Exam 1

Question 1

Glass Steagall Act

Answer 1

Separated commercial and investment banks

Question 2

Gramm-Leach-Bliley Act

Answer 2

Allowed mergers between commercial banks, investment banks, and insurance companies

Question 3

Rights Offering

Answer 3

Firm sells new shares to existing stockholders

Question 4

Advantages of sole proprietorship

Answer 4

Easy to form, all profits go to owner, single taxation

Question 5

Disadvantages of sole proprietorship

Answer 5

Unlimited personal liability, low access to capital

Question 6

Advantages of public corporation

Answer 6

Liability limited to investment, best access to capital, easy to transfer ownership

Question 7

Disadvantages of a public corporation

Answer 7

More difficult to run, double taxation, multiple owners in control

Question 8

Purpose of liquidity ratios

Answer 8

Determine how quickly a company can convert assets into cash

Question 9

Purpose of activity ratios

Answer 9

Efficiency of business to manage it’s resources

Question 10

Purpose of debt ratios

Answer 10

Compare debt to total assets

Question 11

Purpose of profitability ratios

Answer 11

Assess company’s ability to earn profits from its sales or operations, balance sheet assets, or shareholders’ equity

Question 12

Purpose of market ratios

Answer 12

Determine valuation of a company’s stock

Question 13

Weakness of pro forma statements

Answer 13

Assumes firm’s past financial condition is accurate indicator of the future

Question 14

MACRS depreciation

Answer 14

Businesses can utilize double declining balance and then switch to straight line when advantageous