Question 1

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

Accepted Answer

A)  The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced. 
B)  The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. 
C)  The percentage of the firm's stock that is held by institutional investors such as mutual funds,pension funds,and hedge funds rather than by small individual investors rises from 10% to 80%. 
D)  The firm's founder,who is also president and chairman of the board,sells 90% of her shares. 
E)  The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval. 
A)  The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced. 
B)  The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. 
C)  The percentage of the firm's stock that is held by institutional investors such as mutual funds,pension funds,and hedge funds rather than by small individual investors rises from 10% to 80%. 
D)  The firm's founder,who is also president and chairman of the board,sells 90% of her shares. 
E)  The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure. 
B)  The threat of takeover generally increases potential conflicts between stockholders and managers. 
C)  Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. 
D)  The threat of takeovers tends to reduce potential conflicts between stockholders and managers. 
E)  The creation of the Securities and Exchange Commission (SE
C) has eliminated conflicts between managers and stockholders. 
A)  One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure. 
B)  The threat of takeover generally increases potential conflicts between stockholders and managers. 
C)  Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. 
D)  The threat of takeovers tends to reduce potential conflicts between stockholders and managers. 
E)  The creation of the Securities and Exchange Commission (SE
C) has eliminated conflicts between managers and stockholders.

Question 3

Which of the following statements is CORRECT?

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 are partners. 
B)  Relative to proprietorships,corporations generally face fewer regulations,and they also find it easier to raise capital. 
C)  There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of assets in which it invests. 
D)  Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns. 
E)  Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value. 
A)  One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than are partners. 
B)  Relative to proprietorships,corporations generally face fewer regulations,and they also find it easier to raise capital. 
C)  There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of assets in which it invests. 
D)  Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns. 
E)  Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.

Question 4

If a corporation elects to be taxed as an S corporation,then it can avoid the corporate tax.However,its stockholders will have to pay personal taxes on the firm's net income.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  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. 
B)  Most businesses (by number and total dollar sales)are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation.However,if the business gets very large,it becomes advantageous to convert to a corporation,primarily because corporations have important tax advantages over proprietorships and partnerships. 
C)  Due to legal considerations related to ownership transfers and limited liability,which affect the ability to attract capital,most business (measured by dollar sales)is conducted by corporations in spite of large corporations' less favorable tax treatment. 
D)  Large corporations are taxed more favorably than proprietorships. 
E)  Corporate stockholders are exposed to unlimited liability. 
A)  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. 
B)  Most businesses (by number and total dollar sales)are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation.However,if the business gets very large,it becomes advantageous to convert to a corporation,primarily because corporations have important tax advantages over proprietorships and partnerships. 
C)  Due to legal considerations related to ownership transfers and limited liability,which affect the ability to attract capital,most business (measured by dollar sales)is conducted by corporations in spite of large corporations' less favorable tax treatment. 
D)  Large corporations are taxed more favorably than proprietorships. 
E)  Corporate stockholders are exposed to unlimited liability.

Question 6

The more capital a firm is likely to require,the greater the probability that it will be organized as a corporation.

Accepted Answer

A) True 
 B)False

Question 7

If someone deliberately understates costs and thereby increases profits,this can cause the stock price to rise above its intrinsic value.The stock price will probably fall in the future.Also,those who participated in the fraud can be prosecuted,and the firm itself can be penalized.

Accepted Answer

A) True 
 B)False

Question 8

Assume that the corporate tax rate is 34% and the personal tax rate is 30%.The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation.The firm will not need to retain any earnings,so all of its after-tax income will be paid out to its investors,who will have to pay personal taxes on whatever they receive.What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization?

Accepted Answer

A)  22.61% 
B)  23.80% 
C)  21.90% 
D)  23.56% 
E)  28.56% 
A)  22.61% 
B)  23.80% 
C)  21.90% 
D)  23.56% 
E)  28.56%

Question 9

With which of the following statements would most people in business agree?

Accepted Answer

A)  A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation. 
B)  Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees. 
C)  "Whistle blowers," because of the courage it takes to blow the whistle,are generally promoted more rapidly than other employees. 
D)  It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. 
E)  Although people's moral characters are probably developed before they are admitted to a business school,it is still useful for business schools to cover ethics,if only to give students an idea about the adverse consequences of unethical behavior to themselves,their firms,and the nation. 
A)  A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation. 
B)  Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees. 
C)  "Whistle blowers," because of the courage it takes to blow the whistle,are generally promoted more rapidly than other employees. 
D)  It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. 
E)  Although people's moral characters are probably developed before they are admitted to a business school,it is still useful for business schools to cover ethics,if only to give students an idea about the adverse consequences of unethical behavior to themselves,their firms,and the nation.

Question 10

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Accepted Answer

A)  Decrease the use of restrictive covenants in bond agreements. 
B)  Take actions that reduce the possibility of a hostile takeover. 
C)  Elect a board of directors that allows managers greater freedom of action. 
D)  Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. 
E)  Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock. 
A)  Decrease the use of restrictive covenants in bond agreements. 
B)  Take actions that reduce the possibility of a hostile takeover. 
C)  Elect a board of directors that allows managers greater freedom of action. 
D)  Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. 
E)  Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)  One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy. 
B)  Proprietorships are subject to more regulations than corporations. 
C)  In any partnership,every partner has the same rights,privileges,and liability exposure as every other partner. 
D)  Corporations of all types are subject to the corporate income tax. 
E)  Proprietorships and partnerships generally have a tax advantage over corporations. 
A)  One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy. 
B)  Proprietorships are subject to more regulations than corporations. 
C)  In any partnership,every partner has the same rights,privileges,and liability exposure as every other partner. 
D)  Corporations of all types are subject to the corporate income tax. 
E)  Proprietorships and partnerships generally have a tax advantage over corporations.

