Deck 1: Getting Startedprinciples of Finance

Question 1

In a [blank], the life of the partnership is tied to the life of the general partner.

A)private company
B)general partnership
C)public company
D)limited partnership

Answer 1

D

Question 2

Limited liability companies (LLCs)differ from limited partnerships in that [blank].

A)owners of the LLC are subject to double taxation
B)owners of the LLC have unlimited liability for the firm's debt
C)owners of the LLC are not liable for the firm's debt
D)owners of the LLC may not exceed 12 in number

Answer 2

C

Question 3

Assume that you are starting a business.Further, assume that the business is expected to grow very quickly and a great deal of capital will be needed soon.After reading the chapter, which type of business organisation would you choose?

A)Corporation
B)General partnership
C)Limited liability company
D)Limited partnership

Answer 3

A

Question 4

The area of finance that deals with long-term investment decisions is known as [blank].

A)capital structure
B)working capital management
C)financial strategy
D)capital budgeting

Question 5

From a financial point of view, a company that decides to develop a new product is making [blank].

A)a financing decision
B)an investment decision
C)a capital structure decision
D)a cash flow decision

Question 6

A key component of finance is the management and interpretation of [blank].

A)marketing managers
B)accounting staff
C)entrepreneurship
D)information

Question 7

In terms of organisational costs, which of the following sequences is generally correct, moving from lowest to highest cost?

A)General partnership, sole proprietorship, limited partnership, corporation
B)Sole proprietorship, general partnership, limited partnership, corporation
C)Corporation, limited partnership, general partnership, sole proprietorship
D)Sole proprietorship, general partnership, corporation, limited partnership

Question 8

According to the authors, the personal decision to take a year off from work to obtain a graduate degree in business is primarily a(n)[blank] decision.

A)social
B)financial
C)ethical
D)investment

Question 9

Which of the following is true for limited partnerships?

A)Only limited partners can manage the business.
B)All partners must have limited liability.
C)General and limited partners can appear in the name of the firm.
D)Limited partners may sell their interest in the company.

Question 10

The true owners of the corporation are the [blank].

A)holders of debt issues of the firm
B)preferred stockholders
C)board of directors of the firm
D)common stockholders

Question 11

Working capital management refers to [blank].

A)long-term financing decisions
B)the management of cash flows
C)investing in product development
D)capital structure

Question 12

Capital structure refers to the financing of long-term investments.

Question 13

What is the chief disadvantage of the sole proprietorship as a form of business organisation when compared to the corporate form?

A)Sole proprietorships are subject to double taxation of profits
B)The cost of formation
C)Inadequate profit sharing
D)Owners have unlimited liability

Question 14

Sole proprietorships are often used at which stage of a firm's life?

A)After a partnership
B)At the early stages
C)As the number of employees increases
D)When the company goes public

Question 15

Which of the following is a significant disadvantage of a general partnership?

A)The cost of forming it is high.
B)Each partner is fully responsible for the liabilities incurred by the partnership.
C)There is a risk associated with the industry in which it operates.
D)Forming the business is very complex.

Question 16

Which of the following statements best represents what finance is about?

A)The study of how political, social and economic forces affect corporations
B)Maximising profits
C)The study of how people and businesses make investment decisions and how to finance those decisions
D)Reducing risk

Question 17

Which of the following types of business forms is least risky to investors?

A)Sole proprietorship
B)Limited partnership
C)General partnership
D)A public company

Question 18

Which form of organisation is free of initial legal requirements?

A)Sole proprietorship
B)Private company
C)Corporation
D)Public company

Question 19

Which of the following is a characteristic of a corporation?

A)It allows one or more partners to have limited liability.
B)It requires one or more of the partners to be a general partner to whom the privilege of limited liability does not apply.
C)It prohibits the limited partners from participating in the management of the partnership.
D)It is legally owned by its current set of shareholders.

Question 20

One advantage of a corporation is [blank].

A)unlimited liability
B)the life of the business is tied to the status of the investors
C)the classical tax system
D)ease of raising capital

Question 21

Which legal form of businesses will be examined most frequently in this book?

A)The sole proprietorship
B)The general partnership
C)The limited partnership
D)The corporation

Question 22

In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred.

Question 23

The life of a corporation is not dependent upon the status of the investors.

Question 24

If a limited partner dies or leaves the business, the partnership is dissolved and a new partnership must be formed.

Question 25

There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership.

Question 26

A firm's Treasurer is typically responsible for [blank].

A)data processing
B)capital expenditures
C)cost accounting
D)financial statements

Question 27

General partners have unrestricted transferability of ownership, while limited partners must have the consent of all partners to transfer their ownership.

