3301 FIN Practice # 1 Chapter 1 & 2 AK Friday, September 17, 2010 True or False statements 1- The separation of ownership and management is one distinctive feature of corporations. TRUE 2- A major disadvantage of partnerships is that they have "double taxation" of profits. FALSE 3- Capital budgeting decisions are used to determine how to raise the cash necessary for investments. FALSE 4- Financial assets have value because they are claims on the firm's real assets and the cash that those assets will produce. TRUE 5- Boards of directors are often portrayed as active supporters of top management. FALSE 6- Maximizing profits is the same as maximizing the value of the firm. FALSE 7- Major banks and securities firms protect their reputations by emphasizing their long history and their responsible behavior when seeking new customers. TRUE 8- Making good investment and financing decisions is the chief task of the financial manager. TRUE 9- While control of large public companies in the United States is exercised through the board of directors and pressure from the stock market, in many other countries the stock market is less important and control shifts to major stockholders, typically banks and other companies. TRUE
10- Insider trading is the purchase or sale of shares based on information that is not available to public investors, and such behavior is accepted by the CDVM. FALSE 11- The reinvestment of cash back into the firm's operations is an example of a flow of savings to investment. TRUE 12- Previously issued securities are traded among investors in the secondary markets. TRUE 13- Financial markets are also called equity markets. FALSE 14- The derivative market is also a source of financing. FALSE 15- For corporate bonds, the higher the credit quality of an issuer, the higher the interest rate. FALSE 16- The cost of capital is the interest rate paid on a loan from a bank or some other financial institution. FALSE 17- Like public companies, private companies can also use their stock price as a measure of performance. FALSE 18- The cost of capital is the minimum acceptable rate of return for capital investment. TRUE
MCQ 1- Which of the following would be considered an advantage of the sole proprietorship form of organization? A. Wide access to capital markets B. Unlimited liability C. A pool of expertise D. Profits taxed at only one level 2- Which of the following would correctly differentiate general partners from limited partners in a limited partnership? A. General partners have more job experience. B. General partners have an ownership interest. C. General partners are subject to double taxation. D. General partners have unlimited personal liability. 3- Which of the following is not an advantage to incorporating a business? A. Easier access to financial markets. B. Limited liability. C. Becoming a permanent legal entity. D. Profits taxed at the corporate level and the shareholder level. 4- In the case of a professional corporation, ________ has/have limited liability. A. only the professionals. B. only the business. C. both the professionals and the business. D. neither the professionals nor the business. 5- A board of directors is elected as a representative of the corporation's: A. top management. B. stakeholders. C. shareholders. D. customers. 6- Which of the following would not be considered a real asset? A. A corporate bond B. A machine C. A patent D. A factory
7- Which of the following would be considered a capital budgeting decision? A. Planning to issue common stock rather than issuing preferred stock B. A decision to expand into a new line of products, at a cost of $5 million C. Repurchasing shares of common stock D. Issuing debt in the form of long-term bonds 8- A financial manager facing a capital budgeting decision must decide whether to: A. issue stock or debt securities. B. use the money market or capital market. C. use primary markets or secondary markets. D. buy new machinery or repair the old. 9- 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 agency of problems. 10- An example of a firm's financing decision would be: A. acquisition of a competitive firm. B. how much to pay for a specific asset. C. the issuance of ten-year versus twenty-year bonds. D. whether or not to increase the price of its products. 11- Long-term financing arrangements occur in the: A. money markets. B. capital markets. C. secondary markets. D. primary markets. 12- The term "capital structure" refers to: A. the manner in which a firm obtains its long-term sources of funding. B. the length of time needed to repay debt. C. whether the firm invests in capital budgeting projects. D. which specific assets the firm should invest in. 13- Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm? A. Treasurer B. Controller C. Chief Executive Officer D. Board of Directors
14- Investment banks like Merrill Lynch or Goldman Sachs: A. collect deposits and relend the cash to corporations and individuals. B. help companies sell their securities to investors. C. design and sell insurance policies for businesses. D. lend to corporations and investors in commercial real estate. 15- Ethical decision making in business: A. reduces the firm's profits. B. requires adherence to implied rules as well as written rules. C. is not in the best interests of shareholders. D. is less important than good capital budgeting decisions. 16- In which of the following organizations would it be least likely to find the existence of agency problems? A. A sole proprietorship B. A partnership C. A corporation D. A closely held corporation 17- The term "corporate stakeholder" typically refers to: A. a company's customers. B. anyone with a financial interest in the firm. C. the equity holders of the firm. D. the management and Board of Directors of the firm. 18- A corporate board of directors should provide support for the top management team: A. under all circumstances. B. in all decisions related to cash dividends. C. only when the board has confidence in management's actions. D. if shareholders are pleased with the firm's performance. 19- Which of the following are real assets? I. A patent. II. A share of stock issued by Bank of New York. III. A blast furnace in a steel-making factory. IV. A mortgage loan taken out to help pay for a new home. V. After a successful advertising campaign, potential customers' belief that FedEx will deliver packages promptly and reliably. VI. An IOU ("I owe you") from your brother-in-law. A. I only B. III only C. I and III only D. I, III & V
20- The primary distinction between securities sold in the primary and secondary markets is the: A. riskiness of the securities. B. price of the securities. C. previous issuance of the securities. D. profitability of the issuing corporation. 21- When Patricia sells her General Motors common stock at the same time that Brian purchases the same amount of General Motors stock, General Motors receives: A. the dollar value of the transaction. B. the dollar amount of the transaction, less brokerage fees. C. only the par value of the common stock. D. nothing. 22- Short-term financing decisions commonly occur in the: A. primary markets. B. secondary markets. C. capital markets. D. money markets. 23- You can buy silver in the: A. capital markets. B. foreign-exchange markets. C. commodities markets. D. option markets. 24- One reason suggesting that banks may be better than individuals at matching lenders to borrowers is that banks: A. can shift loan risk to their deposit customers. B. are motivated by the potential for profit. C. do not have any income tax liability. D. have information to evaluate creditworthiness. 25- Financial markets and intermediaries: A. channel savings to real investment. B. enable investors and businesses to reduce risk. C. provide liquidity. D. All of these. 26- Liquidity is important to a mutual fund because: A. a fund that is more liquid will attract more investors. B. the fund's shareholders may want to redeem their shares at any time. C. the fund's managers need liquidity to trade actively. D. the fund needs to distribute payouts to its shareholders and managers periodically.