Question 1

You recently sold to your brother 200 shares of Disney stock, and 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. C

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
B)   If you purchased 100 shares of Disney stock from your brother-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. E

Question 3

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. A

Question 4

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 5

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 6

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)   S corporation, 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.
E)   In this situation, the various forms of organization seem equally desirable.

Question 7

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 8

With which of the following statements would most people in business agree?

Accepted Answer

A)   A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation.
B)   Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.
C)   Although people's moral characters are probably developed before they get into a business school, it is still useful for business schools to cover ethics, including giving students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.
D)   It is not useful for a large corporation to develop a formal set of rules defining ethical and unethical behavior. Such rules generally can't be applied in many specific instances, so it is better to deal with ethical issues on a case-by-case basis.
E)   "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees.

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

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 11

Which of the following statements is CORRECT?

Accepted Answer

A)   Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.
B)   Hedge funds have more in common with commercial banks than with any other type of financial institution.
C)   Hedge funds have more in common with investment banks than with any other type of financial institution.
D)   Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.
E)   The justification for the "light" regulation of hedge funds is that only "sophisticated" investors with high net worths and high incomes are permitted to invest in these funds, and such investors supposedly can do the necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

Question 12

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

Accepted Answer

A)   Corporations generally find it relatively difficult to raise large amounts of capital.
B)   Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.
C)   Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.
D)   Corporate investors are exposed to unlimited liability.
E)   Corporations generally face relatively few regulations.

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)   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 15

Which of the following statements is CORRECT?

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 in the state, and their purpose is to ensure that the firm's managers run the firm in accordance with state laws.
B)   The corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm's managers run the firm in accordance with state laws. Procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporateCharter.
C)   Companies must establish a home office, or domicile, in a particular state, and that state must be the one in which most of their business (sales, manufacturing, and so forth)  is conducted.
D)   Attorney fees are generally involved when a company develops its charter and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws.
E)   The corporate charter is 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.

Question 16

The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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 19

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 20

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.

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

You recently sold to your brother 200 shares of Disney stock, and 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?

Which of the following statements is CORRECT?

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 statements is NOT CORRECT?

With which of the following statements would most people in business agree?

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?

Which of the following statements is CORRECT?

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 sole proprietorship or a partnership?

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 facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business.

Money markets are markets for

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.

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