Questions in Chapter1 concept.qz 1) In a firm with no long-term debt, the question of capital structure is irrelevant. [A] True [B] False [A] :Capital structure is still relevant. This firm has chosen to have no long-term debt. Review section 1.1. [B] :You are correct! 2) Which one of the following is the best description of the goal of a financial manager in a corporation where shares are publicly traded? [A] maximize sales growth over the short-term [B] maximize profits over the short-term [C] avoid financial distress [D] maintain steady earnings growth [E] maximize the current value per share of the existing stock [A] :The primary goal is to maximize the current value per share of the existing stock. Review section 1.3. [B] :The primary goal is to maximize the current value per share of the existing stock. Review section 1.3. [C] :The primary goal is to maximize the current value per share of the existing stock. Review section 1.3. [D] :The primary goal is to maximize the current value per share of the existing stock. Review section 1.3. [E] :You are correct! 3) Which one of the following is a responsibility of the corporate controller? [A] cash management [B] credit management [C] cost accounting management [D] capital expenditure management [E] financial planning [A] :This is the responsibility of the treasurer. Review section 1.1. [B] :This is the responsibility of the treasurer. Review section 1.1. [C] :You are correct! [D] :This is the responsibility of the treasurer. Review section 1.1. [E] :This is the responsibility of the treasurer. Review section 1.1. 4) Which one of the following creates an agency cost? [A] auditing the corporate financial statements [B] employee health insurance [C] managers who own corporate stock [D] financing the firm [E] buying insurance on the firm's assets [A] :You are correct! [B] :This is a normal employee benefit and not an agency cost. Review section 1.4. [C] :Agency costs arise when owners and managers are different individuals. Review section 1.4.

[D] :Financing costs are not agency costs. Review section 1.4. [E] :Insurance is a risk-reducing activity, not an agency cost. Review section 1.4. 5) The partnership form of organization is considered more important than the corporate form in respect to firm size. [A] True [B] False [A] :The largest firms are generally corporations. Review section 1.2. [B] :You are correct! 6) When evaluating a project in which a firm might invest, both the size and the timing of the cash flows are important. [A] True [B] False [A] :You are correct! [B] :Both the size and timing of cash flows are important when evaluating a project. Review section 1.1. 7) A type of small corporation that is taxed like a partnership and thus avoids double taxation in the U.S. is called a: [A] limited partnership. [B] sole proprietorship. [C] S corporation. [D] joint stock company. [E] general partnership. [A] :This is not a corporation. Review section 1.2. [B] :This is not a corporation. Review section 1.2. [C] :You are correct! [D] :This is a foreign version of a corporation. Review section 1.2. [E] :This is not a corporation. Review section 1.2. 8) Which of the following are disadvantages of a sole proprietorship? I. ease of formation II. double taxation III. limited life IV. ability to raise capital [A] I and III only [B] I and IV only [C] II and III only [D] III and IV only [E] II and IV only

[A] :One of these is an advantage. Review section 1.2. [B] :One of these is an advantage. Review section 1.2. [C] :One of these does not apply to a sole proprietorship. Review section 1.2. [D] :You are correct! [E] :One of these does not apply to a sole proprietorship. Review section 1.2. 9) The term capital structure describes the: [A] mixture of debt and equity a firm uses to finance its operations. [B] types of long-term investments a firm has made. [C] long term assets acquired by a firm. [D] firm's short-term assets and liabilities. [E] mixture of short-term liabilities a firm uses to finance its short-term assets. [A] :You are correct! [B] :This reflects a firm's capital budgeting decisions. Review section 1.1. [C] :This reflects a firms capital budgeting decisions. Review section 1.1. [D] :This reflects a firm's working capital decisions. Review section 1.1. [E] :This reflects a firm's working capital decisions. Review section 1.1. 10) Which of the following criteria are required if a firm is to accept a project? I. The size of the cash flows must be acceptable to the firm. II. The value of the cash flows generated by the project must exceed the cost of the project. III. The risk level of the project must be acceptable to the firm. IV. The timing of the cash flows must be acceptable to the firm. [A] I and II only [B] I and IV only [C] II and III only [D] I, II, and III only [E] I, II, III, and IV [A] :True, but at least one other criteria is also required. Review section 1.1. [B] :True, but at least one other criteria is also required. Review section 1.1. [C] :True, but at least one other criteria is also required. Review section 1.1. [D] :True, but at least one other criteria is also required. Review section 1.1. [E] :You are correct! 11) In the evaluation of cash flow in a capital budgeting decision, which of the following must be considered? I. size of the cash flow II. timing of the cash flow III. risk of the cash flow [A] I only [B] II only [C] III only [D] II and III only [E] I, I, and III

