Question 1

Which of the following statements is CORRECT?

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.

Question 2

​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 3

Which of the following statements is CORRECT?

Accepted Answer

A)  In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. 
B)  Attracting large amounts of capital is more difficult for partnerships than for corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. 
C)  A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company. 
D)  The limited partners in a limited partnership have voting control, while the general partner has operating control over the business.Also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. 
E)  A major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

Question 4

​ Which of the following statements is NOT CORRECT?

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.

Question 5

​You recently sold 200 shares of Apple stock to your brother.The transfer was made through a broker, and the trade occurred on the NYSE.This is an example of:

Accepted Answer

A)  ​A futures market transaction. 
B)  ​A primary market transaction. 
C)  ​A secondary market transaction. 
D)  ​A money market transaction. 
E)  ​An over-the-counter market transaction.

Question 6

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

Accepted Answer

A)  Maximize the stock price per share over the long run, which is the stock's intrinsic value. 
B)  Maximize the firm's expected EPS. 
C)  Minimize the chances of losses. 
D)  Maximize the firm's expected total income. 
E)  Maximize the stock price on a specific target date.

Question 7

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 8

​Money markets are markets for

Accepted Answer

A)  ​Foreign stocks. 
B)  ​Consumer automobile loans. 
C)  ​U.S.stocks. 
D)  ​Short-term debt securities. 
E)  ​Long-term bonds.

Question 9

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 10

The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)  One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. 
B)  It is generally easier to transfer one's ownership interest in a partnership than in a corporation. 
C)  One of the advantages of the corporate form of organization is that it avoids double taxation. 
D)  One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote." 
E)  Corporations of all types are subject to the corporate income tax.

Question 12

​ Which of the following statements is CORRECT?

Accepted Answer

A)  ​If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction. 
B)  ​If you purchased 100 shares of Apple stock from your sister-in-law, this would be an example of a primary market transaction. 
C)  ​The IPO market is a subset of the secondary market. 
D)  ​Only institutions, and not individuals, can participate in derivatives market transactions. 
E)  ​As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned. 
B)  In a regular partnership, liability for the firm's debts is limited to the amount a particular partner has invested in the business. 
C)  A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company. 
D)  Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership. 
E)  A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation.

Question 14

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 15

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 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 16

Which of the following statements is CORRECT?

Accepted Answer

A)  It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required. 
B)  Corporations face fewer regulations than sole proprietorships. 
C)  One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level. 
D)  One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership. 
E)  If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)  A good goal for a firm's management is maximization of expected EPS. 
B)  Most business in the U.S.is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment. 
C)  Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society. 
D)  Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited. 
E)  The potential exists for agency conflicts between stockholders and managers.

Question 18

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

Question 19

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 20

Which of the following factors would be most likely to lead to an increase in interest rates in the economy?

Accepted Answer

A)  Households reduce their consumption and increase their savings. 
B)  The Federal Reserve decides to try to stimulate the economy. 
C)  There is a decrease in expected inflation. 
D)  The economy falls into a recession. 
E)  Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs.

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

Which of the following statements is CORRECT?

​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 statements is CORRECT?

​ Which of the following statements is NOT CORRECT?

​You recently sold 200 shares of Apple stock to your brother.The transfer was made through a broker, and the trade occurred on the NYSE.This is an example of:

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

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.

​Money markets are markets for

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.

The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

Which of the following statements is CORRECT?

​ Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

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 factors would be most likely to lead to an increase in interest rates in the economy?

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 statements is NOT CORRECT?

You recently sold 200 shares of Apple stock to your brother.The transfer was made through a broker, and the trade occurred on the NYSE.This is an example of:

Money markets are markets for

Which of the following statements is CORRECT?