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Chapter 001 The Corporation and the Financial ManagerTrue / False Questions1. The liability of sole proprietors is limited...
Chapter 001 The Corporation and the Financial Manager5. Financial assets have value because they are claims on the firms r...
Chapter 001 The Corporation and the Financial Manager9. Boards of directors are often portrayed as active supporters of to...
Chapter 001 The Corporation and the Financial Manager13. Major banks and securities firms protect their reputations by emp...
Chapter 001 The Corporation and the Financial Manager17. If a projects value is less than its required investment, then th...
Chapter 001 The Corporation and the Financial Manager21. The separation of ownership and management is one distinctive fea...
Chapter 001 The Corporation and the Financial Manager25. Insider trading is the purchase or sale of shares based on inform...
Chapter 001 The Corporation and the Financial Manager28. In a partnership form of organization, income tax liability, if a...
Chapter 001 The Corporation and the Financial Manager31. Which of the following is least likely to be discussed in the art...
Chapter 001 The Corporation and the Financial Manager34. Unlimited liability is faced by the owners of:A. corporations.B. ...
Chapter 001 The Corporation and the Financial Manager37. A board of directors is elected as a representative of the corpor...
Chapter 001 The Corporation and the Financial Manager40. "Double taxation" refers to:A. all partners paying equal taxes on...
Chapter 001 The Corporation and the Financial Manager43. A common problem for closely held corporations is:A. lack of acce...
Chapter 001 The Corporation and the Financial Manager46. Which of the following statements best distinguishes the differen...
Chapter 001 The Corporation and the Financial Manager49. Corporations that do not issue financial securities such as stock...
Chapter 001 The Corporation and the Financial Manager52. The best criterion for success in a capital budgeting decision wo...
Chapter 001 The Corporation and the Financial Manager55. Which of the following is NOT a financing decision?A. Should the ...
Chapter 001 The Corporation and the Financial Manager58. Firms can alter their capital structure by:A. not accepting any c...
Chapter 001 The Corporation and the Financial Manager61. The short-term decisions of financial managers are comprised of:A...
Chapter 001 The Corporation and the Financial Manager64. In a large corporation, budget preparation would most likely be c...
Chapter 001 The Corporation and the Financial Manager67. A chief financial officer would typically:A. report to the treasu...
Chapter 001 The Corporation and the Financial Manager70. Investment banks like Merrill Lynch or Goldman Sachs:A. collect d...
Chapter 001 The Corporation and the Financial Manager73. Which of the following appears to be the most appropriate goal fo...
Chapter 001 The Corporation and the Financial Manager76. A managerial objective to increase market share is more likely to...
Chapter 001 The Corporation and the Financial Manager79. Ethical decision-making by management has a payoff for shareholde...
Chapter 001 The Corporation and the Financial Manager82. In which of the following organizations would it be least likely ...
Chapter 001 The Corporation and the Financial Manager85. Which of the following is least likely to represent an agency pro...
Chapter 001 The Corporation and the Financial Manager88. Which of the following groups is least likely to be considered a ...
Chapter 001 The Corporation and the Financial Manager91. Which of the following forms of compensation is most likely to al...
Chapter 001 The Corporation and the Financial Manager94. A corporations board of directors:A. is selected by and can be re...
Chapter 001 The Corporation and the Financial ManagerEssay Questions97. What general factors may influence the decision of...
Chapter 001 The Corporation and the Financial Manager99. Why is limited liability such an important aspect to investors?Ma...
Chapter 001 The Corporation and the Financial Manager101. Distinguish between a firms capital budgeting decision and finan...
Chapter 001 The Corporation and the Financial Manager103. Who are the financial managers in large corporations?The treasur...
Chapter 001 The Corporation and the Financial Manager105. Provide examples of managerial goals other than the maximization...
Chapter 001 The Corporation and the Financial Manager107. Develop a case for the interrelationship of ethical decision mak...
Chapter 001 The Corporation and the Financial Manager109. Describe agency problems in general, and offer at least three ex...
Chapter 001 The Corporation and the Financial Manager111. What are the two major decisions made by financial managers?Fina...
Chapter 001 The Corporation and the Financial Manager114. Why does it make sense for corporations to maximize their market...
Chapter 001 The Corporation and the Financial Manager115. Is value maximization always ethical?Modern finance does not con...
Chapter 001 The Corporation and the Financial Manager117. What actions can shareholders take when the corporation is under...
Chapter 001 The Corporation and the Financial Manager118. What is a Japanese keiretsu, e.g., the Mitsubishi keiretsu? What...