Question 28

The major sources of financing for corporations are [blank].

A)partners contributions
B)exchanges between shareholders
C)interest and dividends
D)debt and equity

Question 29

The authors believe that [blank].

A)most businesses act out of greed to get rich quickly
B)successful companies must choose between maximising return to shareholders and looking after the interests of their customers
C)maximising the wealth of shareholders and doing the right thing for other stakeholders in the company go hand in hand
D)companies that achieve their goals have competing objectives

Question 30

Ultimate control in a corporation is vested in the board of directors.

Question 31

In a limited partnership, at least one general partner must remain in the association; the privilege of limited liability still applies to this partner.

Question 32

Which of the following is central to all five priorities at Woolworths Ltd?

A)Shareholders
B)Strategy
C)Culture
D)Customers

Question 33

A corporation is owned by [blank].

A)its Chief Operations Officer
B)the shareholders
C)the Board of Directors
D)its Chief Executive Officer (CEO)

Question 34

Limited partners may actively manage the business.

Question 35

Owners must register and pay yearly fees to their State of residence when establishing a sole proprietorship.

Question 36

In a general partnership, all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm.

Question 37

The owners of a corporation are liable for the corporation's obligations up to the amount of their investment.

Question 38

Compare and contrast the duties of a corporate Treasurer and a Financial Controller.

Question 39

The sole proprietorship is the same as the individual for liability purposes.

Question 40

A limited partner is liable [blank].

A)for only his or her own share of the partnership's debts
B)for his or her own share of the partnership's debts and contingently liable for the other partners shares
C)only up to the amount invested by that partner
D)for none of the partnership's debts

Question 41

Business dealings between people and firms ultimately depend on the [blank].

A)willingness of parties to trust one another
B)perfectly crafted contract
C)ability of all parties to not make errors
D)maximising wealth of shareholders

Question 42

Unethical insider trading by government officials inspired both the Sarbanes-Oxley Act and CLERP 9.

Question 43

[blank] are the principal owners of a corporation.

A)Shareholders
B)Managers
C)Employees
D)Suppliers

Question 44

Most criticism of legislation aimed at preventing corporate collapses and scandals has focused on [blank].

A)the excessive cost of compliance
B)inadequate penalties for violations
C)diminished competitiveness of US corporations in international markets
D)decreased confidence in financial reporting

Question 45

The goal of maximising shareholder wealth inevitably conflicts with socially responsible behaviour on the part of corporations.

Question 46

Profit maximisation is not an adequate goal of the firm when making financial decisions because [blank].

A)it reflects shareholder wealth maximisation
B)it reflects the risk inherent in different projects that will generate the profits
C)it ignores the timing of a project's returns
D)it minimises the share price

Question 47

If managers do not pursue the goal of maximising shareholder wealth [blank].

A)they concentrate on more important matters like growing market share
B)they can focus more on social responsibilities
C)they are likely to lose their jobs
D)they can focus more on long-term profitability

Question 48

The goal of profit maximisation ignores the timing of profit.

Question 49

The case of Tony Faddell and the MP3 player is an illustration of how [blank].

A)a management team's investment decision can positively affect a firm's total value
B)becoming a lean retailer through end-to-end process and systems excellence
C)maximising wealth of shareholders is more important than doing the right thing for stakeholders
D)lack of financial ethics can cost investors billions of dollars

Question 50

The Sarbanes-Oxley Act of 2002 [blank].

A)protects managers of publicly held corporations from frivolous lawsuits for unethical behaviour
B)prohibits managers of publicly held corporations from personally profiting from non-public information
C)holds those who influence corporate decisions legally accountable for unethical conduct
D)allows corporate accountants greater latitude in the application of generally accepted accounting principles

Question 51

Managers of corporations need to act in an ethical manner [blank].

A)because ethics violations will be punished by the law
B)because a business must be trusted by investors, customer and the public if it is to succeed
C)because business managers must answer to a higher authority
D)because ethical behaviour is its own justification

Question 52

The goal of the firm should be the maximisation of profit.

Question 53

Which act mandates that Australian CEOs and CFOs must affirm in writing that company financial statements are 'true and fair?'

A)The Corporate Law Economic Reform Program Act 2004
B)The Insider Trading Act of 1988
C)The Sarbanes-Oxley Act
D)The Bank Integration Act of 1901

Question 54

It is impossible to write a perfect contract.

Question 55

The goal of profit maximisation is equivalent to the goal of maximisation of share value.

Question 56

In 2002, following serious ethical violations by corporations such as Enron, the United States Congress passed the [blank].

