Deck 1: Goals and Governance of the Firm

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

Real assets can be intangible assets.

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

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 24

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 25

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 26

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 27

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 28

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

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

Question 29

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 30

"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 31

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 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

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 34

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 35

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 36

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

Question 37

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 38

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 39

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

Question 40

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

Question 41

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 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

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

Which one of the following is a financial asset?

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

Question 53

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 54

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 55

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 56

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 57

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 58

The term "capital structure" refers to:

A) the mix of long-term debt and equity financing.
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 59

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 60

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 61

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 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) good systems of corporate governance.
D) electing senior managers to the board of directors.

Question 63

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 64

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 65

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 66

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 67

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

A) The alternative investment opportunities available to investors
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 68

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 69

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 70

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.

Question 71

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 72

A firm with spare cash

A) should always reinvest it in new equipment.
B) should pay it out to shareholders unless the firm can earn a higher rate of return on the cash than the shareholders can earn by investing in the capital market.
C) should invest it in the safest projects available.
D) Should always invest it in U.S. equities.

Question 73

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 74

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 75

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 76

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 77

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 78

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 79

In a large corporation,preparation of the firm's financial statements would most likely be conducted by the:

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

Question 80

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