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  1. 1. Chapter 001 The Corporation and the Financial ManagerTrue / False Questions1. The liability of sole proprietors is limited to the amount of their investment in thecompany.FALSEAACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: EasyLearning Objective: 1-32. General partners have limited personal liability for business debts in a limited partnership.FALSEAACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-33. The separation of ownership and management is one distinctive feature of corporations.TRUEAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-34. A major disadvantage of partnerships is that they have "double taxation" of profits.FALSEAACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: EasyLearning Objective: 1-3 1-1
  2. 2. Chapter 001 The Corporation and the Financial Manager5. Financial assets have value because they are claims on the firms real assets and the cashthat those assets will produce.TRUEAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-26. Capital budgeting decisions are used to determine how to raise the cash necessary forinvestments.FALSEAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-17. A successful investment is one that increases the value of the firm.TRUEAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-18. BPs committing of $500 million to partnership with University of California–Berkeley todevelop new sources of energy is a capital budgeting decision.TRUEAACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: EasyLearning Objective: 1-1 1-2
  3. 3. Chapter 001 The Corporation and the Financial Manager9. Boards of directors are often portrayed as active supporters of top management.FALSEAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-310. Financial analysts are involved in monitoring and controlling the risk associated withinvestment projects and financing decisions.TRUEAACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-411. The primary goal of any company should be to maximize current period profit.FALSEAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-512. Maximizing profits is the same as maximizing the value of the firm.FALSEAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-5 1-3
  4. 4. Chapter 001 The Corporation and the Financial Manager13. Major banks and securities firms protect their reputations by emphasizing their longhistory and their responsible behavior when seeking new customers.TRUEAACSB: Ethical Understanding & Reasoning AbilitiesBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-614. Ethical decision making in business can be viewed as a long-term investment inreputation.TRUEAACSB: Ethical Understanding & Reasoning AbilitiesBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-615. Real assets can be intangible assets.TRUEAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-216. Making good investment and financing decisions is the chief task of the financialmanager.TRUEAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-1 1-4
  5. 5. Chapter 001 The Corporation and the Financial Manager17. If a projects value is less than its required investment, then the project is attractivefinancially.FALSEAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-118. Pfizers spending of $7.6 billion in 2006 on research and development of new drugs is acapital budgeting decision but not a financing decision.TRUEAACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: MediumLearning Objective: 1-119. LVMHs Issuance of a 7-year bond in 2005, raising 600 million euros is a financingdecision.TRUEAACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: MediumLearning Objective: 1-120. An IOU ("I owe you") from your brother in law is a financial asset.TRUEAACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: MediumLearning Objective: 1-2 1-5
  6. 6. Chapter 001 The Corporation and the Financial Manager21. The separation of ownership and management is one distinctive feature of bothcorporations and sole proprietors.FALSEAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-322. Shareholders welcome higher short-term profits even when they damage long-termprofits.FALSEAACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: MediumLearning Objective: 1-523. Investors usually give some companies with good track records the benefit of the doubtwhen the companies performance fails to meet the market expectation.TRUEAACSB: Ethical Understanding & Reasoning AbilitiesBlooms: ApplicationDifficulty: MediumLearning Objective: 1-624. While control of large public companies in the United States is exercised through theboard of directors and pressure from the stock market, in many other countries the stockmarket is less important and control shifts to major stockholders, typically banks and othercompanies.TRUEAACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-3 1-6
  7. 7. Chapter 001 The Corporation and the Financial Manager25. Insider trading is the purchase or sale of shares based on information that is not availableto public investors, and such behavior is accepted by the Securities Exchange Commission.FALSEAACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-6Multiple Choice Questions26. 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.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: EasyLearning Objective: 1-327. Which of the following would be considered an advantage of the sole proprietorship formof organization?A. Wide access to capital marketsB. Unlimited liabilityC. A pool of expertiseD. Profits taxed at only one levelAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-3 1-7
  8. 8. Chapter 001 The Corporation and the Financial Manager28. 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.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-329. Which of the following would correctly differentiate general partners from limitedpartners 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.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-330. One common reason for partnerships to convert to a corporate form of organization is thatthe partnership:A. faces rapidly growing financing requirements.B. wishes to avoid double taxation of profits.C. has issued all of its allotted shares.D. agreement expires after ten years of use.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-3 1-8
