Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  A hostile takeover is the main method of transferring ownership interest in a corporation. 
B)  Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. 
C)  A corporation is a legal entity that is generally created by a state, and it has a life and existence that is separate from the lives of its individual owners and managers. 
D)  Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. 
E)  Although its stockholders are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions. 
A)  A hostile takeover is the main method of transferring ownership interest in a corporation. 
B)  Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. 
C)  A corporation is a legal entity that is generally created by a state, and it has a life and existence that is separate from the lives of its individual owners and managers. 
D)  Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. 
E)  Although its stockholders are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.

Question 2

You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?

Accepted Answer

A)  This is an example of an exchange of physical assets. 
B)  This is an example of a primary market transaction. 
C)  This is an example of a direct transfer of capital. 
D)  This is an example of a money market transaction. 
E)  This is an example of a derivatives market transaction. 
A)  This is an example of an exchange of physical assets. 
B)  This is an example of a primary market transaction. 
C)  This is an example of a direct transfer of capital. 
D)  This is an example of a money market transaction. 
E)  This is an example of a derivatives market transaction.

Question 3

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

Accepted Answer

A) True 
 B)False

Question 4

The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

Accepted Answer

A) True 
 B)False

Question 5

One of the functions of NYSE specialists is to facilitate trading by keeping an inventory of shares of the stocks in which they specialize, buying when investors want to sell and selling when they want to buy. They change the bid and ask prices of the securities so as to keep supply and demand in balance.

Accepted Answer

A) True 
 B)False

Question 6

If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.

Accepted Answer

A) True 
 B)False

Question 7

There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

Accepted Answer

A) True 
 B)False

Question 8

Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?

Accepted Answer

A)  Households start saving a larger percentage of their income. 
B)  The economy moves from a boom to a recession. 
C)  The level of inflation begins to decline. 
D)  Corporations step up their expansion plans and thus increase their demand for capital. 
E)  The Federal Reserve uses monetary policy in an attempt to stimulate the economy. 
A)  Households start saving a larger percentage of their income. 
B)  The economy moves from a boom to a recession. 
C)  The level of inflation begins to decline. 
D)  Corporations step up their expansion plans and thus increase their demand for capital. 
E)  The Federal Reserve uses monetary policy in an attempt to stimulate the economy.

Question 10

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?

Accepted Answer

A)  Prices and interest rates would both rise. 
B)  Prices would rise and interest rates would decline. 
C)  Prices and interest rates would both decline. 
D)  There would be no changes in either prices or interest rates. 
E)  Prices would decline and interest rates would rise. 
A)  Prices and interest rates would both rise. 
B)  Prices would rise and interest rates would decline. 
C)  Prices and interest rates would both decline. 
D)  There would be no changes in either prices or interest rates. 
E)  Prices would decline and interest rates would rise.

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)  The proper goal of the financial manager should be to attempt to maximize the firm's expected cash flows, because this will add the most to the wealth of the individual shareholders. 
B)  The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year. 
C)  The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, and thus on the firm's assets. However, EPS is not affected by the manner in which those assets are financed. 
D)  Potential agency problems can arise between stockholders and managers, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders. 
E)  Large, publicly-owned firms like AT&T and GM are controlled by their management teams. Ownership is generally widely dispersed, hence managers have great freedom in how they manage the firm. Managers may operate in stockholders' best interests, but they may also operate in their own personal best interests. As long as managers stay within the law, there is no way to either force or motivate them to act in the stockholders' best interests. 
A)  The proper goal of the financial manager should be to attempt to maximize the firm's expected cash flows, because this will add the most to the wealth of the individual shareholders. 
B)  The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year. 
C)  The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, and thus on the firm's assets. However, EPS is not affected by the manner in which those assets are financed. 
D)  Potential agency problems can arise between stockholders and managers, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders. 
E)  Large, publicly-owned firms like AT&T and GM are controlled by their management teams. Ownership is generally widely dispersed, hence managers have great freedom in how they manage the firm. Managers may operate in stockholders' best interests, but they may also operate in their own personal best interests. As long as managers stay within the law, there is no way to either force or motivate them to act in the stockholders' best interests.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. 
B)  It is generally easier to transfer one's ownership interest in a partnership than in a corporation. 
C)  One of the advantages of the corporate form of organization is that it avoids double taxation. 
D)  One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote." 
E)  Corporations of all types are subject to the corporate income tax. 
A)  One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. 
B)  It is generally easier to transfer one's ownership interest in a partnership than in a corporation. 
C)  One of the advantages of the corporate form of organization is that it avoids double taxation. 
D)  One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote." 
E)  Corporations of all types are subject to the corporate income tax.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have
Important tax advantages over proprietorships and partnerships. 
B)  Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations. 
C)  Due to legal considerations related to ownership transfers and limited liability, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment. 
D)  Large corporations are taxed more favorably than sole proprietorships. 
E)  Corporate stockholders are exposed to unlimited liability. 
A)  Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have
Important tax advantages over proprietorships and partnerships. 
B)  Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations. 
C)  Due to legal considerations related to ownership transfers and limited liability, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment. 
D)  Large corporations are taxed more favorably than sole proprietorships. 
E)  Corporate stockholders are exposed to unlimited liability.

Question 14

If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the
Business. 
B)  Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. 
C)  A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company. 
D)  In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business. Also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. 
E)  A major disadvantage of all partnerships relative to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself. 
A)  In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the
Business. 
B)  Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. 
C)  A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company. 
D)  In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business. Also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. 
E)  A major disadvantage of all partnerships relative to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

Question 16

Which of the following is a primary market transaction?

Accepted Answer

A)  You sell 200 shares of IBM stock on the NYSE through your broker. 
B)  IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. 
C)  You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you just give him cash and he gives you the stock. 
D)  One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. 
E)  You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares on the NYSE. 
A)  You sell 200 shares of IBM stock on the NYSE through your broker. 
B)  IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. 
C)  You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you just give him cash and he gives you the stock. 
D)  One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. 
E)  You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares on the NYSE.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)  One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt. 
B)  Sole proprietorships are subject to more regulations than corporations. 
C)  In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner. 
D)  Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones. 
E)  Corporations of all types are subject to the corporate income tax. 
A)  One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt. 
B)  Sole proprietorships are subject to more regulations than corporations. 
C)  In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner. 
D)  Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones. 
E)  Corporations of all types are subject to the corporate income tax.

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship. 
B)  Corporate shareholders are exposed to unlimited liability. 
C)  Corporations generally face fewer regulations than sole proprietorships. 
D)  Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation. 
E)  Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship. 
A)  It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship. 
B)  Corporate shareholders are exposed to unlimited liability. 
C)  Corporations generally face fewer regulations than sole proprietorships. 
D)  Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation. 
E)  Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.

Exam 1: An Overview of Financial Management and the Financial Environment

Which of the following statements is CORRECT?

You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.

There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction.

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.

Which of the following statements is CORRECT?

Which of the following is a primary market transaction?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risks and Rates of Return

Stocks and Their Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management, and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Analysis of Capital Structure Theory

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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