Deck 1: Getting Started-Principles of Finance

Question 1

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

A)a financing decision.
B)an investment decision.
C)a capital structure decision.
D)a cash flow decision.

Answer 1

B

Question 2

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

A)How political,social,and economic forces affect corporations
B)Maximizing profits
C)The study of how people and businesses make investment decisions and how to finance those decisions
D)Reducing risk

Answer 2

C

Question 3

Which of the following is NOT true for limited partnerships?

A)Limited partners can only manage the business.
B)One general partner must exist who has unlimited liability.
C)Only the name of general partners can appear in the name of the firm.
D)Limited partners may sell their interest in the company.

Answer 3

A

Question 4

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

Question 5

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

A)It allows one or more partners to have limited liability.
B)It requires one or more of the partners to be a general partner to whom the privilege of limited liability does not apply.
C)It prohibits the limited partners from participating in the management of the partnership.
D)All of the above.

Question 6

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

A)Sole proprietorship
B)Limited partnership
C)General partnership
D)A public corporation

Question 7

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

A)Sole proprietorships are subject to double taxation of profits.
B)The cost of formation.
C)Inadequate profit sharing.
D)Owners have unlimited liability.

Question 8

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

A)capital structure.
B)working capital management.
C)financial strategy.
D)capital budgeting.

Question 9

Business financial decisions are fundamentally different from personal financial decisions.

Question 10

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

A)General partnership,sole proprietorship,limited partnership,corporation
B)Sole proprietorship,general partnership,limited partnership,corporation
C)Corporation,limited partnership,general partnership,sole proprietorship
D)Sole proprietorship,general partnership,corporation,limited partnership

Question 11

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

Question 12

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 organisation would you choose?

A)Corporation
B)General Partnership
C)Sole proprietorship
D)Limited partnership

Question 13

Which forms of organisation are free of initial legal requirements?

A)Sole proprietorship
B)General partnership
C)Corporation
D)Both A and B

Question 14

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

A)limited liability company general partners
B)corporation shareholders
C)sole proprietors
D)both A and B

Question 15

Which of the following forms of organisation blends elements of partnerships and corporations?

A)managing partnerships
B)sole proprietorships
C)limited liability companies
D)general partnerships

Question 16

The personal decision to obtain a college degree in business is primarily a(n)________ decision.

A)social
B)investment
C)ethical
D)financing

Question 17

Financial management skills are not just needed by finance professionals,they are also needed by

A)marketing managers.
B)accountants.
C)management information systems professionals.
D)all of the above.

Question 18

Working capital management refers to

A)long-term financing decisions.
B)the management of cash flows.
C)investing in product development.
D)capital structure.

Question 19

Which of the following is true concerning a sole proprietorship?

A)It has limited liability for the owner.
B)The business survives the death of the owner.
C)It has only one owner.
D)Profits are taxed at the company tax rate.

Question 20

The true owners of a corporation are the

A)holders of debt issues.
B)preferred stockholders.
C)board of directors.
D)common shareholders.

Question 21

Which of the following is a significant disadvantage of a general partnership?

A)The cost of forming it is high.
B)Each partner is fully responsible for the liabilities incurred by the partnership.
C)There is a risk associated with the industry in which it operates.
D)Forming the business is very complex.

Question 22

For these types of organisation,no distinction is made between business and personal assets.

A)Sole proprietorship
B)General partnership
C)Limited partnership
D)Both A and B

Question 23

In a general partnership,all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm.

Question 24

There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership.

Question 25

Ultimate control in a corporation is vested in the board of directors.

Question 26

The major sources of financing for corporations are

A)partners contributions.
B)exchanges between shareholders.
C)interest and dividends.
D)debt and equity.

Question 27

In a general partnership,each partner is liable for the partnership's obligations only up to a percentage of the obligation equal to that partner's percentage of ownership of the partnership.

Question 28

A corporation is owned by

A)shareholders and partners.
B)the shareholders who hold the company's stock.
C)the Board of Directors.
D)its Chief Executive Officer.

Question 29

Limited partners may actively manage the business.

Question 30

General partners have unrestricted transferability of ownership,while limited partners must have the consent of all partners to transfer their ownership.

Question 31

The cost to create a business is usually the lowest for the sole proprietorship.

Question 32

In a sole proprietorship,the owner is personally responsible without limitation for the liabilities incurred.