  9. 9. Chapter 001 The Corporation and the Financial Manager31. Which of the following is least likely to be discussed in the articles of incorporation?A. The maximum number of shares that can be issued.B. The purpose of the business.C. The price range of the shares of stock.D. The number of members of the Board of Directors.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-332. When a corporation fails, the maximum that can lost by an investor protected by limitedliability is:A. the amount of the initial investment.B. the amount of the profit on the investment.C. the amount necessary to pay the corporations debts.D. the amount of the investors personal wealth.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-333. 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.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-3 1-9
  10. 10. Chapter 001 The Corporation and the Financial Manager34. Unlimited liability is faced by the owners of:A. corporations.B. partnerships and corporations.C. sole proprietorships and partnerships.D. all forms of business organization.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: EasyLearning Objective: 1-335. Which of the following statements generally cannot be correct for an investor who facesunlimited liability on an investment?A. The investor owns stock in the firm.B. The investor has no partners.C. The investor is subject to double taxation.D. The investor is responsible for managing the firm.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-336. 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.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-3 1-10
  11. 11. Chapter 001 The Corporation and the Financial Manager37. A board of directors is elected as a representative of the corporations:A. top management.B. stakeholders.C. shareholders.D. customers.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-338. The legal "life" of a corporation is:A. coincident with that of its CEO.B. equal to the life of the Board of Directors.C. permanent, as long as shareholders dont change.D. permanent, regardless of current ownership.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-339. When the management of a business is conducted by individuals other than the owners,the business is more likely to be a:A. corporation.B. sole proprietorship.C. partnership.D. general partner.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-3 1-11
  12. 12. Chapter 001 The Corporation and the Financial Manager40. "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.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-341. 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.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: EasyLearning Objective: 1-342. 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 widely traded.D. products or services are available to the public.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: EasyLearning Objective: 1-3 1-12
  13. 13. Chapter 001 The Corporation and the Financial Manager43. 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.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-344. Corporate managers are expected to make corporate decisions that are in the best interestof:A. top corporate management.B. the corporations board of directors.C. the corporations shareholders.D. all corporate employees.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-545. Which of the following would not be considered a real asset?A. A corporate bondB. A machineC. A patentD. A factoryAACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: MediumLearning Objective: 1-2 1-13
  14. 14. Chapter 001 The Corporation and the Financial Manager46. Which of the following statements best distinguishes the difference between real andfinancial assets?A. Real assets have less value than financial assets.B. Real assets are tangible; financial assets are not.C. Financial assets represent claims to income that is generated by real assets.D. Financial assets appreciate in value; real assets depreciate in value.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-247. Which of the following would not be considered a financial asset?A. A patentB. A personal IOUC. A checking account balanceD. A share of stockAACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: MediumLearning Objective: 1-248. Financial markets are used for trading:A. both real assets and financial assets.B. the goods and services produced by a firm.C. securities, such as shares of IBM.D. the raw materials used in manufacturing.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-2 1-14
  15. 15. Chapter 001 The Corporation and the Financial Manager49. Corporations that do not issue financial securities such as stock or debt obligations:A. will not be able to increase sales.B. cannot be profitable.C. will not be able to generate sufficient funds to fulfill their needs.D. do not face double taxation of their profits.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-150. Which of the following would be considered a capital budgeting decision?A. Planning to issue common stock rather than issuing preferred stockB. A decision to expand into a new line of products, at a cost of $5 millionC. Repurchasing shares of common stockD. Issuing debt in the form of long-term bondsAACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: MediumLearning Objective: 1-151. 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.AACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: MediumLearning Objective: 1-1 1-15
