FIN 370 Finance For Business
FINAL EXAM (Set 2)
True/False
1.
The financial
manager should examine available risk-return trade-offs and make his decision
based upon the greatest expected return.
2.
Only a few
financial decisions involve some sort of risk-return tradeoff.
3.
The sole
proprietorship can be described as the absence of any legal business structure.
4.
In a general
partnership, all partners have unlimited liability for the actions of any one
partner when that partner is conducting business for the firm.
5.
There is no
legal distinction made between the assets of the business and the personal
assets of the owners in the limited partnership.
6.
General
partners have unrestricted transferability of ownership, while limited partners
must have the consent of all partners to transfer their ownership.
7.
Ultimate
control in a corporation is vested in the board of directors.
8.
There are a
significant number of legal requirements to follow when establishing a sole
proprietorship.
9.
Limited
partners may actively manage the business.
10. The life of a corporation is not dependent upon the status of the
investors.
11. A sole proprietorship is the most desirable business form in all
circumstances.
12. In a sole proprietorship, the owner is personally responsible
without limitation for the liabilities incurred.
13. In a limited partnership, at least one general partner must remain
in the association; the privilege of limited liability still applies to this
partner.
14. In a general partnership, there is a distinction between business
and personal assets.
15. In order to maximize shareholder wealth, a firm must consider
historical costs as an integral part of their decision-making.
16. Financial management is concerned with the maintenance and
creation of wealth. True
17. Shareholder wealth is measured by the market value of the firm's
common stock. True
18. The agency problem arises due to the separation of ownership and
control in a firm.
19. There is little, if any, difference between a business error and
an ethical error.
20. For markets to be efficient, price adjustments to new information
must be correct.
21. Ethical dilemmas frequently exist in finance.
22. Even though diversification can eliminate risk, it also makes it
more difficult to measure a project's or an asset's risk.
Multiple Choice
23. Consider the following equally likely project outcomes: Profit XY
Pessimistic prediction$0$500 Expected outcome$ 500$500 Optimistic
prediction$1000 $500 a.Project Y has less uncertainty than Project X. b.Project
X has more variability than Project Y. -----------. d.Since Projects X
and Y have the same expected outcomes of $500, investors will view them as
identical in value.
24. Maximization of shareholder wealth as a goal is superior to profit
maximization because: a.it considers the time value of the money. b.following
the shareholder wealth maximization goal will ensure high stock prices. c.it
considers uncertainty. -------------.
25. Why is maximizing shareholder wealth a better goal than maximizing
profits? a.Maximizing shareholder wealth places greater emphasis on the short
term. b.Maximizing profits ignores the
uncertainty that is related to expected profits. c.Maximizing
shareholder wealth gives superior consideration to the entire portfolio of
shareholder investments. d.Maximizing profits gives too much weight to the tax
position of shareholders.
26. Profit maximization does not adequately describe the goal of the
firm because: a.profit maximization does not require the consideration of risk.
b.profit maximization ignores the timing of a project's return. c.maximization
of dividend payout ratio is a better description of the goal of the firm.
27. Consider cash flows for Projects X and Y such as: Project XProject
Y Year 1$3000 $0 Year 2$0$3000 A rational person would prefer receiving cash
flows sooner because: a.the money can
be reinvested. b.the money is nice to have around. c.the investor may be
tired of a particular investment. d.the investor is indifferent to either
proposal.
28.
What is the
chief disadvantage of the sole proprietorship as a form of business
organization when compared to the corporate form? a.Sole proprietorships are
subject to double taxation of profits. b.The cost of formation. c.Inadequate
profit sharing. d.Owners have unlimited
liability.
29. Which of the following is not true for limited partnerships? a.Limited partners can only manage the
business. b.One general partner must exist who has unlimited liability.
c.Only the name of general partners can appear in the name of the firm.
d.Limited partners may sell their interest in the company.
30. In terms of organizational costs, which of the following sequences
is correct, moving from lowest to highest cost? a.General partnership, sole
proprietorship, limited partnership, corporation b.Sole proprietorship, general partnership, limited partnership,
corporation c.Corporation, limited partnership, general partnership,
sole proprietorship d.Sole proprietorship, general partnership, corporation,
limited partnership
31. Coplon, Inc., an industrial firm, earned $180,000 in dividends in
1993 on their stock holding in the Finco Company. How much of the dividends are
excluded from Coplon's taxable income? a.$27,000 b.None c.$126,000 d.$153,000
32. Which one of the following categories of owners enjoys limited
liability? a.General partners in a limited partnership b.Shareholders (common stock) of a corporation c.Sole proprietors
d.Both a & b
33. Which of the following is a characteristic of a limited
partnership? a.It allows one or more partners to have limited liability. b.It
requires one or more of the partners to be a general partner to whom the
privilege of limited liability does not apply. c.It prohibits the limited
partners from participating in the management of the partnership. d.all of
the above.
