Finance Exam I: Chapter 1

Shares in a corporation can be sold to raise capital from investors who are not involved in the business. This greatly increases the amount of capital that can be raised to fund the business. Which of the following is the advantage of the corporate form of organization?A. Reduced start-up costsB. Greater access to capital marketsC. Unlimited liabilityD. Single taxation B.
A good capital budgeting or investment decision is one in which the benefits are worth more to the firm than the cost of the asset.A. TrueB. False A.
Corporations hold the majority of all business assets and generate the majority of business revenues and profits in the United States.A. TrueB. False A.
Unlimited liability means that the owner of a firm is responsible for paying all the bills of the firm.A. TrueB. False A.
The process of transferring ownership of a sole proprietorship is relatively easy compared to a public corporation.A. TrueB. False B.
General partners in a business have limited liability with regard to their firm’s obligations.A. TrueB. False B.
An agency conflict can arise when the agent of the firm is the sole owner of the firm.A. TrueB. False B.
The owners of a firm are unaffected by agency costs.A. TrueB. False B.
Which of the following is a stakeholder?A. An employeeB. A lenderC. The IRSD. All of the above D.
The capital budgeting decision process addresses…A. How a firm’s day-to-day financial matters should be managedB. How a firm should finance its assetsC. Which productive assets a firm should purchaseD. All of the above C.
Which of the following business organizational form(s) subject(s) the owner(s) to unlimited liability?A. Sole proprietorshipB. General partnershipC. CorporationD. Both sole proprietorship and general partnership D.
Which of the following business organizational form(s) create(s) a tax liability on income at the personal income tax rate?A. Sole proprietorshipB. PartnershipC. CorporationD. Both sole proprietorship and partnership D.
Which of the following business organizational form(s) is/are the easiest one(s) to raise capital?A. Sole proprietorshipB. PartnershipC. CorporationD. Both sole proprietorship and partnership C.
Which of the following cannot be engaged in managing the business?A. A sole proprietorB. A general partnerC. A limited partnerD. None of the above C.
If a firm establishes maximizing profits as the most important goal of the firm, which of the following would not be given proper consideration?A. Sales revenuesB. ProfitsC. Cost of goods soldD. Risk of bankruptcy D.
One reason for the existence of agency problems between managers and stockholders is that…A. There is a significant degree of separation between management and ownershipB. Managers know how to manage the firm better than stockholdersC. Stockholders have unreasonable expectations about managerial performance A.
Who among the following is the principal in the agency relationship of a corporation?A. The Board of DirectorsB. The CEO of the firmC. A stockholdersD. A company engineer C.
An example of an agency cost is…A. A manager turning down a value-contributing project because of its risksB. A manager expensing a lavish dinner on the company expense reportC. A manager using too little debt within the firm’s capital structure because of the additional risk associated with debt B.
Executives that repeatedly put their own interests before that of the firm may find that they have difficulty in finding another job after their current one. This is an example of…A. The managerial labor market disciplining managersB. The market for corporate controlC. The Board of Directors affecting the prospects of a manager A.
The legal system and market forces impose substantial costs on individuals and institutions that engage in unethical behavior. Which of the following would not be an example of the above?A. Legal finesB. Jail timeC. Financial lossesD. Agency conflicts D.
Maximization of a firm’s profit is more important than maximization of a firm’s value.A. TrueB. False B.
Which of the following is likely to reduce agency costs?A. Guaranteeing managers a large base salaryB. Hiring few qualified managersC. The threat of the firm being a takeover targetD. A Board of Directors compromised mostly of insiders C.
Profit maximization is not an appropriate goal for a firm because…A. It directly considers the timing and riskiness of the firm’s cash flowsB. It does not consider time value of moneyC. It considers the current value of the firm’s stockD. It directly accounts for the firm’s cash flows B.
The main objective of a firm’s management should be to…A. Maximize its profitB. Minimize its risk exposureC. Maximize its long-term shareholder valueD. Maximize its current stock price C.

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