Finance CH1

1. Capital budgeting decisions are used to determine how to raise the cash necessary for investments. False
2. A successful investment is one that increases the value of the firm. True
3. BP’s committing of$500 million to partnership with University of California-Berkeley to develop new sources of energy is a capital budgeting decision. True
12. General partners have limited personal liability for business debts in a limited partnership. False
13. The separation of ownership and management is one distinctive feature of corporations. True
14. A major disadvantage of partnerships is that they have double taxation of profits. False
19. The primary goal of any company should be to maximize current period profits. False
20. Maximizing profits is the same as maximizing the value of the firm. False
22. Major banks and securities firms protect their reputations by emphasizing their long history and their responsible behavior when seeking new customers. True
46. The stockholders in a sole proprietorship are represented by: A. the owner of the firm.B. the general partner of the firm.C. the board of directors of the firm.D. no one, sole proprietorships have no stockholders.; D. no one, sole proprietorships have no stockholders.
48. 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. B. the partners individually.
51. Which of the following is least likely to be discussed in the articles of incorporation? A. The maximum number of shares that can be issuedB. The purpose of the businessC. The price range of the shares of stockD. The number of members of the board of directors C. The price range of the shares of stock
52. When a corporation fails, the maximum that can be lost by an investor protected by limited liability is: A. the amount of the initial investment.B. the amount of the profit on the investment.C. the amount necessary to pay the corporation’s debts.D. the amount of the investor’s personal wealth. A. the amount of the initial investment.
53. Which of the following is not an advantage to incorporating a business? A. Easier access to financial marketsB. Limited liabilityC. Becoming a permanent legal entityD. Profits taxed at the corporate level and the shareholder level D. Profits taxed at the corporate level and the shareholder level
58. 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. D. permanent, regardless of current ownership.
60. “Double taxation” refers to: A. all partners paying equal taxes on profits.B. corporations paying taxes on both dividends and retained earnings.C. paying taxes on profits at the corporate level and dividends at the personal level.D. the fact that marginal tax rates are doubled for corporations. C. paying taxes on profits at the corporate level and dividends at the personal level.
61. A corporation is considered to be closely held when: A. only a few shareholders exist.B. the market value of the shares is stable.C. it operates in a small geographic area.D. management also serves as the board of directors. A. only a few shareholders exist.
62. Corporations are referred to as public companies when their: A. shareholders have no tax liability.B. shares are held by the federal or state government.C. stock is publicly traded.D. products or services are available to the public. C. stock is publicly traded.
63. A common problem for closely held corporations is: A. lack of access to substantial amounts of capital.B. that shareholders receive only one vote each.C. the separation of ownership and management.D. an abundance of agency problems. A. lack of access to substantial amounts of capital.
64. Which of the firm’s financial managers is most likely to be involved with obtaining financing for the firm? A. TreasurerB. ControllerC. Chief Operating OfficerD. Board of directors A. Treasurer
69. One corporate activity that is specifically reserved for the board of directors is the: A. declaration of dividends.B. custody of records.C. preparation of budgets.D. day-to-day operation of the firm. A. declaration of dividends.
73. 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. D. maximize the shareholders’ wealth.
79. WorldCom’s failure to report $3.8 billion of operating expenses is an example of: A. an effort to conform to changed accounting rules.B. an attempt to maximize the value of the shareholders’ investment in the firm.C. an effort to serve the needs of the customer.D. an attempt to increase the company’s market value in an unethical way. D. an attempt to increase the company’s market value in an unethical way.
86. Agency problems can best be characterized as: A. dislike of firm’s bondholders by its equity holders.B. differing incentives between managers and owners.C. spending of corporate resources.D. friction between the primary and secondary markets. B. differing incentives between managers and owners.

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