34. Which of the following categories of owners have limited
liability? a.General partners b.Sole proprietors c.Shareholders of a corporation d.Both a and b
35.
Which of the
statements below is true? a.The sole proprietorship and the general partnership
both feature unlimited liability. b.It is very complicated (legally) to
establish a corporation. c.No legal criterion exists for a general partnership.
d.All of the above are true.
36.
Which of the
following types of business forms is the most ideal in terms of attracting new
capital? a.Sole proprietorship b.Limited partnership c.General partnership d.A public corporation
37. Which forms of organization are free of initial legal
requirements? a.Sole proprietorship b.General partnership c.Corporation d.Both a and b
38.
For these
types of organization, no distinction is made between business and personal
assets. a.Sole proprietorship b.General partnership c.Limited partnership d.All
of the above e.Both a and b
39. Which of the following is a significant disadvantage of a general
partnership? a.The cost of forming it is high. b.Each partner is fully responsible for the liabilities incurred by the
partnership. c.There is a risk associated with the industry in which it
operates. d.Forming the business is very complex.
40. Which of the following should be considered when assessing the
financial impact of business decisions? a.The amount of projected earnings
b.The risk-return tradeoff c.The timing of projected earnings; i.e., when they
are expected to occur d.The amount of the investment in a given project e.All of the above
41. Which of the following forms of business organization is the
dominant economic force in the United States? a.The sole proprietorship b.The
general partnership c.The limited partnership d.The joint venture e.The corporation
42. Which of the following reasons is most responsible for
corporations being the most important form of business organization in the
United States? a.Corporations have limited life. b.Stockholders have unlimited
liability. c.Corporations are subject to less government regulation than the other
forms of business organization. d.Corporations
have the ability to raise larger sums of capital than the other forms of
business organization. e.Corporations are subjected to less taxation
than the other forms of business organization.
43. How could you compensate an investor for taking on a significant
amount of risk? a.Increase the expected
rate of return. b.Raise more debt capital. c.Offer stock at a higher
price. d.Increase sales.
44. Which of the following would be most likely to align the interests
of managers and shareholders? a.Fixed but high salaries b.Large bonuses c.Stock options d.All of the above
e.None of the above
45. What does the agency problem refer to? a.The conflict that exists
between the board of directors and the employees of the firm b.The problem
associated with financial managers and Internal Revenue agents c.The conflict
that exists between stockbrokers and investors d.The problem that results from potential conflicts of interest between
the manager of a business and the stockholders e.None of the above
46. A limited liability company (LLC) is: a.able to retain limited
liability for owners. b.taxed like a corporation. c.a cross between a
partnership and a corporation. d.a and
c. e.all of the above.
47. Purchasing a security of a company that is issuing their stock for
the first time publicly would be considered: a.a secondary market transaction. b.an initial public offering. c.a
seasoned new issue. d.both a and b.
48. In measuring value, the focus should be on: a.cash flow. b.accounting profits. c.time
value of money. d.earnings per share.
49. Which of the following is true regarding accounting profits? a.Received by the firm and reinvested
b.Reflects money in hand c.Represents actual money received and paid out
d.Equals cash in the bank
50. Which of the following statements is true regarding competitive
markets? a.Large profits exist over the long run. b.Product differentiation produces insulation for competitors.
c.Cost advantages attract new entrants. d.Both b and c.
51. Which of the following decrease new competition in competitive
markets? a.Economies of scale b.Proprietary technology c.Product
differentiation d.Both a and b e.All of
the above
52.
Cost
advantages in competitive markets: a.have the potential to create large
profits. b.deter new entrants from entering. c.can be created by economies of
scale. d.all of the above.
53. Which of the following is a characteristic of an efficient market?
a.Small number of individuals. b.Opportunities exist for investors to profit
from publicly available information. c.Security
prices reflect fair value of the firm. d.Immediate response occurs for
new public information.
54. Diversification increases when ________ decreases. a.variability
b.return c.risk d.a and c e.all
of the above
55. IBM issuing new shares of common stock would be classified as: a.a new seasoned issue. b.an initial
public offering. c.a secondary market transaction. d.a and b.
56.
According to
the agency problem, _________ represent the principals of a corporation. a.shareholders b.managers c.employees
d.suppliers
57.
The opening
of new international markets to the U.S. can be attributed to: a.acceptance of
a free market system by third world countries. b.regulation of U.S. industries.
c.increase in information technology.
d.a and c. e.all of the above.
Short-Answer
Questions - Explanatory
58.
Briefly
discuss mechanisms that can be used to align the interests of shareholders and
managers.
59.
Briefly
discuss why financial decision makers must focus on incremental cash flows when
evaluating new projects.
60.
Discuss the
risk/return tradeoff and how it relates to finance.
61.
Compare and
contrast primary market and secondary market transactions as it relates to the
flow of funds in the transactions.
62.
Discuss how
new entrants are deterred from entering a competitive market.
63.
What is incremental
cash flow and how is it used in project analysis?
