Chapter 001 The Corporation and the Financial Manager

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Nov 8, 2013 (3 years and 9 months ago)

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Chapter 001
The Corporation and the Financial Manager

1
-
1





True / False Questions



1.

The liability of sole proprietors is limited to the amount of their investment in the company.


FALSE




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Easy

Learning Objective: 1
-
3



2.

General partners have limited personal liability for bu
siness debts in a limited partnership.


FALSE




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Medium

Learning Objective: 1
-
3



3.

The separation of ownership and management is one distinctive feature of corporations.


TRUE




AACSB: Reflec
tive Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
3



4.

A major disadvantage of partnerships is that they have "double taxation" of profits.


FALSE




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Easy

Lear
ning Objective: 1
-
3



Chapter 001
The Corporation and the Financial Manager

1
-
2


5.

Financial assets have value because they are claims on the firm's real assets and the cash that
those assets will produce.


TRUE




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
2



6.

Capital budgeting decisions are used to determine how to raise the cash necessary for
investments.


FALSE




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
1



7.

A successful investment is one that
increases the value of the firm.


TRUE




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
1



8.

BP's committing of $500 million to partnership with University of California

Berkeley to
develop new sources of

energy is a capital budgeting decision.


TRUE




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Easy

Learning Objective: 1
-
1



Chapter 001
The Corporation and the Financial Manager

1
-
3


9.

Boards of directors are often portrayed as active supporters of top management.


FALSE




AACSB: Reflec
tive Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
3



10.

Financial analysts are involved in monitoring and controlling the risk associated with
investment projects and financing decisions.


TRUE




AACSB: Communication A
bilities

Bloom's: Knowledge

Difficulty: Medium

Learning Objective: 1
-
4



11.

The primary goal of any company should be to maximize current period profit.


FALSE




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
5



12.

Maximizing profits is the same as maximizing the value of the firm.


FALSE




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
5



Chapter 001
The Corporation and the Financial Manager

1
-
4


13.

Major banks and securities firms protect

their reputations by emphasizing their long history
and their responsible behavior when seeking new customers.


TRUE




AACSB: Ethical Understanding & Reasoning Abilities

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
6



14.

Ethical decisi
on making in business can be viewed as a long
-
term investment in reputation.


TRUE




AACSB: Ethical Understanding & Reasoning Abilities

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
6



15.

Real assets can be intangible assets.


TRUE




AA
CSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
2



16.

Making good investment and financing decisions is the chief task of the financial manager.


TRUE




AACSB: Reflective Thinking Skills

Bloom's: Understan
ding

Difficulty: Medium

Learning Objective: 1
-
1



Chapter 001
The Corporation and the Financial Manager

1
-
5


17.

If a project's value is less than its required investment, then the project is attractive
financially.


FALSE




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Ob
jective: 1
-
1



18.

Pfizer's spending of $7.6 billion in 2006 on research and development of new drugs is a
capital budgeting decision but not a financing decision.


TRUE




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Medium

Learning
Objective: 1
-
1



19.

LVMH's Issuance of a 7
-
year bond in 2005, raising 600 million euros is a financing
decision.


TRUE




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Medium

Learning Objective: 1
-
1



20.

An IOU ("I owe you") from your brother in law is a financial asset.


TRUE




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Medium

Learning Objective: 1
-
2



Chapter 001
The Corporation and the Financial Manager

1
-
6


21.

The separation of ownership and management is one distinctive feature of
both corporations
and sole proprietors.


FALSE




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
3



22.

Shareholders welcome higher short
-
term profits even when they damage long
-
term profits.


FALSE




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Medium

Learning Objective: 1
-
5



23.

Investors usually give some companies with good track records the benefit of the doubt
when the companies' performance fails to meet the market expectat
ion.


TRUE




AACSB: Ethical Understanding & Reasoning Abilities

Bloom's: Application

Difficulty: Medium

Learning Objective: 1
-
6



24.

While control of large public companies in the United States is exercised through the board
of directors and pressure fro
m the stock market, in many other countries the stock market is less
important and control shifts to major stockholders, typically banks and other companies.


TRUE




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Medium

Learning Objective:
1
-
3



Chapter 001
The Corporation and the Financial Manager

1
-
7


25.

Insider trading is the purchase or sale of shares based on information that is not available to
public investors, and such behavior is accepted by the Securities Exchange Commission.


FALSE




AACSB: Communication Abilities

Bloom's: Knowledge

D
ifficulty: Medium

Learning Objective: 1
-
6






Multiple Choice Questions



26.

The stockholders in a sole proprietorship are represented by:


A.

the owner of the firm.

B.

the general partner of the firm.

C.

the Board of Directors of the firm.