Question 33

The term,shareholder,applies to a

A)general partner.
B)creditor.
C)corporate owner.
D)proprietor.

Question 34

A sole proprietorship is the most desirable business form in all circumstances.

Question 35

In a limited partnership,at least one general partner must remain in the association;the privilege of limited liability still applies to this partner.

Question 36

The life of a corporation is not dependent upon the status of the investors.

Question 37

The owners of a corporation are liable for the corporation's obligations up to the amount of their investment.

Question 38

As firms grow and their capital needs increase,they are more likely to become a

A)sole proprietorship.
B)general partnership.
C)limited partnership.
D)joint venture.
E)corporation.

Question 39

The sole proprietorship is the same as the individual for liability purposes.

Question 40

A limited partner is liable

A)for only his or her own share of the partnership's debts.
B)for his or her own share of the partnership's debts and contingently liable for the other partners shares.
C)only up to the amount invested by that partner.
D)for none of the partnership's debts.

Question 41

Profit maximisation does not adequately describe the goal of the firm because

A)profit maximisation does not require the consideration of risk.
B)profit maximisation ignores the timing of a project's return.
C)maximisation of dividend payout ratio is a better description of the goal of the firm.
D)A and B.

Question 42

If managers do not pursue the goal of maximising shareholder wealth

A)they concentrate on more important matters like growing market share.
B)they can focus more on social responsibilities.
C)they are likely to lose their jobs.
D)they can focus more on long-term profitability.

Question 43

In regard to the agency problem,________ are the principal owners of a corporation.

A)shareholders
B)managers
C)employees
D)suppliers

Question 44

The goal of maximising shareholder wealth inevitably conflicts with socially responsible behavior on the part of corporation.

Question 45

One of the problems associated with profit maximisation is that it ignores the timing of a project's return.

Question 46

The goal of the firm should be the maximisation of profit.

Question 47

A reputation for unethical behavior can negatively affect the value of a company's stock.

Question 48

Managers of corporations need to act in an ethical manner

A)because ethics violations will be punished by the law.
B)because a business must be trusted by investors,customers and the public if it is to succeed.
C)because business managers must answer to a higher authority.
D)because ethical behavior is its own justification.

Question 49

Which of the following best describes the goal of the firm?

A)The maximisation of the total market value of the firm's common stock
B)Profit maximisation
C)Risk minimisation
D)None of the above

Question 50

Maximisation of shareholder wealth as a goal is superior to accounting profit maximisation because

A)the former avoids an excessively short term focus.
B)the former ensures high stock prices.
C)accounting profits are not the same as cash flows.
D)both A and C.

Question 51

If managers are making decisions to maximise shareholder wealth,then they are primarily concerned with making decisions that should

A)positively affect short term profits at the expense of long term profits.
B)increase the market value of the firm's stock.
C)have no effect on the value of the firm's stock.
D)accomplish all of the above.

Question 52

Which of the following goals is in the best long-term interest of stockholders?

A)profit maximisation
B)risk minimisation
C)maximising the market value of shareholders' stock
D)maximising sales revenues

Question 53

Serious ethical violations by corporations including Enron led the United States to pass

A)the Corporate Law Economic Reform Program.
B)the Audit Reform and Corporate Disclosure Act.
C)the Sarbanes-Oxley Act.
D)all of the above.

Question 54

Which of the following goals of the firm is equivalent to the maximisation of shareholder wealth?

A)rofit maximisation
B)isk minimisation
C)stock maximisation
D)None of the above

Question 55

The agency problem arises due to the separation of ownership and control in a corporation.

Question 56

The goal of profit maximisation is equivalent to the goal of maximisation of share value.

Question 57

The goal of profit maximisation ignores the timing of profit.

Question 58

Profit maximisation is not an adequate goal of the firm when making financial decisions because

A)it does not necessarily reflect shareholder wealth maximisation.
B)it ignores the risk inherent in different projects that will generate the profits.
C)it ignores the timing of a project's returns.
D)all of the above are correct.

Question 59

The Sarbanes-Oxley Act primarily addresses insider trading.

Question 60

What does the agency problem refer to?

A)the conflictsbetween the board of directors and the employees of the firm
B)the problems between financial managers and Internal Revenue agents
C)the problems between stockbrokers and investors
D)the conflicts of interest between the business managers and the stockholders

Question 61

Investors choose to invest in higher risk investments because these investments offer higher

A)expected returns.
B)inflation.
C)actual returns.
D)future consumption.

