Ch.1 Finance

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Capital Budgeting
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Process of planning and measuring the firms investment in long term real assets. EX) what projects should the firm invest in?
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Capital Structure
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Deals with long term liabilities and equity EX) What mixture of debt and equity will the business use?
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Working capital
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Deals with short term (current) assets and liabilities EX) will firm purchase supplies on credit or pay cash
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Net Working Capital
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Current Assets-Current Liability
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Sole proprietorship
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A business owned by a solitary individual who has unlimited liability for its debt is called a: Predominent Form Easy to start up and tax treatment good, Difficult to transfer ownership Limited life
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Limited Partnership
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A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:
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General Partnership
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2 or more partners Easy to start up and tax treatment, pooling of capital by partners, limited life, difficulty transferring partnership, unlimited liabilities
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Corporation
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A business created as a distinct legal entity and treated as a legal “person” is called a: Business form existing separate and apart from its owners Separate ownership and control: shareholders, directors and management, easy to attract investors, better access to capital, Liability limited to investment. Transfer of ownership divined by shares of stock, but double taxation and time and cost of incorporation
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Which one of the following is a capital budgeting decision?
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deciding whether or not to purchase a new machine for the production line EX) evaluating the size, timing and risk of future cash flows is the essence of this
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Which of the following accounts are included in working capital management?
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accounts payable, accounts receivable, inventory
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Which of the following individuals have unlimited liability based on their ownership interest?
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General Partner and Sole Proprietorship
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Which of the following are advantages of the corporate form of business ownership?
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Ability to raise capital and unlimited firm life
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Which one of the following statements is correct?
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Both sole proprietorship and partnership income is taxed as individual income.
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Which one of the following business types is best suited to raising large amounts of capital?
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corporation
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Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm’s debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm’s profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?
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Limited partnership
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Which one of the following best states the primary goal of financial management?
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maximize the current value per share, maximize stockholder wealth!
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The Sarbanes-Oxley Act of 2002 is a governmental response to:
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management greed and abuses.
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Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes.
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I. compensation based on the value of the stock II. stock option plans III. threat of a company takeover IV. threat of a proxy fight
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Which form of business structure is most associated with agency problems?
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Corporation
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Which one of the following is an agency cost?
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hiring outside accountants to audit the company’s financial statements
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Primary Market
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The corporation is the seller, and the transactions raise money for the corporation. EX) sale of a new share of stock to an individual investor
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Secondary Market
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One owner or creditor selling to another
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Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:
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was facilitated in the secondary market
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Why is the stock price considered to be the best measure of a company’s performance?
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it incorporates all available information about the company’s financial standing it incorporates all available information about the company’s cash flows it incorporates non-financial information that is relevant to the company’s performance
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Which of the following is an example of an agency problem?
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You hire Frank’s Lawn Service to maintain your yard while you are out of town for two months. When you return you find that your plants are all dead.
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Of the choices below, only one is a characteristic of the corporation. Which one?
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personal assets of owner(s) may not be seized by creditors
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Ownership in a corporation is evidenced by
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owning either the corporation’s bonds or common stock.
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Which of the following represents a significant disadvantage to the corporate form of organization?
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Exposure to taxation of both corporate earnings and stockholder dividend income.

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