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Finance Flashcards

Finance Exam 1

There are three basic questions that are addressed by the study of finance. They are? 1. How should the firm raise money to fund new investments(capital structure decisions)?2. What long-term investments should the firm undertake(capital budgeting decisions)?3. How can the firm best manage its cash flows as they arise in its day-to-day operations (working capital management decisions)?
Even if you are not planning a career in finance, a working knowledge of finance can be useful in both your personal and professional life for the following reasons: For those who plan to be entrepreneurs, managing company finances is crucial to the survival of the firms.Even if you do not pursue a career in finance, you may find yourself working closely with finance managersFinancial management is a key component of other academic disciplines such as management, marketing, production and operations management, and accounting.
Which of the following are legal forms of business organization? The partnershipThe sole proprietorshipThe corporation
Which of the following statements regarding a sole proprietorship are correct? Sole proprietorships are easy to set up with no paperwork required before the business can be openedSources of funds for a sole proprietorship typically include personal savings, as well as raising funds from a bank or personal loans from friends and familyThe sole proprietor is personally responsible for all debt of the sole proprietorship
Limited partnerships have two classes of partners. The __________ partner actually runs the business and faces unlimited liability for the firm’s debts, while the _________ partner is only liable up to the amount of the _______ partner invested. General, limited, limited
The typical business organization for large companies is the corporation. Advantages of the corporate form of business organization include: The life of the business is not tied to the status of the corporate ownersCorporations have a greater ease in raising large sums of money than other forms of business organizationThe owners’ liability is limited to the amount of their investment in the company
One attractive alternative to the corporation for a small business is the _______ because it combines the tax benefits of a partnership with the limited liability of a corporation limited liability company
When managers have little or no ownership in the firm, they are less likely to work energetically for the company’s shareholders. We call this type of conflict a(n) ________. agency problem
There are several measures that can be taken to help limit the agency problem The board of directors can actively monitor the actions of managers to keep pressure on them to act in the best interest of shareholders.Compensation plans can be put in place to reward managers when they maximize shareholder wealthFinancial markets play a key role in monitoring managementFirms that fail to maximize shareholder wealth may be taken over and their management team replaced
The sarbanes-oxley act of 2002 (SOX) was passed to directly confront concerns about both agency and ethical issues. Select all of the following statements that correctly describe this act. 1. SOX holds corporate advisors who have access to or influence on company decisions, legally accountable for any instances of misconduct2. While the goal of SOX is to provide greater protection against accounting fraud and financial misconduct, the demanding reporting requirements of SOX are quite costly and may inhibit firms from listing on U.S stock markets3. The purpose of SOX is protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the security laws.
There are four basic principles of finance. Which principle correctly describes the following statement. ” A dollar today is worth more than a dollar received in the future.” Principle 1: Money has a time value.
Which basic principle describes the following statement: “Profit is an accounting concept designed to measure a business’s performance over an interval of time. Cash flow is the amount of cash that can actually be taken out of the business over this same interval?” Principle 3: Cash flows are the source of value
Which basic principle of finance correctly describes the following statement, “Investors respond to new information by buying and selling their investments. The speed with which investors act and the way that prices respond to the information determine the efficiency of the market?” Principle 4: Market prices reflect information
Which basic principle of finance correctly describes the following statement: “We won’t take on additional risk unless we expect to be compensated with additional return?” Principle 2: There is a risk-return tradeoff
T/F: Mutual Funds and ETFs provide the investor a chance to diversify without having to buy shares in numerous corporations. TRUE
T/F: Private equity firms are financial intermediaries that are not traded on public capital markets. TRUE
T/F: Capital markets are markets for short term debt instruments maturing in less than one year, and money markets are markets for long term debt instruments maturing in more than one year FALSE
T/F: The difference between mutual funds and ETFs is that ETFs are traded on exchanges and mutual funds are not TRUE
Which of the following is true about bonds? They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.
Which of the following is true about Preferred Stock? Preferred dividends are not tax deductible to the corporation
The market for short-term debt is known as The money market
Characteristics of typical bonds include all of the following except The dividend rate
Which of the following financial instruments is not traded in the capital markets? Debt with a maturity of less than one year
Which of the following financial instruments entails the most risk and potentially the highest returns for investors? Common stock
Investors in common stock increase their wealth when the 1. the market value of the stock goes up2. when the stock pays a dividend
T/F: Primary markets are always larger than secondary markets False
T/F : ABC corporation issued and sold 10 shares of stock to Irene Investor, a private individual. This represents a secondary market transaction. False
T/F: Colin, a private individual, sold one thousand shares of stock in DEF Corporation to Colleen, also a private individual. This represents a secondary market Transation. True
T/F: Owners of common stock are the owners of the firm True
T/F: Each year, shareholders receive a dividend equal to the firm’s net earnings dividends by the number of shares of common stock False
T/F: A company has the option to pay bond interest or not False
T/F: There are more companies listed on NASDAQ than are listed on the New York Stock Exchange True
T/F: Established firms in need of additional capital can raise it in the secondary market False
Which of the following is NOT an advantage of the sole proprietorship? Limited liability
What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form? Owners have unlimited liability
Which of the following is NOT true for limited partnerships? Limited partners can only manage the business
The true owners of the corporation are the common stockholders
In terms of organizational costs, which of the following sequences is generally correct, moving from lowest to highest cost? Sole proprietorship, general partnership, limited partnership, corporation
Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose? Corporation
Which of the following categories of owners enjoys limited liability? Shareholders (common stock) of a corporation
Which of the following is a characteristic of a limited partnership? It prohibits the limited partners from participating in the management of the partnershipIt requires one or more of the partners to be a general partner to whom the privilege of limited liability does not applyIt allows one or more partners to have limited liability
Which of the following forms of organization blends elements of partnerships and corporations? Limited liability companies (LLC’s)
For these types of organization, no distinction is made between business and personal assets Sole proprietorshipGeneral partnership
Which of the following is a significant disadvantage of a general partnership? Each partner is fully responsible for the liabilities incurred by the partnership
Which of the following forms of business organization is the dominant economic force in the United States The corporation
A corporation is owned by the shareholders who hold the company’s stock
T/F: Limited partners may actively manage the business False
Which of the following best describes the goal of the firm? The maximization of the total market value of the firm’s common stock
What does the agency problem refer to? The problem that results from potential conflicts of interest between the manager of a business and the stockholders
Managers of corporations need to act in an ethical way.. because a business must be trusted by investors, customer and the public if it is to succeed.
Serious ethical violations by corporations such as Enron led to the passage of The sarbanes – Oxley Act
T/F: The Sarbanes-Oxley Act addresses insider trading by members of Congress False
IN measuring value, the focus should be on Cash flow
Which of the following is a characteristic of an efficient market? Security prices reflect fair value of the firm
The prices of Netflix stock dropped sharply after customers responded negatively to a change in pricing policies. The change in stock prices illustrates which principle? Market prices reflect information
T/F: In efficient markets, price adjustments to new information are gradual. FALSE

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