A)Dodd-Frank Act
B)Insider Trading Act of 1988
C)Sarbanes-Oxley Act
D)Bank Integration Act of 1901

Question 57

Which of the following goals is in the best long-term interest of shareholders?

A)Profit maximisation
B)Risk minimisation
C)Maximising of the market value of the existing shareholders' common stock
D)Maximising sales revenues

Question 58

One of the problems associated with profit maximisation is that it ignores the timing of a project's return.

Question 59

A reputation for unethical behaviour can negatively affect the value of a company's shares.

Question 60

Managing funding for the company's day-to-day operations is known as [blank].

A)capital budgeting decisions
B)working capital management
C)capital structure decisions
D)generating sustainable portfolios

Question 61

In measuring value, the focus should be on [blank].

A)cash flow
B)accounting profits
C)time value of money
D)earnings per share

Question 62

Foregoing the earning potential of a dollar today is referred to as the [blank].

A)time value of money
B)opportunity cost concept
C)risk-return trade-off
D)creation of wealth

Question 63

If an investor had a choice of receiving $1000 today, or $1000 in five years, which would the average investor prefer?

A)$1000 in five years because they are not good at saving money
B)$1000 today because it will be worth more than $1000 received in five years
C)$1000 in five years because it will be worth more than $1000 received today
D)Investors would be indifferent to when they would receive the $1000

Question 64

In finance, we assume that investors are generally [blank].

A)tolerant of risk
B)averse to risk
C)expecting risk
D)natural risk-takers

Question 65

Consider the following equally likely project outcomes:

A)Investors will prefer project X because it potentially offers a higher profit.
B)Investors will reject both projects because the profit is too low.
C)Investors will prefer project Y because the expected return is the same as for project X but the outcome is certain.
D)Since projects X and Y have the same expected outcomes of $500, investors will view them as identical in value.

Question 66

Who was Alan Bond? What lessons does his story offer business entrepreneurs?

Question 67

Why do investors prefer receiving cash sooner rather than later, according to finance theory?

A)Incremental profits are greater than accounting profits.
B)Money received earlier can be reinvested and returns can be increased.
C)Tax considerations are important when investing.
D)Diversification leads to increased value.

Question 68

If one security has a greater risk than another security, investors will most likely require a [blank] rate of return for the investment that has the [blank] risk.

A)lower; greater
B)higher; lower
C)higher; greater
D)lower; lesser

Question 69

In November 2005, traders on the ground sold off a significant amount of Nike's shares while Nike's CEO was flying aboard the company's Gulfstream jet.The jet was malfunctioning and traders were watching television coverage of the event.This scenario illustrates which principle?

A)Market prices reflect information
B)Individuals respond to incentives
C)Cash flows are the source of value
D)The time value of money

Question 70

The risk-return principle implies that the more risky a given course of action, the higher the expected return must be.

Question 71

Briefly discuss the incentives for financial managers to conduct their business in an ethical manner.

Question 72

Investors choose to invest in higher risk investments because these investments offer higher [blank].

A)expected returns
B)inflation
C)actual returns
D)future consumption

Question 73

Which of the following is a characteristic of an efficient market?

A)Small number of individuals
B)Opportunities exist for investors to profit from publicly available information
C)Security prices reflect fair value of the firm
D)Immediate response occurs for new public information

Question 74

Consider cash flows for projects X and Y such as: A rational person would prefer receiving cash flows sooner because [blank].

A)the money can be reinvested
B)the money is nice to have around
C)the investor may be tired of a particular investment
D)the investor is indifferent to either proposal

Question 75

The two worst performers on the ASX in 2016 were healthcare companies.

Question 76

Which of the following factors is most important in investment decisions?

A)The change in earnings before taxes
B)The change in gross sales revenue
C)The change in net income
D)The change in after-tax cash flow

Question 77

Which of the following should be considered when assessing the financial impact of business decisions?

A)The amount of projected earnings
B)The risk-return trade-off
C)The timing of projected earnings-that is, when they are expected to occur
D)All of the above

Question 78

Which of the following is most likely to motivate executives to maximise shareholder wealth?

A)Tying bonuses to cost reductions and meeting budget goals
B)Offering them relatively high salaries
C)Tying annual bonuses to increases in annual profits
D)Compensating them with stock options that can only be exercised after five years

Question 79

How could you compensate an investor for taking on a significant amount of risk?

A)Increase the expected rate of return
B)Raise more debt capital
C)Offer stock at a higher price
D)Increase sales

Question 80

Consider the timing of the profits of the following certain investment projects:

A)Project S is preferred to project L.
B)Project L is preferred to project S.
C)Projects S and L are equally desirable.
D)A goal of profit maximisation would favour project S only.