Deck 1: Goals and Governance of the Corporation

Question 1

The separation of ownership and management is one distinctive feature of corporations.

Answer 1

True

Question 2

If a project's value is less than its required investment, then the project is financially attractive.

Answer 2

False

Question 3

A successful investment is one that increases the value of the firm.

Answer 3

True

Question 4

The Dodd-Frank financial reform law in 2010 granted shareholders a binding vote on executive compensation.

Question 5

The primary goal of any company should be to maximize current period profits.

Question 6

Volkswagen's issuance of a 2.5 billion euro convertible bond is a financing decision.

Question 7

A major disadvantage of partnerships is that they have double taxation of profits.

Question 8

Sole proprietorships face the same agency problems as those associated with corporations.

Question 9

Boards of directors are generally appointed by the firm's senior officers.

Question 10

Capital budgeting decisions are used to determine how to raise the cash necessary for investments.

Question 11

General partners have limited personal liability for business debts in a limited partnership.

Question 12

Maximizing profits is the same as maximizing the value of the firm.

Question 13

Facebook's decision to spend $700 million to acquire Instagram is an investment decision.

Question 14

Financial analysts are involved in monitoring and controlling the risk associated with investment projects and financing decisions.

Question 15

The liability of sole proprietors is limited to the amount of their investment in the company.

Question 16

Real assets can be intangible assets.

Question 17

An IOU ("I owe you") from your brother-in-law is a financial asset.

Question 18

Financial assets have value because they are claims on the firm's real assets and the cash that those assets will produce.

Question 19

Making good investment and financing decisions is the chief task of the financial manager.

Question 20

GlaxoSmithKline's spending of $6 billion in 2012 on research and development of new drugs is a capital budgeting decision but not a financing decision.

Question 21

Which of the following is a disadvantage to incorporating a business?

A) Easier access to financial markets
B) Limited liability
C) Becoming a permanent legal entity
D)Profits taxed at the corporate level and the shareholder level

Question 22

A board of directors is elected as a representative of the corporation's:

A) top management.
B) stakeholders.
C) shareholders.
D)customers.

Question 23

Which of the following is least likely to be discussed in the articles of incorporation?

A) How the firm is to be financed
B) The purpose of the business
C) The price range of the shares of stock
D)How the board of directors is to be structured

Question 24

The separation of ownership and management is one distinctive feature of both corporations and sole proprietors.

Question 25

Which one of the following would correctly differentiate general partners from limited partners in a limited partnership?

A) General partners have more job experience.
B) General partners have an ownership interest.
C) General partners are subject to double taxation.
D)General partners have unlimited personal liability.

Question 26

Which form of organization provides limited liability for the firm but yet allows the professionals working within that firm to be sued personally?

A) Limited liability partnership
B) Limited liability company
C) Sole proprietorship
D)Professional corporation

Question 27

Shareholders welcome higher short-term profits even when they damage long-term profits.

Question 28

Which one of these statements correctly applies to a limited partnership?

A) All partners share the daily management duties.
B) All partners enjoy limited personal liability.
C) General partners have unlimited personal liability.
D)Taxes are imposed at both the firm and the personal level on profits earned.

Question 29

Which one of the following gives a corporation its permanence?

A) Multiple owners
B) Limited liability
C) Corporation taxation
D)Separation of ownership and control

Question 30

Unlimited liability is faced by the owners of:

A) corporations.
B) partnerships and corporations.
C) sole proprietorships and general partnerships.
D)all forms of business organization.

Question 31

"Double taxation" refers to:

A) all partners paying equal taxes on profits.
B) corporations paying taxes on both dividends and retained earnings.
C) paying taxes on profits at the corporate level and dividends at the personal level.
D)the fact that marginal tax rates are doubled for corporations.

Question 32

In the case of a limited liability partnership, ________ has/have limited liability.

A) only some of partners
B) only the managing partner
C) all of the partners
D)none of the partners

Question 33

When the management of a business is conducted by individuals other than the owners, the business is most likely to be a:

A) corporation.
B) sole proprietorship.
C) partnership.
D)general partner.

Question 34

A well-designed compensation package can help a firm achieve its goal of maximizing market value.

Question 35

In a partnership form of organization, income tax liability, if any, is incurred by:

A) the partnership itself.
B) the partners individually.
C) both the partnership and the partners.
D)neither the partnership nor the partners.

Question 36

While control of large public companies in the United States is exercised through the board of directors and pressure from the stock market, in many other countries the stock market is less important and control shifts to major stockholders, typically banks and other companies.

Question 37

Established firms can create value by developing long-term relationships and maintaining a good reputation.

