Deck 1: The Goals and Functions of Financial Management

Question 1

There is unlimited liability in a general partnership.

Answer 1

True

Question 2

The Internet is responsible for many new business models.

Answer 2

True

Question 3

The most common partnership arrangement carries limited liability to the partners.

Answer 3

False

Question 4

Financial Capital is composed of long-term plant and equipment, as well as other tangible investments.

Question 5

Businesses will increasingly rely on B2B Internet applications to speed up the cash flows through their firms.

Question 6

A limited partnership limits the profits partners may receive.

Question 7

The first Nobel Prizes given to finance professors were for their contributions to capital structure theory and portfolio theories of risk and return.

Question 8

As finance emerged as a new field, much emphasis was placed on mergers and acquisitions.

Question 9

The Internet impacts e-commerce by creating a mechanism for improved communications between a business, its customers, and its suppliers.

Question 10

Inflation is assumed to be a temporary problem that does not affect financial decisions.

Question 11

Profits of sole proprietorships are taxed at corporate tax rates.

Question 12

One advantage of the corporate form of organization is that income received by stockholders is not taxable since the corporation already paid taxes on the income distributed.

Question 13

During the 1930s, financial practice revolved around such topics as the preservation of capital, maintenance of liquidity, reorganization of financially troubled corporations and bankruptcy.

Question 14

Recently, the emphasis of financial management has been on the relationship between risk and return.

Question 15

The sole proprietorship represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs.

Question 16

Real Capital is composed of long-term plant and equipment.

Question 17

In terms of revenues and profits, the corporation is by far the most important form of business organization in the United States.

Question 18

The Internet has accounted for an acceleration of productivity for "old economy" firms.

Question 19

In the mid 1950s, finance began to change to a more analytical, decision-oriented approach.

Question 20

Dividends paid to corporate stockholders have already been taxed once as corporate income.

Question 21

Insider trading involves the use of information not available to the general public to make profits from trading in a company's stock.

Question 22

Timing is not a particularly important consideration in financial decisions.

Question 23

Agency theory assumes that corporate managers act to increase the wealth of corporate shareholders.

Question 24

Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide.

Question 25

A corporation must have more than 75 stockholders to qualify for Subchapter S designation.

Question 26

Social responsibility and profit maximization are synonymous.

Question 27

Because socially desirable goals can impede profitability in many instances, managers should not try to operate under the assumption of wealth maximization.

Question 28

The formation of a Subchapter S corporation is a way to circumvent the double taxation of a small corporation.

Question 29

The Sarbanes Oxley Act reduced agency conflicts by giving corporate managers greater flexibility to select their preferred candidates to the Board of Directors.

Question 30

Profits of a Subchapter S corporation are taxed at corporate tax rates.

Question 31

Institutional investors have had increasing influence over corporations with their ability to vote large blocks of stock and replace poor performing boards of directors.

Question 32

The Sarbanes Oxley Act is primarily intended to increase public scrutiny of private companies that had previously been exempt from many public disclosure requirements.

Question 33

There are some serious problems with the financial goal of maximizing the earnings of the firm.

Question 34

A major focus of the Sarbanes Oxley Act is to make sure that publicly traded companies accurately present their assets, liabilities and income in their financial statements.

Question 35

The higher the profit of a firm, the higher the value the firm is assured of receiving in the market.

Question 36

Maximizing the earnings of the firm is the goal of financial management.

Question 37

Money markets refer to those markets dealing with short-term securities having a life of one year or less.

Question 38

Agency Theory examines the relationship between companies and their customers.

Question 39

Corporate governance issues have become less important to the financial community during the first decade of the new millennium.

Question 40

The issues of corporate governance are really agency problems.

Question 41

What is the primary goal of financial management?

A) Increased earnings
B) Maximizing cash flow
C) Maximizing shareholder wealth
D) Minimizing risk of the firm

Question 42

If a company has a written code of ethics, they will generally avoid ethical problems.

Question 43

Financial management requires both short-term activities as well as long-term planning such as raising funds.

Question 44

Credit swaps are:

A) an insurance product designed to protect financial institutions from customers who default on their loans.
B) securities with a maturity of less than 1 year.
C) the result of a leveling off or slowing down of price increases.
D) market trades in previously issued securities.
E) none of the above.

Question 45

In the past, the study of finance has included

A) mergers and acquisitions.
B) raising capital.
C) bankruptcy.
D) all of these.

Question 46

Social responsibility is an expense and thus should be avoided by financial managers because it will lead to loss of income.

Question 47

New issues are sold in the secondary market.

Question 48

Existing securities are traded in the secondary market.

Question 49

Many companies have cross-listed their stock on multiple international stock exchanges and more than several hundred foreign companies have listed their shares on the New York Stock Exchange.

Question 50

Risk management will be an important factor over the next decade.

Question 51

The primary market includes the sale of securities by way of initial public offerings.

Question 52

Money markets refer to markets where excess corporate cash is exchanged for foreign currencies that can earn a higher return than domestic money.

Question 53

Which of the following did not contribute to the financial crisis?

A) The change from mark-to-market accounting to
B) Solid credit ratings from the ratings agencies
C) The extension of credit to high-risk borrowers
D) The takeover of JPMorgan Chase by Bear Sterns
E) Mark this response if all of the above contributed to the financial crisis

Question 54

High quality initial public offerings are usually sold in a primary market, such as the New York Stock Exchange. However, low-quality stocks must usually be sold in secondary markets, such as NASDAQ.

