Question 1

Finance managers need to interact constantly with

Accepted Answer

Finance managers need to interact with marketing managers to understand the company's sales trends and how to allocate budgets to maximize profits. They need to interact with accounting staff to ensure accurate financial reporting and compliance with regulations. They also need to interact with management information systems staff to analyze financial data and make strategic decisions. Therefore, the best choice is D, all of the above.

Question 2

Limited liability companies (LLCs) differ from limited partnerships in that

Accepted Answer

LLCs provide limited liability protection for their owners, meaning that they are not personally responsible for the firm's debts and obligations. Limited partnerships, on the other hand, have at least one general partner who has unlimited liability for the partnership's debts, while limited partners have limited liability but also limited control over the business. Option A is incorrect because LLCs are generally taxed as pass-through entities, meaning that the profits and losses are reported on the owner's personal tax returns and not subject to corporate income tax. Option B is also incorrect because, as mentioned above, LLCs provide limited liability protection. Option D is a false statement with no relevance to LLCs.

Question 3

What are the three basic questions addressed by the study of investments?

Accepted Answer

1. What investments should the firm undertake?
2. How should the firm fund these investments?
3. How can the firm best manage cash flows in its day to day operations?

Question 4

Which of the following is a characteristic of a limited partnership?

Accepted Answer

A) A limited partnership allows one or more partners to have limited liability, meaning that they are only liable for the amount of their investment in the partnership.
B) A limited partnership requires one or more of the partners to be a general partner who has unlimited liability for the partnership's debts and obligations.
C) Limited partners are prohibited from participating in the management of the partnership, which is reserved for the general partner(s).

Question 5

In terms of organizational costs, which of the following sequences is generally correct, moving from lowest to highest cost?

Accepted Answer

Sole proprietorship is the least costly form of organization since it involves only one owner, followed by general partnership, which involves sharing of profits and losses between two or more owners. Limited partnership and corporation are generally more costly due to legal and administrative requirements such as formal registration, taxation, and governance structures. Therefore, the correct sequence from lowest to highest costs is Sole proprietorship, general partnership, limited partnership, corporation, making option B the best choice.

Question 6

From a financial point of view, a company that decides to develop new product is making

Accepted Answer

Developing a new product is considered an investment decision as it involves allocating funds towards a project that is expected to generate future cash flows and create value for the company.

Question 7

Which forms of organization are free of initial legal requirements?

Accepted Answer

Both sole proprietorship and general partnership are free of initial legal requirements, meaning they can be formed without any formal legal registration or documentation. This makes them a good choice for small businesses or individuals looking for a simple and easy-to-create business structure. However, it's important to note that both forms of organization have unlimited personal liability for the owners, which means that their personal assets are at risk if the business faces any legal or financial issues.

Question 8

Which one of the following categories of owners enjoys limited liability?

Accepted Answer

Shareholders (common stock) of a corporation enjoy limited liability, meaning their personal assets are not at risk in the event of the corporation's financial obligations or lawsuits. General partners in a limited partnership or limited liability company may also enjoy limited liability, but it is not a guarantee and depends on the specific terms outlined in the partnership agreement or operating agreement. Sole proprietors do not have limited liability and are personally responsible for all financial obligations and lawsuits related to their business. Therefore, choices A and C are incorrect.

Question 9

Which of the following is NOT true for limited partnerships?

Accepted Answer

Limited partners cannot manage the business, as they have limited liability and are not responsible for the management of the partnership. The general partner is responsible for managing the business.

Question 10

Working capital management refers to

Accepted Answer

Working capital management refers to managing the cash flows of a company, including the management of current assets (such as inventory and accounts receivable) and current liabilities (such as accounts payable and short-term debt). It is focused on ensuring that a company has enough cash to meet its short-term obligations and to fund its day-to-day operations. Long-term financing decisions, investing in product development, and capital structure are all related to longer-term financial planning and management.

Question 11

Which of the following statements best represents what finance is about?

Accepted Answer

Finance is the study of how people and businesses make investment decisions and how to finance those decisions. Options A, B, and D are relevant aspects of finance but do not represent the whole picture.

Question 12

Which of the following is NOT an advantage of the sole proprietorship?

Accepted Answer

The sole proprietorship does not offer limited liability, meaning the owner's personal assets are at risk in case of legal action against the business. The other options listed (no time limit on existence and no legal requirements for starting) are advantages of the sole proprietorship.

Question 13

What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form?

Accepted Answer

The chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form is that owners have unlimited liability. This means that the owner's personal assets are not protected in case of business debts or lawsuits. In the corporate form, shareholders have limited liability, which means that they are only responsible for the amount they have invested in the company.

Question 14

Capital structure refers to the financing of long-term investments.

Accepted Answer

Capital structure refers to the way a company funds its long-term investments, including the use of debt, equity, and other sources of financing.

Question 15

Financial decisions can be difficult because the cost of investments can be estimated with greater confidence than future payoffs.

Accepted Answer

Financial decisions involve predicting future payoffs, which can be uncertain and difficult to estimate accurately. On the other hand, the cost of investments can usually be calculated with more certainty. This imbalance of information can make financial decisions challenging.

Question 16

The area of finance that deals with long-term investment decisions is known as

Accepted Answer

Capital budgeting involves making long-term investment decisions by evaluating potential investments and determining which projects will generate the highest returns. Capital structure refers to the mix of debt and equity financing used by a company, working capital management deals with short-term cash flow and liquidity management, and financial strategy is a broader concept that encompasses all aspects of a company's financial management.

Question 17

The personal decision to take a year off from work to obtain a graduate degree in business is primarily a(n)________ decision.

Accepted Answer

The personal decision to take a year off from work to obtain a graduate degree in business is primarily an investment decision because it involves sacrificing a year of income and incurring education expenses in the hope of obtaining higher future earnings potential. While social and ethical considerations may also play a role in the decision, they are not the primary factors driving this decision. Financial considerations such as the cost of tuition and the potential returns on investment are also important, but again they are secondary to the overall goal of investing in one's future career prospects.

Question 18

Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose?

Accepted Answer

A corporation would be the best choice in this scenario because it has the ability to raise large amounts of capital through issuing stocks or bonds. Additionally, a corporation provides limited liability protection for its owners, which would be beneficial in case the business encounters any legal or financial issues.

Question 19

The true owners of the corporation are the

Accepted Answer

Common stockholders are the true owners of the corporation. They have the right to elect the board of directors and vote on major decisions, as well as receive dividends and capital gains from the appreciation of their shares. Debt holders and preferred stockholders have a claim on the company's assets but do not have the same level of ownership as common stockholders. The board of directors is responsible for overseeing the management of the company but does not technically own the corporation.

Question 20

Which of the following types of business forms is least risky to investors?

Accepted Answer

A public corporation is the least risky option for investors because it offers limited liability for shareholders and the ability to easily buy and sell stocks on public markets. With a sole proprietorship, the owner is personally responsible for all liabilities and debts of the business. In a general partnership, each partner is personally liable for the business's debts and obligations. In a limited partnership, there are both general partners who have unlimited liability and limited partners who have limited liability but also limited control over the business.

Quiz 1: Getting Started-Principles of Finance