Question 1

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  True

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.
B)   Corporate shareholders are exposed to unlimited liability.
C)   Corporations generally face fewer regulations than sole proprietorships.
D)   Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.
E)   Shareholders in a regular corporation (not an S corporation)  pay higher taxes than owners of an otherwise identical proprietorship. A

Question 3

​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. D

Question 4

Debt is a less risky than equity because a debtholder's claim has priority to an equity holder's claim.

Accepted Answer

A) True 
 B)False

Question 5

One drawback of switching from a partnership to the corporate form of organization is the following:

Accepted Answer

A)   It subjects the firm to additional regulations.
B)   It cannot affect the amount of the firm's operating income that goes to taxes.
C)   It makes it more difficult for the firm to raise additional capital.
D)   It makes the firm's investors subject to greater potential personal liabilities.
E)   It makes it more difficult for the firm's investors to transfer their ownership interests.

Question 6

​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 7

Which of the following statements is CORRECT?

Accepted Answer

A)   Corporations generally are subject to more favorable tax treatment and fewer regulations than partnerships and sole proprietorships, which is why corporations do most of the business in the United States.
B)   Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers.
C)   One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm.
D)   Because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations.
E)   Bond covenants are an effective way to resolve conflicts between shareholders and managers.

Question 8

If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.

Accepted Answer

A) True 
 B)False

Question 9

Cheers Inc.operates as a partnership.Now the partners have decided to convert the business into a regular corporation.Which of the following statements is CORRECT?

Accepted Answer

A)   Assuming Cheers is profitable, less of its income will be subject to federal income taxes.
B)   Cheers will now be subject to fewer regulations.
C)   Cheers' shareholders (the ex-partners)  will now be exposed to less liability.
D)   Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
E)   Cheers will find it more difficult to raise additional capital.

Question 10

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

Accepted Answer

A) True 
 B)False

Question 11

You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion.At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates.Which of the following statements best describes this transaction?

Accepted Answer

A)   This is an example of an exchange of physical assets.
B)   This is an example of a primary market transaction.
C)   This is an example of a direct transfer of capital.
D)   This is an example of a money market transaction.
E)   This is an example of a derivatives market transaction

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

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 14

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 15

Which of the following statements is CORRECT?

Accepted Answer

A)   If expected inflation increases, interest rates are likely to increase.
B)   If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
C)   If companies have fewer good investment opportunities, interest rates are likely to increase.
D)   Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
E)   Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

Question 16

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 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

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 19

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 20

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

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

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.

Which of the following statements is CORRECT?

​Money markets are markets for

Debt is a less risky than equity because a debtholder's claim has priority to an equity holder's claim.

One drawback of switching from a partnership to the corporate form of organization is the following:

​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:

Which of the following statements is CORRECT?

If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.

Cheers Inc.operates as a partnership.Now the partners have decided to convert the business into a regular corporation.Which of the following statements is CORRECT?

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion.At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates.Which of the following statements best describes this transaction?

​ Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

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.

Money markets are markets for

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:

Which of the following statements is CORRECT?