Finance 300: Ch. 1

T/F:Financial management deals with the maintenance and creation of economic value or wealth True
T/F: The fundamental goal of a business is to maximize the retained earning to the corporation’s shareholders False
T/F: The payment of a dividend to current shareholders will have no impact on a corporation’s share price because the cash paid is not available to future potential shareholders who may want to buy the corporation’s stock False
T/F: Only a firm’s financial decisions affect its stock prices False
The primary goal of a publicly owned corporation is to… maximize shareholder wealth
A financial manager is considering two projects, A and B. A is expected to add $2 million to profits this year while B is expected to add $1 million to profits this year. Which of the following statements is MOST correct? A. The manager should select the project that causes the stock price to increase the most, which could be A or B.
Shareholder wealth maximization means maximizing the price of existing common stock
Which of the following goals of the firm are synonymous (equivalent) to the maximization of shareholder wealth? maximization of the total market value of the firm’s common stock
Which of the following is the most important goal that a corporation should strive for? maximize shareholder wealth
T/F: When making financial decisions, managers should always look at marginal, or incremental cash flows true
An investment project is acceptable if the total cash received over the life of the project exceeds the total cash spent over the life of the project false
T/F: Cash flows and profits are synonymous; in other words, higher cash flows equal higher profits false
T/F: the risk-return trade- off implies that the return on a riskless asset must be zero false
T/F: An efficient market is one where the prices of the assets traded in that market fully reflect all available info. at any instant in time true
T/F: Beginning in 2007 the United States experienced its most severe financial crisis since the Great Depression of the 1930s true
To measure value, the concept of time value of money is used to bring the future benefits and costs of a project, measured by its cash flows, back to the present
The expected return on a riskless asset is greater than zero due to an expected return for delaying consumption
The principle of risk- return trade- off means that a rational investor will only take on higher risk if he expects a higher return
Project A is expected to generate positive cash flow of $1 million in 10 years while Project B is expected to generate $500,000 in 5 years. Therefore, Project B may be preferred to Project A if the opportunity cost of money is high enough
Company A reports sales of $100,000 and net income of $15,000. Company B reports sales of $100,000 and net income of $10,000. Therefore Company A’s cash flow may be higher or lower than Company B’s cash flow even though A’s net income is higher
Investors generally don’t like risk. Therefore, a typical investor will only take on additional risk if he expects to be compensated in the form of additional return
Assume that an investor is offered a choice of a risk-free government bond or a high-risk corporate stock. Further assume that the expected return is the same for both. According to one of the axioms of finance, which investment would be chosen? the government bond
Assume that you won the Lotta Dough Lotto jackpot for​ $20 million. Further assume that you were offered a choice to receive the​ $20 million​ today, or receive it in equal installments of​ $1 million per year for 20 years. According to one of the principles of​ finance, which would you​ take? the $20 million today because it would be worth more than if you would receive it in equal installments of $1 million per year for 20 years
As of today, the most severe economic crisis to afflict the United States economy is considered to be the Great Depression of the 1930s
The financial manager most directly responsible for producing the company’s financial statements and directing its cost accounting functions is the controller
A corporate treasurer is typically responsible for each of the following duties EXCEPTa. cash management b. credit management c. cost accountingd. capital expenditures c. cost accounting
The 3 basic types of issues addressed by the study of finance are capital budgeting, capital structure decisions, and working capital management
Cash and credit management are typically the responsibility of the treasurer
Capital budgeting is concerned with what long- term investments a firm should undertake
Determining the best way to raise money to fund a firm’s long-term investments is called the capital structure decision
T/F: Its ability to raise capital by selling stock makes the corporation the best form of organization in terms of raising capital true
T/F: The procedure by which significant changes may be made to a partnership, such as admission of new partner or termination of the partnership, are governed by each state so no partnership agreement is needed false
A limited partnership provides limited liability to only to limited partners who do not participate in the management of the business
Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it. If Joe invests and the business loses the lawsuits, the most Joe can lose is $10,000 if Joe is a limited partner
S-type corporations have all of the following advantages EXCEPTa. they are taxed as partnershipsb. the owners have limited liabilityc. distributions are taxed twice, similar to corporate dividend paymentsd. all owners must be people, no corporations distributions are taxed twice, similar to corporate dividend payments
All of the following business organizations provide limited liability to their owners EXCEPTa. S-type corporationb. general partnershipc. corporation d. limited liability company general partnership
Bill, a local​ inventor, developed a diet pill that he believes will solve the obesity problem in the United States. Bill wants to create a new​ company, 50% owned by Bill and​ 50% owned by a major drug company. Although he believes the pills are​ safe, Bill is concerned about liability if someone becomes sick or dies. The best form of business organization for the new company is limited liability company with Bill and the drug company owning equal shares
Which of the following statements about the corporate form of business organization is​ true? A.The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation.B.The corporate form has the advantage of unlimited liability.C.The corporate form has the disadvantage of double taxation relative to a sole proprietorship.Your answer is correct.D.Sole proprietorships are the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor. C. The corporate form has the disadvantage of double taxation relative to a sole proprietorship.
Limited partnerships are not as prevalent as corporations because it is easier to transfer ownership by selling common stock than it is to sell partnership
Which of the following is an advantage of the sole proprietorship? significant legal requirements for starting the businessYour answer is correct.B.easily transferred ownershipC.double taxation for its liability for its owners no significant legal requirements for starting the business
The true owners of the corporation are the common stockholders
In terms of the costs to organize each, which of the following sequences is correct, moving from highest to lowest cost? A.​corporation, limited​ partnership, general​ partnership, sole proprietorshipB.general​ partnership, sole​ proprietorship, limited​ partnership, corporationC.sole​ proprietorship, general​ partnership, limited​ partnership, corporation D.sole​ proprietorship, general​ partnership, corporation, limited partnership A.​corporation, limited​ partnership, general​ partnership, sole proprietorship
Which of the statements below are true?A corporation is the business form that is typically the most complicated​ (legally) to establish.B.The sole proprietorship and the general partnership both feature unlimited liability.C.The corporation and the limited partnership both provide at least some owners with limited liability. D.all of the above D. all of the above
Advantages of the corporate form of business organizations include easier transfer of ownership
Which form of organization is free of initial legal requirements?A.general partnershipB.sole proprietorshipC.corporation D.both A and B D. both A and B
Which of the following is NOT considered to be a disadvantage of the sole proprietorship form of business ability to raise capital is limited to that of the ownerC.unlimited liability of business ownersD.fewer regulations and reporting requirements fewer regulations and reporting requirements
Which of the following is an advantage of the general partnership form of business organization? liability of business ownersB.low cost of formationYour answer is correct.C.double taxationD.easy ability to raise capital low cost of formation
T/F: Due to unstable world markets, most large U.S corporations do almost all of their business in the United States false
Even though many U.S companies, including General Electric, IBM, Walt Disney, and American Express, have successfully restructured their operations to expand internationally, not many foreign firms have made their mark in the United States false
In the search for profits, U.S corporations have been forced to look beyond our country’s borders. All of the following contributed to the movement EXCEPTA.information technology protectionism.Your answer is correct.C.acceptance of the free market system in Third World countries.D.collapse of communism. B. trade protectionism

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