Finance Ch. 1

T/F There is unlimited liability in a general partnership. True
T/F Dividends paid to corporate stockholders have already been taxed once as corporate income. True
T/F Corporate governance issues have become less important to the financial community during the first decade of the new millennium. False
T/F A major focus of the Sarbanes-Oxley Act is to make sure that publicly traded companies accurately present their assets, liabilities, and income in their financial statements. True
What is the primary goal of financial management? A. Increased earnings B. Maximizing cash flow C. Maximizing shareholder wealth D. Minimizing risk of the firm C. Maximizing shareholder wealth
One of the major advantages of a sole proprietorship is A. that the owner has limited liability. B. that stock in the proprietorship can be easily transferred. C. that it is exempt from many tax rules that would otherwise apply when employees are hired by the firm. D. low operating costs. D. low operating costs.
The partnership form of an organizationA. avoids the double taxation of earnings and dividends found in the corporate form of organization. B. usually provides limited liability to the partners. C. has unlimited life. D. simplifies decision making. A. avoids the double taxation of earnings and dividends found in the corporate form of organization.
Agency theory deals with the issue ofA. when to hire an agent to represent the firm in negotiations. B. the legal liabilities of a firm if an employee, acting as the firm’s agent, injures someone. C. the limitations placed on an employee acting as the firm’s agent to obligate or bind the firm. D. the conflicts that can arise between the viewpoints and motivations of a firm’s owners and managers. D. the conflicts that can arise between the viewpoints and motivations of a firm’s owners and managers.
When a corporation uses the financial markets to raise new funds, the sale of securities is made in theA. primary market. B. secondary market. C. online market. D. third market. A. primary market.
Companies that have higher risk than a competitor in the same industry will generally haveA. to pay a higher interest rate than its competitors. B. a lower relative stock price than its competitors. C. a higher cost of funds than its competitors. D. All of the options D. All of the options
Concerned with managing a corporation’s money. Ex: company must decide where to invest its money, whether or not to replace an old asset, when to issue new stocks and bonds, and whether or not to pay dividends. Financial Management
Concerned with short-term financing decisions that are less than one year. Ex: managing cash and other current assets. Working Capital
Concerned with long-term financing decisions that are more than one year. Ex: purchasing a new machine in the future. Capital Budgeting
Represents single-person ownership. Advantages: simplicity of decision-making, low organizational and operational costs. Disadvantages: unlimited liability, profits and losses are taxed as through they belong to the individual owner. Sole Proprietorship
Two or more owners. Must file an article of _____. It carries unlimited liability for the owners. Partnership
One or more partners are designated general parents and have unlimited liability for the debts of the firm. Other partners designate limited partners and are liable only for their initial contribution. Limited Partnership
Unique, it is a legal entity unto itself. It is owned by shareholders who enjoy the privilege of limited liability. It has a continual life. A key feature is the easy divisibility of ownership interest by issuing shares of stock. A disadvantage is the potential of double taxation of earnings. Corporation
Income is taxed as direct income to stockholders and thus is taxed only once as normal income. Subchapter S Corporation
Adopting policies that: maximize values in the market, attracts capital, provides employment, offers benefits to the society. Certain cost-increasing activities may have to be mandatory rather than voluntary initially, to ensure burden falls equally over all business firms. Social Responsibility
Examines the relationship between the owners and managers of the firm. Agency Theory
Have more to say about the way publicly owned companies are managed. Institutional Investors

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