Midterm practice

Midterm Practice
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Unformatted text preview: Chapter 1 Midterm Study Guide Question 1 What is working capital management? deciding which real assets to invest in managing curent assets and current liabilities deciding which long term financial assets to invest in deciding how much debt and equity to use to finance the Question 2 The major financial decisions are: I. Capital budgeting, II. Financing decision, III. Setting sales price, IV. Working capital policies. I, II, III and IV I, II and IV only I only I and II only Question 3 The three basic forms of business organization discussed in Chapter 1 are _________________. I. proprietorship, II. partnership, III. corporation, IV. municipalities, V. agencies. I, II and III II, III and IV I, III and IV III, IV and V Question 4 Which of the following matters most to investors? A firm's profits. A firm's cash flows. A firm's assets. A firm's debt level Question 5 Profit maximization is not an appropriate goal for a firm because it is difficult to define. it does not directly account for a firm's cash flows. it does not consider the timing and riskiness of the firm's cash flows. All of the above. Question 6 Deciding whether or not to spend $5 million to purchase a new piece of equipment is an example of a working capital decision faced by a financial manager. Fals e True Question 7 Maximization of a firm's profit is more important than maximization of a firm's value. False True Question 8 Correct. The two basic sources of funds for all businesses are debt and equity. Question 9 A business is liquidated and receives $500,000 for its assets. The business has debts of $600,000. If the business was a corporation the stockholders would owe $_______ and if the business was a partnership the owners would owe $_________ . Question 10 Correct. A corporation has taxable income of $100,000 and pays corporate taxes of $34,000. The firm pays $50,000 in dividends to its stockholders. The stockholders then must pay taxes on the dividend income received. This is referred to as double taxation. Question 11 Profit maximization is not the proper goal of the firm because I. Maximizing profits ignores the time value of money, II. Maximizing profits ignores risk, III. Profits are subject to manipulation under accounting rules. I only I, II and III I and II only II and III only Question 12 Correct. The appropriate goal of financial managers is to maximize stock price. Management decisions such as selecting which products or services to produce, deciding which assets to purchase or which ad campaign to use should be evaluated based on their effect on a firm's cash flow....
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