chap1_test bank_1-25Q

Question 1

1. The financial manager is responsible for making decisions that are in the best interests of the firm’s owners (Shareholders).

True or False

Answer 1

Answer: A) True
Explanation: This statement is true. Financial managers have a fiduciary duty to act in the firm’s owners’ best interests, primarily the shareholders. The primary goal of financial management is to maximize shareholder wealth by making decisions that increase the firm’s stock price, aligning with the shareholders’ interests.

Question 2

2. A patent is a productive asset for a technology-based firm.

True or False

Answer 2

Answer: A) True
Explanation: This statement is true. In the context of technology-based firms, patents are often considered valuable productive assets. They provide legal protection for innovative technologies or intellectual property, which can be essential for a technology-based firm’s competitive advantage and generating future cash flows.

Question 3

3. Intangible assets generate most of a manufacturing firm’s cash flows.

True or False

Answer 3

Answer: B) False
Explanation: This statement is false. While intangible assets can be significant for many firms, tangible assets such as machinery, equipment, and real estate may play a more substantial role in generating cash flows in a typical manufacturing firm. Intangible assets, like patents or trademarks, may be important, but there might be other sources of cash flows for manufacturing companies.

Question 4

4. The most fundamental way that a business can grow in size is the reinvestment of cash flows or earnings.

True or False

Answer 4

Answer: A) True
Explanation: This statement is true. One of the fundamental ways that a business can grow in size and value is by reinvesting its cash flows or earnings into productive assets and projects. This reinvestment allows the firm to expand its operations, develop new products, acquire other businesses, or make other investments that can lead to growth and increased profitability.

Question 5

5. A firm that goes bankrupt will always be liquidated.

True or False

Answer 5

Answer: B) False
Explanation: This statement is false. Bankruptcy does not always lead to the liquidation of a firm. Bankruptcy proceedings can take various forms, including reorganization (Chapter 11 in the U.S.), where the firm attempts to continue its operations while restructuring its debts and financial obligations. Liquidation (Chapter 7 in the U.S.) is one possible outcome of bankruptcy, but it is not the only option. The goal of bankruptcy proceedings is to provide a framework for resolving financial distress and may involve various outcomes depending on the specific circumstances of the firm.

Question 6

Question 6. True or False: Capital assets are generally short term in nature.

Answer 6

Answer: False
Explanation: Capital assets are typically long-term assets, not short term. They include items like buildings, machinery, and equipment, which are expected to provide value to the firm for an extended period, usually more than one year.

Question 7

Question 7. True or False: A good capital budgeting or investment decision is one in which the perceived benefits are worth more to the firm than the cost of the asset.

Answer 7

Answer: True
Explanation: This statement is true. A good capital budgeting or investment decision is one where the present value of the expected benefits (such as future cash flows or returns) from the investment is greater than the cost of acquiring the asset. In other words, the decision should add value to the firm.

Question 8

Question 8. True or False: Investment decisions determine how firms raise cash to pay for their investments.

Answer 8

Answer: False
Explanation: This statement is false. Investment decisions (capital budgeting) focus on selecting which projects or assets to invest in based on their expected returns and costs. How to raise cash to pay for these investments is determined by financing decisions, which are separate from investment decisions. Financing decisions involve raising capital through sources like issuing stocks, bonds, or obtaining loans.

Question 9

Question 9. True or False: Net working capital is the dollar difference between a firm’s total current assets and total liabilities.

Answer 9

Answer: False
Explanation: This statement is false. Net working capital is the difference between a firm’s total current assets and total current liabilities. It represents the amount of funds available to cover the firm’s short-term obligations. Total liabilities, in this context, include both current and long-term liabilities.

Question 10

Question 10. True or False: A sole proprietorship is an owner’s only business.

Answer 10

Answer: False
Explanation: This statement is false. A sole proprietorship is a business structure with a single owner, but it does not imply that the owner has only one business. An individual can operate multiple businesses, each as a separate sole proprietorship. The key characteristic is that the business is not legally separate from the owner, and the owner has full control and responsibility for the business.

Question 11

11. True or False: Corporations hold the majority of all business assets and generate the majority of business revenues and profits in the United States.

Answer 11

Answer: A) True
Explanation: This statement is true. Corporations, particularly large corporations, hold the majority of business assets and generate the majority of business revenues and profits in the United States. They play a significant role in the economy.

Question 11

12. True or False: Unlimited liability means that the owner of a firm is responsible for paying all the bills of the firm in the event of bankruptcy.

Answer 11

Answer: A) True
Explanation: This statement is true. Unlimited liability means that the owner, particularly in a sole proprietorship or general partnership, is personally responsible for paying all the firm’s debts and liabilities, even in the event of bankruptcy. Their personal assets are at risk.

