Question 1

Which of the following statements best describes partnerships?

Accepted Answer

A)   Corporations are at a disadvantage relative to partnerships because they have to file more reports to regulatory agencies, 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)   There must be at least one person acting as a general partner in a limited partnership. D

Question 2

Which of the following statements best describes financial markets?

Accepted Answer

A)   If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
B)   The IPO market is a major part of the secondary market.
C)   Only institutions, not individuals, can participate in derivatives market transactions.
D)   Money market transactions involve debt securities with maturities of less than one year. D

Question 3

Which of the following statements best describes articles of incorporation and bylaws?

Accepted Answer

A)   The corporate bylaws are a standard set of rules established by the state of incorporation. These rules are identical for all corporations, and their purpose is to ensure that the firm's managers run the firm in accordance with government laws.
B)   Companies must establish a home office in a particular province, and that province must be the one in which most of their business is conducted.
C)   Attorney fees are generally involved when a company develops its articles of incorporation and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have any.
D)   The articles of incorporation are concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors. D

Question 4

Which of the following statements best describes firm organization?

Accepted Answer

A)   One of the disadvantages of incorporating a business is that the owners have personal liabilities when firm goes bankrupt.
B)   Sole proprietorships are subject to more regulations than corporations.
C)   In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
D)   Sole proprietorships and partnerships generally have a tax advantage over corporations, especially large ones.

Question 5

The form of organizing a business is unimportant 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 6

By being too involved in the business operation, limited partners can lose their limited liability status.

Accepted Answer

A) True 
 B)False

Question 7

For businesses with cash-producing assets and no need of large capital expenditures, which of the following forms of organization is the best?

Accepted Answer

A)   sole proprietorship
B)   limited partnership
C)   corporation
D)   income trust

Question 8

Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needs?

Accepted Answer

A)   proprietorship, because of ease of entry
B)   income trust, to gain some tax advantages and also to obtain limited liability
C)   partnership, but only if she needs additional capital
D)   regular corporation, because of the limited liability

Question 9

Which of the following statements best describes financial markets?

Accepted Answer

A)   Capital market instruments include both long-term debt and common stocks.
B)   Banker's acceptance has no default risk.
C)   Foreign banks are more restricted from operating in Canada.
D)   The original maturity of a commercial loan can go up to ten years.

Question 10

Which of the following statements best describes corporate goals?

Accepted Answer

A)   The proper goal of the financial manager should be to attempt to maximize the firm's expected cash flows, because this will add the most to the wealth of the individual shareholders.
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 shareholders and managers, because managers hired as agents to act on behalf of the owners may instead make decisions favourable to themselves rather than the shareholders.

Question 11

With the more formal nature of the partnership agreement and the commitment of all partners'
personal assets, partnerships have no difficulty raising large amounts of capital as do proprietorships.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements best describes firm organization?

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)   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.
C)   One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.
D)   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 13

Fighting recession with low interest rates is technically impossible when we have large trade deficits and huge national debt.

Accepted Answer

A) True 
 B)False

Question 14

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 makes it more difficult for the firm to raise additional capital.
C)   It makes the firm's investors subject to greater potential personal liabilities.
D)   It makes it more difficult for the firm's investors to transfer their ownership interests.

Question 15

Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements best describes firm organization?

Accepted Answer

A)   Assuming Cheers is profitable, less of its income will be subject to 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 will find it more difficult to raise additional capital.

Question 16

Which of the following statements best describes interest rates?

Accepted Answer

A)   The cost of money to fund users is basically determined by the rate of return required by fund providers.
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)   If expected inflation increases, interest rates are likely to decrease.

Question 17

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?

Accepted Answer

A)   Households start saving a larger percentage of their income.
B)   The economy moves from a boom to a recession.
C)   The level of inflation begins to decline.
D)   With expansion plans, corporate increase their demand for capital.

Question 18

If an individual investor trades currently outstanding common shares through a broker, this is a secondary market transaction.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements best describes financial markets?

Accepted Answer

A)   Rates of return on T-bill are the highest among all major financial securities.
B)   Money market mutual funds are illiquid.
C)   Money markets are markets for long-term debt and common stocks.
D)   EuroCanadian market time deposits are instruments issued by banks outside Canada.

Question 20

Which of the following statements best describes hedge funds?

Accepted Answer

A)   Hedge funds are risky, although they may be market-neutral.
B)   Hedge funds open to everyone.
C)   Hedge funds have low risk because they hedge their investments.
D)   Hedge funds are legal only in Canada, but they are not permitted to operate in Europe or Asia.

Exam 1: Overview of Financial Management and the Financial Environment

Which of the following statements best describes partnerships?

Which of the following statements best describes financial markets?

Which of the following statements best describes articles of incorporation and bylaws?

Which of the following statements best describes firm organization?

The form of organizing a business is unimportant issue, as this decision has very little effect on the income and wealth of the firm's owners.

By being too involved in the business operation, limited partners can lose their limited liability status.

For businesses with cash-producing assets and no need of large capital expenditures, which of the following forms of organization is the best?

Which of the following statements best describes financial markets?

Which of the following statements best describes corporate goals?

With the more formal nature of the partnership agreement and the commitment of all partners' personal assets, partnerships have no difficulty raising large amounts of capital as do proprietorships.

Which of the following statements best describes firm organization?

Fighting recession with low interest rates is technically impossible when we have large trade deficits and huge national debt.

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

Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements best describes firm organization?

Which of the following statements best describes interest rates?

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?

If an individual investor trades currently outstanding common shares through a broker, this is a secondary market transaction.

Which of the following statements best describes financial markets?

Which of the following statements best describes hedge funds?