Quiz 1: Goals and Governance of the Corporation

Capital budgeting decisions are used to determine how to raise the cash necessary for investments.

A successful investment is one that increases the value of the firm.

BP's committing of$500 million to partnership with University of California-Berkeley to develop new sources of energy is a capital budgeting decision.

Making good investment and financing decisions is the chieftask of the financial manager.

If a project's value is less than its required investment,then the project is attractive financially.

Pfizer's spending of $7.6 billion in 2006 on research and development of new drugs is a capital budgeting decision but not a financing decision.

LVMH's issuance ofa 7-year bond in 2005,raising 600 million euros,is a financing decision.

Financial assets have value because they are claims on the firm's real assets and the cash that those assets will produce.

Real assets can be intangible assets.

An IOU ("I owe you")from your brother-in-law is a financial asset.

The liability of sole proprietors is limited to the amount of their investment in the company.

General partners have limited personal liability for business debts in a limited partnership.

The separation of ownership and management is one distinctive feature of corporations.

A major disadvantage of partnerships is that they have double taxation of profits.

Boards of directors are often portrayed as active supporters of top management.

The separation of ownership and management is one distinctive feature of both corporations and sole proprietors.

While control of large public companies in the United States is exercised through the board of directors and pressure from the stock market,in many other countries the stock market is less important and control shifts to major stockholders,typically banks and other companies.

Financial analysts are involved in monitoring and controlling the risk associated with investment projects and financing decisions.

The primary goal of any company should be to maximize current period profits.

Maximizing profits is the same as maximizing the value of the firm.

Shareholders welcome higher short-term profits even when they damage long-term profits.

Major banks and securities firms protect their reputations by emphasizing their long history and their responsible behavior when seeking new customers.

Ethical decision making in business can be viewed as a long-term investment in reputation.

Investors usually give some companies with good track records the benefit of the doubt when the companies' performance fails to meet the market expectation.

Insider trading is the purchase or sale of shares based on information that is not available to public investors,and such behavior is accepted by the Securities Exchange Commission.

Corporations that do not issue financial securities such as stock or debt obligations: A) will not be able to increase sales. B) cannot be profitable. C) may not be able to generate sufficient funds to fulfill their needs. D) do not face double taxation of their profits.

Which of the following would be considered a capital budgeting decision? A) Planning to issue common stock rather than issuing preferred stock B) Deciding to expand into a new line of products, at a cost of $5 million C) Repurchasing shares of common stock D) Issuing debt in the form of long-term bonds

A financial manager facing a capital budgeting decision must decide whether to: A) issue stock or debt securities. B) use the money market or capital market. C) use primary markets or secondary markets. D) buy new machinery or repair the old.

The best criterion for success in a capital budgeting decision would be to: A) minimize the cost of the investment. B) maximize the number of capital budgeting projects. C) maximize the difference between cash inflows and cost. D) finance all capital budgeting projects with debt.

The overall goal of capital budgeting projects should be to: A) decrease the firm's reliance on debt. B) increase the firm's sales. C) increase the firm's outstanding shares of stock. D) increase the wealth of the firm's shareholders.

An example of a firm's financing decision would be: A) acquiring a competitive firm. B) determining how much to pay for a specific asset. C) issuing 10-year versus 20-year bonds. D) deciding whether or not to increase the price of its products.

Which of the following is not a financing decision? A) Should the firm borrow money from a bank or sell bonds? B) Should the firm shut down an unprofitable factory? C) Should the firm buy or lease a new machine that it is committed to acquiring? D) Should the firm issue preferred stock or common stock?

Long-term financing arrangements occur in the: A) money markets. B) capital markets. C) secondary markets. D) tertiary markets.

The term "capital structure" refers to: A) the manner in which a firm obtains its long-term sources of funding. B) the length of time needed to repay debt. C) whether the firm invests in capital budgeting projects. D) which specific assets the firm should invest in.

Firms can alter their capital structure by: A) not accepting any capital budgeting projects. B) investing in intangible assets. C) issuing stock to repay debt. D) becoming a limited liability company.