Question 38

When a corporation fails, the maximum that can be lost by an individual shareholder is:

A) the amount of their initial investment.
B) the amount of their share of the profits.
C) their proportionate share required to pay the corporation's debts.
D)the amount of their personal wealth.

Question 39

Which one of these is a disadvantage of the corporate form of business?

A) Access to capital
B) Unlimited personal liability for owners
C) Limited firm life
D)Legal requirements

Question 40

The legal "life" of a corporation is:

A) coincidental with that of its CEO.
B) equal to the life of its board of directors.
C) permanent, as long as shareholders don't change.
D)permanent, regardless of current ownership.

Question 41

Firms can alter their capital structure by:

A) not accepting any new capital budgeting projects.
B) investing in intangible assets.
C) issuing stock to repay debt.
D)becoming a limited liability company.

Question 42

Which one of the following is a real asset?

A) A patent
B) A personal IOU
C) A checking account balance
D)A share of stock

Question 43

Which one of these statements is correct?

A) Financial managers have a fiduciary duty to stockholders.
B) Financial managers are concerned only with funds that flow to investors.
C) The chief financial officer generally reports directly to the corporate treasurer.
D)The corporate controller is primarily responsible for overseeing a firm's cash functions.

Question 44

An example of a firm's financing decision would be:

A) acquiring a competitive firm.
B) determining how much to pay for a specific asset.
C) issuing 10-year versus 20-year bonds.
D)deciding whether or not to increase the price of its products.

Question 45

A firm decides to pay for a small investment project through a $1 million increase in short-term bank loans. This is best described as an example of a(n):

A) financing decision.
B) investment decision.
C) capital budgeting decision.
D)capital expenditure decision.

Question 46

Which one of these is a capital budgeting decision?

A) Deciding between issuing stock or debt securities
B) Deciding whether or not the firm should go public
C) Deciding if the firm should repurchase some of its outstanding shares
D)Deciding whether to buy a new machine or repair the old machine

Question 47

The overall goal of capital budgeting projects should be to:

A) decrease the firm's reliance on debt.
B) increase the firm's sales.
C) increase the firm's outstanding shares of stock.
D)increase the wealth of the firm's shareholders.

Question 48

Which of the following statements best distinguishes the difference between real and financial assets?

A) Real assets have less value than financial assets.
B) Real assets are tangible; financial assets are not.
C) Financial assets represent claims to income that is generated by real assets.
D)Financial assets appreciate in value; real assets depreciate in value.

Question 49

Which one of the following would be considered a capital budgeting decision?

A) Planning to issue common stock rather than issuing preferred stock
B) Deciding to expand into a new line of products, at a cost of $5 million
C) Repurchasing shares of common stock
D)Issuing debt in the form of long-term bonds

Question 50

Corporate managers are expected to make corporate decisions that are in the best interest of:

A) top corporate management.
B) the corporation's board of directors.
C) the corporation's shareholders.
D)all corporate employees.

Question 51

Corporations that issue financial securities such as stock or debt obligations to the public do so primarily to:

A) increase sales.
B) become profitable.
C) increase their access to funds.
D)avoid double taxation of their profits.

Question 52

A corporation is considered to be closely held when:

A) only a few shareholders exist.
B) the market value of the shares is stable.
C) it operates in a small geographic area.
D)management also serves as the board of directors.

Question 53

Which of the following is a capital budgeting decision?

A) Should the firm borrow money from a bank or sell bonds?
B) Should the firm shut down an unprofitable factory?
C) Should the firm buy or lease a new machine that it is committed to acquiring?
D)Should the firm issue preferred stock or common stock?

Question 54

Which one of these is not considered to be a security?

A) Shares of GE stock
B) A bond traded in the financial market
C) A mortgage loan issued and held by a bank
D)A convertible bond issued to the public

Question 55

Which one of the following is a financial asset?

A) A corporate bond
B) A machine
C) A patent
D)A factory

Question 56

The term "capital structure" refers to:

A) the manner in which a firm obtains its long-term sources of funding.
B) the length of time needed to repay debt.
C) whether or not the firm invests in capital budgeting projects.
D)the types of assets a firm acquires.

Question 57

Which of these duties are responsibilities of the corporate treasurer?

A) Financial statements and taxes
B) Cash management and tax reporting
C) Cash management and banking relationships
D)Raising capital and financial statements

Question 58

A common problem for closely held corporations is:

A) the lack of access to substantial amounts of capital.
B) the restriction that shareholders receive only one vote each.
C) the separation of ownership and management.
D)an abundance of agency problems.

Question 59

Corporations are referred to as public companies when their:

A) shareholders have no tax liability.
B) shares are held by the federal or state government.
C) stock is publicly traded.
D)products or services are available to the public.

