Chapter1

What are the 5 basic areas of finance?

1. Corporate Finance

2. Investments

3. Fintech

4. International Finance

5. Financial Institutions

Which of the following are key questions for investments?

• What is the minimum amount required to open a portfolio?

• What are stocks?

• What determines the price of a financial asset?

• What is the best mixture of financial assets to hold?

• What are the potential risks and rewards associated with investing?

• What determines the price of a financial asset?

• What is the best mixture of financial assets to hold?

• What are the potential risks and rewards associated with investing?

At the start of a new business, the investor needs to consider the requirement of ___ investments.

• some

• all

• short term

• long term

long term

In large firms, financial activity is usually associated with which top officer?

• vice president for marketing

• vice president of production

• chief financial officer

• chief management consultant

chief financial officer

Which corporate officer is responsible for accurate financial accounting of the firm’s activities?

• controller

• credit manager

• corporate secretary

• treasurer

controller

In how many aread the financial topics have been grouped traditionally?

• 2

• 3

• 6

• 5

5 which are corporate finance, international finance, investments, financial institutions, fintech

One of the important questions in the area of investments includes the potential risks and rewards associated with investing in _______ assets.

financial

Business finance is broadly concerned with which of the following?

• which long term investment to make?

• how to finance long term investments?

• how to set up the audit committee?

• how to manage day to day finances of the firm?

Which long term investment to make?

How to finance long term investments?

How to manage day to day finances of the firm?

Which of the following positions generally report to the chief financial officer (CFO)?

• director of marketing

• chief executive officer (CEO)

• treasurer

• controller

Treasurer

Controller

Which corporate officer is responsible for managing the firm’s cash?

• sales manager

• treasurer

• cost accounting manager

• controller

Treasurer

The controller’s office is responsible for which of the following tasks?

• capital expenditures

• raising capital

• financial accounting

• tax payments

• financial accounting

• tax payments

_____ budgeting is the process of planning and managing a firm’s long term assets.

Capital

Which of the following are included in a firm’s capital structure?

• equity

• net sales

• long term debt

• current assets

• Equity

• Long Term debt

At the start of a new business, the investor needs to consider the requirement of _____ investments.

• short term

• long term

• all

• some

long term

A treasurer’s responsibility typically include:

• making financial plans

• financial accounting

• managing capital expenditure decisions

• handling cash flows

• making financial plans

• managing capital expenditure decisions

• handling cash flows

Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of _____ management.

• total asset

• working capital

• accounts receivables

• fixed asset

working capital

Capital budgeting is concerned with making and managing expenditures on ____.

• current assets

• current liabilities

• long term liabilities

• long term assets

long term assets

Which term defines the mixture of debt and equity used by a firm to finance its operations?

• net working capital

• cash management

• capital structure

• capital budget

capital structure

A sole proprietorship is a business that _____.

• provides limited personal liability to its owner

• is similar to a limited partnership

• is organized with bylaws

• is owned by one person

• is owned by one person

The officer responsible for managing the firm’s cash flows is the _____.

• treasurer

• controller

• auditor

• information systems manager

treasurer

A partnership must have at least _____ owners.

• two

• ten

• three

• four

two

Working capital includes which of the following?

• cash

• inventory

• equipment

• short term assets

• cash

• inventory

• short term assets

What type of partnership involves both general and limited partners to run the business?

limited partnership

Which of the following are included in a firm’s capital structure?

• equity

• net sales

• current assets

• long term debt

• equity

• long term debt

Which of the following is a disadvantage of sole proprietorships and partnerships?

• unlimited life of the business

• double taxation

• difficulty transferring ownership

• separation of ownership and management

difficulty transferring ownership

A sole proprietor has _____ personal liability for all business debts and obligations.

• limited

• no

• unlimited

• little

unlimited

Which of the following are reasons that the corporation is the most important form of business?

• corporations can sue and be sued

• corporations are separate legal entities

• corporations can vote in general elections

• corporations can enter contracts

• corporations can sue and be sued

• corporations are separate legal entities

• corporations can enter contracts

Which of the following documents describes the way partnership gains (and losses) are divided?

