Question 1

Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A simple average of those returns (which gives equal weight to each company in the S&P 500) is then calculated. That average is called "the return on the S&P Index," and it is often used as an indicator of the "return on the market."

Accepted Answer

A) True 
 B)False

Question 2

One advantage of the corporate form of organization is that it avoids double taxation.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

Accepted Answer

A)  The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced. 
B)  The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. 
C)  The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%. 
D)  The firm's founder, who is also president and chairman of the board, sells 90% of her shares. 
E)  The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval.

Question 4

If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a secondary market transaction, not a primary market transaction.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is a primary market transaction?

Accepted Answer

A)  You sell 200 shares of IBM stock on the NYSE through your broker. 
B)  You buy 200 shares of IBM stock from your brother. The trade is not made through a broker; you just give him cash and he gives you the stock. 
C)  IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. 
D)  One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. 
E)  IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years.

Question 6

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

Accepted Answer

A) True 
 B)False

Question 7

Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the NASDAQ, where anyone can make transactions.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. 
B)  The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market. 
C)  Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks. 
D)  Money markets are markets for long-term debt and common stocks. 
E)  A liquid security is a security whose value is derived from the price of some other "underlying" asset.

Question 9

Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?

Accepted Answer

A)  Corporations generally face fewer regulations. 
B)  Less of a corporation's income is generally subject to federal taxes. 
C)  Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. 
D)  Corporate investors are exposed to unlimited liability. 
E)  Corporations generally find it easier to raise large amounts of capital.

Question 10

In most corporations, the CFO ranks under the CEO.

Accepted Answer

A) True 
 B)False

Question 11

If a lower level person in a firm does something illegal, like "cooking the books," to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

Accepted Answer

A)  Pay managers large cash salaries and give them no stock options. 
B)  Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. 
C)  Beef up the restrictive covenants in the firm's debt agreements. 
D)  Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock. 
E)  For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

Question 13

One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.

Accepted Answer

A) True 
 B)False

Question 14

Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."

Accepted Answer

A) True 
 B)False

Question 15

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

Accepted Answer

A)  Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth. 
B)  Maximize the firm's expected EPS, which must also maximize the firm's price per share. 
C)  Minimize the firm's risks because most stockholders dislike risk. In turn, this will maximize the firm's stock price. 
D)  Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers. 
E)  Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.

Question 16

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Accepted Answer

A)  Decrease the use of restrictive covenants in bond agreements. 
B)  Take actions that reduce the possibility of a hostile takeover. 
C)  Elect a board of directors that allows managers greater freedom of action. 
D)  Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. 
E)  Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

Question 17

Primary markets are large and important, while secondary markets are smaller and less important.

Accepted Answer

A) True 
 B)False

Question 18

Charleston Corporation (CC) now operates as a "regular" corporation, but it is considering a switch to S Corporation status. CC is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 35%. The firm earns $2,000,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. Assume that the corporate tax rate is 34% and the personal tax rate is 35%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status?

Accepted Answer

A)  $ 2,565 
B)  $ 4,420 
C)  $ 8,580 
D)  $11,150 
E)  $13,000

Question 19

Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.

Accepted Answer

A) True 
 B)False

Question 20

The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world.

Accepted Answer

A) True 
 B)False

Exam 1: An Overview of Financial Management

One advantage of the corporate form of organization is that it avoids double taxation.

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a secondary market transaction, not a primary market transaction.

Which of the following is a primary market transaction?

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the NASDAQ, where anyone can make transactions.

Which of the following statements is CORRECT?

Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?

In most corporations, the CFO ranks under the CEO.

If a lower level person in a firm does something illegal, like "cooking the books," to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Primary markets are large and important, while secondary markets are smaller and less important.

Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.

The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world.