Question 60

The best criterion for success in a capital budgeting decision would be to:

A) minimize the cost of the investment.
B) maximize the number of capital budgeting projects.
C) maximize the value added to the firm.
D)finance all capital budgeting projects with debt.

Question 61

In a firm having both a treasurer and a controller, which of the following would most likely be handled by the controller?

A) Internal auditing
B) Credit management
C) Banking relationships
D)Insurance

Question 62

Agency problems can least be controlled by:

A) establishing good internal controls and procedures.
B) designing compensation packages that align manager's goals with those of the shareholders.
C) corporate governance.
D)electing senior managers to the board of directors.

Question 63

Ethical decision making in business:

A) reduces the firm's profits.
B) requires adherence to implied rules as well as written rules.
C) is not in the best interests of shareholders.
D)is less important than good capital budgeting decisions.

Question 64

Which of the following appears to be the most appropriate goal for corporate management?

A) Maximizing market value of the company's shares
B) Maximizing the company's market share
C) Maximizing the current profits of the company
D)Minimizing the company's liabilities

Question 65

Investment banks like Morgan Stanley or Goldman Sachs:

A) collect deposits and relend the cash to corporations and individuals.
B) help companies sell their securities to investors.
C) design and sell insurance policies for businesses.
D)lend to corporations and investors in commercial real estate.

Question 66

Financial managers should only accept investment projects that:

A) increase the current profits of the firm.
B) can increase the firm's market share.
C) earn a higher rate of return than the firm currently earns on its existing projects.
D)earn a higher rate of return than shareholders can get by investing on their own.

Question 67

Corporate raiders will be looked upon most favorably if they:

A) divide up large profitable entities.
B) take actions that increase current shareholder wealth.
C) create value for themselves through their actions.
D)change the capital structure of a firm by increasing its debt.

Question 68

Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm?

A) Treasurer
B) Controller
C) Chief Operating Officer
D)Board of directors

Question 69

In a large corporation, budget preparation would most likely be conducted by the:

A) treasurer.
B) controller.
C) chief financial officer.
D)financial manager.

Question 70

Which one of these determines the minimum acceptable rate of return on a capital investment?

A) The available alternative investment opportunities
B) The profit margin of the existing firm
C) The rate of return on the firm's outstanding shares
D)The rate of return on risk-free debt securities

Question 71

A block holder is commonly defined as an investor who:

A) owns 5 percent or more of a firm's outstanding shares.
B) invests in more than one firm within the same industry.
C) is another corporation.
D)is also one of the firm's managers or directors.

Question 72

The primary goal of corporate management should be to:

A) maximize the number of shareholders.
B) maximize the firm's profits.
C) minimize the firm's costs.
D)maximize the shareholders' wealth.

Question 73

A chief financial officer would typically:

A) report to the treasurer, but supervise the controller.
B) report to the controller, but supervise the treasurer.
C) report to both the treasurer and controller.
D)supervise both the treasurer and controller.

Question 74

Ethical decision making by management has a payoff for shareholders in terms of:

A) improved capital structure.
B) enhanced firm reputation value.
C) increased managerial benefits.
D)higher current dividend payments.

Question 75

How may a reduction in cash dividends be in the best interests of current shareholders?

A) A reduction of cash dividends is always in the best interests of current shareholders.
B) The firm will have available cash to increase current investment and future profits.
C) Reduced dividends increase managerial compensation, thus increasing managers' motivation.
D)A reduction of cash dividends cannot be in the best interests of current shareholders.

Question 76

Which one of these best defines the objective of a well-functioning financial market?

A) Establishing accurate security prices
B) Creating higher security prices
C) Eliminating short-selling profits
D)Increasing shareholder value by any means possible

Question 77

Which one of the following statements more accurately describes the controller than the treasurer?

A) Reports directly to the chief executive officer
B) Monitors capital expenditures to make sure that they are not misappropriated
C) Responsible for investing the firm's spare cash
D)Responsible for arranging any issue of common stock

Question 78

The short-term decisions of financial managers are comprised of:

A) capital structure decisions only.
B) investment decisions only.
C) financing decisions only.
D)both investment and financing decisions.

Question 79

A corporate board of directors should provide support for the top management team:

A) under all circumstances.
B) in all decisions related to cash dividends.
C) only when the board approves of management's actions.
D)if shareholders are pleased with the firm's performance.

Question 80

A financial analyst in a corporation may be involved with all of the following EXCEPT:

A) analyzing a new investment project.
B) monitoring risk.
C) managing investment of the company's cash.
D)purchasing the firm's plant and equipment.