[A] :True, but this is not the only consideration. Review section 1.1. [B] :True, but this is not the only consideration. Review section 1.1. [C] :True, but this is not the only consideration. Review section 1.1. [D] :True, but is the size of the cash flows not a consideration also? Review section 1.1. [E] :You are correct! 12) Which one of the following is an advantage enjoyed by the owner of a corporation but not by the owner of a sole proprietorship? [A] unlimited liability [B] ease of formation [C] unlimited life [D] double taxation [E] limited access to capital [A] :Owners of a corporation have limited liability. Review section 1.2. [B] :A corporation is one of the more difficult organizations to form. Review section 1.2. [C] :You are correct! [D] :Double taxation is a disadvantage. Review section 1.2. [E] :This is a disadvantage of a sole proprietorship. Review section 1.2. 13) The treasurer and controller generally report to the: [A] president. [B] chief executive officer. [C] board of directors. [D] vice president of finance. [E] chief operations officer. [A] :The treasurer and controller report to the vice president of finance. Review section 1.1. [B] :The treasurer and controller report to the vice president of finance. Review section 1.1. [C] :The treasurer and controller report to the vice president of finance. Review section 1.1. [D] :You are correct! [E] :The treasurer and controller report to the vice president of finance. Review section 1.1. 14) It is generally easier to form a sole proprietorship than it is to form a corporation. [A] True [B] False [A] :You are correct! [B] :This is a main advantage of a sole proprietorship. Review section 1.2. 15) 71. The shareholders at the Kenper Group have received two offers to purchase their firm. In the first offer, Kenper shareholders would receive $60 per share in cash for their stock (the current market price is $45), and existing managers would lose their jobs. In the second, Kenper shareholders would receive $55 in cash for their stock, but the firm's managers would retain their positions after the firm is purchased.

Kenper's management is acting to block the first offer and backs the second offer. This is an example of a(n): [A] working capital decision. [B] agency problem. [C] capital budgeting decision. [D] capital structure decision. [E] cash management decision. [A] :This is not a working capital problem. Review sections 1.1 and 1.4. [B] :You are correct! [C] :This is not a capital budgeting problem. Review sections 1.1 and 1.4. [D] :This is not a capital structure problem. Review sections 1.1 and 1.4. [E] :This is not a cash management problem. Review sections 1.1 and 1.4. 16) Which of the following help ensure managers act in the best interest of owners? I. a compensation package for managers that ties their salary to the firm's share price II. the incentives managers have for being promoted or having better job prospects are related to the prosperity of the firm III. the threat that if the firm does poorly, shareholders will use a proxy fight to replace existing management IV. a high probability the firm will become a takeover candidate if the firm performs poorly [A] I and II only [B] I, II, and III only [C] I, III, and IV only [D] I and III only [E] I, II, III, and IV [A] :These are not the only ones that are correct. Review section 1.4. [B] :These are not the only ones that are correct. Review section 1.4. [C] :These are not the only ones that are correct. Review section 1.4. [D] :These are not the only ones that are correct. Review section 1.4. [E] :You are correct! 17) Which one of the following is considered a primary market transaction? [A] a firm selling stock to the public for the first time in an IPO [B] an investor buying stock in Chrysler from his buddy [C] IBM stockholders selling some of their shares to another investor [D] Cathy Smith giving shares of GE stock to her sister [E] ABC company buying shares of AT&&T stock from John Smith [A] :You are correct! [B] :This is a secondary market transaction. Review section 1.5. [C] :This is a secondary market transaction. Review section 1.5. [D] :This is a secondary market transaction. Review section 1.5. [E] :This is a secondary market transaction. Review section 1.5. 18) Limited liability may be available for an owner in which of the following types of organizations?