Question 62

If an investor had a choice of receiving $1,000 today or $1,000 in five years,which would the typical investor prefer?

A)$1,000 in five years: is better to receive money later rather than sooner.
B)$1,000 today: it will be worth more than $1,000 received in five years.
C)$1,000 in five years: it will be worth more than $1,000 received today.
D)Investors would be indifferent to when they would receive the $1,000.
E)None of the above.

Question 63

Which of the following should be considered when assessing the financial impact of business decisions?

A)The amount of projected earnings
B)The risk-return tradeoff
C)The timing of projected earnings;i.e. ,when they are expected to occur
D)All of the above

Question 64

Foregoing the earning potential of a dollar today is referred to as the

A)time value of money.
B)opportunity cost concept.
C)risk/return tradeoff.
D)creation of wealth.

Question 65

In finance,we assume that investors are generally

A)neutral to risk.
B)averse to risk.
C)fond of risk.
D)none of the above.

Question 66

Investors prefer $1 today versus $1 in the future due to

A)time value of money.
B)response to incentives.
C)the need for immediate gratification.
D)A and B.

Question 67

How could you compensate an investor for taking on a significant amount of risk?

A)Increase the expected rate of return
B)Raise more debt capital
C)Offer stock at a higher price
D)Increase sales

Question 68

The price of Netflix stock dropped sharply after customers responded negatively to a change in pricing policies.The change in stock price illustrates which principle?

A)Market prices reflect information.
B)Individuals respond to incentives.
C)Cash flows are the source of value.
D)The time-value of money.

Question 69

In measuring value,the focus should be on

A)cash flow.
B)accounting profits.
C)time value of money.
D)earnings per share.

Question 70

Consider the timing of the profits of the following certain investment projects: Profit
L S
Year 1 $ 0 $ 3000
Year 2 $ 3000 $ 0

A)Project S is preferred to Project L.
B)Project L is preferred to Project S.
C)Projects S and L are equally desirable.
D)A goal of profit maximisation would favor Project S only.

Question 71

Why do investors prefer receiving cash sooner rather than later,according to finance theory?

A)Incremental profits are greater than accounting profits.
B)Money received earlier can be reinvested and returns can be increased.
C)Tax considerations are important when investing.
D)Diversification leads to increased value.

Question 72

Which of the following is a characteristic of an efficient market?

A)There are small numbers of individuals.
B)Opportunities exist for investors to profit from publicly available information.
C)The market prices of securities reflect fair value of the firm.
D)Immediate responses occur for new public information.

Question 73

For the risk-return principle implies that the more risky a given course of action,the higher the expected return must be.

Question 74

Briefly discuss the incentives for financial managers to conduct their business in an ethical manner.

Question 75

The financial manager should examine available risk-return trade-offs and make his decision based upon the greatest expected return.

Question 76

Which of the following is most likely to motivate executives to maximise shareholder wealth?

A)Tying bonuses to cost reductions and meeting budget goals
B)Offering them relatively high salaries
C)Tying annual bonuses to increases in annual profits
D)Compensating them with stock options that can only be exercised after five years

Question 77

Which of the following factors is most important in investment decisions?

A)the change in earnings before taxes
B)the change in gross sales revenue
C)the change in net income
D)the change in cash flow

Question 78

Consider cash flows for Projects X and Y such as: Project X Project Y
Year 1 $3000 $ 0
Year 2 $ 0 $3000
A rational person would prefer receiving cash flows sooner because

A)the money can be reinvested.
B)the money is nice to have around.
C)the investor may be tired of a particular investment.
D)the investor is indifferent to either proposal.

Question 79

If one security has a greater risk than another security,how will investors respond?

A)They will require a lower rate of return for the investment that has greater risk.
B)They would be indifferent regarding their expectation of rates of return for either investment.
C)They will require a higher rate of return for the investment that has greater risk.
D)None of the above.

Question 80

Consider the following equally likely project outcomes: Profit
X Y
Pessimistic prediction $ 0 $500
Expected outcome $ 500 $500
Optimistic prediction $1000 $500

A)Investors will prefer project X because it potentially offers a higher profit.
B)Investors will reject both projects because the profit is too low.
C)Investors will prefer project Y because the expected return is the same as for project X but the outcome is certain.
D)Since Projects X and Y have the same expected outcomes of $500,investors will view them as identical in value.