FIN 310 Exam 1 Review (Ch. 1)

Jamie is employed as a commercial loan officer for a regional bank centered in the Midwestern section of the U.S. Her job falls into which one of the following areas of finance?

Financial institutions

Which one of the following is a working capital decision?

How much cash should the firm keep in reserve?

Which one of the following is an advantage of being a limited partner?

Losses limited to capital invested

Limited liability companies are primarily designed to:

provide limited liability while avoiding double taxation.

Which of the following are advantages of the corporate form of organization?

1. Ability to raise large sums of equity capital

2. Ease of ownership transfer

3. Profits taxed at the corporate level

4. Limited liability for all owners

I, II, and IV only

Which one of the following best matches the primary goal of financial management?

Increasing the market value of firm

Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002?

Increase protection against corporate fraud

Which one of the following is most apt to align management's priorities with shareholders' interests?

Compensating managers with shares of stock that must be held for 3 years before the shares can be sold

Which of the following are potential ways to align management goals with shareholder interests?

1. Employee stock options

2. Threat of a takeover

3. Management bonuses tied to performance goals

4. Threat of a proxy fight

I, II, III, and IV

Which one of the following statements is correct?

All stock trades between existing shareholders are secondary market transactions.

Below are examples of business transactions. Choose the type of financial management decision that is relevant to each.

1. Deciding whether to expand a manufacturing plant Capital budgeting

2. Deciding whether to issue new equity and use the proceeds to retire outstanding debt Capital structure

3. Modifying the firm's credit collection policy with its customers Working capital management

Answer 1:

Capital budgeting

Answer 2:

Capital structure

Answer 3:

Working capital management

Which are advantages and which are disadvantages of the corporate form of organization?

1. Limited liability —> Advantage

2. The double taxation to shareholders of distributed earnings and dividends —> Disadvantage

3. Ability to raise capital —> Advantage

4. Ease of transferability —> Advantage

5. Unlimited life —> Advantage

What goal should always motivate the actions of the firm's financial manager?

Current market value(share price) of the equity

Who owns a corporation? Describe the process whereby the owners control the firm's management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?

In the corporate form of ownership, the__ are the owners of the firm. The__ elect the__ of the corporations, who in turn appoint the firm's management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist.__ may act in its own or someone else's best interests, rather than those of the __ . If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.

Answer 1:

shareholders

Answer 2:

shareholders

Answer 3:

Board of directors

Answer 4:

management

Answer 5:

shareholders

You've probably noticed coverage in the financial press of an initial public offering (IPO) of a company's securities. IPO is a __ .

primary market transaction

What does it mean when we say the New York Stock Exchange is an auction market? How are auction markets different from dealer markets? What kind of market is NASDAQ?

In auction markets like the NYSE,__ meet at a physical location to buy and sell their assets. Markets like Nasdaq represent__ operating in dispersed locales who buy and sell assets themselves, usually communicating with other dealers electronically or literally over the counter.

Answer 1:

Brokers and agents

Answer 2:

Dealers