I. sole proprietorship II. limited partnership III. corporation IV. limited liability company [A] IV only [B] II and IV only [C] I and III only [D] II, III, and IV only [E] I, II, III, and IV [A] :True, but this is only one of the correct options. Review section 1.2. [B] :True, but there is one more correct option. Review section 1.2. [C] :One of these is incorrect. Review section 1.2. [D] :You are correct! [E] :One of these is incorrect. Review section 1.2. 19) None of the owners of a __________ benefit from limited liability. [A] sole proprietorship [B] limited liability company [C] corporation [D] limited partnership [E] S corporation [A] :You are correct! [B] :What are the advantages of a limited liability company? Review section 1.2. [C] :What are the advantages of a corporation? Review section 1.2. [D] :What is the difference between a general and a limited partnership? Review section 1.2. [E] :What are the advantages of an S corporation? Review section 1.2. 20) The process by which unhappy stockholders can attempt to replace existing management is called a(n): [A] dealer market fight. [B] proxy fight. [C] public offering. [D] private placement. [E] agency problem. [A] :There is no such term. Review section 1.4. [B] :You are correct! [C] :This deals with the issuance of stock. Review sections 1.4 and 1.5. [D] :This deals with the issuance of stock. Review sections 1.4 and 1.5. [E] :This deals with conflicts of interest but not the replacement of management. Review section 1.4. 21) Which of the following types of firm owners can lose no more than their initial investment in the firm? I. common stockholder II. limited partner III. general partner

IV. sole proprietor [A] I only [B] I and II only [C] I, II, and IV only [D] II, III, and IV only [E] II and III only [A] :True, but this also applies to one other type of owner. Review section 1.2. [B] :You are correct! [C] :At least one of these is incorrect. Review section 1.2. [D] :At least one of these is incorrect. Review section 1.2. [E] :At least one of these is incorrect. Review section 1.2. 22) A secondary market transaction can occur in either a dealer market or an auction market. [A] True [B] False [A] :You are correct! [B] :Who are the parties to a trade in a dealer market versus in an auction market? Are any of these parties the corporation which issued the security being traded? Review section 1.5. 23) A ____________ transaction occurs when a firm first sells its shares to the investing public. [A] money market [B] primary market [C] secondary market [D] bond market [E] cash market [A] :The money market is not for shares of stock. Review section 1.5. [B] :You are correct! [C] :Note the word "first" in the sentence. Review section 1.5. [D] :Shares mean stock, not bonds. Review section 1.5. [E] :Cash markets are not related to the sale of stock. Review section 1.5. 24) The division of partnership profits is outlined in the: [A] articles of incorporation. [B] bylaws. [C] partnership limitation statement. [D] partnership agreement. [E] limited partnership amendment. [A] :The articles of incorporation apply to a corporation. Review section 1.2. [B] :Bylaws apply to a corporation. Review section 1.2. [C] :There is no such statement. Review section 1.2. [D] :You are correct! [E] :There is no such amendment. Review section 1.2.

25) The death of an owner effectively dissolves which of the following types of firms? I. sole proprietorship II. partnership comprised of only general partners III. corporation [A] I only [B] II only [C] III only [D] I and III only [E] I and II only [A] :True, but this also applies to another option. Review section 1.2. [B] :True, but this also applies to another option. Review section 1.2. [C] :A corporation is not affected by the death of an owner. Review section 1.2. [D] :Only one of these is correct. Review section 1.2. [E] :You are correct! 26) What should the primary goal of a financial manager be? [A] maximizing current profits [B] maximizing current sales [C] maximizing the growth rate of the firm [D] minimizing costs [E] maximizing the firm's current stock price [A] :This is not the primary goal. Review section 1.3. [B] :This is not the primary goal. Review section 1.3. [C] :This is not the primary goal. Review section 1.3. [D] :This is not the primary goal. Review section 1.3. [E] :You are correct! 27) Which one of the following statements concerning the cash flows between a firm and the financial markets is correct? [A] When a firm sells shares of stock, cash flows out of the firm into the financial markets. [B] When a firm issues debt, cash flows into the firm. [C] When a firm pays taxes, cash flows into the firm. [D] When a firm pays dividends, cash flows into the firm. [E] When a firm makes a payment on its debt, cash flows into the firm. [A] :Who receives the cash when a firm sells stock? Review section 1.5. [B] :You are correct! [C] :This is a cash outflow from the firm. Review section 1.5. [D] :This is a cash outflow from the firm. Review section 1.5. [E] :This is a cash outflow from the firm. Review section 1.5. 28) The majority of the trades on the NYSE can best be described as:

