FIN_331_2010_Spring_Test_1_A - Towson University Principles...

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Towson University Principles of Financial Management (Fin331) Professor M. Rhee Spring 2010 Exam I Name_____________________________ ID#_________________ 1. Which of the following statements is CORRECT? a. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy. b. Sole proprietorships are subject to more regulations than corporations. c. In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner. d. Corporations of all types are subject to the corporate income tax. e. Sole proprietorships and partnerships generally have a tax advantage over corporations. Answer: e Some corporations (S corporations) are able to avoid the corporate income tax. Sole proprietorships and partnerships pay personal income tax, but they avoid the corporate income tax. 2. What is the sequential approach? a. Profit maximization b. Agency conflict c. Efficient management d. Satisfying stakeholders to maximize shareholder wealth maximization e. e. None f the above Answer: d 3. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to a. Maximize its expected total corporate income. b. Maximize its expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share over the long run e. Maximize the stock price on a specific target date. Answer: d The primary operating goal should be to maximize the long-run stock price, or the intrinsic value. 4. Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers? a. Pay managers large cash salaries and give them no stock options. b. Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. c. Beef up the restrictive covenants in the firm’s debt agreements. d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm’s stock. e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold. Answer: b Corporate takeovers are most likely to occur when a firm is underperforming. Managers who fear losing their jobs will try to maximize shareholder wealth. 5. Which of the following statements is CORRECT? a. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity. b. The balance sheet gives us a picture of the firm’s financial position at a point in time. c. The income statement gives us a picture of the firm’s financial position at a point in time.
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FIN_331_2010_Spring_Test_1_A - Towson University Principles...

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