  16. 16. Chapter 001 The Corporation and the Financial Manager52. The best criterion for success in a capital budgeting decision would be to:A. minimize the cost of the investment.B. maximize the number of capital budgeting projects.C. maximize the difference between cash inflows and cost.D. finance all capital budgeting projects with debt.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-153. The overall goal of capital budgeting projects should be to:A. decrease the firms reliance upon debt.B. increase the firms sales.C. increase the firms outstanding shares of stock.D. increase the wealth of the firms shareholders.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-154. An example of a firms 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.AACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: MediumLearning Objective: 1-1 1-16
  17. 17. Chapter 001 The Corporation and the Financial Manager55. Which of the following is NOT a financing decision?A. Should the firm borrow money from a bank or sell bonds?B. Should the firm shut down an unprofitable factory?C. Should the firm buy or lease a new machine that it is committed to acquiring?D. Should the firm issue preferred stock or common stock?AACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: MediumLearning Objective: 1-156. Long-term financing arrangements occur in the:A. money markets.B. capital markets.C. secondary markets.D. primary markets.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-157. 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.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-1 1-17
  18. 18. Chapter 001 The Corporation and the Financial Manager58. Firms can alter their capital structure by:A. not accepting any capital-budgeting projects.B. investing in nontangible assets.C. issuing stock to repay debt.D. becoming a limited liability company.AACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: EasyLearning Objective: 1-159. When a corporation decides to issue long-term debt in order to pay for the acquisition ofreal assets, it has made a:A. capital budgeting decision.B. financing decision.C. money market decision.D. secondary market decision.AACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: EasyLearning Objective: 1-160. A firm decides to pay for a small investment project through a $1 million increase inshort-term bank loans. This is best described as an example of a(n):A. financing decision.B. investment decision.C. capital budgeting decision.D. capital market decision.AACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: EasyLearning Objective: 1-1 1-18
  19. 19. Chapter 001 The Corporation and the Financial Manager61. The short-term decisions of financial managers are comprised of:A. capital structure decisions.B. investment decisions.C. financing decisions.D. both investment and financing decisions.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-162. Which of the following represents a financing decision?A. A decision to borrow $10 million through a bank loan.B. A decision to invest in the common stock of another corporation.C. A decision to buy a new mainframe computer.D. A decision to pay $1 million of accounts payable.AACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: EasyLearning Objective: 1-163. Which of the firms financial managers is most likely to be involved with obtainingfinancing for the firm?A. TreasurerB. ControllerC. Chief Executive OfficerD. Board of DirectorsAACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: EasyLearning Objective: 1-4 1-19
  20. 20. Chapter 001 The Corporation and the Financial Manager64. In a large corporation, budget preparation would most likely be conducted by the:A. treasurer.B. controller.C. chief financial officer.D. financial manager.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: EasyLearning Objective: 1-465. In a firm having both a treasurer and a controller, which of the following would mostlikely be handled by the controller?A. Internal auditingB. Credit managementC. Banking relationshipsD. InsuranceAACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-466. Which of the following statement more accurately describes the controller than thetreasurer?A. Likely to be the only financial executive in small firms.B. Monitors capital expenditures to make sure that they are not misappropriated.C. Responsible for investing the firms spare cash.D. Responsible for arranging any issue of common stock.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-4 1-20
  21. 21. Chapter 001 The Corporation and the Financial Manager67. A chief financial officer would typically:A. report to the treasurer, but supervise the controller.B. report to the controller, but supervise the treasurer.C. report to both the treasurer and controller.D. supervise both the treasurer and controller.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-468. 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.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: EasyLearning Objective: 1-469. A financial analyst in a corporation may be involved in:A. proposing a new investment project.B. collecting payments from customers.C. managing investment of the companys cash.D. purchasing the firms plant and equipment.AACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: EasyLearning Objective: 1-4 1-21
  22. 22. Chapter 001 The Corporation and the Financial Manager70. 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.AACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: EasyLearning Objective: 1-471. The primary goal of corporate management should be to:A. maximize the number of shareholders.B. maximize the firms profit.C. minimize the firms costs.D. maximize the shareholders wealth.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-572. Within the realm of ethical decision making, managers should attempt to maximize:A. the market value of the shareholders wealth.B. their compensation plans.C. their firms market share.D. the profits of the firm.AACSB: Ethical Understanding & Reasoning AbilitiesBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-6 1-22
