Deck 1: Introduction to Financial Management

Question 1

The practice generally known as double taxation is due to:

A)shareholders' dividends being taxed at both the federal and state levels.
B)corporate income being taxed at both the federal and state levels.
C)interest on shareholders' dividends being taxed as income.
D)corporate incomes being taxed at the corporate level, then again at the shareholder level when corporate profits are paid out as dividends.

Answer 1

corporate incomes being taxed at the corporate level, then again at the shareholder level when corporate profits are paid out as dividends.

Question 2

Not all cash a company generates will be returned to the investors. Which of the following will NOT reduce the amount of capital returned to the investors?

A)Retained earnings
B)Taxes
C)Dividends
D)None of these will reduce the amount of capital returned to the investors.

Answer 2

Dividends

Question 3

When determining a form of business organization, all of the following are considered EXCEPT:

A)who owns the firm.
B)the owners' risks.
C)the tax ramifications.
D)the physical location of the business.

Answer 3

the physical location of the business.

Question 4

In the financial crisis that started in 2006, a significant indicator of the U.S. economic decline was:

A)a significant drop in interest rates.
B)a sharp increase in unregulated Ponzi-type security sales.
C)rising defaults by subprime mortgage borrowers.
D)a large increase in loan default due to unemployment.

Question 5

This subarea of finance helps facilitate the capital flows between investors and companies.

A)Investments
B)Financial management
C)Treasury management
D)Financial institutions and markets

Question 6

Which of the following is the firm's highest-level financial manager?

A)Chief executive officer
B)Chief financial officer
C)Board of directors
D)Corporate governance

Question 7

The most commonly accepted groups of asset classes include all of the following except:

A)Stocks
B)Bonds
C)Machinery and equipment
D)Real estate

Question 8

This subarea of finance is important for adapting to the global economy.

A)Investments
B)Financial management
C)International finance
D)Financial institutions and markets

Question 9

Which of the following is NOT considered a hybrid organization?

A)S corporation
B)Limited liability partnership
C)Limited liability company
D)Limited partnership
E)All of these are considered hybrid organizations.

Question 10

This subarea of finance looks at firm decisions in acquiring and utilizing cash received from investors or from retained earnings.

A)Investments
B)Financial management
C)Treasury management
D)None of these

Question 11

Financial management involves decisions about which of the following?

A)Which projects to fund
B)How to minimize taxation
C)What type of capital should be raised
D)All of these

Question 12

This subarea of finance involves methods and techniques to make appropriate decisions about what kinds of securities to own, which firms' securities to buy, and how to be paid back in the form that the investor wishes.

A)Real markets
B)Investments
C)Financial management
D)None of these

Question 13

This is a general term for securities like stocks, bonds, and other assets that represent ownership in a cash flow.

A)Investment
B)Financial asset
C)Real asset
D)Financial markets

Question 14

Which of the following is defined as a group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations?

A)Investments
B)Asset classes
C)Market instruments
D)Financial markets

Question 15

This type of business organization is relatively easy to start, and it is subject to much lighter regulatory and paperwork burden than other business forms.

A)Sole proprietorship
B)Partnership
C)Corporation
D)Hybrid organization

Question 16

Which of the following personal decisions is NOT impacted by finance?

A)Borrowing money to purchase cars or homes.
B)Making credit card payments.
C)Making retirement decisions.
D)All of these are impacted by finance.

Question 17

The financial crisis that started in 2006 was magnified by which of the following?

A)Public concern over the war in Afghanistan
B)Consistently increasing oil and gas prices
C)Ethical issues affecting high value investment
D)Mortgage lenders securitizing large quantities of their loans

Question 18

A potential future negative impact to value and/or cash flows is often discussed in terms of probability of loss and the expected magnitude of the loss. This is called:

A)options.
B)standard deviation.
C)coefficient of variation.
D)risk.

Question 19

Which of the following managers would NOT use finance?

A)Operational managers
B)Marketing managers
C)Human resource managers
D)All of these would use finance.

Question 20

This type of business organization is entirely legally independent from its owners.

A)Sole proprietorship
B)Partnership
C)Public corporations
D)Hybrid organizations

Question 21

For corporations, maximizing the value of owner's equity can also be stated as:

A)maximizing retained earnings.
B)maximizing earnings per share.
C)maximizing net income.
D)maximizing the stock price.

Question 22

These individuals help firms access capital markets and advise managers about how to interact with those capital markets.