D.

no one; sole proprietorships have no stockholders.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Easy

Learning Objective: 1
-
3



27.

Which of the following would be considered an advantage of the sole proprietorship form of
organization?


A.

Wide access to capital markets

B.

Unlimited liability

C.

A pool of expertise

D.

Profits taxed at only one level




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
3



Chapter 001
The Corporation and the Financial Manager

1
-
8


28.

In a partnership form of organi
zation, income tax liability, if any, is incurred by:


A.

the partnership itself.

B.

the partners individually.

C.

both the partnership and the partners.

D.

neither the partnership nor the partners.




AACSB: Communication Abilities

Bloom's: Knowledge

Diff
iculty: Medium

Learning Objective: 1
-
3



29.

Which of the following would correctly differentiate general partners from limited partners
in a limited partnership?


A.

General partners have more job experience.

B.

General partners have an ownership interest
.

C.

General partners are subject to double taxation.

D.

General partners have unlimited personal liability.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Medium

Learning Objective: 1
-
3



30.

One common reason for partnerships to convert to a corporate form of organization is that
the partnership:


A.

faces rapidly growing financing requirements.

B.

wishes to avoid double taxation of profits.

C.

has issued all of its allotted shares.

D.

agreeme
nt expires after ten years of use.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
3



Chapter 001
The Corporation and the Financial Manager

1
-
9


31.

Which of the following is
least

likely to be discussed in the articles of incorporation?


A.

The maximum number
of shares that can be issued.

B.

The purpose of the business.

C.

The price range of the shares of stock.

D.

The number of members of the Board of Directors.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
3



32.

When a corporation fails, the maximum that can lost by an investor protected by limited
liability is:


A.

the amount of the initial investment.

B.

the amount of the profit on the investment.

C.

the amount necessary to pay the corporation's debts.

D
.

the amount of the investor's personal wealth.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
3



33.

Which of the following is
not

an advantage to incorporating a business?


A.

Easier access to

financial markets.

B.

Limited liability.

C.

Becoming a permanent legal entity.

D.

Profits taxed at the corporate level and the shareholder level.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
3



Chapter 001
The Corporation and the Financial Manager

1
-
10


34.

Unlimited liability is faced by the owners of:


A.

corporations.

B.

partnerships and corporations.

C.

sole proprietorships and partnerships.

D.

all forms of business organization.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Easy

Learni
ng Objective: 1
-
3



35.

Which of the following statements generally cannot be correct for an investor who faces
unlimited liability on an investment?


A.

The investor owns stock in the firm.

B.

The investor has no partners.

C.

The investor is subject to do
uble taxation.

D.

The investor is responsible for managing the firm.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
3



36.

In the case of

a professional corporation, ________ has/have limited liability.


A.

only the professionals.

B.

only the business.

C.

both the professionals
and

the business.

D.

neither the professionals
nor

the business.




AACSB: Communication Abilities

Bloom's: Knowle
dge

Difficulty: Medium

Learning Objective: 1
-
3



Chapter 001
The Corporation and the Financial Manager

1
-
11


37.

A board of directors is elected as a representative of the corporation's:


A.

top management.

B.

stakeholders.

C.

shareholders.

D.

customers.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
3



38.

The legal "life" of a corporation is:


A.

coincident with that of its CEO.

B.

equal to the life of the Board of Directors.

C.

permanent, as long as shareholders don't change.

D.

permanent, regardless of cur
rent ownership.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
3



39.

When the management of a business is conducted by individuals other than the owners, the
business is more likely to be a:


A.

corpo
ration.

B.

sole proprietorship.

C.

partnership.

D.

general partner.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
3



Chapter 001
The Corporation and the Financial Manager

1
-
12


40.

"Double taxation" refers to:


A.

all partners paying equal taxes on profits.

B.

corporations paying taxes on both dividends and retained earnings.

C.

paying taxes on profits at the corporate level and dividends at the personal level.

D.

the fact that marginal tax rates are doubled for corporations.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Medium

Learning Objective: 1
-
3



41.

A corporation is considered to be closely held when:


A.

only a few shareholders exist.

B.

the market value of the shares is stable.

C.

it operates in a small geographic area.

D.

management also serves as the board of directors.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Easy

Learning Objective: 1
-
3



42.

Corporations are referred to as public companies when their:


A.

shareholders have no tax liability.

B.

sh
ares are held by the federal or state government.

C.

stock is widely traded.

D.

products or services are available to the public.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Easy

Learning Objective: 1
-
3



Chapter 001
The Corporation and the Financial Manager

1
-
13


43.

A common problem for clo
sely held corporations is:


A.

lack of access to substantial amounts of capital.

B.

that shareholders receive only one vote each.

C.

the separation of ownership and management.