  23. 23. Chapter 001 The Corporation and the Financial Manager73. Which of the following appears to be the most appropriate goal for corporatemanagement?A. Maximizing market value of the companys shares.B. Maximizing the companys market share.C. Maximizing the current profits of the company.D. Minimizing the companys liabilities.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-574. How may a reduction in cash dividends be in the best interests of current shareholders?A. Dividends are taxed at twice the rate of other gains.B. The firm will have available cash to increase current investment and future profits.C. Reduced dividends increase managerial compensation, thus increasing their motivation.D. A reduction of cash dividends cannot be in the best interests of current shareholders.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: HardLearning Objective: 1-575. Profit maximization is not a well-defined corporate objective because:A. it leaves open the question of which years profits.B. higher profits does not necessarily mean a better rate of return.C. profits can be changed by using different accounting rules.D. All of these.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-5 1-23
  24. 24. Chapter 001 The Corporation and the Financial Manager76. A managerial objective to increase market share is more likely to be successful in thelong-run if the firm is:A. selling shares in the secondary market.B. the low-cost producer in the industry.C. managed by the board of directors.D. investing in capital budgeting projects.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-577. WorldComs 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 companys market value in an unethical way.AACSB: Ethical Understanding & Reasoning AbilitiesBlooms: ApplicationDifficulty: EasyLearning Objective: 1-678. A first-step in determining managerial objectives is to:A. develop appropriate compensation policies.B. eliminate agency problems.C. serve the needs of the customer.D. select an appropriate capital structure.AACSB: Ethical Understanding & Reasoning AbilitiesBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-5 1-24
  25. 25. Chapter 001 The Corporation and the Financial Manager79. Ethical decision-making by management has a payoff for shareholders in terms of:A. improved capital structure.B. enhanced reputation value.C. increased managerial benefits.D. higher dividend payments.AACSB: Ethical Understanding & Reasoning AbilitiesBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-680. Ethical decision making in business:A. reduces the firms 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.AACSB: Ethical Understanding & Reasoning AbilitiesBlooms: UnderstandingDifficulty: HardLearning Objective: 1-681. The actions of Salomon Brothers during their 1991 Treasury bond bidding suggest that afirms reputation:A. cannot be expected to affect profitability.B. is determined by the firms bondholders.C. is outside of managerial control.D. can impact shareholders wealth.AACSB: Ethical Understanding & Reasoning AbilitiesBlooms: ApplicationDifficulty: MediumLearning Objective: 1-6 1-25
  26. 26. Chapter 001 The Corporation and the Financial Manager82. In which of the following organizations would it be least likely to find the existence ofagency problems?A. A sole proprietorshipB. A partnershipC. A corporationD. A closely held corporationAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-783. Sole proprietorships resolve the issue of agency problems by:A. avoiding excessive expense accounts.B. discharging those who violate the rules.C. allowing owners to share the cost of their actions with others.D. forcing owners to bear the full cost of their actions.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-784. Agency problems can best be characterized as:A. dislike of firms bondholders by its equity holders.B. differing incentives between managers and owners.C. spending corporate resources.D. friction between the primary and secondary markets.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-7 1-26
  27. 27. Chapter 001 The Corporation and the Financial Manager85. Which of the following is least likely to represent an agency problem?A. lavish spending on expense accounts.B. plush remodeling of the executive suite.C. excessive investment in "safe" projects.D. executive incentive compensation plans.AACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: HardLearning Objective: 1-786. When managers compensation plans are tied in a meaningful manner to the profits of thefirm, agency problems:A. can be reduced.B. will be created.C. are shifted to other stakeholders.D. are eliminated entirely from the firm.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-787. The term "corporate stakeholder" typically refers to:A. a companys 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.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-7 1-27
  28. 28. Chapter 001 The Corporation and the Financial Manager88. Which of the following groups is least likely to be considered a stakeholder of the firm?A. GovernmentB. BondholdersC. CompetitorsD. EmployeesAACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: EasyLearning Objective: 1-789. A managers compensation plan that offers financial incentives for increases in quarterlyprofitability may create agency problems in that:A. the managers are not motivated by personal gain.B. the board of directors may claim the credit.C. short-term, not long-term profits become the focus.D. investors desire stable profits.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: HardLearning Objective: 1-790. One continuing problem with managerial incentive-compensation plans is that:A. the plans increase agency problems.B. managers prefer guaranteed salaries.C. effectiveness of the plans is difficult to evaluate.D. the plans do not reward shareholders.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-7 1-28
  29. 29. Chapter 001 The Corporation and the Financial Manager91. Which of the following forms of compensation is most likely to align the interests ofmanagers and shareholders?A. A fixed salary.B. A salary that is linked to company profits.C. A salary that is paid partly in the form of the companys shares.D. A salary that is linked to the companys total market value.AACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: HardLearning Objective: 1-792. Profit-sharing plans may be beneficial when used to:A. reduce the impact of corporate income taxes.B. improve managers incentives for effective decision making.C. divert financial resources from shareholders.D. reduce the payment of cash dividends.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-793. 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 managements actions.D. if shareholders are pleased with the firms performance.AACSB: Reflective Thinking SkillsBlooms: UnderstandingDifficulty: MediumLearning Objective: 1-7 1-29