[A] secondary market transactions in an auction market. [B] primary market transactions in an auction market. [C] secondary market transactions in a dealer market. [D] primary market transactions in a dealer market. [E] secondary market transactions in a money market. [A] :You are correct! [B] :While some transactions on the NYSE are primary transactions they are in the minority. Review section 1.5. [C] :The NYSE is an auction market. Review section 1.5. [D] :The NYSE is an auction market. Review section 1.5. [E] :The NYSE is a financial market not a money market. Review section 1.5. 29) Working capital refers to a firms total assets and liabilities. [A] True [B] False [A] :Working capital refers only to short-term assets and short-term liabilities. Review section 1.1. [B] :You are correct! 30) Sole proprietorships incur agency costs when the owner is also the manager. [A] True [B] False [A] :Agency costs arise only when the owner and the manager are separate parties. Review section 1.4. [B] :You are correct! 31) The board of directors has the power to act on behalf of the shareholders to hire and fire the operating management of a firm. In a legal sense, the directors are "principals" and the shareholders are "agents". [A] True [B] False [A] :The shareholders are the "principals," the directors are the "agents." Review section 1.4. [B] :You are correct! 32) In capital budgeting, the financial manager tries to identify investment opportunities that are worth more to the firm than they cost to acquire. [A] True [B] False [A] :You are correct! [B] :This is the capital budgeting decision. Review section 1.1.

33) A manager in charge of working capital determines: [A] how to raise the money required to fund a project. [B] how much inventory a firm should maintain. [C] how many additional shares of stock should be sold. [D] which projects a firm should undertake. [E] which fixed assets a firm should purchase. [A] :This is related to the capital structure. Review section 1.1. [B] :You are correct! [C] :This is related to the capital structure. Review section 1.1. [D] :This is related to capital budgeting. Review section 1.1. [E] :This is related to capital budgeting. Review section 1.1. 34) An appropriate financial decision will ______________ of the cash flows to the firm, all else equal. I. slow down the receipt II. increase the size III. increase the risk [A] I only [B] II only [C] I and II only [D] II and III only [E] I, II, and III [A] :It would generally be better to speed up receipts. Review section 1.1. [B] :You are correct! [C] :At least one of these is incorrect. Review section 1.1. [D] :At least one of these is incorrect. Review section 1.1. [E] :At least one of these is incorrect. Review section 1.1. 35) Capital structure refers to the: [A] types of projects a firm invests in. [B] mixture of short-term and long-term debt a firm uses to finance its operations. [C] amount of long-term debt and equity a firm employs. [D] amount of short-term assets and short-term liabilities a firm has on its balance sheet. [E] size, timing, and risk of a firm's future cash flows. [A] :This is a capital budgeting decision. Review section 1.1. [B] :Short-term debt is part of working capital management. Review section 1.1. [C] :You are correct! [D] :This is the working capital decision. Review section 1.1. [E] :This is a part of the capital budgeting decision. Review section 1.1. 36) The primary goal of a financial manager is to maximize the current earnings of the firm.

[A] True [B] False [A] :The primary goal is to maximize the current value per share of the existing stock. Review section 1.3. [B] :You are correct! 37) Which one of the following is a primary market transaction? [A] buy order given to an investment banker for a new public stock offering [B] sell order given to a broker for shares of a company trading on the NYSE [C] buy order given to a broker for shares of a company trading on AMEX [D] sell order given to a dealer for shares of a company trading over-the counter [E] buy order given to a broker for a stock listed on a regional exchange [A] :You are correct! [B] :Nothing in this statement indicates it is a primary market transaction. Review section 1.5. [C] :Nothing in this statement indicates it is a primary market transaction. Review section 1.5. [D] :Nothing in this statement indicates it is a primary market transaction. Review section 1.5. [E] :Nothing in this statement indicates it is a primary market transaction. Review section 1.5. 38) The __________ contain(s) the corporation's name, its intended life, its business purpose, and the number of shares that can be issued. [A] business license [B] articles of incorporation [C] bylaws [D] partners' agreement [E] oral partnership agreement [A] :This does not contain this information. Review section 1.2. [B] :You are correct! [C] :These do not contain this information. Review section 1.2. [D] :This is not related to a corporation. Review section 1.2. [E] :This is not related to a corporation. Review section 1.2. 39) Which one of the following is a primary market transaction? [A] inheriting shares of stock from your deceased grandmother [B] your mother selling you shares she purchased in your uncle's latest business venture [C] buying shares in General Motors from your closest friend [D] buying shares in a firm when it first sells shares to the public [E] buying shares of General Electric through your stock broker [A] :This is a secondary market transaction. Review section 1.5. [B] :This is a secondary market transaction. Review section 1.5. [C] :This is a secondary market transaction. Review section 1.5. [D] :You are correct! [E] :This is a secondary market transaction. Review section 1.5.