When a corporation decides to issue long-term debt in order to pay for the acquisition of real assets,it has made a: A) capital budgeting decision. B) financing decision. C) money market decision. D) secondary market decision.

A firm decides to pay for a small investment project through a $1 million increase in short-term bank loans.This is best described as an example of a(n): A) financing decision. B) investment decision. C) capital budgeting decision. D) capital market decision.

The short-term decisions of financial managers are comprised of: A) capital structure decisions. B) investment decisions. C) financing decisions. D) both investment and financing decisions.

Which of the following represents a financing decision? A) A decision to borrow $10 million through a bank loan B) A decision to invest in the common stock of another corporation C) A decision to buy a new mainframe computer D) A decision to pay $1 million of accounts payable

Which of the following would not be considered a real asset? A) A corporate bond B) A machine C) A patent D) A factory

Which of the following statements best distinguishes the difference between real and financial assets? A) Real assets have less value than financial assets. B) Real assets are tangible; financial assets are not. C) Financial assets represent claims to income that is generated by real assets. D) Financial assets appreciate in value; real assets depreciate in value.

Which of the following would not be considered a financial asset? A) A patent B) A personal IOU C) A checking account balance D) A share of stock

Financial markets are used for trading: A) both real assets and financial assets. B) the goods and services produced by a firm. C) securities, such as shares of IBM. D) the raw materials used in manufacturing.

Which of the following are real assets? A) A patent B) A share of stock issued by Bank of New York C) An IOU ("I owe you") from your brother-in-law D) A mortgage loan taken out to help pay for a new home

The stockholders in a sole proprietorship are represented by: A) the owner of the firm. B) the general partner of the firm. C) the board of directors of the firm. D) no one; sole proprietorships have no stockholders.

Which of the following would be considered an advantage of the sole proprietorship form of organization? A) Wide access to capital markets B) Unlimited liability C) A pool of expertise D) Profits taxed at only one level

In a partnership form of organization,income tax liability,if any,is incurred by: A) the partnership itself. B) the partners individually. C) both the partnership and the partners. D) neither the partnership nor the partners.

Which of the following would correctly differentiate general partners from limited partners in a limited partnership? A) General partners have more job experience. B) General partners have an ownership interest. C) General partners are subject to double taxation. D) General partners have unlimited personal liability.

One common reason for partnerships to convert to a corporate form of organization is that the partnership: A) faces rapidly growing financing requirements. B) wishes to avoid double taxation of profits. C) has issued all of its allotted shares. D) agreement expires after ten 10 years.

Which of the following is least likely to be discussed in the articles of incorporation? A) The maximum number of shares that can be issued B) The purpose of the business C) The price range of the shares of stock D) The number of members of the board of directors

When a corporation fails,the maximum that can be lost by an investor protected by limited liability is: A) the amount of the initial investment. B) the amount of the profit on the investment. C) the amount necessary to pay the corporation's debts. D) the amount of the investor's personal wealth.

Which of the following is not an advantage to incorporating a business? A) Easier access to financial markets B) Limited liability C) Becoming a permanent legal entity D) Profits taxed at the corporate level and the shareholder level

Unlimited liability is faced by the owners of: A) corporations. B) partnerships and corporations. C) sole proprietorships and partnerships. D) all forms of business organization.

Which of the following statements is generally not true for an investor who faces unlimited liability on an investment? A) The investor owns stock in the firm. B) The investor has no partners. C) The investor is subject to double taxation. D) The investor is responsible for managing the firm.

In the case of a professional corporation,________ has/have limited liability. A) only the professionals B) only the business C) both the professionals and the business D) neither the professionals nor the business

A board of directors is elected as a representative of the corporation's: A) top management. B) stakeholders. C) shareholders. D) customers.

The legal "life" of a corporation is: A) coincidental with that of its CEO. B) equal to the life of its board of directors. C) permanent, as long as shareholders don't change. D) permanent, regardless of current ownership.

