3020 EXAM #1 Flashcards
Which one of the following business structures does not have limited liability?
A) limited partnership
B) corporation
C) sole proprietorship
D) limited liability company
sole proprietorship
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.
increase shareholder wealth
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.
financial assets represent claims to income that is generated by real assets.
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.
issuing stock to repay debt.
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.
permanent, regardless of current ownership.
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
real assets are used to produce the goods and services of the company
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.
maximizes the value added to the firm
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
sole proprietorship
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.
differing incentives between managers and owners.
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.
maximize shareholder wealth
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.
the amount of his or her initial investment.
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.
stock is publicly traded.
Which one of the following is a real asset?
A) a personal check
B) a patent
C) a share of stock
D) US currency
a patent
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
it protects the personal property and wealth of the company owners
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
separation of ownership and control
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
purchasing new equipment to expand production capacity
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
sole proprietorship
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
the life of the corporation is limited by federal regulation
A board of directors is elected as a representative of the corporation’s:
A) stakeholders.
B) top management.
C) customers.
D) shareholders.
shareholders
Which one of the following is a financial asset?
A) a corporate bond
B) a factory
C) a machine
D) a trademark
a corporate bond
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
spending $2 million on a new product line
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
profits being taxed at the corporate level and the shareholder level
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
tying management compensation to the value of the company
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.
the expected return investors require to invest money with a specific company.
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.
the corporation’s shareholders
The decision by a company to purchase a forklift as an example of:
A) asset allocation
B) financing
C) capital structure
D) investing
investing
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.
selling new shares of stock to buy an office building.
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.
price of the company’s common stock
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.
the mix of long-term debt and equity financing.
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
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
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.
payment of interest on previously earned interest.
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
A) it is also known as the nominal interest rate
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.
B) effective annual rate
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.
A) higher the effective annual interest rate
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.
B) compounding occurs annually.
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.
A) the cash flows have been discounted to a common date.
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.
B) decreases as the interest rate increases.