D.

an abundance of agency problems.




AACSB: Reflective Thinking Skills

Bloom'
s: Understanding

Difficulty: Medium

Learning Objective: 1
-
3



44.

Corporate managers are expected to make corporate decisions that are in the best interest
of:


A.

top corporate management.

B.

the corporation's board of directors.

C.

the corporation's shar
eholders.

D.

all corporate employees.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
5



45.

Which of the following would not be considered a real asset?


A.

A corporate bond

B.

A machine

C.

A patent

D.

A factory




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Medium

Learning Objective: 1
-
2



Chapter 001
The Corporation and the Financial Manager

1
-
14


46.

Which of the following statements best distinguishes the difference between real and
financial assets?


A.

Real assets have less value t
han financial assets.

B.

Real assets are tangible; financial assets are not.

C.

Financial assets represent claims to income that is generated by real assets.

D.

Financial assets appreciate in value; real assets depreciate in value.




AACSB: Reflective Thi
nking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
2



47.

Which of the following would not be considered a financial asset?


A.

A patent

B.

A personal IOU

C.

A checking account balance

D.

A share of stock




AACSB: Reflective Thi
nking Skills

Bloom's: Application

Difficulty: Medium

Learning Objective: 1
-
2



48.

Financial markets are used for trading:


A.

both real assets and financial assets.

B.

the goods and services produced by a firm.

C.

securities, such as shares of IBM.

D.

the raw materials used in manufacturing.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Medium

Learning Objective: 1
-
2



Chapter 001
The Corporation and the Financial Manager

1
-
15


49.

Corporations that
do not

issue financial securities such as stock or debt obligations:


A.

will not be able to
increase sales.

B.

cannot be profitable.

C.

will not be able to generate sufficient funds to fulfill their needs.

D.

do not face double taxation of their profits.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objec
tive: 1
-
1



50.

Which of the following would be considered a capital budgeting decision?


A.

Planning to issue common stock rather than issuing preferred stock

B.

A decision to expand into a new line of products, at a cost of $5 million

C.

Repurchasing sha
res of common stock

D.

Issuing debt in the form of long
-
term bonds




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Medium

Learning Objective: 1
-
1



51.

A financial manager facing a capital budgeting decision must decide whether to:


A
.

issue stock or debt securities.

B.

use the money market or capital market.

C.

use primary markets or secondary markets.

D.

buy new machinery or repair the old.




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Medium

Learning Objectiv
e: 1
-
1



Chapter 001
The Corporation and the Financial Manager

1
-
16


52.

The best criterion for success in a capital budgeting decision would be to:


A.

minimize the cost of the investment.

B.

maximize the number of capital budgeting projects.

C.

maximize the difference between cash inflows and cost.

D.

finance a
ll capital budgeting projects with debt.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
1



53.

The overall goal of capital budgeting projects should be to:


A.

decrease the firm's reliance upon debt.

B
.

increase the firm's sales.

C.

increase the firm's outstanding shares of stock.

D.

increase the wealth of the firm's shareholders.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
1



54.

An example of a f
irm's financing decision would be:


A.

acquisition of a competitive firm.

B.

how much to pay for a specific asset.

C.

the issuance of ten
-
year versus twenty
-
year bonds.

D.

whether or not to increase the price of its products.




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Medium

Learning Objective: 1
-
1



Chapter 001
The Corporation and the Financial Manager

1
-
17


55.

Which of the following is
NOT

a financing decision?


A.

Should the firm borrow money from a bank or sell bonds?

B.

Should the firm shut down an unprof
itable factory?

C.

Should the firm buy or lease a new machine that it is committed to acquiring?

D.

Should the firm issue preferred stock or common stock?




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Medium

Learning Objective: 1
-
1



56.

Long
-
term financing arrangements occur in the:


A.

money markets.

B.

capital markets.

C.

secondary markets.

D.

primary markets.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
1



57.

The term "capit
al structure" refers to:


A.

the manner in which a firm obtains its long
-
term sources of funding.

B.

the length of time needed to repay debt.

C.

whether the firm invests in capital budgeting projects.

D.

which specific assets the firm should invest in.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
1



Chapter 001
The Corporation and the Financial Manager

1
-
18


58.

Firms can alter their capital structure by:


A.

not accepting any capital
-
budgeting projects.

B.

investing in nontangible assets.

C.

issuing stock to
repay debt.

D.

becoming a limited liability company.




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Easy

Learning Objective: 1
-
1



59.

When a corporation decides to issue long
-
term debt in order to pay for the acquisition of
real ass
ets, it has made a:


A.

capital budgeting decision.

B.

financing decision.

C.

money market decision.

D.

secondary market decision.




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Easy

Learning Objective: 1
-
1



60.

