3020 EXAM #1

Question 1

Which one of the following business structures does not have limited liability?
A) limited partnership
B) corporation
C) sole proprietorship
D) limited liability company

Answer 1

sole proprietorship

Question 2

The overall goal of capital budgeting projects should be to:
A) increase shareholder wealth.
B) diversify the firm’s operations.
C) increase the firm’s sales.
D) decrease the firm’s costs.

Answer 2

increase shareholder wealth

Question 3

Which of the following statements best distinguishes the difference between real and financial assets?
A) real assets are tangible; financial assets are not.
B) real assets have less value than financial assets.
C) financial assets appreciate in value; real assets depreciate in value.
D) financial assets represent claims to income that is generated by real assets.

Answer 3

financial assets represent claims to income that is generated by real assets.

Question 4

One way a corporation can alter its capital structure by:
A) becoming a limited liability company.
B) issuing stock to repay debt.
C) investing in intangible assets.
D) not accepting any new capital budgeting projects.

Answer 4

issuing stock to repay debt.

Question 5

The legal “life” of a corporation is:
A) equal to the life of its board of directors.
B) determined by the chief executive officer (CEO). C) permanent, regardless of current ownership.
D) permanent, as long as shareholders don’t change.

Answer 5

permanent, regardless of current ownership.

Question 6

Which of the following is true regarding real assets?
A) real assets must be tangible
B) real assets are associated with land and buildings only
C) real assets are used to produce the goods and services of the company D) real assets determine a company’s capital structure

Answer 6

real assets are used to produce the goods and services of the company

Question 7

Success in a capital budgeting decision is measured by how it: A) maximizes the number of capital budgeting projects.
B) maximizes the value added to the firm.
C) minimizes the cost of the investment.
D) minimizes project risk.

Answer 7

maximizes the value added to the firm

Question 8

Which of the following business organization types exposes the owner to the greatest level of personal risk?
A) limited liability company
B) s-corporation
C) limited partnership
D) sole proprietorship

Answer 8

sole proprietorship

Question 9

Which one of the following can best be characterized as an agency problem?
A) differing opinions among directors as to the merits of paying a higher dividend. B) persistently late delivery times by a major supplier.
C) geological problems in the company’s new gold mine.
D) differing incentives between managers and owners.

Answer 9

differing incentives between managers and owners.

Question 10

The primary goal of corporate management should be to: A) maximize employee satisfaction.
B) maximize shareholder wealth.
C) minimize corporate risk.
D) maximize corporate profits.

Answer 10

maximize shareholder wealth

Question 11

When a corporation fails, the maximum that can be lost by an individual shareholder is:
A) his or her proportionate share required to pay the corporation’s debts.
B) the amount of his or her personal wealth.
C) the amount of his or her initial investment.
D) the amount of his or her share of the profits.

Answer 11

the amount of his or her initial investment.

Question 12

A corporation is considered a public company when its:
A) stock is publicly traded.
B) shares are held by the federal or state government. C) shareholders have no tax liability.
D) products or services are available to the public.

Answer 12

stock is publicly traded.

Question 13

Which one of the following is a real asset?
A) a personal check
B) a patent
C) a share of stock
D) US currency

Answer 13

a patent

Question 14

Which of the following best describes the concept of limited liability?
A) it limits the type of offenses that a company can be sued for
B) it allows the owners of a company to sue its managers
C) it prevents creditors from suing top management
D) it protects the personal property and wealth of the company owners

Answer 14

it protects the personal property and wealth of the company owners

Question 15

Which one of the following gives a corporation its permanence?
A) limited liability
B) separation of ownership and control
C) multiple owners
D) corporation taxation

Answer 15

separation of ownership and control

Question 16

Which of the following is an example of an investing decision?
A) implementing an employee education fund
B) purchasing new equipment to expand production capacity
C) selecting a destination and theme for the annual shareholder meeting
D) issuing shares of stock to repay corporate debt

Answer 16

purchasing new equipment to expand production capacity

Question 17

In which of the following organizations would agency problems be least likely to occur?
A) sole proprietorship
B) limited liability company (LLC)
C) corporation
D) general partnership

Answer 17

sole proprietorship

Question 18

Which of the following is false regarding a c-corporation?
A) owner liability is limited to the amount of his or her initial investment
B) the life of the corporation is limited by federal regulation
C) stock can be owned by an unlimited number of shareholders
D) corporate earnings are double taxed

Answer 18

the life of the corporation is limited by federal regulation

Question 19

A board of directors is elected as a representative of the corporation’s:
A) stakeholders.
B) top management.
C) customers.
D) shareholders.

