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finance > chapter 1 conceptual > Flashcards

chapter 1 conceptual Flashcards

1
Q

T/F: the valuation principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly

A

true

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2
Q

T/F: financial decisions require that you weigh alternatives in strictly monetary terms

A

false

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3
Q

which of the following best describes why the valuation principle is a key concept in making financial decisions?

A

it shows how to make the costs and benefits of a decision comparable so that we can weigh them properly

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4
Q

T/F: partnerships are the most common type of business firms in the world

A

false

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5
Q

T/F: corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors

A

true

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6
Q

which of the following types of firms does NOT have limited liability?

A

sole proprietorships

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7
Q

over four-fifths of all U.S. business revenue is generated by which type of firms?

A

corporations

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8
Q

what is the most common type of firms in the U.S. and the world?

A

sole proprietorships

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9
Q

which of the following is typically the major factor in limiting the growth of sole proprietorships?

A

the amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts

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10
Q

joe is a general partner in a limited partnership firm, while jane is a limited partner in the same firm. which statement regarding their respective relationships to the firm is correct?

A

jane’s liability for the firm’s debts consists solely of her investment in the firm

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11
Q

what is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership?

A

the owners of a limited liability company can take an active role in running the company

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12
Q

in which of the following ways is a limited liability company like a corporation?

A

its owners’ liability is restricted to their investment

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13
Q

why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property?

A

it is a legally defined, artificial entity that is separate from its owners

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14
Q

which of the following features of a corporation is LEAST accurate?

A

earnings from a corporation are taxed only once

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15
Q

what is the major advantage corporations have over other business entities?

A

all of the above (easier to raise capital, treated as separate legal entity, shares can be freely traded)

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16
Q

which of the following is unique for an S corporation?

A

none of the above (profit and losses are not taxed, shareholders must include profit, maximum limit)

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17
Q

which of the following people may not manage the operations of a firm in which they are part or full owners?

A

limited partners in a limited partnership

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18
Q

what is the process of double taxation for the stockholders in a C corporation?

A

the corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them

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19
Q

a sole proprietorship is owned by ?

A

one person

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20
Q

which of the following organization forms has the most revenue?

A

C corporation

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21
Q

which is NOT an advantage of a sole proprietorship?

A

unlimited liability

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22
Q

a limited liability company is essentially ?

A

a limited partnership without a general partner

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23
Q

T/F: the principal goal of a financial manager is to maximize the wealth of the stockholders

A

true

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24
Q

T/F: it is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions

A

false

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25
Q

which of the following is a major duty of a financial manager?

A

all of the above (I-investment decisions, II-financing decisions, and III-manage cash flow)

26
Q

why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves?

A

there are often many owners, and they can often change as they buy and sell stock

27
Q

what is the most important duty of a firm’s financial officer?

A

to make investment decisions

28
Q

the financial manager of a well-regarded book publishing firm wishes to buy a small internet publishing company to provide an avenue for sale of its materials online. in order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. how is the financial manager raising funds in this case?

A

by raising the company’s equity by encouraging new owners to take a stake in the company

29
Q

which is NOT a reason why a firm’s financial managers must take great care when making investment decisions?

A

these investment decisions determine the corporation’s mix of debt and equity

30
Q

a company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations?

A

new models will require a lot of money to develop and bring to market before they generate any revenue

31
Q

a typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. how does a financial manager ensure that the priorities and concerns of such disparate stockholders are met?

A

in general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment

32
Q

whose interests should a financial manager consider paramount when making a decision?

A

the stockholders who have risked their money to become owners of the company

33
Q

T/F: in most corporations, the owners exercise direct control of a corporation

A

false

34
Q

T/F: the fact that corporations’ shares are easily traded within the market has a net effect of acting as a disincentive for managers to favor the interests of shareholders over their own interests

A

false

35
Q

how do the shareholders of most corporations exercise their control of that corporation?

A

by electing members of a board of directors

36
Q

which is NOT a function of the board of directors?

A

day-to-day running of the company

37
Q

in most corporations, to whom does the chief financial officer report?

A

the chief executive officer

38
Q

which of the following would be more typically the responsibility of a controller rather than a treasurer?

A

overseeing accounting and tax functions

39
Q

which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers?

A

bill chooses to pursue a risky investment for the company’s funds because his compensation will substantially rise if it succeeds

40
Q

a factory owner wants his workers to produce as many widgets as they can so he pays his workers based on how many widgets they produce. however, in order to make sure that the workers do not rush and produce a large amount of poorly made widgets, he checks the widgets at random at various stages of their manufacture. if a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. how is this factory owner seeing to solve the agency conflict problem in this case?

A

by supplying incentives so the agent act in the way principal desires

41
Q

in which of the following relationships is an agency conflict problem LEAST likely to arise?

A

the relationship between a driver and the passengers in a car regarding the safe driving of that car

42
Q

what is the most common way that agency conflict problems are addressed in most corporations?

A

by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders

43
Q

a company’s board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. they argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employees’ diligence and industry. what general principle is being argues by the board of directors?

A

some activities that decrease shareholders’ wealth may have intangible benefits which increase the strength of the company overall

44
Q

why is the stock price of a company an indication of the performance of the company’s senior managers?

A

in general, people want to invest in a well-managed corporation, which will drive up the price of shares

45
Q

a corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. how does the corporate raider hope to make a profit in this case?

A

by the rise in value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors

46
Q

a ____ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO

A

hostile takeover

47
Q

T/F: the shares of private corporations are traded on a stock market

A

false

48
Q

T/F: stock markets provide liquidity for a firm’s shares

A

true

49
Q

T/F: if broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85

A

false

50
Q

which of the following should be true for an asset to be considered liquid?

A

it can easily be bought and sold and the selling price is very close to the buying price at a given point in time

51
Q

why is it difficult to determine the market price of a private corporation’s shares at any point in time?

A

there is no organized market for its shares

52
Q

which of the stock markets listed below is the smallest, as judged by trading volume?

A

Deutsche Börse

53
Q

why is a stock exchange like NASDAQ considered a secondary market?

A

shares sold on it are exchanged between investors without any involvement of the issuing corporation

54
Q

on August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. which of the following statements best describes why these are considered a primary market transaction?

A

the transaction was between the corporation and investors

55
Q

what is the bid-ask spread?

A

the difference in price available for an immediate sale of a stock and the immediate purchase of the stock

56
Q

which of the following is a measure of the aggregate price level of collections of pre-selected stocks?

A

SP 500

57
Q

what is the term for the applicable price that i will pay, if i have to buy a stock?

A

buyer of the stock pays the ask price when he buys the stock

58
Q

what is the term for the applicable price that the seller gets when he sells a stock on the exchange?

A

the seller gets the bid price when he sells a stock on the exchange

59
Q

T/F: raising new capital by issuing bonds is an example of a commercial banking activity

A

false

60
Q

put the following steps of the financial cycle in the correct order

A

II-people invest, I-money flows to companies, III-money flows back

61
Q

investments by wealthy individuals and endowments is a major source of money for each of the following EXCEPT

A

mutual funds

62
Q

which of the following is NOT a role of financial institutions?

A

printing money for borrowers

finance (10 decks)

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