40) The New York Stock Exchange operates as a dealer market. [A] True [B] False [A] :The New York Stock Exchange operates as an auction market. Review section 1.5. [B] :You are correct! 41) A financial manager must be concerned with three basic areas: Capital budgeting, capital structure, and working capital. [A] True [B] False [A] :You are correct! [B] :These are the three main areas of corporate financial management. Review section 1.1. 42) One advantage of the corporate form of organization is that you can buy shares in a major corporation without worrying about being held personally liable for the debt of that corporation. [A] True [B] False [A] :You are correct! [B] :What does the term limited liability imply? Review section 1.2. 43) A(n) ________________ is a sale of securities which typically does not require registration with the SEC and is usually sold to a large financial institution. [A] initial public offering [B] over-the-counter transaction [C] primary market transaction [D] secondary market transaction [E] private placement [A] :This is a public offering, not a private one. Review section 1.5. [B] :This is a transaction in a public market, not a private one. Review section 1.5. [C] :This is a transaction in a public market, not a private one. Review section 1.5. [D] :This is a transaction in a public market, not a private one. Review section 1.5. [E] :You are correct! 44) In which one of the following situations does an agency problem exist? [A] when there is a conflict of interest between the stockholders and the management of a firm [B] the manager of a sole proprietorship is also the firm owner

[C] when the management of a firm rejects a project because they feel the project will reduce the current value of the firms stock [D] when the managers decide to lay off employees because they feel by doing so the firm has more value [E] when the managers of ABC acquire firm XYZ because they feel that the acquisition will increase the value of ABC stock [A] :You are correct! [B] :There is no agency conflict here. Review section 1.4. [C] :There is no agency conflict here. Review section 1.4. [D] :There is no agency conflict here. Review section 1.4. [E] :There is no agency conflict here. Review section 1.4. 45) Which of the following are auction markets? I. New York Stock Exchange II. OTC market III. American Stock Exchange IV. Pacific Stock Exchange [A] I and II only [B] II and III only [C] I and IV only [D] I, III, and IV only [E] I, II, III, and IV [A] :One of these is a dealer market. Review section 1.5. [B] :One of these is a dealer market. Review section 1.5. [C] :True, but there is one more. Review section 1.5. [D] :You are correct! [E] :One of these is a dealer market. Review section 1.5. 46) Which of the following are considered basic questions of corporate finance? I. What long-term investments should the firm undertake? II. Where will the firm get the long-term financing to pay for its investments? III. Which mixture of debt and equity should the firm use to fund its operations? IV. How should the firm manage its working capital? [A] I and IV only [B] II and III only [C] I, III, and IV only [D] I, II, and III only [E] I, II, III, and IV [A] :True, but there are additional correct options. Review section 1.1. [B] :True, but there are additional correct options. Review section 1.1. [C] :True, but there is an additional correct option. Review section 1.1. [D] :True, but there is an additional correct option. Review section 1.1. [E] :You are correct! 47) Capital budgeting is the process of:

[A] determining how to raise the money required to fund a project. [B] choosing how much cash to keep on hand. [C] deciding the amount of earnings that a firm should retain. [D] planning and managing a firm's long-term investments. [E] deciding what marketable securities to purchase. [A] :This is a capital structure decision. Review section 1.1. [B] :This is a working capital decision. Review section 1.1. [C] :This is a capital structure decision. Review section 1.1. [D] :You are correct! [E] :This is a working capital decision. Review section 1.1. 48) Which of the following are true statements concerning limited partnerships? I. Limited partners are personally responsible for all debts of the partnership. II. Limited partners are NOT active managers of the partnership. III. In a limited partnership, all partners share equally in the gains or losses. IV. A limited partnership has a limited life. [A] I and II only [B] II and IV only [C] I, II and IV only [D] I and III only [E] I, II and III only [A] :One of these is incorrect. Review section 1.2. [B] :You are correct! [C] :One of these is incorrect. Review section 1.2. [D] :Both of these are incorrect. Review section 1.2. [E] :Two of these are incorrect. Review section 1.2. 49) The secondary market is defined as a market: [A] for the original sale of securities by governments and corporations. [B] in which dealers buy and sell for themselves at their own risk. [C] in which brokers match buyers with sellers. [D] which has no central location. [E] in which securities are traded between two shareholders. [A] :This is the definition of a primary market, not a secondary market. Review section 1.5. [B] :This is the definition of a dealer market, not a secondary market. Review section 1.5. [C] :This is the definition of an auction market, not a secondary market. Review section 1.5. [D] :This is the definition of a dealer market, not a secondary market. Review section 1.5. [E] :You are correct! 50) Which one of the following is considered a benefit of the corporate form of organization? [A] ease of the transfer of ownership [B] limited life [C] double taxation

