chapter 1 and 2 quiz

Question 1

Which of the following represents a financing decison?
A. a decison to borrow $10 million through a bank loan
B. a decision to invest in the common stock of another corporation
C. a decison to buy a new mainframe computer
D. a decison to pay $1 million of account payable

Answer 1

A. a decision yto borrow $10 million through a bank loan

Question 2

for small firms, shareholders and managment may be one and the same. but for large companies, separation of ownership and management is…
A. a practical necessity
B. not a necessity
C. a liability
D. a fraudulent move

Answer 2

A. a practical necessity

Question 3

3. Which of the following would not be considered a real asset?
   A. a corporate bond
   B. a machine
   C. a patent
   D. a factory

Answer 3

A. a corporate bond

Question 4

which of the following would be considered an advantage of the sole proprietorship from of organization ?
A. wide access to capital markets
B. unlimited liability
C. a pool of expertise
D. profts taxed at only one level

Answer 4

D. profits taxed at only one level

Question 5

sole proprietorship resolve the issue of agency problems by :
A. avoiding excessive expense accounts
B. discharging those whop violate the rules
C. allowing owners to share the cost of their actions with others
D. forcing owners to bear the full cost of their actions

Answer 5

D. forcing owners to bear the full cost of their actions

Question 6

when managers’ compensation plans are tied in a meaningful manner to the profits of the firm, agency problems
A. can be reduced
B. will be created
C. are shifted to other stakeholders
D. are eliminated entirely from the firm

Answer 6

A. can be reduced

Question 7

in a firm having both a treasurer and a controller, which of the following would be most likely be handled by the controller
A. internal auditing
B. credit managment
C. banking relationships
D. insurance

Answer 7

A. internal auditing

Question 8

which of the following is NOT an advantage to incorporating a business
A. easier access to financial markets
B. limited liability
C. becoming a permanent legal entity
D. profits taxed at the corporate level and the shareholder level

Answer 8

D. profits taxed at the corporate level and the shareholder level

Question 9

in a partnership form of organization, income tax liability, if any, is insured by:
A. a partnership itself
B. the partners individually
C. both the partnership and the partners
D. neither the partnership nor the partners

Answer 9

B. the partners individually

Question 10

in the case of a professional corporation, ______ has/have limited liability.
A. only the professionals
B. only the business
C. both the professionals AND the business
D. neither the professionals NOR the business

Answer 10

A. only the professionals

Question 11

a frim decides to pay for a small investment project through a $1 million increase in short-term bank loans. this is best described as an example of an
A. financing decison
B. investment decision
C. capital budgeting decison
D. capital market decison

Answer 11

A. financing decison

Question 12

in a large corporation, budget preparation would most likely be conduced by the:
A. treasurer
B. controller
C. chief financial officer
D. financial manger

Answer 12

B. controller

Question 13

which of the following groups is least likely to be considered a stakeholder of the firm?
A. government
B. bondholders
C. competitors
D. employees

Answer 13

C. competitors

Question 14

what are the two critical decisions to have to be made by the financial manager?
A. investment and financing
B. short term and long term
C. debt and equity
D. all the choices are correct

Answer 14

A. investment and financing

Question 15

profit-sharing plans may be beneficial when used to:
A. reduce the impact of corporate income taxes
B. improve managers’ incentives for effective decision making
C. divert financial resources from shareholders
D. reduce the payment of cash dividends

Answer 15

B. improve managers’ incentives for effective decison making

Question 16

One continuing problem with managerial incentive-compensation plans is that:
A. the plans increase agency problems.
B. managers prefer guaranteed salaries.
C. effectiveness of the plans is difficult to evaluate.
D. the plans do not reward shareholders.

Answer 16

C. effectiveness of the plans is difficult to evaluate

Question 17

Which of the following is least likely to represent an agency problem?
A. lavish spending on expense accounts.
B. plush remodeling of the executive suite.
C. excessive investment in “safe” projects.
D. executive incentive compensation plans.

Answer 17

C. excessive investment in “safe” projects

Question 18

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

Answer 18

C. financial assets represent claims to income that are generated by real assets

Question 19

the short-term decisions of financial managers are comprised of:
A. capital structure decisions
B. investment decisions
C. financing decisions
D. both investment and financing decisions

Answer 19

C. financing decisions

Question 20

Which of the following would correctly differentiate general partners from limited partners in a limited partnership?
A. general partners have more job experience.
B. general partners have an ownership interest.
C. general partners are subject to double taxation.
D. general partners have unlimited personal liability.

