with their own laws and regulations governing their formation, operation, and dissolution.

Question 9

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

Accepted Answer

Corporations are typically taxed at two levels: first on the corporate income, and then shareholders are taxed again on dividends received, which are considered personal income.

Question 10

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

Accepted Answer

Limited partners have limited liability, meaning they are only liable up to the amount they have invested in the partnership, which addresses concerns about personal liability.

Question 11

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

Accepted Answer

In a general partnership, general partners have unlimited liability, meaning they are personally responsible for the debts and obligations of the business, which does not align with the goal of limiting personal liability.

Question 12

At least one general partner is required for all partnerships?

Accepted Answer

In a partnership, at least one general partner is required who is responsible for the management of the partnership and has unlimited personal liability for the debts and obligations of the partnership.

Question 13

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

Accepted Answer

In a general partnership, all partners are general partners who share in the management and are personally liable for the partnership's debts. In a limited partnership, there are both general partners, who manage the business and have personal liability, and limited partners, who invest capital but have limited liability and do not participate in management.

Question 14

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.

Accepted Answer

A master limited partnership (MLP) allows for the partnership interests to be traded on public exchanges, unlike traditional limited partnerships which do not have this feature.

Question 15

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%.

Accepted Answer

Partnerships themselves are not subject to income tax. Instead, the income is passed through to the partners who then pay tax at their individual rates. Therefore, if the individual income tax rate is 33%, the effective tax rate on the income distributed by the partnership would indeed be 33%.

Question 16

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

Accepted Answer

The answer of A limited liability company is a combination...

Question 17

Any company may become a limited liability company.

Accepted Answer

The answer of Any company may become a limited liability...

Question 18

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

Accepted Answer

Corporations generally generate more revenue due to their larger size and scale compared to sole proprietorships and partnerships, which are typically smaller businesses.

Question 19

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

Accepted Answer

A stockholder, or shareholder, specifically refers to an individual or entity that owns shares in a corporation, not just any party affected by the corporation's decisions and actions.

Question 20

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

Accepted Answer

Economic profit takes into account both explicit and implicit costs, including opportunity costs, while accounting profit only considers explicit costs. Therefore, economic profit can be less than accounting profit if the implicit costs are significant.

Quiz 2: Financial Management