[D] unlimited liability for owners [E] taxation of corporate profits [A] :You are correct! [B] :Corporations have unlimited lives. Review section 1.2. [C] :Double taxation is a disadvantage. Review section 1.2. [D] :Corporate owners have limited liability. Review section 1.2. [E] :This is not an advantage and leads to double taxation. Review section 1.2. 51) Agency problems can NOT exist: [A] in corporations. [B] in limited partnerships. [C] when managers act in the best interest of the firm owners. [D] when managers receive bonuses based on the total sales of a firm. [E] while managers are hiring new employees. [A] :Agency problems can exist in corporations. Review section 1.4. [B] :Agency problems can exist in limited partnerships. Review sections 1.2 and 1.4. [C] :You are correct! [D] :Do more sales necessarily increase the value of the stock? Review section 1.4. [E] :Does increasing the number of employees necessarily increase the value of the stock? Review section 1.4. 52) Which of the following induce managers to work in the best interests of the shareholders? I. incentives tied to current firm earnings II. threat of takeover III. prospects for promotion [A] II only [B] I and II only [C] I and III only [D] II and III only [E] I, II, and III [A] :True, but one other is correct as well. Review section 1.4. [B] :Only one of these is correct. Review section 1.4. [C] :Only one of these is correct. Review section 1.4. [D] :You are correct! [E] :One of these is not correct. Review section 1.4. 53) The duties of a financial manager include determining: I. which marketing strategy to use to promote a product. II. the most appropriate mix of long-term debt and equity. III. which projects a firm should undertake. IV. how much short-term debt to utilize. [A] I and II only [B] I, II, and III only [C] II and III only

[D] II, III, and IV only [E] I, II, III, and IV [A] :One of these is not a duty of the financial manager. Review section 1.1. [B] :One of these is not a duty of the financial manager. Review section 1.1. [C] :True, but there is one additional duty. Review section 1.1. [D] :You are correct! [E] :One of these is not a duty of the financial manager. Review section 1.1. 54) Which one of the following should produce the least amount of agency cost? [A] bonuses based on the per share value of the company stock [B] promotions based upon increases in market share [C] annual raises based upon the growth rate of the company [D] bonuses based on number of retail outlets owned [E] annual raises based on the number of smaller firms acquired [A] :You are correct! [B] :There is a better answer. Review section 1.4. [C] :There is a better answer. Review section 1.4. [D] :There is a better answer. Review section 1.4. [E] :There is a better answer. Review section 1.4. 55) Which one of the following is a true statement concerning corporations? [A] The equity that can be raised by a corporation is limited to the current shareholders' personal wealth. [B] The life of a corporation is unlimited. [C] A corporation has limited liability for its business debts. [D] The interest paid by a corporation on its debt is subject to double taxation. [E] It is difficult to transfer ownership of corporate shares. [A] :This is incorrect. Review section 1.2. [B] :You are correct! [C] :The corporation itself has unlimited liability for all of its debts. Review section 1.2. [D] :Interest is not subject to double taxation. Review section 1.2. [E] :Ownership transfer is relatively easy. Review section 1.2. 56) Which one of the following statements represents an advantage of the corporate form of organization over that of a sole proprietorship? [A] A sole proprietorship has an unlimited life while a corporation does not. [B] Owners in a sole proprietorship have limited liability for the firm's debts. [C] It is easier to raise new capital in a sole proprietorship than in a corporation. [D] Sole proprietorships pay dividends but corporations do not. [E] It is easier to transfer ownership in a corporation than in a sole proprietorship. [A] :This is not true, but the reverse of this statement is. Review section 1.2. [B] :This is not true, they have unlimited liability. Review section 1.2. [C] :This is not true, but the reverse of this statement is. Review section 1.2. [D] :This is not true, but the reverse of this statement is. Review section 1.2.