When the management of a business is conducted by individuals other than the owners,the business is more likely to be a: A) corporation. B) sole proprietorship. C) partnership. D) general partner.

"Double taxation" refers to: A) all partners paying equal taxes on profits. B) corporations paying taxes on both dividends and retained earnings. C) paying taxes on profits at the corporate level and dividends at the personal level. D) the fact that marginal tax rates are doubled for corporations.

A corporation is considered to be closely held when: A) only a few shareholders exist. B) the market value of the shares is stable. C) it operates in a small geographic area. D) management also serves as the board of directors.

Corporations are referred to as public companies when their: A) shareholders have no tax liability. B) shares are held by the federal or state government. C) stock is publicly traded. D) products or services are available to the public.

A common problem for closely held corporations is: A) lack of access to substantial amounts of capital. B) that shareholders receive only one vote each. C) the separation of ownership and management. D) an abundance of agency problems.

Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm? A) Treasurer B) Controller C) Chief Operating Officer D) Board of directors

In a large corporation,budget preparation would most likely be conducted by the: A) treasurer. B) controller. C) chief financial officer. D) financial manager.

In a firm having both a treasurer and a controller,which of the following would most likely be handled by the controller? A) Internal auditing B) Credit management C) Banking relationships D) Insurance

Which of the following statements more accurately describes the controller than the treasurer? A) Likely to be the only financial executive in small firms B) Monitors capital expenditures to make sure that they are not misappropriated C) Responsible for investing the firm's spare cash D) Responsible for arranging any issue of common stock

A chief financial officer would typically: A) report to the treasurer, but supervise the controller. B) report to the controller, but supervise the treasurer. C) report to both the treasurer and controller. D) supervise both the treasurer and controller.

One corporate activity that is specifically reserved for the board of directors is the: A) declaration of dividends. B) custody of records. C) preparation of budgets. D) day-to-day operation of the firm.

A financial analyst in a corporation may be involved in: A) proposing a new investment project. B) collecting payments from customers. C) managing investment of the company's cash. D) purchasing the firm's plant and equipment.

Investment banks like Merrill Lynch or Goldman Sachs: A) collect deposits and relend the cash to corporations and individuals. B) help companies sell their securities to investors. C) design and sell insurance policies for businesses. D) lend to corporations and investors in commercial real estate.

Corporate managers are expected to make corporate decisions that are in the best interest of: A) top corporate management. B) the corporation's board of directors. C) the corporation's shareholders. D) all corporate employees.

The primary goal of corporate management should be to: A) maximize the number of shareholders. B) maximize the firm's profits. C) minimize the firm's costs. D) maximize the shareholders' wealth.

Which of the following appears to be the most appropriate goal for corporate management? A) Maximizing market value of the company's shares B) Maximizing the company's market share C) Maximizing the current profits of the company D) Minimizing the company's liabilities

How may a reduction in cash dividends be in the best interests of current shareholders? A) A reduction of cash dividends is always in the best interests of current shareholders. B) The firm will have available cash to increase current investment and future profits. C) Reduced dividends increase managerial compensation, thus increasing their motivation. D) A reduction of cash dividends cannot be in the best interests of current shareholders.

Profit maximization is not a well-defined corporate objective because: A) it leaves open the question of which year's profits. B) higher profits does not necessarily mean a better rate of return. C) profits can be changed by using different accounting rules. D) all of these.

A managerial objective to increase market share is more likely to be successful in the long run if the firm is: A) selling shares in the secondary market. B) the low-cost producer in the industry. C) managed by the board of directors. D) investing in capital budgeting projects.

The first step in determining managerial objectives is to: A) develop appropriate compensation policies. B) eliminate agency problems. C) serve the needs of the customer. D) select an appropriate capital structure.

WorldCom's failure to report $3.8 billion of operating expenses is an example of: A) an effort to conform to changed accounting rules. B) an attempt to maximize the value of the shareholders' investment in the firm. C) an effort to serve the needs of the customer. D) an attempt to increase the company's market value in an unethical way.