• Memorandum of Association

• Business Agreement

• Articles of Association

• Partnership Agreement

Partnership agreement

An organization must prepare _____ and bylaws when forming a corporation.

• an indenture agreement

• a legal will

• a partnership agreement

• articles of incorporation

articles of incorporation aka or a charter

Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of _____ management.

• working capital

• fixed asset

• accounts receivables

• total asset

working capital

In a limited partnership, a limited partner’s liability for business debts is

• limited to their cash contribution to the partnership

• unlimited

• limited by their average annual income over the life of the partnership

• $0

limited to their cash contribution to the partnership

Why do businesses avoid organizing as sole proprietorships or partnerships?

• it makes raising cash for investment difficult, which limits business growth

• it causes businesses to maximize their liability, which increases risk

• it makes business organizations too complicated to manage on a large scale

• it is too easy to transfer ownership from one part to another

it makes raising cash for investment difficult, which limits business growth

True or False

In a large corporation, stockholders and managers are usually separate groups.

True

Which one of the following is a person separate and distinct from its owners?

• proprietorship firm

• partnership firm

• corporation

• resident

corporation

True or False

A corporation borrows money in its own name.

True

Which of the following is not included in the articles of incorporation?

• number of shares issued

• business purpose

• corporation’s name

• name of shareholders

name of shareholders

Which of the following are tax disadvantages of corporates?

• stockholders pay taxes on corporate dividends

• corporations pay taxes on corporate profits

• corporations don’t pay taxes

• corporations pay taxes on all money coming in

• stockholders pay taxes on corporate dividends

• corporations pay taxes on corporate profits

Which of the following are different among corporations all around the world?

• essential features of liabilities

• essential features of assets

• laws and regulations

• general provisions

laws and regulations

The owners of a corporation are called _____.

Stockholders

Businesses are motivated to organize as corporations because stockholders in a corporation have _____ liability for corporate debts.

• no

• unlimited

• personal

• limited

limited

Which of the following is cited as the most commonly mentioned business goal?

• profit maximization

• cost leadership

• revenue growth

profit maximization

Which of the following defines the term “double taxation”

• neither corporate earnings nor stockholders’ dividends

• corporate earnings and stockholder dividends

• corporate earnings but not stockholder dividends

• stockholders’ dividends but not corporate earnings

corporate earnings and stockholder dividends

Corporations in other countries are often called:

• joint stock companies

• public limited companies

• autonomous entities

• re-calibrated partnerships

• limited liability companies

• joint stock companies

• public limited companies

• limited liability companies

The goal of financial managers is to increase the value of _____.

• the total compensation package

• the future profits

• the current earnings

• the existing stocks

the existing stocks

In a for-profit business, owners’ equity is equivalent to

• the business’s profits

• the money they put in

• the total value of average profits

• the total value of stock in a corporation

the total value of stock in a corporation

True or False

‘Profit Maximization’ is the goal for the management of a corporation in the short run only.

False

A good financial decision will do which of the following?

• increase current dividends per share

• increase market value of shareholders’ equity

• increase the cost of capital

• increase the value of the firm’s existing stock

• increase market value of shareholders’ equity

• increase the value of the firm’s existing stock

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?

• Enron

• Tyco

• Disney

• WorldCom

• Enron

• Tyco

• WorldCom

“Increasing shareholder wealth” means increasing the

• market value of liabilities

• current common stock value

• current bond value

• book value of liabilities

current common stock value

The goal of a “for-profit” business is to _____ the value of shareholders’ wealth.

• maintain

• minimize

• maximize

• recognize

maximize

The Sarbanes-Oxley Act requires corporate officers to:

• personally prepare all financial statements

• confirm the validity of the financial statements

• limit their compensation and stock options

• be responsible for errors in the annual reports

• confirm the validity of the financial statements

• be responsible for errors in the annual reports

A bad financial decision is defined as a decision that _____ shareholder wealth.

• decreases

• increases

• maximizes

decreases

True or False

The Sarbanes-Oxley Act provides incentives for companies to go public in US markets.

False

The Sarbanes-Oxley Act is intended to strengthen protection against

• companies going out of business

• corporate accounting fraud and financial malpractice

• destroying shareholder wealth with bad decisions

• using overseas tax heavens

corporate accounting fraud and financial malpractice

The goal of financial management is to increase the value of _____.