[E] :You are correct! 57) According to the balance sheet model of the firm, corporate finance may be thought of as the analysis of three primary subject areas. Which of the following groups correctly lists these three areas? [A] capital structure, capital budgeting, security analysis [B] capital budgeting, capital structure, capital spending [C] capital budgeting, capital structure, net working capital [D] capital structure, net working capital, capital rationing [E] capital budgeting, capital spending, net working capital [A] :Security analysis deals with buying investments, which is not a primary subject area in corporate finance. Review section 1.1. [B] :Capital spending is very much the same as capital budgeting. Review section 1.1. [C] :You are correct! [D] :As you will learn later, capital rationing is a concern of capital budgeting analysis. Review section 1.1. [E] :Capital spending is very much the same as capital budgeting. Review section 1.1. 58) Which of the following statements is/are correct regarding agency costs? I. Indirect costs occur when managers, acting to minimize the risk of the firm, forego investments shareholders would prefer they take. II. Direct costs occur when shareholders must incur costs to monitor their managers actions. III. Direct costs occur when managers buy assets considered unnecessary by the firm's owners. [A] I only [B] I and II only [C] II only [D] II and III only [E] I, II, and III [A] :This is not the only one that is correct. Review section 1.4. [B] :These two are not the only ones that are correct. Review section 1.4. [C] :This is not the only one that is correct. Review section 1.4. [D] :These two are not the only ones that are correct. Review section 1.4. [E] :You are correct! 59) On a typical day in the U.S., the largest volume of trading in auction markets occurs: [A] in the OTC market. [B] on the New York Stock Exchange. [C] on the American Stock Exchange. [D] on the Philadelphia Stock Exchange. [E] in the primary markets. [A] :The OTC market is a dealer market. Review section 1.5. [B] :You are correct! [C] :This market is dwarfed by at least one of the other choices. Review section 1.5. [D] :This market is dwarfed by at least one of the other choices. Review section 1.5. [E] :Most trading is in secondary, not primary, markets. Review section 1.5.

60) Control of a firm ultimately rests with the stockholders. [A] True [B] False [A] :You are correct! [B] :The final control rests with the owners of a firm. Who are the owners of a corporation? Review section 1.4. 61) A financial manager of a corporation is considering different operating strategies for the coming year. From a financial management standpoint, which one of the following would be her optimal strategy? [A] reducing the overall risk level of the firm [B] maximizing the value of the stock [C] maximizing current year profits [D] maximizing her personal wealth [E] creating a stable stock price for the year [A] :Reducing the risk level also typically reduces returns. Would stockholders like this? Review section 1.3. [B] :You are correct! [C] :Is it okay to maximize profits for this year only? Review section 1.3. [D] :The stockholders probably wouldn't appreciate her increasing her personal wealth at their expense. Review section 1.3. [E] :Do you think stockholders prefer stocks whose price remains stable, that is, never goes up? Review section 1.3. 62) The primary goal of financial management is to minimize the corporate tax liability. [A] True [B] False [A] :Minimizing taxes is a good thing but is this the primary goal? Review section 1.3. [B] :You are correct! 63) Two advantages of the corporate form of organization are the ease of transferring ownership and an unlimited firm life. [A] True [B] False [A] :You are correct! [B] :Both are advantages of the corporate form of organization. Review section 1.2. 64) Financial markets bring the buyers and sellers of debt and equity together.

[A] True [B] False [A] :You are correct! [B] :This is the definition of a financial market. Review section 1.5. 65) Which one of the following statements is true? [A] The OTC market has a central location. [B] The OTC market is an auction market. [C] Financial markets function solely as a secondary market. [D] New issues of securities occur in the secondary market. [E] Auction markets have a physical location. [A] :OTC markets have no central location. Review section 1.5. [B] :The OTC market is a dealer market. Review section 1.5. [C] :Financial markets function as both primary and secondary markets. Review section 1.5. [D] :New issues occur in the primary market. Review section 1.5. [E] :You are correct! 66) Julie Etling wants to start a new business decommissioning nuclear warheads and reactors. The work will involve significant hazards. Julie is concerned about protecting her personal wealth from any losses the business might incur. Which form of business structure should she select if she will be the majority owner and the sole manager of the firm? [A] corporation [B] general partnership [C] limited partnership [D] general partnership with limited partners [E] sole proprietorship [A] :You are correct! [B] :As a general partner, would she have limited liability? Review section 1.2. [C] :As the general partner in a limited partnership, would she have limited liability? Review section 1.2. [D] :As the general partner in a limited partnership, would she have limited liability? Review section 1.2. [E] :Would this provide her with limited liability? Review section 1.2. 67) A financial manager is responsible for determining the firm's appropriate level of inventory. Which of the financial management areas addresses this decision? I. capital budgeting II. capital structure management III. working capital management [A] I only [B] II only [C] III only [D] I and II only [E] I, II, and III