Ethical decision making by management has a payoff for shareholders in terms of: A) improved capital structure. B) enhanced reputation value. C) increased managerial benefits. D) higher dividend payments.

Ethical decision making in business: A) reduces the firm's profits. B) requires adherence to implied rules as well as written rules. C) is not in the best interests of shareholders. D) is less important than good capital budgeting decisions.

A corporate board of directors should provide support for the top management team: A) under all circumstances. B) in all decisions related to cash dividends. C) only when the board has confidence in management's actions. D) if shareholders are pleased with the firm's performance.

A corporation's board of directors: A) is selected by and can be removed by management. B) can be voted out of power by the shareholders. C) has a lifetime appointment to the board. D) is selected by a vote of all corporate stakeholders.

In which of the following organizations would agency problems be least likely to occur? A) A sole proprietorship B) A partnership C) A corporation D) A closely held corporation

Sole proprietorships resolve the issue of agency problems by: A) avoiding excessive expense accounts. B) discharging those who violate the rules. C) allowing owners to share the cost of their actions with others. D) forcing owners to bear the full cost of their actions.

Agency problems can best be characterized as: A) dislike of firm's bondholders by its equity holders. B) differing incentives between managers and owners. C) spending of corporate resources. D) friction between the primary and secondary markets.

Which of the following is least likely to represent an agency problem? A) Lavish spending on expense accounts B) Plush remodeling of the executive suite C) Excessive investment in "safe" projects D) Executive incentive compensation plans

When managers' compensation plans are tied in a meaningful manner to the profits of the firm,agency problems: A) can be reduced. B) will be created. C) are shifted to other stakeholders. D) are eliminated entirely from the firm.

Which of the following groups is least likely to be considered a stakeholder of the firm? A) Government B) Bondholders C) Competitors D) Employees

A manager's compensation plan that offers financial incentives for increases in quarterly profitability may create agency problems in that: A) the managers are not motivated by personal gain. B) the board of directors may claim the credit. C) short-term, not long-term profits become the focus. D) investors desire stable profits.

One continuing problem with managerial incentive compensation plans is that: A) the plans increase agency problems. B) managers prefer guaranteed salaries. C) their effectiveness is difficult to evaluate. D) the plans do not reward shareholders.

Which of the following forms of compensation is most likely to align the interests of managers and shareholders? A) A fixed salary B) A salary that is linked to company profits C) A salary that is paid partly in the form of the company's shares D) A salary that is linked to the company's total market value

Distinguish between a firm's capital budgeting decisions and its financing decisions by giving examples of each.

Discuss the interrelationship between a firm's financing and its capital structure decisions.

What two major decisions are made by financial managers?

Provide at least three examples each of real and financial assets that might appear on the balance sheet of General Motors.

What does "real asset" mean?

What general factors may influence the decision of whether to organize as a sole proprietorship,a partnership,or a corporation?

Discuss why corporations typically exhibit separation of ownership and management,as distinguished from sole proprietorships or partnerships.

Why is limited liability such an important aspect to investors?

Tabulate and compare the differences among corporations,sole proprietorships,and partnerships.

Who are the financial managers in large corporations?

Fritz and Frieda went to business school together 10 years ago.They have just been hired by a midsized corporation that wants to bring in new financial managers.Fritz studied finance,with an emphasis on financial markets and institutions.Frieda majored in accounting and became a CPA 5 years ago.Who is more suited to be treasurer and who controller? Briefly explain.

Who is the financial manager?

Provide examples of managerial goals other than the maximization of market value.

Why does it make sense for corporations to maximize their market value?

Are there companies that have attempted to increase their market value in unethical ways recently?

Develop a case for the interrelationship of ethical decision making by corporate management and profitability of the firm.

Is there a conflict between "doing well" and "doing good"? When there are conflicts,how may government regulations or laws tilt the firm toward doing good?

Is value maximization always ethical?

Describe agency problems in general,and offer at least three examples from corporations.

How do corporations ensure that managers' and stockholders' interests coincide?

What actions can shareholders take when the corporation is underperforming and the board of directors is not aggressive in holding managers to task?