Quiz 1: Goals and Governance of the Corporation
Business
Q 1Q 1
Capital budgeting decisions are used to determine how to raise the cash necessary for investments.
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True False
False
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True False
True
Q 3Q 3
BP's committing of$500 million to partnership with University of California-Berkeley to develop new sources of energy is a capital budgeting decision.
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True False
True
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True False
Q 5Q 5
If a project's value is less than its required investment,then the project is attractive financially.
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True False
Q 6Q 6
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.
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True False
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True False
Q 8Q 8
Financial assets have value because they are claims on the firm's real assets and the cash that those assets will produce.
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True False
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True False
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True False
Q 11Q 11
The liability of sole proprietors is limited to the amount of their investment in the company.
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True False
Q 12Q 12
General partners have limited personal liability for business debts in a limited partnership.
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True False
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True False
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True False
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True False
Q 16Q 16
The separation of ownership and management is one distinctive feature of both corporations and sole proprietors.
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True False
Q 17Q 17
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.
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True False
Q 18Q 18
Financial analysts are involved in monitoring and controlling the risk associated with investment projects and financing decisions.
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True False
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True False
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True False
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True False
Q 22Q 22
Major banks and securities firms protect their reputations by emphasizing their long history and their responsible behavior when seeking new customers.
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True False
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True False
Q 24Q 24
Investors usually give some companies with good track records the benefit of the doubt when the companies' performance fails to meet the market expectation.
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True False
Q 25Q 25
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.
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True False
Q 26Q 26
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.
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Multiple Choice
Q 27Q 27
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
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Multiple Choice
Q 28Q 28
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.
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Multiple Choice
Q 29Q 29
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.
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Multiple Choice
Q 30Q 30
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.
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Multiple Choice
Q 31Q 31
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.
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Multiple Choice
Q 32Q 32
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?
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Multiple Choice
Q 33Q 33
Long-term financing arrangements occur in the:
A) money markets.
B) capital markets.
C) secondary markets.
D) tertiary markets.
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Multiple Choice
Q 34Q 34
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.
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Multiple Choice
Q 35Q 35
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.
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Multiple Choice
Q 36Q 36
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.
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Multiple Choice
Q 37Q 37
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.
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Multiple Choice
Q 38Q 38
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.
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Multiple Choice
Q 39Q 39
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
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Multiple Choice
Q 40Q 40
Which of the following would not be considered a real asset?
A) A corporate bond
B) A machine
C) A patent
D) A factory
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Multiple Choice
Q 41Q 41
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.
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Multiple Choice
Q 42Q 42
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
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Multiple Choice
Q 43Q 43
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.
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Multiple Choice
Q 44Q 44
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
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Multiple Choice
Q 45Q 45
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.
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Multiple Choice
Q 46Q 46
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
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Multiple Choice
Q 47Q 47
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.
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Multiple Choice
Q 48Q 48
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.
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Multiple Choice
Q 49Q 49
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.
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Multiple Choice
Q 50Q 50
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
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Multiple Choice
Q 51Q 51
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.
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Multiple Choice
Q 52Q 52
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
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Multiple Choice
Q 53Q 53
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.
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Multiple Choice
Q 54Q 54
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.
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Multiple Choice
Q 55Q 55
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
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Multiple Choice
Q 56Q 56
A board of directors is elected as a representative of the corporation's:
A) top management.
B) stakeholders.
C) shareholders.
D) customers.
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Multiple Choice
Q 57Q 57
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.
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Multiple Choice
Q 58Q 58
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.
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Multiple Choice
Q 59Q 59
"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.
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Multiple Choice
Q 60Q 60
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.
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Multiple Choice
Q 61Q 61
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.
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Multiple Choice
Q 62Q 62
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.
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Multiple Choice
Q 63Q 63
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
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Multiple Choice
Q 64Q 64
In a large corporation,budget preparation would most likely be conducted by the:
A) treasurer.
B) controller.
C) chief financial officer.
D) financial manager.
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Multiple Choice
Q 65Q 65
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
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Multiple Choice
Q 66Q 66
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
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Multiple Choice
Q 67Q 67
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.
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Multiple Choice
Q 68Q 68
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.
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Multiple Choice
Q 69Q 69
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.
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Multiple Choice
Q 70Q 70
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.
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Multiple Choice
Q 71Q 71
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.
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Multiple Choice
Q 72Q 72
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.
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Multiple Choice
Q 73Q 73
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
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Multiple Choice
Q 74Q 74
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.
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Multiple Choice
Q 75Q 75
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.
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Multiple Choice
Q 76Q 76
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.
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Multiple Choice
Q 77Q 77
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.
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Multiple Choice
Q 78Q 78
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.
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Multiple Choice
Q 79Q 79
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.
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Multiple Choice
Q 80Q 80
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.
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Multiple Choice
Q 81Q 81
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.
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Multiple Choice
Q 82Q 82
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.
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Multiple Choice
Q 83Q 83
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
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Multiple Choice
Q 84Q 84
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.
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Multiple Choice
Q 85Q 85
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.
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Multiple Choice
Q 86Q 86
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
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Multiple Choice
Q 87Q 87
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.
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Multiple Choice
Q 88Q 88
Which of the following groups is least likely to be considered a stakeholder of the firm?
A) Government
B) Bondholders
C) Competitors
D) Employees
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Multiple Choice
Q 89Q 89
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.
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Multiple Choice
Q 90Q 90
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.
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Multiple Choice
Q 91Q 91
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
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Multiple Choice
Q 92Q 92
Distinguish between a firm's capital budgeting decisions and its financing decisions by giving examples of each.
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Essay
Q 93Q 93
Discuss the interrelationship between a firm's financing and its capital structure decisions.
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Essay
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Essay
Q 95Q 95
Provide at least three examples each of real and financial assets that might appear on the balance sheet of General Motors.
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Essay
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Essay
Q 97Q 97
What general factors may influence the decision of whether to organize as a sole proprietorship,a partnership,or a corporation?
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Essay
Q 98Q 98
Discuss why corporations typically exhibit separation of ownership and management,as distinguished from sole proprietorships or partnerships.
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Essay
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Essay
Q 100Q 100
Tabulate and compare the differences among corporations,sole proprietorships,and partnerships.
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Essay
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Essay
Q 102Q 102
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.
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Essay
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Essay
Q 106Q 106
Are there companies that have attempted to increase their market value in unethical ways recently?
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Essay
Q 107Q 107
Develop a case for the interrelationship of ethical decision making by corporate management and profitability of the firm.
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Essay
Q 108Q 108
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?
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Essay
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Q 112Q 112
What actions can shareholders take when the corporation is underperforming and the board of directors is not aggressive in holding managers to task?
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Essay