Question 12

For a stock to be in equilibrium as the book defines it,its market price should exceed its intrinsic value.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  Corporations are taxed more favorably than proprietorships. 
B)  Corporations have unlimited liability. 
C)  Because of their size,large corporations face fewer regulations than smaller corporations and proprietorships. 
D)  Reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders' interests. 
E)  Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders. 
A)  Corporations are taxed more favorably than proprietorships. 
B)  Corporations have unlimited liability. 
C)  Because of their size,large corporations face fewer regulations than smaller corporations and proprietorships. 
D)  Reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders' interests. 
E)  Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.

Question 14

As a result of financial scandals occurring during the past decade,there has been a strong push to improve business ethics.

Accepted Answer

A) True 
 B)False

Question 15

In order to maximize its shareholders' value,a firm's management must attempt to maximize the expected EPS.

Accepted Answer

A) True 
 B)False

Question 16

There are many types of unethical business behavior.One example is where executives provide information that they know is incorrect to banks and to stockholders.It is illegal to provide such information to banks,but it is not illegal to provide it to stockholders because they are the owners of the firm,not outsiders.

Accepted Answer

A) True 
 B)False

Question 17

If a stock's intrinsic value is greater than its market price,then the stock is overvalued and should be sold.

Accepted Answer

A) True 
 B)False

Question 18

​The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose,barring any new information coming out about the stock.It is the "marginal investor" who determines the actual stock price.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  In most corporations,the CFO ranks above the CEO. 
B)  By law in most states,the chairman of the board must also be the CEO. 
C)  The board of directors is the highest ranking body in a corporation,and the chairman of the board is the highest ranking individual.The CEO generally works under the board and its chairman,and the board generally has the authority to remove the CEO under certain conditions.The CEO,however,cannot remove the board,but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise.It is possible for a person to simultaneously serve as CEO and chairman of the board,though many corporate control experts believe it is bad to vest both offices in the same person. 
D)  The CFO generally reports to the firm's chief accounting officer,who is normally the controller. 
E)  The CFO is responsible for raising capital and for making sure that capital expenditures are desirable,but he or she is not responsible for the validity of the financial statements,as the controller and the auditors have that responsibility. 
A)  In most corporations,the CFO ranks above the CEO. 
B)  By law in most states,the chairman of the board must also be the CEO. 
C)  The board of directors is the highest ranking body in a corporation,and the chairman of the board is the highest ranking individual.The CEO generally works under the board and its chairman,and the board generally has the authority to remove the CEO under certain conditions.The CEO,however,cannot remove the board,but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise.It is possible for a person to simultaneously serve as CEO and chairman of the board,though many corporate control experts believe it is bad to vest both offices in the same person. 
D)  The CFO generally reports to the firm's chief accounting officer,who is normally the controller. 
E)  The CFO is responsible for raising capital and for making sure that capital expenditures are desirable,but he or she is not responsible for the validity of the financial statements,as the controller and the auditors have that responsibility.

Question 20

If a corporation elects to be taxed as an S corporation,then both it and its stockholders can avoid all Federal taxes.This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.

Accepted Answer

A) True 
 B)False

Exam 1: An Overview of Financial Management

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

If a corporation elects to be taxed as an S corporation,then it can avoid the corporate tax.However,its stockholders will have to pay personal taxes on the firm's net income.

Which of the following statements is CORRECT?

The more capital a firm is likely to require,the greater the probability that it will be organized as a corporation.

If someone deliberately understates costs and thereby increases profits,this can cause the stock price to rise above its intrinsic value.The stock price will probably fall in the future.Also,those who participated in the fraud can be prosecuted,and the firm itself can be penalized.

With which of the following statements would most people in business agree?

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Which of the following statements is CORRECT?

For a stock to be in equilibrium as the book defines it,its market price should exceed its intrinsic value.

Which of the following statements is CORRECT?

As a result of financial scandals occurring during the past decade,there has been a strong push to improve business ethics.

In order to maximize its shareholders' value,a firm's management must attempt to maximize the expected EPS.

If a stock's intrinsic value is greater than its market price,then the stock is overvalued and should be sold.

​The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose,barring any new information coming out about the stock.It is the "marginal investor" who determines the actual stock price.

Which of the following statements is CORRECT?

If a corporation elects to be taxed as an S corporation,then both it and its stockholders can avoid all Federal taxes.This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.

Financial Markets and Institutions

Financial Statements,cash Flow,and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Capital Structure and Leverage

Distribution to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Interest Rates and Compounding

Zero Coupon Bonds and Taxation

Taxes, Bankruptcy Act, and Financial Management

Capital Budgeting and Risk Analysis

Financial Analysis and Capital Structure Decision Making

Comparing Two Mutually Exclusive Projects: NPV and Equivalent Annual Annuity Analysis

Financial Leverage and Operating Leverage

Filters

The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose,barring any new information coming out about the stock.It is the "marginal investor" who determines the actual stock price.