A)Auditors
B)Investment analysts
C)Investment bankers
D)Credit analysts

Question 23

A metaphor used to illustrate how an individual pursuing his own interests also tends to promote the good of the community.

A)Agency theory
B)Angel investor
C)Invisible hand
D)Perks or perquisites

Question 24

As individual legal entities, corporations assume liability for their own debts, so the shareholders hold:

A)only limited liability.
B)unlimited liability.
C)shared liability.
D)joint liability.

Question 25

In order for an angel investor or venture capitalist to exchange capital for ownership in a business that is a sole proprietorship, which of these must happen?

A) A. The business must be re-formed as a partnership.
B) B. The owner must give up some control.
C) C. The owner must co-sign on all loans.
D) Both A and B

Question 26

Which of the following can create ethical dilemmas between corporate managers and stockholders?

A)Agency relationship
B)Auditors
C)Boards of directors
D)Venture capitalist

Question 27

The opportunity to buy stock at a fixed price over a specific period of time is referred to as:

A)stock opportunities.
B)stock options.
C)real assets.
D)restricted stock.

Question 28

This group is elected by stockholders to oversee management in a corporation.

A)Chief counselors
B)Chief executives
C)Board of directors
D)Auditors

Question 29

Individuals who provide small amounts of capital and expert business advice to small firms in exchange for an ownership stake in the firm are referred to as:

A)institutional investors.
B)corporate investors.
C)angel investors.
D)capital investors.

Question 30

Which of the following is legal duty between two parties where one party must act in the interest of the other party?

A)Agency theory
B)Angel investor
C)Fiduciary
D)Investment banker

Question 31

These individuals examine the firm's accounting systems and comment on whether financial statements fairly represent the firm's financial position.

A)Accounting departments
B)Chief financial officers
C)Board of directors
D)Auditors

Question 32

Which of the following is an example of aligning managers' personal interests with those of the owners?

A)Allow the managers to have as many perks as they request.
B)Pay the managers high salaries.
C)Offer the managers an equity stake in the firm.
D)Trust the managers' actions as they will always act in the owners' best interest.

Question 33

These individuals examine a firm's financial strength for its debt holders.

A)Auditors
B)Investment analysts
C)Investment bankers
D)Credit analysts

Question 34

An employee stock option plan is:

A)a perk usually only given to the board of directors as compensation.
B)a plan that only partnerships can use to defer compensation to partners.
C)a way to align the interests of employees with those of the owners.
D)None of these answers is correct.

Question 35

This should be the primary objective of a firm as it may actually be the most beneficial for society in the long run.

A)Minimizing layoffs
B)Maximizing market share
C)Minimizing costs
D)Maximizing shareholder value

Question 36

The portion of a company's profits that are kept by the company rather than distributed to the stockholders as cash dividends is referred to as:

A)restricted earnings.
B)venture capital.
C)retained earnings.
D)institutional investment.

Question 37

This is the set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control.

A)Agency theory
B)Corporate governance
C)Defined benefit plan
D)Invisible hand

Question 38

Which of these are NOT basic approaches to minimizing the agency problem?

A)Ignore the conflict of interest.
B)Monitor managers' actions.
C)Align managers' personal interest with those of the owners by making the managers owners.
D)All of these are basic approaches to minimizing the agency problem.

Question 39

These individuals follow a firm, conduct their own evaluations of the company's business activities, and report to the investment community.

A)Auditors
B)Investment analysts
C)Investment bankers
D)Credit analysts

Question 40

Nonwage compensation that might actually enhance owner value, in that such items may boost managers' productivity.

A)Agency theory
B)Angel investor
C)Invisible hand
D)Perks or perquisites

Question 41

Maximizing owners' equity value means carefully considering all of the following EXCEPT:

A)how to best bring additional funds into the firm.
B)which projects to invest in.
C)how best to increase the firm's risk.
D)how best to return the profits from those projects to the owners over time.

Question 42

Restricted stock is:

A)a special type of stock that is not transferable from the current holder to others until specific conditions are satisfied.
B)a special type of stock that can be converted into corporate bonds after a specific amount of time has elapsed.
C)a special type of stock that is a result of offering an employee stock ownership plan.
D)None of these answers is correct.

Question 43

Methods to minimize agency problem include all EXCEPT:

A)offer the managers an equity stake in the firm.
B)award the CEO stock options.
C)allow the CEO to purchase stock via an employee stock option plan.
D)allow the CEO to purchase bonds via an employee bond option plan.

