Business Finance Ch. 1

Which of the following statements about the corporate form of business organization is true?A) 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.B) The corporate form has the advantage of unlimited liability.C) The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation. D) The corporate form has the disadvantage of double taxation relative to a sole proprietorship. D) The corporate form has the disadvantage of double taxation relative to a sole proprietorship.
All of the following business organizations provide limited liability to their owners except___.A) limited liability company.B) corporation.C) S-type corporation.D) general partnership. D) general partnership.
Bill, a local inventor, developed a diet pill that he believes will solve the obesity problem in the U.S. 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___. A) general partnership with Bill and the drug company as equal partners. B) S-type corporation with Bill and the drug company owning equal shares. C) limited liability company with Bill and the drug company owning equal shares. D) sole proprietorship with Bill as owner and the drug company as creditor. C) limited liability company with Bill and the drug company owning equal shares.
Shareholder wealth maximization means___. A) maximizing dividends per share. B) maximizing earnings per share. C) maximizing the price of existing common stock. D) maximizing stockholders equity. C) maximizing the price of existing common stock.
The goal of the financial management of the firm should be: a. maximize profits or net income or earnings per share b. minimize costs and expenses c. maximize shareholders’ wealth d. maximize sales and market share c. maximize shareholders’ wealth
Which of the following category(ies) of business owners enjoy the most limited legal liability?a. general partners in an unincorporated general partnershipb. owner of an unincorporated sole proprietorshipc. common shareholders of a corporationd. all of the abovee. only a and b above c. common shareholders of a corporation
Profit maximization does not adequately describe the goal of the firm because____. a. profit maximization does not require the consideration of risk b. profit maximization ignores the timing of a project’s return (it’s a short-term measure) c. maximization of dividend payout ratio is a better description of the goal of the firm d. all of the above e. Only a and b above e. Only a and b above
We discussed the Agency Problem and a Solution in Chapter 1. What does this mean? a. Management is agent for the Owner; example: Management should be paid well no matter what. b. Management and Ownership are separate in large companies, and Management must be given strong incentives to provide a fair return to the owners; example: Management must be required to purchase a substantial amount of common stock. c. Management is agent for the Owner; Management should not be paid unless they can maximize net earnings. d. Management and Ownership are separate in large companies and Management must be given strong incentives to provide a fair return to the owners; example: Owners must give management high salaries and generous benefits greater than fair market compensation because their careers are at risk. b. Management and Ownership are separate in large companies, and Management must be given strong incentives to provide a fair return to the owners; example: Management must be required to purchase a substantial amount of common stock.
Which of the following category(ies) of business owners enjoy the least limited legal liability? A) general partners in an unincorporated general partnership B) owner of an unincorporated sole proprietorship C) common shareholders of a corporation D) all of the above E) only a and b above E) only a and b above
The primary goal of a publicly owned corporation is to: A) minimize shareholder risk B) maximize earnings per share after taxes C) maximize dividends per share D) maximize shareholder wealth D) maximize shareholder wealth
A limited partnership provides limited liability to___. A) all partners B) only to limited partners who do not participate in the management of the business C) only limited partners responsible for day to day management of the firm D) all general partners B) only to limited partners who do not participate in the management of the business
The true owners of the corporation are___. A) board of directors of the firm B) holders of debt issues of the firm C) common stockholders D) preferred stockholders C) common stockholders
Which of the following is an advantage of a sole proprietorship? A) limited liability B) ability to share responsibility C) ability to raise large amounts of capital easily D) no legal requirements for forming the business D) no legal requirements for forming the business
From a finance perspective the goal of the financial manager of the firm should be: A) maximization of profits B) maximization of shareholders’ wealth C) maximization of customer satisfaction D) maximization of the utility of the manager B) maximization of shareholders’ wealth
Maximization of shareholder wealth as a goal is superior to profit maximization because: A) it considers the time value of money B) following the goal of shareholder wealth maximization will ensure high stock prices C) it considers uncertainty D) A and C D) A and C
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. B) The manager should select project A because it maximizes profits. C) The manager should select the project that maximizes long-term profits, not just one year of profits. D) The manager should select project A or he is irrational. A) The manager should select the project that causes the stock price to increase the most, which could be A or B.

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