Question 1

Which of the following statements is CORRECTσ

Accepted Answer

A)  the main method of transferring ownership interest in a corporation is by means of a hostile takeover. 
B)  two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life. 
C)  a corporation is a legal entity that is generally created by a state; its life and existence is separate from the lives of its individual owners and managers. 
D)  limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. 
E)  although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions. 
A)  the main method of transferring ownership interest in a corporation is by means of a hostile takeover. 
B)  two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life. 
C)  a corporation is a legal entity that is generally created by a state; its life and existence is separate from the lives of its individual owners and managers. 
D)  limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. 
E)  although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.

Question 2

Which of the following statements is NOT CORRECTσ

Accepted Answer

A)  when a corporation's shares are owned by a few individuals and are not traded on public markets, we say that the firm is "closely, or privately, held." 
B)  "going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the firm's shares. 
C)  when stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. 
D)  publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with and report to a regulatory agency such as the sec. 
E)  it is possible for a firm to go public and yet not raise any additional new capital at the time. 
A)  when a corporation's shares are owned by a few individuals and are not traded on public markets, we say that the firm is "closely, or privately, held." 
B)  "going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the firm's shares. 
C)  when stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. 
D)  publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with and report to a regulatory agency such as the sec. 
E)  it is possible for a firm to go public and yet not raise any additional new capital at the time.

Question 3

If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECTσ

Accepted Answer

A)  one disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners. 
B)  there is no good reason to expect a firm's bondholders and stockholders to react differently to the types of new asset investments a firm makes. 
C)  bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns. 
D)  stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns. 
E)  relative to sole proprietorships, corporations generally face fewer regulations, which makes raising capital easier for corporations. 
A)  one disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners. 
B)  there is no good reason to expect a firm's bondholders and stockholders to react differently to the types of new asset investments a firm makes. 
C)  bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns. 
D)  stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns. 
E)  relative to sole proprietorships, corporations generally face fewer regulations, which makes raising capital easier for corporations.

Question 5

Which of the following statements is CORRECTσ

Accepted Answer

A)  corporations generally are subject to more favorable tax treatment and fewer regulations than partnerships and sole proprietorships, which is why corporations do most of the business in the united states. 
B)  managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers. 
C)  one advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm. 
D)  because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations. 
E)  bond covenants are an effective way to resolve conflicts between shareholders and managers. 
A)  corporations generally are subject to more favorable tax treatment and fewer regulations than partnerships and sole proprietorships, which is why corporations do most of the business in the united states. 
B)  managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers. 
C)  one advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm. 
D)  because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations. 
E)  bond covenants are an effective way to resolve conflicts between shareholders and managers.

Question 6

The disadvantages associated with a proprietorship are similar to those under a partnership. One exception relates to the more formal nature of the partnership agreement and the commitment of all partners' personal assets. As a result, partnerships do not have difficulty raising large amounts of capital.

Accepted Answer

A) True 
 B)False

Question 7

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest ratesσ

Accepted Answer

A)  prices and interest rates would both rise. 
B)  prices would rise and interest rates would decline. 
C)  prices and interest rates would both decline. 
D)  there would be no changes in either prices or interest rates. 
E)  prices would decline and interest rates would rise. 
A)  prices and interest rates would both rise. 
B)  prices would rise and interest rates would decline. 
C)  prices and interest rates would both decline. 
D)  there would be no changes in either prices or interest rates. 
E)  prices would decline and interest rates would rise.

Question 8

The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not.

Accepted Answer

A) True 
 B)False

Question 9

If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECTσ

Accepted Answer

A)  one of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt. 
B)  sole proprietorships are subject to more regulations than corporations. 
C)  in any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner. 
D)  sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones. 
E)  corporations of all types are subject to the corporate income tax. 
A)  one of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt. 
B)  sole proprietorships are subject to more regulations than corporations. 
C)  in any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner. 
D)  sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones. 
E)  corporations of all types are subject to the corporate income tax.

Question 11

Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is a primary market transactionσ

Accepted Answer

A)  you sell 200 shares of johnson & johnson stock on the nyse through your broker. 
B)  johnson & johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker. 
C)  you buy 200 shares of johnson & johnson stock from your younger brother. you just give him cash and he gives you the stock¾the trade is not made through a broker. 
D)  one financial institution buys 200,000 shares of johnson & johnson stock from another institution. an investment banker arranges the transaction. 
E)  you invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of johnson & johnson shares on the nyse. 
A)  you sell 200 shares of johnson & johnson stock on the nyse through your broker. 
B)  johnson & johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker. 
C)  you buy 200 shares of johnson & johnson stock from your younger brother. you just give him cash and he gives you the stock¾the trade is not made through a broker. 
D)  one financial institution buys 200,000 shares of johnson & johnson stock from another institution. an investment banker arranges the transaction. 
E)  you invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of johnson & johnson shares on the nyse.