Question 12

13. True or False: The process of transferring ownership of a sole proprietorship is relatively easy compared to a public corporation.

Answer 12

Answer: B) False
Explanation: This statement is false. The process of transferring ownership of a sole proprietorship can be relatively straightforward, but it can also be more complex, depending on the specifics of the business. Transferring ownership in a public corporation is often more straightforward because shares of stock can be easily bought and sold, while sole proprietorships may require more extensive legal and financial processes.

Question 13

14. True or False: General partners in a business have limited liability with regard to money owed to creditors.

Answer 13

Answer: B) False
Explanation: This statement is false. General partners in a business typically have unlimited liability, which means they are personally responsible for the business’s debts and liabilities. Their personal assets are at risk to cover the debts of the partnership.

Question 14

15. True or False: C-Corporations do not have their income subject to double taxation.

Answer 14

Answer: B) False
Explanation: This statement is false. C-Corporations are subject to double taxation. This means that the corporation itself is taxed on its profits, and when shareholders receive dividends, they are taxed again on their individual tax returns. Double taxation is one of the distinctive features of C-Corporations.

Question 15

16. True or False: Privately held corporations are allowed to have stockholders.

Answer 15

Answer: A) True
Explanation: This statement is true. Privately held corporations can have stockholders, but these shares are typically held by a smaller group of individuals or entities and are not publicly traded on stock exchanges, unlike publicly traded corporations.

Question 16

17. True or False: The treasurer of a corporation usually reports to the CFO of the firm.

Answer 16

Answer: A) True
Explanation: This statement is true. In most corporate structures, the treasurer typically reports to the Chief Financial Officer (CFO). The CFO is responsible for managing the financial functions of the company, which often includes oversight of the treasurer’s activities.

Question 17

18. True or False: The external auditors of the firm report their findings directly to the CFO of the firm.

Answer 17

Answer: B) False
Explanation: This statement is false. External auditors are independent third parties responsible for examining and verifying a company’s financial statements. They typically report their findings to the company’s board of directors or an audit committee, not directly to the CFO, to maintain independence and objectivity.

Question 18

19. True or False: Maximizing revenue should be the goal of the firm.

Answer 18

• Answer: B) False
  Explanation: This statement is false. While generating revenue is important, maximizing revenue is not necessarily the firm’s primary goal. Corporate finance’s primary goal is to maximize shareholder wealth, which involves considering both revenues and costs, as well as profitability and long-term value creation.

Question 19

20. True or False: An agency conflict can arise when the agent of the firm is the sole owner of the firm.

Answer 19

Answer: B) False
Explanation: This statement is false. An agency conflict typically arises when there is a separation between ownership and control, meaning that the agent (management) is not the sole owner of the firm. It occurs when managers act in their own interests rather than in the best interests of shareholders. In cases where the agent is also the sole owner, there is generally less potential for agency conflicts, as their interests are closely aligned.==

Question 20

21. True or False: The owners of a firm are unaffected by agency costs.

Answer 20

Answer: B) False
Explanation: This statement is false. Agency costs are the costs associated with the conflicts of interest between owners (shareholders) and management (agents). These costs directly impact the owners of the firm as they represent the potential loss of value or resources due to agency conflicts.

Question 21

22. True or False: Fraudulent business practices do not affect the growth of the financial markets.

Answer 21

Answer: B) False
Explanation: This statement is false. Fraudulent business practices can significantly impact the growth and stability of financial markets. When investors and participants lose trust in the integrity of financial markets due to fraud, it can result in reduced investment, decreased liquidity, and hindered market growth.

Question 22

23. To start a business, the owners need:
    A) a market where there is demand for their product.
    B) a clear vision of what products or services they want to produce.
    C) the know-how to successfully market their product.
    D) all of the above.

Answer 22

• Answer: D) all of the above
  Explanation: Starting a business typically requires multiple factors, including identifying a market with demand (A), having a clear vision of products or services (B), and possessing the knowledge to successfully market the product (C). Therefore, all of the above options are correct.

Question 23

24. A stakeholder is:
    A) someone geographically close to the firm’s headquarters.
    B) someone who has a claim on the cash flows of the firm.
    C) some government agency.
    D) all of the above.

Answer 23

Answer: B) someone who has a claim on the cash flows of the firm.
Explanation: A stakeholder is an individual or entity that has an interest or claim in the financial well-being of the firm. This can include employees, creditors, customers, suppliers, and others who have a stake in the firm’s performance.

Question 24

25. If you have loaned capital to a firm, then you could be:
    A) a manager.
    B) a stakeholder.
    C) a partner.
    D) all of the above.

Answer 24

Answer: B) a stakeholder.
Explanation: If you have loaned capital to a firm, you are considered a stakeholder. This is because you have a financial interest in the firm and a claim on its cash flows, as your loan represents a debt that the firm must repay.