Answer 20

D. general partners have unlimited personal liability

Question 21

Which one of these is a money market security?
A. commercial paper
B. common stock
C. 2-year bond
D. 20-year bond

Answer 21

A. commercial paper

Question 22

Which one of these assists in shifting an individual’s consumption forward in time?
A. a bank line of credit
B. a bank savings account
C. a life insurance policy
D. a retirement savings plan

Answer 22

A. a bank line of credit

Question 23

Which of the following is not typically considered a function of financial intermediaries?
A. providing a payment mechanism
B. investing in real assets
C. accumulating funds from smaller investors
D. spreading, or pooling risk among individuals

Answer 23

B. investing in real assets

Question 24

Commodity and derivative markets:
A. are additional sources of financing for corporate projects.
B. enable the financial manager to adjust a firm’s exposure to various business risks.
C. are always over-the-counter markets.
D. deal only in foreign currencies.

Answer 24

B. enable the financial manger to adjust a firm’s exposure to various business risks

Question 25

Which one of these transports income forward in time?
A. retirement savings
B. car loan
C. bank line of credit
D. credit card purchase

Answer 25

A. retirement savings

Question 26

Who was responsible for the financial crisis of 2007-2009?
A. The U.S. Federal Reserve, for its policy of easy money
B. The U.S. government, for pushing banks to expand credit for low-income housing
C. bankers, who aggressively promoted and resold subprime mortgages
D. The U.S. Federal Reserve, the U.S. government, rating agencies, and bankers

Answer 26

D. the U.S. Federal Reserve, the US government, rating agencies, and bankers

Question 27

Which one of the following funds not provides a tax advantage to individual investors?
A. balanced funds
B. pension funds
C. bond funds
D. funds that are invested in foreign countries

Answer 27

A. balanced funds

Question 28

Which of the following financial assets is least likely to have an active secondary market?
A. common stock of a large public firm
B. bank loans made to smaller firms
C. bonds of a major, multinational corporation
D. debt issued by the federal government

Answer 28

B. bank loans made to smaller firms

Question 29

A company can pay for its expansion in all the following ways except:
A. by using the earnings generated from its sale of obsolete equipment.
B. by persuading a director’s mother to make a personal loan to the company.
C. by purchasing bonds in the secondary market.
D. by selling stock certificates for a new subsidiary.

Answer 29

C. by purchasing bonds in the secondary market

Question 30

Short-term financing decisions commonly occur in the:
A. primary markets.
B. secondary markets.
C. capital markets.
D. money markets.

Answer 30

D. money markets

Question 31

. Long-term financing decisions commonly occur in the:
A. option markets.
B. secondary markets.
C. capital markets.
D. money markets.

Answer 31

C. capital markets

Question 32

Which type of financial institution generally does not accept deposits but does underwrite stock offerings?
A. Insurance company
B. Mutual fund
C. Commercial bank
D. Investment bank

Answer 32

D. investment bank

Question 33

You can buy silver in the:
A. capital markets.
B. foreign exchange markets.
C. commodities markets.
D. option markets.

Answer 33

C. commodities markets

Question 34

Which of the following actions does not help reduce risk?
A. extending the service warranty for your notebook
B. converting your money market account to a mutual fund account
C. contracting to sell your farm produce to the neighborhood grocery
D. buying Japanese yen now when you plan to study in Japan next year

Answer 34

B. converting your money market account to a mutual fund account

Question 35

Financing for public corporations flows through:
A. the financial markets only.
B. financial intermediaries only.
C. derivatives markets.
D. the financial markets, financial intermediaries, or both.

Answer 35

D. the financial markets, financial intermediaries, or both

Question 36

One reason suggesting that banks may be better than individuals at matching lenders to borrowers is that banks:
A. can shift loan risk to their deposit customers.
B. are motivated by the potential for profit.
C. do not have any income tax liability.
D. have information to evaluate creditworthiness.

Answer 36

D. have information to evaluate creditworthiness

Question 37

Which of the following factors contributed to the financial crisis of 2007-2009?
A. Greece’s debt
B. Subprime mortgages
C. Drought conditions in the mid-west
D. Both Greece’s debt and subprime mortgages

Answer 37

B. subprime mortgages

Question 38

Which one of the following financial intermediaries has shown the greatest preference for investing in long-term financial assets?
A. Commercial banks
B. Insurance companies
C. Finance companies
D. Savings banks

Answer 38

B. insurance companies

Question 39

Financial markets and intermediaries:
A. channel savings to real investment.
B. increase risks for businesses.
C. generally reduce the liquidity of securities.
D. prevent the transportation of cash across time.

Answer 39

A. channel savings to real investment

Question 40

A bond differs from a share of stock in that a bond:
A. represents a claim on the firm.
B. has more risk.
C. has guaranteed dividend payments.
D. has a maturity date.

Answer 40

D. has a maturity date