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Intermediate Financial Management-
Chapter 1 exam with complete solutions
Which one of these is a disadvantage of the corporate form of business? A. Access to capital B. Unlimited personal liability for owners C. Limited firm life D. Legal requirements - ANSWER-D. Legal requirements Which one of the following gives a corporation its permanence? A. Multiple owners B. Limited liability C. Corporation taxation D. Separation of ownership and control - ANSWER-D. Separation of ownership and control
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. - ANSWER-B. the partners individually. Which one 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. - ANSWER-D. General partners have unlimited personal liability. Which form of organization provides limited liability for the firm but yet allows the professionals working within that firm to be sued personally? A. Limited liability partnership B. Limited liability company C. Sole proprietorship
C. Becoming a permanent legal entity D. Profits taxed at the corporate level and the shareholder level - ANSWER-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 general partnerships. D. all forms of business organization. - ANSWER-C. sole proprietorships and general partnerships. Which one of these statements correctly applies to a limited partnership? A. All partners share the daily management duties. B. All partners enjoy limited personal liability. C. General partners have unlimited personal liability. D. Taxes are imposed at both the firm and the personal level on profits earned. - ANSWER-C. General partners have unlimited personal liability. In the case of a limited liability partnership, ________ has/have limited liability. A. only some of partners B. only the managing partner
C. all of the partners D. none of the partners - ANSWER-C. all of the partners A board of directors is elected as a representative of the corporation's: A. top management. B. stakeholders. C. shareholders. D. customers. - ANSWER-C. shareholders. 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. - ANSWER-D. permanent, regardless of current ownership. When the management of a business is conducted by individuals other than the owners, the business is most likely to be a: A. corporation. B. sole proprietorship.
B. shares are held by the federal or state government. C. stock is publicly traded. D. products or services are available to the public. - ANSWER-C. stock is publicly traded. A common problem for closely held corporations is: A. the lack of access to substantial amounts of capital. B. the restriction that shareholders receive only one vote each. C. the separation of ownership and management. D. an abundance of agency problems. - ANSWER-A. the lack of access to substantial amounts of capital. 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. - ANSWER-C. the corporation's shareholders. Which one of the following is a financial asset? A. A corporate bond
B. A machine C. A patent D. A factory - ANSWER-A. A corporate bond 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. - ANSWER- C. Financial assets represent claims to income that is generated by real assets. Which one of the following is a real asset? A. A patent B. A personal IOU C. A checking account balance D. A share of stock - ANSWER-A. A patent Which one of these is not considered to be a security? A. Shares of GE stock
A. Deciding between issuing stock or debt securities B. Deciding whether or not the firm should go public C. Deciding if the firm should repurchase some of its outstanding shares D. Deciding whether to buy a new machine or repair the old machine - ANSWER- D. Deciding whether to buy a new machine or repair the old machine 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 value added to the firm. D. finance all capital budgeting projects with debt. - ANSWER-C. maximize the value added to the firm. 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. - ANSWER-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. - ANSWER-C. issuing 10-year versus 20-year bonds. Which of the following is a capital budgeting 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? - ANSWER-B. Should the firm shut down an unprofitable factory? Which of these duties are responsibilities of the corporate treasurer? A. Financial statements and taxes B. Cash management and tax reporting C. Cash management and banking relationships D. Raising capital and financial statements - ANSWER-C. Cash management and banking relationships
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 expenditure decision. - ANSWER-A. financing decision. The short-term decisions of financial managers are comprised of: A. capital structure decisions only. B. investment decisions only. C. financing decisions only. D. both investment and financing decisions. - ANSWER-D. both investment and financing decisions. A block holder is commonly defined as an investor who: A. owns 5 percent or more of a firm's outstanding shares. B. invests in more than one firm within the same industry. C. is another corporation.
D. is also one of the firm's managers or directors. - ANSWER-A. owns 5 percent or more of a firm's outstanding shares. 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 - ANSWER-A. Treasurer In a large corporation, budget preparation would most likely be conducted by the: A. treasurer. B. controller. C. chief financial officer. D. financial manager. - ANSWER-B. controller. n 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
B. The profit margin of the existing firm C. The rate of return on the firm's outstanding shares D. The rate of return on risk-free debt securities - ANSWER-A. The available alternative investment opportunities A financial analyst in a corporation may be involved with all of the following EXCEPT: A. analyzing a new investment project. B. monitoring risk. C. managing investment of the company's cash. D. purchasing the firm's plant and equipment. - ANSWER-D. purchasing the firm's plant and equipment. Investment banks like Morgan Stanley 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. - ANSWER-B. help companies sell their securities to investors. 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. - ANSWER-D. maximize the shareholders' wealth. 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 approves of management's actions. D. if shareholders are pleased with the firm's performance. - ANSWER-C. only when the board approves of management's actions. 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 - ANSWER-A. Maximizing market value of the company's shares
B. designing compensation packages that align manager's goals with those of the shareholders. C. corporate governance. D. electing senior managers to the board of directors. - ANSWER-D. electing senior managers to the board of directors. Which one of these best defines the objective of a well-functioning financial market? A. Establishing accurate security prices B. Creating higher security prices C. Eliminating short-selling profits D. Increasing shareholder value by any means possible - ANSWER-A. Establishing accurate security prices Corporate raiders will be looked upon most favorably if they: A. divide up large profitable entities. B. take actions that increase current shareholder wealth. C. create value for themselves through their actions. D. change the capital structure of a firm by increasing its debt. - ANSWER-B. take actions that increase current shareholder wealth.
Ethical decision making by management has a payoff for shareholders in terms of: A. improved capital structure. B. enhanced firm reputation value. C. increased managerial benefits. D. higher current dividend payments. - ANSWER-B. enhanced firm reputation value. 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. - ANSWER-B. requires adherence to implied rules as well as written rules. A corporate director: 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.