  30. 30. Chapter 001 The Corporation and the Financial Manager94. A corporations board of directors:A. is selected by and can be removed by management.B. can be voted out of power by the shareholders.C. has a lifetime appointment to the board.D. is selected by a vote of all corporate stakeholders.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-795. Options are important instruments in the financial marketplace, and have been traded atleast since:A. 1800 B.C.B. 1000 B.C.C. 1929.D. 1972.AACSB: Communication AbilitiesBlooms: KnowledgeDifficulty: MediumLearning Objective: 1-196. 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 deliverpackages promptly and reliably.VI. An IOU ("I owe you") from your brother-in-law.A. I onlyB. III onlyC. I and III onlyD. I, III & VAACSB: Reflective Thinking SkillsBlooms: ApplicationDifficulty: MediumLearning Objective: 1-2 1-30
  31. 31. Chapter 001 The Corporation and the Financial ManagerEssay Questions97. What general factors may influence the decision of whether to organize as a soleproprietorship, a partnership, or a corporation?Factors that may influence the decision concerning organizational form would include:amount of capital needed in relation to amount of capital that can be raised, estimated salesvolume, the extent of managerial expertise, the willingness to share profits, the importance oflimited liability, a desire for the permanence of the organization, the issue of double taxation.AACSB: Analytical SkillsBlooms: AnalysisLearning Objective: 1-398. Discuss why corporations typically exhibit separation of ownership and management, asdistinguished from sole proprietorships or partnerships.One reason corporations typically exhibit a separation of ownership and management is thatownership often includes a diverse amount of relatively small investors. Thus, it would benearly impossible to coordinate these owners into decision makers. Also, many smallinvestors are pleased in being relieved of management responsibilities. Therefore, the qualityof management is likely to be better if those managers have been hired specifically for thatfunction. Finally, the separation minimizes managerial disruptions that would occur withchanging or deceased investors. Most sole proprietorships and partnerships are smaller firmsthat do not need, may not be able to afford, and may not desire even if they could afford, theexistence of a separate management.AACSB: Analytical SkillsBlooms: AnalysisLearning Objective: 1-3 1-31
  32. 32. Chapter 001 The Corporation and the Financial Manager99. Why is limited liability such an important aspect to investors?Many investors would not be willing to commit their investment funds into projects if it wereknown they were risking more than those specific funds. Specifically in the case of separatedownership and management, shareholders may be unwilling to remain liable for decisionsthey did not have a hand in making. With the aversion to risk that is witnessed in general formany investors, it is questionable whether investors would direct their funds into financialassets that did not offer limited liability. Thus, the existence of limited liability may greatlyaffect the demand for corporate shares.AACSB: Analytical SkillsBlooms: AnalysisLearning Objective: 1-3100. Provide at least three examples each of real and financial assets that might appear on thebalance sheet of General Motors.Examples of real assets for General Motors: cash, raw materials inventory, productionfacilities, tools and machines, finished inventory of automobiles. Examples of financial assetsthat could have been issued by General Motors: common stock (different classes), preferredstock, corporate bonds, bank loans, et cetera. Of course, GM could show financial assets onthe left side of their balance sheet also, such as: short-term investments in U.S. governmentsecurities, contracts receivable from the financing of their automobiles, or possibly residentialmortgages (GM, through its subsidiaries, is a large originator of residential mortgages,although most would eventually be sold in the secondary market).AACSB: Reflective Thinking SkillsBlooms: ApplicationLearning Objective: 1-2 1-32
  33. 33. Chapter 001 The Corporation and the Financial Manager101. Distinguish between a firms capital budgeting decision and financing decision.Examples of the capital budgeting decision for a firm could include: a decision to replace allof the firms personal computers, a decision to expand the size of the production facility, adecision to buy a corporate jet, a decision to expand production into two new product lines, etcetera. Examples of the financing decision for a firm could include: a decision to issuecorporate bonds rather than expand a bank loan, a decision to float a new issue of commonstock, a decision to denominate a loan in Japanese yen rather than U.S. dollars, a decision toroll over short-term financing rather than borrow for a longer term, et cetera.AACSB: Communication AbilitiesBlooms: KnowledgeLearning Objective: 1-1102. Discuss the interrelationship between a firms financing and capital structure decisions.Although the capital budgeting decision considers what to invest in and specifically howmuch to invest, this decision is importantly related to how the necessary funds should beraised. For example, if many other firms of similar risk have recently issued bonds, the supplyof loanable funds may be low, which could affect the interest rate on such funds. Or, thecurrent market value of common stock may be so low that management would prefer not toissue additional shares at this time. Alternatively, the existence of loan or bond covenantscould restrict certain forms of borrowing. Finally, although certain forms of financing mayappear attractive, they may not represent the targeted capital structure. Thus, elements of thefinancing decision need to be considered simultaneously with the capital budgeting decision.AACSB: Analytical SkillsBlooms: AnalysisLearning Objective: 1-1 1-33
