Chapter 1, 2, 3, 4

Question 1

Which one of the following is a capital budgeting decision?
Deciding whether or not to open a new store
Determining how much inventory to keep on hand
Determining how much debt should be borrowed from a particular lender
Deciding if stock shares should be repurchased
Determining how much cash to keep on hand

Answer 1

Deciding whether or not to open a new store

Question 2

Which position is generally directly responsible for financial planning and capital expenditures?

Answer 2

Treasurer

Question 3

A business entity formed by two or more individuals who each have unlimited liability for business debts is called a:

Answer 3

general partnership.

Question 4

Which one of the following statements is correct concerning corporations?
The shareholders of a corporation select the top managers of that corporation.
A corporation is a distinct legal entity.
The stockholders are usually the managers of a corporation.
The ability of a corporation to raise capital is quite limited.
The income of a corporation is taxed as personal income of the stockholders.

Answer 4

A corporation is a distinct legal entity.

Question 5

_____ refers to the difference between a firm’s current assets and its current liabilities.

Answer 5

Net working capital

Question 6

When you are making a financial decision, the most relevant tax rate is the _____ rate.

Answer 6

marginal

Question 7

Which one of these measures a firm's long-run ability to meet its obligations?
Cash ratio
Total asset turnover
Quick ratio
Return on equity
Equity multiplier

Answer 7

Equity multiplier

Question 8

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _____ ratios.

Answer 8

utilization

Question 9

Which of the following will increase the effective annual rate (EAR) of a loan?

Decreasing the frequency of the interest rate compounding
Applying only simple interest
Decreasing the annual percentage rate (APR)
Increasing either the annual percentage rate (APR) or the compounding frequency
Changing from continuous compounding to daily compounding of interest

Answer 9

Increasing either the annual percentage rate (APR) or the compounding frequency

Question 10

A perpetuity differs from an annuity because:

Answer 10

perpetuity payments never cease.

Question 11

Agency costs refer to:

Answer 11

the costs of any conflicts of interest between stockholders and management.

Question 12

The decisions made by financial managers should all be ones which increase the:

Answer 12

market value of the existing owners’ equity.

Question 13

Capital structure refers to:

Answer 13

decisions related to long-term debt and equity financing.

Question 14

Net working capital is best defined as:

Answer 14

current assets minus current liabilities.

Question 15

Which type of business is the easiest to form?

Answer 15

Sole proprietorship

Question 16

The process of planning and managing a firm’s long-term investments is referred to as:

Answer 16

capital budgeting.

Question 17

A business entity formed by two or more individuals who each have unlimited liability for business debts is called a:

Answer 17

general partnership.

Question 18

Which form(s) of business is a treated as a distinct legal entity separate from its owners?

Answer 18

Corporation

Question 19

In a limited partnership:

Answer 19

each limited partner’s liability is limited to the amount he/she invested.

Question 20

The rules by which corporations govern themselves are called:

Answer 20

bylaws.

Question 21

The primary goal of financial management is to:

Answer 21

maximize the current value per share of the existing stock.

Question 22

The issuance of new equity shares is a cash flow from:

Answer 22

the financial markets to a firm.

Question 23

Which one of these terms refers to a conflict of interest between the stockholders and managers of a corporation?

Answer 23

Agency problem

Question 24

A stakeholder is best described as:

Answer 24

any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

Question 25

The primary purpose of the Sarbanes Oxley Act of 2002 was to:

Answer 25

protect investors from corporate abuses.

Question 26

Which of the following help convince managers to work in the best interest of the stockholders?

I. Compensation based on the value of the stock
II. Stock option plans
III. Threat of a proxy fight
IV. Threat of conversion to a partnership

Answer 26

I, II, and III only

Question 27

A proxy fight occurs when:

Answer 27

a group solicits votes to replace the board of directors.

Question 28

Which one of the following parties is considered a stakeholder of a firm?

Answer 28

Employee

Question 29

Insider trading is:

Answer 29

illegal.

Question 30

Which one of the following is least apt to encourage managers to act in the best interest of shareholders?

Answer 30

Compensating managers with fixed salaries

Question 31

The Securities Act of 1933 focuses on:

Answer 31

the issuance of new securities.

Question 32

The basic regulatory framework for public trading of securities within the United States is provided by:

Answer 32

the Securities Act of 1933 and the Securities Exchange Act of 1934.