[A] :Managing inventory levels is not a capital budgeting decision. Review section 1.1. [B] :Managing inventory levels is not a capital structure decision. Review section 1.1. [C] :You are correct! [D] :One or more of these is incorrect. Review section 1.1. [E] :Only one of these is correct. Review section 1.1. 68) A financial manager is responsible for deciding whether or not new manufacturing equipment should be purchased to replace existing equipment. The firm has sufficient cash available to make the purchase. The new equipment would reduce labor expenses and would allow the firm to reduce its investment in inventory. Which of the financial management areas would be involved in this decision? I. capital budgeting II. capital structure III. working capital [A] I only [B] I and II only [C] II and III only [D] I and III only [E] I, II, and III [A] :This is not the only area affected. Review section 1.1. [B] :How is capital structure affected? Review section 1.1. [C] :How is capital structure affected? Review section 1.1. [D] :You are correct! [E] :How is capital structure affected? Review section 1.1. 69) Which one of the following is a true statement concerning a partnership comprised solely of general partners? [A] All partners are personally responsible for the debts of the partnership. [B] Only one partner can participate in the management of the partnership. [C] The income of the partnership is taxed as a corporation. [D] Each partner enjoys limited liability for the debts of the partnership. [E] The partnership has an unlimited life. [A] :You are correct! [B] :All partners can participate in managing the firm. Review section 1.2. [C] :Partnership profit is taxed as personal income. Review section 1.2. [D] :Each partner has unlimited liability for the partnership debts. Review section 1.2. [E] :The partnership life is limited. Review section 1.2. 70) Ann is interested in purchasing Ted's factory. Since Ann is a poor negotiator, she hires Mary to negotiate a purchase price. Identify the parties to this transaction. [A] Mary is the principal and Ann is the agent [B] Ted is the principal and Ann is the agent [C] Ted is the agent and Ann is the principal [D] Ann is the principal and Mary is the agent [E] Ann is the principal and Ted is the agent

[A] :Who's doing the negotiating for whom here? Review section 1.4. [B] :What is Mary's role here? Review section 1.4. [C] :Why is Ted an agent? Review section 1.4. [D] :You are correct! [E] :Why is Ted an agent? Review section 1.4. 71) The vice-president of finance generally reports directly to the chairman of the board. [A] True [B] False [A] :The vice-president of finance generally reports directly to the president. Review section 1.1. [B] :You are correct! 72) Stakeholder is just another name for a stockholder. [A] True [B] False [A] :What groups of people are considered stakeholders? Review section 1.4. [B] :You are correct! 73) A stock that trades on an organized exchange is said to be: [A] listed. [B] privately held. [C] an OTC security. [D] an IPO. [E] a private placement. [A] :You are correct! [B] :Stock that trades on an exchange is publicly held. Review section 1.5. [C] :Not all stocks trade in over-the-counter markets. Review section 1.5. [D] :An IPO refers to a stock only when it is initially offered. Review section 1.5. [E] :An organized exchange is not involved with a private placement. Review section 1.5. 74) When does the double taxation problem faced by corporations exist? [A] whenever a corporation earns a profit, pays taxes on that profit, and then pays interest to its bondholders who are taxed [B] whenever a corporation earns a profit, pays taxes on that profit, and then pays dividends to its stockholders who are taxed [C] whenever a corporation earns a profit and pays taxes on that profit [D] whenever a corporation earns a profit, pays taxes on that profit, and then pays interest to its shareholders [E] whenever stockholders are also employees

[A] :Isn't interest a tax-deductible expense, thereby avoiding the double taxation problem? Review section 1.2. [B] :You are correct! [C] :There is nothing taxed twice here. Review section 1.2. [D] :Shareholders don't earn interest, they earn dividends. Review section 1.2. [E] :Employee compensation is an expense thus there is no double taxation here. Review section 1.2. 75) Tasks related to tax management, cost accounting, financial accounting, and data processing are the primary responsibilities of which corporate officer? [A] treasurer [B] corporate director [C] controller [D] chairman of the board [E] vice president of production [A] :These are not the responsibilities of the treasurer. Review section 1.1. [B] :The directors do not directly oversee company operations. Review section 1.1. [C] :You are correct! [D] :These are not the primary responsibilities of the chairman of the board. Review section 1.1. [E] :These are not the responsibilities of this officer. Review section 1.1. 76) Stocks that trade on an organized exchange such as the New York Stock Exchange are said to be: [A] over-the-counter securities. [B] primary market securities. [C] money market securities. [D] listed securities. [E] privately placed securities. [A] :The NYSE is not an OTC market. Review section 1.5. [B] :Primary market transactions can occur on the OTC markets as well. Review section 1.5. [C] :Stocks are financial securities. Review section 1.5. [D] :You are correct! [E] :By definition, these do not trade publicly. Review section 1.5. 77) Milo, Inc. spends approximately $3 million annually to hire auditors to review the firm's financial statements. This is an example of an indirect agency cost. [A] True [B] False [A] :Whenever cash is spent it's a direct cost. Review section 1.4. [B] :You are correct!