Answer 19

shareholders

Question 20

Which one of the following is a financial asset?
A) a corporate bond
B) a factory
C) a machine
D) a trademark

Answer 20

a corporate bond

Question 21

Which one of the following would be considered a capital budgeting decision?
A) repurchasing shares of common stock
B) issuing common stock rather than preferred stock
C) issuing debt in the form of long-term bonds
D) spending $2 million on a new product line

Answer 21

spending $2 million on a new product line

Question 22

Which of the following is a disadvantage of establishing a business as a public corporation? A) becoming a permanent legal entity
B) having to rely on public financial markets for funding
C) an increase in the personal liability of ownership
D) profits being taxed at the corporate level and the shareholder level

Answer 22

profits being taxed at the corporate level and the shareholder level

Question 23

Which of the following will most likely help to reduce agency problems?
A) requiring that top managers be shareholders
B) tying management compensation to the value of the company
C) paying management bonuses on profit growth
D) holding annual reviews to measure employee satisfaction

Answer 23

tying management compensation to the value of the company

Question 24

A company’s opportunity cost of capital is best described as:
A) an annual fee charged to a corporation by the securities and exchange commission (SEC).
B) fees incurred by a company to issue new stocks or bonds.
C) special taxes paid by a corporation on foreign earnings.
D) the expected return investors require to invest money with a specific company.

Answer 24

the expected return investors require to invest money with a specific company.

Question 25

Corporate managers are expected to make corporate decisions that are in the best interest of:
A) the corporation’s shareholders.
B) the corporation’s stakeholders.
C) the corporation’s board of directors.
D) all corporate employees.

Answer 25

the corporation’s shareholders

Question 26

The decision by a company to purchase a forklift as an example of:
A) asset allocation
B) financing
C) capital structure
D) investing

Answer 26

investing

Question 27

An example of a firm’s financing decision would be:
A) determining how much to pay for a specific asset.
B) deciding whether or not to increase the price of its products. C) acquiring a competitive firm.
D) selling new shares of stock to buy an office building.

Answer 27

selling new shares of stock to buy an office building.

Question 28

Shareholder wealth is measured by the:
A) price of the company’s common stock.
B) company’s profit margin.
C) size of the company’s capital structure.
D) reduction of the company’s debt.

Answer 28

price of the company’s common stock

Question 29

The term “capital structure” refers to:
A) whether or not the firm invests in capital budgeting projects.
B) the mix of long-term debt and equity financing.
C) the length of time needed to repay debt.
D) the types of assets a firm acquires.

Answer 29

the mix of long-term debt and equity financing.

Question 30

One year ago, Thomas bought 250 shares of British Railways stock at $172 per share representing 3% ownership in the company. Today the company went bankrupt leaving a debt of $2 million. As an investor, what is the maximum amount of money Thomas can lose?
A) $83,000 B) $0.00 C) $40,000 D) $43,000

Answer 30

D
The maximum amount of loss or financial liability of an owner (investor in stock) of a corporation is limited to the amount of his or her initial investment. In this case, Thomas’ initial investment is the amount he paid for his shares as follows:
finical liability= share price * number of shares purchased
= $172 × 250 = $43,000

Question 31

The concept of compound interest refers to:
A) earning interest on the original investment.
B) investing for a multiyear period of time.
C) a loan that charges different interest rates each year. D) payment of interest on previously earned interest.

Answer 31

payment of interest on previously earned interest.

Question 32

Which of the following is false regarding the effective annual rate (EAR) of interest?
A) it is also known as the nominal interest rate
B) it represents the true annual cost of using money
C) it can never be less than the annual percentage rate
D) it is calculated by compounding a periodic interest rate

Answer 32

A) it is also known as the nominal interest rate

Question 33

An interest rate that has been annualized using compound interest is termed the:
A) discount factor.
B) effective annual rate.
C) annual percentage rate.
D) discounted interest rate.

Answer 33

B) effective annual rate

Question 34

Other things being equal, the more frequent the compounding period, the:
A) higher the effective annual interest rate.
B) lower the annual percentage rate.
C) lower the effective annual interest rate.
D) higher the annual percentage rate.

Answer 34

A) higher the effective annual interest rate

Question 35

The annual percentage rate (APR) on a loan will be equal to the effective annual rate (EAR) only when:
A) the loan is for less than one year.
B) compounding occurs annually.
C) the loan is for more than one year.
D) compounding occurs monthly.

Answer 35

B) compounding occurs annually.

Question 36

According to the present value principle, cash flows occurring in different periods must not be compared, combined, or aggregated unless:
A) the cash flows have been discounted to a common date.
B) the cash flows occur no more than one year from each other. C) high rates of interest can be earned on the cash flows.
D) interest rates are expected to be stable.

Answer 36

A) the cash flows have been discounted to a common date.

Question 37

The present value of a future lump sum cash flow:
A) increases as the number of discount periods increases.
B) decreases as the interest rate increases.
C) increases as the discount rate increases.
D) cannot be accurately determined.

Answer 37

B) decreases as the interest rate increases.