Question 44

From the perspective of control, the best form of business organization is the:

A)sole proprietorship.
B)corporation.
C)partnership.
D)S corporation.

Question 45

The agency relationship in corporate finance refers to:

A)when the shareholders hire a manager to run their company.
B)when the corporate hires an advertising agency to market their new product or service.
C)when the board of directors are elected to staggered terms.
D)when the board of directors oversee the CEO.

Question 46

The biggest disadvantage of the sole proprietorship is:

A)unlimited liability.
B)double taxation.
C)limited access to capital.
D)total control.

Question 47

The most common type of business in the United States is the:

A)corporation.
B)partnership.
C)sole proprietorship.
D)hybrid organization such as a limited liability company.

Question 48

Which of the following statements is correct?

A)Sole proprietorships are easy to start.
B)If the sole proprietorship gets sued, the owner is not liable.
C)It is relatively easy for sole proprietorships to raise money.
D)Profits from the sole proprietorship are subject to double taxation.

Question 49

Agency problems exist in which forms of business ownership?

A)Sole proprietorship
B)S corporation
C)Partnership
D)Corporation

Question 50

Which of the following statements is incorrect?

A)Partnerships have unlimited liability.
B)Most sole proprietors raise money by borrowing from banks.
C)An advantage of sole proprietorships is that the owner has complete control.
D)S corporations are considered a hybrid organization.

Question 51

From the perspective of access to capital, the best form of business organization is the:

A)sole proprietorship.
B)corporation.
C)partnership.
D)S corporation.

Question 52

Outside parties that monitor the firm include all of the following EXCEPT:

A)credit agencies.
B)the New York Stock Exchange.
C)analysts.
D)bankers.

Question 53

From the perspective of ownership risk, the best form of business organization is the:

A)sole proprietorship.
B)corporation.
C)partnership.
D)S corporation.

Question 54

Which statement is incorrect regarding hybrid organizations?

A)They offer single taxation.
B)They offer limited risk to the owners.
C)They offer the same type of control as a sole proprietorship.
D)All of these answers are correct statements.

Question 55

All of the following are an example of a fiduciary relationship EXCEPT:

A)a bank employee manages deposits.
B)a financial advisor advises her clients.
C)a CEO manages the firm.
D)the shareholder elects a board member.

Question 56

From a taxation perspective, the form of business organization with the highest business level taxes is the:

A)sole proprietorship.
B)corporation.
C)partnership.
D)S corporation.

Question 57

Which of the following statements is incorrect?

A)Sole proprietorships are subject to less regulation.
B)Both angel investors and venture capitalists exchange capital for ownership.
C)Shareholders are responsible for paying off the corporate bonds in the event of a bankruptcy.
D)All of these statements are correct.

Question 58

All of the following are advantages to organizing as a corporation EXCEPT:

A)limited liability.
B)double taxation.
C)easy access to capital.
D)easy to transfer ownership.

Question 59

Which of the following is NOT a function of the board of directors?

A)Hire the CEO.
B)Evaluate the CEO.
C)Design compensation contracts for the CEO.
D)Provide reports to the auditors.

Question 60

The overall goal of the financial manager is to:

A)minimize total costs.
B)maximize net income.
C)maximize earnings per share.
D)maximize shareholder wealth.

Question 61

An angel investor differs from a venture capitalist because of the:

A)type of investment.
B)investment time frame.
C)size of investment.
D)voting rights.

Question 62

Corporate stakeholders include all of the following EXCEPT:

A)employees.
B)shareholders.
C)suppliers.
D)auditors.

Question 63

The board of directors:

A)are hired by the CEO.
B)are elected by shareholders.
C)have unlimited liability since they oversee the day-to-day operations of the firm.
D)are employed by the Securities Exchange Commission to ensure its rules and regulations have been met.

Question 64

Which of the following statements is correct?

A)Accountants are focused on what happened in the past.
B)Financial managers are focused on what happened in the past.
C)Both accountants and financial managers use total quality management systems to standardize data.
D)Financial managers double-check the accountant's statements.

Question 65

What is the difference in perspective between finance and accounting?

A)Timing
B)Risk
C)Liability
D)Ownership

Question 66

Which of these does NOT act as a monitor of how the firm is being run outside the firm?

A)Auditors
B)Analysts
C)Credit rating agencies
D)Members of the board of directors