Week 1

Question 1

What 3 questions are addressed with corporate finance?

Answer 1

1. In what long-lived assets should the firm invest?
2. How can the firm raise cash for required capital expenditures?
3. How should short-term operating cash flows be managed?

Question 2

What are the 2 primary goals of the financial manager?

Answer 2

1. Selecting value-creating projects.
2. Making smart financial decisions.

Question 3

What is the corporate form of business?

Answer 3

The standard method for solving the problems encountered in raising large amounts of cash.

Question 4

What are the three forms of business organization?

Answer 4

1. The Sole Proprietorship.
2. The Partnership.
3. The Corporation.

Question 5

What is the goal of financial management?

Answer 5

To maximize shareholder wealth.

Question 6

What type of business organization has the same rights and privileges according to a legal person?

Answer 6

Corporation

Question 7

The _____________ established the basic regulatory framework for the public trading of companies in the United States/

Answer 7

Securities act of 1934.

Question 8

True or False:

The value of an investment depends on the size, timing, and risk of the investment’s cash flows.

Answer 8

True.

Question 9

True or False:

Investing in assets that generate cash in excess of their cost is one way a financial manager creates value.

Answer 9

True.

Question 10

True or False:

Insider trading was prohibited by the securities and exchange act of 1934.

Answer 10

True.

Question 11

What business entity is typically the least expensive to form?

Answer 11

Sole Proprietorship.

Question 12

_______________ is defined as planning and managing a firm’s long-term assets.

Answer 12

Capital Budgeting.

Question 13

True or False:

Sole Proprietorships and partnerships are taxed in a similar fashion.

Answer 13

True.

Question 14

Does it create an agency problem when an agent of the firm agrees to expand the company at the expense of the stockholder’s value?

Answer 14

Yes.

Question 15

What business type is best for raising large amounts of capital?

Answer 15

A corporation.

Question 16

What happens when a corporation “goes dark”?

Answer 16

It has limited access to capital markets and stock prices decline.

Question 17

A _________ is a business owned by a single individual.

Answer 17

Sole proprietorship.

Question 18

What is the main reason that corporations grant stock options to managers?

Answer 18

To reward long-term employment.

Question 19

A ______________ provides each owner with a limited liability, and is operated and taxed like a partnership.

Answer 19

Limited Liability Company

Question 20

What happens to the profits earned by a partnership?

Answer 20

They are fully distributed to the partners as taxable income.

Question 21

True or False:

A partnership creates an unlimited liability for all general partners for the partnership debts.

Answer 21

True.

Question 22

True or False:

Regarding a sole proprietorship, the owner may be forced to sell his or her personal assets to pay the company’s debts.

Answer 22

True.

Question 23

If a firm is profitable, it follows that what?

Answer 23

It’s sales exceed its costs.

Question 24

Of the following choices, _______________ is most likely to create an agency problem.

Answer 24

Abandoning a profitable project because it involves some risk.