Exam 1 Practice Questions – Flashcards
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What long-term investments should the firm undertake? How should the firm raise money to fund these decisions? How can the firm best manage its cash flows as they arise in its day-to-day operations?
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What are the three basic questions addressed by the study of finance?
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Capital budgeting decisions, capital structure decisions, and working capital management decisions
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What are the three basic types of decisions addressed by the study of finance?
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TRUE
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TRUE/FALSE Even if you do not pursue a career in finance, you may find yourself working closely with finance managers.
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TRUE
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TRUE/FALSE As an individual you will be faced with numerous financial decisions throughout your life. Knowledge of financial principles will help you make the right decisions.
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TRUE
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TRUE/FALSE For those who plan to be entrepreneurs, managing company finances is crucial to the survival of the firm.
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TRUE
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TRUE/FALSE Financial management is a key component of other academic disciplines such as management, marketing, production, operations management, and accounting.
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Corporation, sole proprietorship, and the partnership
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What are the three legal forms of business organizations?
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FALSE
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TRUE/FALSE One advantage of the sole proprietorship is that the survival of the firm does not depend upon just one person.
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TRUE
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TRUE/FALSE Sources of funds for a sole proprietorship typically include personal savings, as well as raising fronds from a bank or personal loans from friends and family.
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TRUE
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TRUE/FALSE Sole proprietorships are easy to set up with no paperwork required before the business can be opened.
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TRUE
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TRUE/FALSE The sole proprietor is personally responsible for all debt of the sole proprietorship.
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general partner
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Which business partner actually runs the business and faces unlimited liability for the firm's debt?
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limited partner
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This business partner is only liable up to the amount they personally invested.
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TRUE
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TRUE/FALSE Corporations have a greater ease in raising large sums of money than other forms of business organization.
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TRUE
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TRUE/FALSE In corporations, the life of the business is not tied to the status of the corporate owners.
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TRUE
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TRUE/FALSE In corporations, the owners' liability is limited to the amount of their investment in the company.
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FALSE
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TRUE/FALSE The corporation is owned by the board of directors who share in the profits of and the liabilities of the company.
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limited liability company
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One attractive alternative to the corporation for a small business is the _________ because it combines the tax benefits of a partnership with the limited liability of a corporation.
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Chief Financial Officer (CFO)
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In a large corporation, the primary responsibility for overseeing the firm's finance-related activities falls to the:
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agency problem
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When managers have little or no ownership in the firm, they are less likely to work energetically for the company's shareholders. We call this type of conflict a(n) ________.
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-Firms that fail to maximize shareholder wealth may be taken over and their management team replaced. -Compensation plans can be put in place to reward managers when they maximize shareholder wealth. -Financial markets play a key role in monitoring management. -The board of directors can actively monitor the actions of managers to keep pressure on them to act in the best interest of shareholders.
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What measures can be taken to help limit the agency problem?
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The Sarbanes-Oxley Act of 2002 (SOX)
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______________ was passed to directly confront concerns about both agency and ethical issues.
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FALSE
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TRUE/FALSE Regarding SOX, senior executives are no longer held responsible for the accuracy and completeness of the firm's financial reports if an accounting firm declares the reports acceptable according to established accounting procedures.
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TRUE
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TRUE/FALSE SOX holds corporate advisors who have access to or influence on company decisions, legally accountable for instances of misconduct.
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TRUE
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TRUE/FALSE The purpose of SOX is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the security laws.
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TRUE
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TRUE/FALSE While the goal of SOX is to provide greater protection against accounting fraud and financial misconduct, the demanding reporting requirements of SOX are quite costly and may inhibit firms from listing on U.S. stock markets.
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Principle 1: Money has a time value
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There are 4 basic principles of finance. Which principle correctly describes the following statement: "A dollar today is worth more than a dollar received in the future. Conversely, a dollar received in the future is worth less than a dollar received today"?