• the future profits

• the total compensation package

• the current earnings

• the existing stocks

the existing stocks

Which of the following is not part of the agency relationship?

• management

• general public

• stockholders

general public

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?

• capital structure problem

• securities exchange act of 1934 violation

• securities act of 1993 violation

• agency problem

agency problem

How does the Sarbanes-Oxley Act primarily work to make sure that companies tell the truth in financial statements?

• it has government auditors review all financial statements for potential errors or omissions

• it levies heft fines for error

• it makes management personally responsible for the accuracy of a company’s financial statements

it makes management personally responsible for the accuracy of a company’s financial statements

Why do the owners of a firm want to take the new investment?

• because the share price increases

• because the growth rate reduces

• because the share price reduces

• because no impact on the share price

because the share price increases

Which of the following are unintended consequences of the Sarbanes-Oxley Act?

• firms not going public outside of the US market

• shares are no longer traded in the major stock

• public firms “going dark” and leaving the stock market

• lower standards for corporate governance

• shares are no longer traded in the major stock

• public firms “going dark” and leaving the stock market

Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of

• monthly bonus

• stock options

• high salary

stock options

Who among the following has the authority to vote for someone else’s stock?

• proxy

• original shareholder

• management

• director

proxy

The conflict of interest between an agent and a principle is called a(n):

• agency relationship

• moral hazard problem

• agency problem

• moral agency

agency problem

The costs incurred due to a conflict of interest between stockholders and management are called _____ costs.

• sunk

• hidden

• agency

• opportunity

agency

True or False

The Sarbanes-Oxley Act provides incentives for companies to go public in US markets.

False

Why would the threat of a takeover motivate a manager to act in stockholders’ interest?

• acting in the stockholders’ interest will help to keep them from nominating proxies to replace the board of directors

• takeovers are generally viewed as positive, and well-run firms would be a great target for such an acquisition

• running the firm well and acting in the stockholders’ interest makes the firm a less attractive takeover target to begin with

• fear often motivates people to make wise and responsible decisions

running the firm well and acting in the stockholders’ interest makes the firm a less attractive takeover target to begin with

_____ can be used to encourage managers to maximize the value of the stock.

stock options

Which of the following have a financial interest in a firm?

• peer entities

• suppliers

• government

• employees

• suppliers

• government

• employees

For what purposes is the cash generated by a corporation used?

• to distribute all profits to employees as bonuses

• to reinvest some of the cash flow in the firm

• to decrease the company’s liabilities directly

• to make payments to shareholders and creditors

• to reinvest some of the cash flow in the firm

• to make payments to shareholders and creditors

Which of the following are defining features of the primary market?

• proceeds from the sale of securities go to the issuing firm

• it is the market where initial public offerings are made

• it only involves seasoned equity offerings

• it is market where shareholders and bondholders buy and sell to each other

• proceeds from the sale of securities go to the issuing firm

• it is the market where initial public offerings are made

The stakeholders are someone other than an owner or a creditor who potentially has a claim on the _____ of the firm.

• cash flows

• dividend

• profits

• losses

cash flows

When one owner or creditor sells to another, the transaction takes place in the _____ market.

• rudimentary

• secondary

• primary

• underwriting

secondary

Select all the options that are true in an over-the-counter market.

• many dealers are also connected electronically

• only stocks are bought and sold

• most of the buying and selling is done by the dealer

• an over-the-counter market is also called an auction market

• many dealers are also connected electronically

• most of the buying and selling is done by the dealer

Which of the following are defining features of the primary market?

• it only involves seasoned equity offerings

• proceeds from the sale of securities go to the issuing firm

• it is the market where shareholders and bondholders buy and sell to each other

• it is the market where initial public offerings are made

• proceeds from the sale of securities go to the issuing firm

• it is the market where initial public offerings are made

The New York Stock Exchange is a(n)

• auction market

• primary market

• dealers marktet

auction market

What’s the primary objective of an auction market?

• to bring buyers and seller together

• to earn commissions on sales

• to set prices for assets for sale

to bring buyers and seller together