  34. 34. Chapter 001 The Corporation and the Financial Manager103. Who are the financial managers in large corporations?The treasurer is responsible for looking after the firms cash, raising new capital, andmaintaining relationships with banks and other investors who hold the firms securities. Largercorporations usually also have a controller, who prepares the financial statements, managesthe firms internal budgets and accounting, and looks after its tax affairs. Large corporationsoften appoint a chief financial officer (CFO) to oversee both the treasurers and the controllerswork.AACSB: Communication AbilitiesBlooms: KnowledgeLearning Objective: 1-4104. Fritz and Frieda went to business school together 10 years ago. They have just been hiredby a midsized corporation that wants to bring in new financial managers. Fritz studiedfinance, with an emphasis on financial markets and institutions. Frieda majored in accountingand became a CPA 5 years ago. Who is more suited to be treasurer and who controller?Briefly explain.Fritz would more likely be the treasurer and Frieda the controller. The treasurer raises moneyfrom the financial markets and requires a background in financial institutions. The controllerrequires a background in accounting.AACSB: Analytical SkillsBlooms: AnalysisLearning Objective: 1-4 1-34
  35. 35. Chapter 001 The Corporation and the Financial Manager105. Provide examples of managerial goals other than the maximization of market value.Managers may attempt to maximize profits, or to maximize market share, or even tomaximize their own benefits! Problems with maximizing profits can include the method ofmaximizing (i.e., is it in the long-run or short-run best interests of the firm?), the maintenanceof product quality, ethical decision making, customer satisfaction, et cetera. Problems withmarket share can include economies of scale (i.e., low average cost of production), maintainedprofitability, increased liabilities, et cetera. Agency problems that relate to managerialcompensation or perquisites that are not in the long-run interest of shareholders are anotherexample of misguided goals.AACSB: Reflective Thinking SkillsBlooms: UnderstandingLearning Objective: 1-5106. Are there companies that have attempted to increase their market value in unethical waysrecently?The years 2001 and 2002 revealed an unusual number of bad apples. For example, telecomgiant WorldCom admitted that it failed to report $3.8 billion of operating expenses, such thatits income became significantly overstated. When the companys true profitability wasdiscovered, it became bankrupt within a month. In late 2001, Enron, the energy trading andinvestment company, announced over $1.7 billion in losses that had previously beenconcealed in "special purpose entities" (SPEs). One of Enrons top financial executivesallegedly used SPEs to pocket millions at the expense of Enron and its shareholders. Enronalso become bankrupt by the end of the year.AACSB: Ethical Understanding & Reasoning AbilitiesBlooms: ApplicationLearning Objective: 1-6 1-35
  36. 36. Chapter 001 The Corporation and the Financial Manager107. Develop a case for the interrelationship of ethical decision making by corporatemanagement and profitability of the firm.Ethical decision making can have an important impact on employee attitudes, investoractions, and customer retention. Further, all of these factors can have a large impact on thebottom line. The list of potential benefits for a firm that has developed a reputation for ethicaloperations can be long – easier employee recruitment, lower employee turnover, easier issueof primary securities, repeat business, good word of mouth, et cetera. In other words, theactions of all stakeholders can be positively affected when they perceive the firm to be ethicalin its decisions.AACSB: Ethical Understanding & Reasoning AbilitiesBlooms: AnalysisLearning Objective: 1-6108. Is there a conflict between "doing well" and "doing good"? When there are conflicts,how may government regulations or laws tilt the firm toward doing good?As the text notes, the first step in doing well is doing good by your customers. Businessescannot prosper for long if they do not provide to their customers the products and servicesthey desire. In addition, reputation effects often make it in the firms own interest to actethically toward its business partners and employees since the firms ability to make deals andto hire skilled labor depends on its reputation for dealing fairly. In some circumstances, whenfirms have incentives to act in a manner inconsistent with the public interest, taxes or fees canalign private and public interests. For example, taxes or fees charged on pollution make itmore costly for firms to pollute, thereby affecting the firms decisions regarding activities thatcause pollution. Other "incentives" used by governments to align private interests with publicinterests include: legislation to provide for worker safety and product, or consumer, safety,building code requirements enforced by local governments, and pollution and gasolinemileage requirements imposed on automobile manufacturers.AACSB: Ethical Understanding & Reasoning AbilitiesBlooms: AnalysisLearning Objective: 1-6 1-36