Question 55

One of the primary disadvantages of maximizing shareholder value is that it only provides a short-term perspective.

Question 56

In the United States, stocks sold on either the New York Stock Exchange or NASDAQ are considered sold in the primary market.

Question 57

The secondary market characteristically has had stable prices over the past 20 years.

Question 58

Capital markets refer to those markets dealing with short-term securities having a life of one year or less.

Question 59

Although NASDAQ is a secondary market, some of the firms traded there, such as Microsoft, are large enough to move to the primary market if they so desire.

Question 60

Higher return always induces stockholders to invest in a company.

Question 61

Many companies such as Tyco, Enron, and WorldCom that suffered financial distress in the late 1990s and early 2000s,

A) committed fraud.
B) had failed corporate governance oversight.
C) went bankrupt.
D) all of these are true.

Question 62

Agency theory examines the relationship between the

A) shareholders of the firm and the firm's investment banker.
B) owners of the firm and the managers of the firm.
C) board of directors and large institutional investors.
D) shareholders and the firm's transfer agent.

Question 63

Institutional investors are important in today's business world because

A) as large investors they have more say in how businesses are managed.
B) they have a fiduciary responsibility to the workers and investors that they represent to see that the firms they own are managed in an ethical way.
C) as a group they can vote large blocks of stock for the election of board members.
D) all of these.

Question 64

Agency theory would imply that conflicts are more likely to occur between management and shareholders when

A) the company is owned and operated by the same person.
B) management acts in the best interests of maximizing shareholder wealth.
C) the chairman of the board is also the chief executive officer (CEO).
D) the board of directors exerts strong and involved oversight of management.

Question 65

A financial manager's goal of maximizing current or short-term earnings may not be appropriate because

A) it fails to consider the timing of the benefits.
B) increased earnings may be accompanied by unacceptably higher levels of risk.
C) earnings are subjective; they can be defined in various ways such as accounting or economic earnings.
D) all of these.

Question 66

Agency problems are least likely to arise in which organizational form?

A) Sole proprietorship
B) Limited partnership
C) Corporation
D) Subchapter S corporation

Question 67

The Sarbanes-Oxley Act set up the Public Company Accounting Oversight Board with the responsibility for all of the following except

A) auditing standards within companies.
B) controlling the quality of audits.
C) Certifying the competence of financial executives.
D) setting rules and standards for the independence of auditors.

Question 68

One of the major advantages of a sole proprietorship is

A) that the owner has limited liability.
B) that stock in the proprietorship can be easily transferred.
C) that it is exempt from many tax rules that would otherwise apply when employees are hired by the firm.
D) low operating costs.

Question 69

Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the

A) options pricing model.
B) theories of working capital management.
C) theories of risk-return and portfolio theory.
D) theories of international capital budgeting.

Question 70

Proper risk-return management means that

A) the firm should take as few risks as possible.
B) the firm must determine an appropriate trade-off between risk and return.
C) the firm should earn the highest return possible.
D) the firm should value future profits more highly than current profits.

Question 71

The increasing percentage ownership of public corporations by institutional investors has

A) had no effect on corporate management.
B) created higher returns for the stock market in general.
C) created more pressure on public companies to manage their firms more efficiently.
D) taken away the voice of the individual investor.

Question 72

A Subchapter S corporation

A) is similar to a partnership in that it carries unlimited liability.
B) is a separate legal entity which is treated like a normal corporation.
C) has all the organizational benefits of a corporation and its income is only taxed once.
D) all of these.

Question 73

With a Subchapter S corporation

A) income is taxed as direct income to stockholders.
B) stockholders have the same liability as members of a partnership.
C) the number of stockholders is unlimited.
D) life of the corporation is limited.

Question 74

The partnership form of an organization

A) avoids the double taxation of earnings and dividends found in the corporate form of organization.
B) usually provides limited liability to the partners.
C) has unlimited life.
D) simplifies decision making.

Question 75

Agency theory deals with the issue of

A) when to hire an agent to represent the firm in negotiations.
B) the legal liabilities of a firm if an employee, acting as the firm's agent, injures someone.
C) the limitations placed on an employee acting as the firm's agent to obligate or bind the firm.
D) the conflicts that can arise between the viewpoints and motivations of a firm's owners and managers.

Question 76

Corporate governance is the

A) relationship and exercise of oversight by the board of directors of the company.
B) relationship between the chief financial officer and institutional investors.
C) operation of a company by the chief executive officer (CEO) and other senior executives on the management team.
D) governance of the company by the board of directors with a focus on social responsibility.

Question 77

A corporation is

A) owned by stockholders who enjoy the privilege of limited liability.
B) easily divisible between owners.
C) a separate legal entity with perpetual life.
D) all of these.

Question 78

Professor Merton Miller received the Nobel prize in economics for his work on

A) dividend policy.
B) investment theory.
C) working capital management.
D) capital structure theory.

Question 79

One of the major disadvantages of a sole proprietorship is

A) that there is unlimited liability to the owner.
B) the simplicity of decision making.
C) low organizational costs.
D) low operating costs.

Question 80

The Sarbanes-Oxley Act was passed in an effort to

A) protect small business from large corporations dominating the market.
B) ensure that partnerships divide profits among partners in a fair manner.
C) guarantee outside auditors can control corporate accounting practices.
D) control corrupt corporate behavior.