Question 13

If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is CORRECTσ

Accepted Answer

A)  the financial manager's proper goal should be to attempt to maximize the firm's expected cash flows, since that will add the most to the individual shareholders' wealth. 
B)  the financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year. 
C)  the riskiness inherent in a firm's earnings per share (eps) depends on the characteristics of the projects the firm selects, and thus on the firm's assets. however, eps is not affected by the manner in which those assets are financed. 
D)  potential agency problems can arise between managers and stockholders, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders. 
E)  large, publicly owned firms like ibm and ge are controlled by their management teams. ownership is generally widely dispersed; hence managers have great freedom in how they run the firm. managers may operate in stockholders' best interests, but they also may operate in their own personal best interests. as long as they stay within the law, there is no way to either force or motivate managers to act in the stockholders' best interests. 
A)  the financial manager's proper goal should be to attempt to maximize the firm's expected cash flows, since that will add the most to the individual shareholders' wealth. 
B)  the financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year. 
C)  the riskiness inherent in a firm's earnings per share (eps) depends on the characteristics of the projects the firm selects, and thus on the firm's assets. however, eps is not affected by the manner in which those assets are financed. 
D)  potential agency problems can arise between managers and stockholders, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders. 
E)  large, publicly owned firms like ibm and ge are controlled by their management teams. ownership is generally widely dispersed; hence managers have great freedom in how they run the firm. managers may operate in stockholders' best interests, but they also may operate in their own personal best interests. as long as they stay within the law, there is no way to either force or motivate managers to act in the stockholders' best interests.

Question 15

Which of the following statements is CORRECTσ

Accepted Answer

A)  most businesses (by number and total dollar sales) are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation. however, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships. 
B)  due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of u.s. businesses (in terms of number of businesses) are organized as corporations. 
C)  most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment, due to legal considerations related to ownership transfers and limited liability. 
D)  large corporations are taxed more favorably than sole proprietorships. 
E)  corporate stockholders are exposed to unlimited liability. 
A)  most businesses (by number and total dollar sales) are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation. however, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships. 
B)  due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of u.s. businesses (in terms of number of businesses) are organized as corporations. 
C)  most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment, due to legal considerations related to ownership transfers and limited liability. 
D)  large corporations are taxed more favorably than sole proprietorships. 
E)  corporate stockholders are exposed to unlimited liability.

Question 16

Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts.

Accepted Answer

A) True 
 B)False

Question 17

Debt is a less risky than equity because a debtholder's claim has priority to an equity holder's claim.

Accepted Answer

A) True 
 B)False

Question 18

Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needsσ

Accepted Answer

A)  proprietorship, because of ease of entry. 
B)  s corporation, to gain some tax advantages and also to obtain limited liability. 
C)  partnership, but only if she needs additional capital. 
D)  regular corporation, because of the limited liability. 
E)  in this situation, the various forms of organization seem equally desirable. 
A)  proprietorship, because of ease of entry. 
B)  s corporation, to gain some tax advantages and also to obtain limited liability. 
C)  partnership, but only if she needs additional capital. 
D)  regular corporation, because of the limited liability. 
E)  in this situation, the various forms of organization seem equally desirable.

Question 19

Which of the following statements is CORRECTσ

Accepted Answer

A)  the corporate bylaws are a standard set of rules established by the state of incorporation. these rules are identical for all corporations in the state, and their purpose is to ensure that the firm's managers run the firm in accordance with state laws. 
B)  the corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm's managers run the firm in accordance with state laws. procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter. 
C)  companies must establish a home office, or domicile, in a particular state, and that state must be the one in which most of their business (sales, manufacturing, and so forth) is conducted. 
D)  attorney fees are generally involved when a company develops its charter and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws. 
E)  the corporate charter is concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors. 
A)  the corporate bylaws are a standard set of rules established by the state of incorporation. these rules are identical for all corporations in the state, and their purpose is to ensure that the firm's managers run the firm in accordance with state laws. 
B)  the corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm's managers run the firm in accordance with state laws. procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter. 
C)  companies must establish a home office, or domicile, in a particular state, and that state must be the one in which most of their business (sales, manufacturing, and so forth) is conducted. 
D)  attorney fees are generally involved when a company develops its charter and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws. 
E)  the corporate charter is concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors.

Question 20

There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

Accepted Answer

A) True 
 B)False

Exam 1: An Overview of Financial Management and the Financial Environment

Which of the following statements is CORRECTσ

Which of the following statements is NOT CORRECTσ

If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.

Which of the following statements is CORRECTσ

Which of the following statements is CORRECTσ

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest ratesσ

The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not.

If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.

Which of the following statements is CORRECTσ

Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction.

Which of the following is a primary market transactionσ

If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.

Which of the following statements is CORRECTσ

Which of the following statements is CORRECTσ

Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts.

Debt is a less risky than equity because a debtholder's claim has priority to an equity holder's claim.

Which of the following statements is CORRECTσ

There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

Risk and Return-Part I

Risk and Return-Part II

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Distributions to Shareholders-Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

Filters