  37. 37. Chapter 001 The Corporation and the Financial Manager109. Describe agency problems in general, and offer at least three examples fromcorporations.Whenever the firms managers are different from the firms owners, the potential exists foragency problems. Management may be taking advantage of the fact that corporate ownershipis often quite diverse, such that none of the owners appears to be "minding the store." In thosecases, it may be easy for top management to vote itself an excessive raise, or to redecorate thecorporate suite, or to be lax on the justification of expense reports, or even to invest inprojects that are "too safe." Why might managers choose safe projects? For example, theexecutive may have one year remaining on an employment contract and be more concernedwith stable profits than with rising profits.AACSB: Reflective Thinking SkillsBlooms: UnderstandingLearning Objective: 1-7110. Tabulate and compare the differences among corporations, proprietorships andpartnerships.AACSB: Reflective Thinking SkillsBlooms: UnderstandingLearning Objective: 1-3 1-37
  38. 38. Chapter 001 The Corporation and the Financial Manager111. What are the two major decisions made by financial managers?Financial management can be broken down into (1) the investment, or capital budgeting,decision and (2) the financing decision. The firm has to decide (1) how much to invest andwhich real assets to invest in and (2) how to raise the necessary cash.AACSB: Reflective Thinking SkillsBlooms: UnderstandingLearning Objective: 1-1112. What does "real asset" mean?Real assets include all assets used in the production or sale of the firms products or services.Real assets can be tangible (plant and equipment, for example) or intangible (patents ortrademarks, for example).AACSB: Reflective Thinking SkillsBlooms: UnderstandingLearning Objective: 1-2113. Who is the financial manager?Almost all managers are involved to some degree in investment decisions, but some managersspecialize in finance, for example, the treasurer, controller, and CFO.AACSB: Reflective Thinking SkillsBlooms: UnderstandingLearning Objective: 1-4 1-38
  39. 39. Chapter 001 The Corporation and the Financial Manager114. Why does it make sense for corporations to maximize their market value?Value maximization is the natural financial goal of the firm. Maximizing value maximizes thewealth of the firms owners, its shareholders. Shareholders can invest or consume that wealthas they wish.AACSB: Reflective Thinking SkillsBlooms: UnderstandingLearning Objective: 1-5 1-39
  40. 40. Chapter 001 The Corporation and the Financial Manager115. Is value maximization always ethical?Modern finance does not condone attempts to pump up stock price by unethical means. Butthere need be no conflict between ethics and value maximization. The surest route tomaximum value starts with products and services that satisfy customers. A good reputationwith customers, employees, and other stakeholders is also important for the firms long-runprofitability and value.AACSB: Ethical Understanding & Reasoning AbilitiesBlooms: ApplicationLearning Objective: 1-6116. How do corporations ensure that managers and stockholders interests coincide?Conflicts of interest between managers and stockholders can lead to agency problems. Theseproblems are kept in check by compensation plans that link the well-being of employees tothat of the firm; by monitoring of management by the board of directors, security holders, andcreditors; and by the threat of takeover.AACSB: Reflective Thinking SkillsBlooms: UnderstandingLearning Objective: 1-7 1-40
  41. 41. Chapter 001 The Corporation and the Financial Manager117. What actions can shareholders take when the corporation is underperforming and theboard of directors is not aggressive in holding managers to task?If shareholders believe that the corporation is underperforming and the board of directors isnot sufficiently aggressive in holding managers to task, they can try to replace the board in thenext election. The dissident shareholders will attempt to convince the other shareholders tovote for their slate of candidates to the board. If they succeed, a new board will be elected andit can replace the current management team. Short of that, unhappy shareholders can attemptto elect representatives to the board to make their voices heard. In 2006, for example,dissatisfied shareholders of the H. J. Heinz food company voted in two directors proposed byan outside investor, Nelson Peltz. With over $1 trillion of assets under management, hedgefunds have become increasingly aggressive and successful in pursuing this strategy.AACSB: Reflective Thinking SkillsBlooms: UnderstandingLearning Objective: 1-7 1-41
  42. 42. Chapter 001 The Corporation and the Financial Manager118. What is a Japanese keiretsu, e.g., the Mitsubishi keiretsu? What are the advantages anddisadvantages of performing corporate governance in a keiretsu?In Japan major industrial and financial companies have traditionally been linked together in agroup called a keiretsu. For example, the Mitsubishi keiretsu contains 29 core companiesincluding a bank, two insurance companies, an automobile manufacturer, a brewery, and asteel company. Members of the keiretsu are tied together in several ways. First, managers maysit on the boards of directors of other group companies, and a "presidents council" of chiefexecutives meets regularly. Second, each company in the group holds shares in many of theother companies. And third, companies generally borrow from the keiretsus bank or fromelsewhere within the group.These links may have several advantages. Companies can obtain funds from other membersof the group without the need to reveal confidential information to the public, and if a memberof the group runs into financial heavy weather, its problems can be worked out with othermembers of the group rather than in the bankruptcy court. The more stable and concentratedshareholder base of large Japanese corporations may make it easier for them to resistpressures for short-term performance and allow them to focus on securing long-termadvantage.But the Japanese system of corporate governance also has its disadvantages, for the lack ofmarket discipline can allow lagging or inefficient corporations to put off painful surgery. Asthe Japanese economy languished in the 1990s, these disadvantages became more apparent,the links that bound keiretsus together began to weaken, and companies began to sell theirshares in other members of the group.AACSB: Reflective Thinking SkillsBlooms: UnderstandingLearning Objective: 1-7 1-42

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