A firm decides to pa
y for a small investment project through a $1 million increase in
short
-
term bank loans. This is best described as an example of a(n):


A.

financing decision.

B.

investment decision.

C.

capital budgeting decision.

D.

capital market decision.




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Easy

Learning Objective: 1
-
1



Chapter 001
The Corporation and the Financial Manager

1
-
19


61.

The short
-
term decisions of financial managers are comprised of:


A.

capital structure decisions.

B.

investment decisions.

C.

financing decisions.

D.

bo
th investment and financing decisions.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
1



62.

Which of the following represents a financing decision?


A.

A decision to borrow $10 million through a bank
loan.

B.

A decision to invest in the common stock of another corporation.

C.

A decision to buy a new mainframe computer.

D.

A decision to pay $1 million of accounts payable.




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Easy

Learnin
g Objective: 1
-
1



63.

Which of the firm's financial managers is most likely to be involved with obtaining
financing for the firm?


A.

Treasurer

B.

Controller

C.

Chief Executive Officer

D.

Board of Directors




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Easy

Learning Objective: 1
-
4



Chapter 001
The Corporation and the Financial Manager

1
-
20


64.

In a large corporation, budget preparation would most likely be conducted by the:


A.

treasurer.

B.

controller.

C.

chief financial officer.

D.

financial manager.




AACSB: Communication Ab
ilities

Bloom's: Knowledge

Difficulty: Easy

Learning Objective: 1
-
4



65.

In a firm having both a treasurer and a controller, which of the following would most likely
be handled by the controller?


A.

Internal auditing

B.

Credit management

C.

Banking relat
ionships

D.

Insurance




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Medium

Learning Objective: 1
-
4



66.

Which of the following statement more accurately describes the controller than the
treasurer?


A.

Likely to be the only financial ex
ecutive in small firms.

B.

Monitors capital expenditures to make sure that they are not misappropriated.

C.

Responsible for investing the firm's spare cash.

D.

Responsible for arranging any issue of common stock.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
4



Chapter 001
The Corporation and the Financial Manager

1
-
21


67.

A chief financial officer would typically:


A.

report to the treasurer, but supervise the controller.

B.

report to the controller, but supervise the treasurer.

C.

report to both the
treasurer and controller.

D.

supervise both the treasurer and controller.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
4



68.

One corporate activity that is specifically reserved for the board of direc
tors is the:


A.

declaration of dividends.

B.

custody of records.

C.

preparation of budgets.

D.

day
-
to
-
day operation of the firm.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Easy

Learning Objective: 1
-
4



69.

A financial analyst in a c
orporation may be involved in:


A.

proposing a new investment project.

B.

collecting payments from customers.

C.

managing investment of the company's cash.

D.

purchasing the firm's plant and equipment.




AACSB: Reflective Thinking Skills

Bloom's: Applicat
ion

Difficulty: Easy

Learning Objective: 1
-
4



Chapter 001
The Corporation and the Financial Manager

1
-
22


70.

Investment banks like Merrill Lynch or Goldman Sachs:


A.

collect deposits and relend the cash to corporations and individuals.

B.

help companies sell their securities to investors.

C.

design and sell in
surance policies for businesses.

D.

lend to corporations and investors in commercial real estate.




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Easy

Learning Objective: 1
-
4



71.

The primary goal of c
orporate management should be to:


A.

maximize the number of shareholders.

B.

maximize the firm's profit.

C.

minimize the firm's costs.

D.

maximize the shareholders' wealth.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Lea
rning Objective: 1
-
5



72.

Within the realm of ethical decision making, managers should attempt to maximize:


A.

the market value of the shareholders' wealth.

B.

their compensation plans.

C.

their firm's market share.

D.

the profits of the firm.




AACSB:
Ethical Understanding & Reasoning Abilities

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
6



Chapter 001
The Corporation and the Financial Manager

1
-
23


73.

Which of the following appears to be the most appropriate goal for corporate management?


A.

Maximizing market value of the company's shares.

B.

Maximizing the company's market share.

C.

Maximizing the current profits of the company.

D.

Minimizing the company's liabilities.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Me
dium

Learning Objective: 1
-
5



74.

How may a reduction in cash dividends be in the best interests of current shareholders?


A.

Dividends are taxed at twice the rate of other gains.

B.

The firm will have available cash to increase current investment and fut
ure profits.

C.

Reduced dividends increase managerial compensation, thus increasing their motivation.

D.

A reduction of cash dividends
cannot

be in the best interests of current shareholders.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Diff
iculty: Hard

Learning Objective: 1
-
5



75.

Profit maximization is not a well
-
defined corporate objective because:


A.

it leaves open the question of which year's profits.

B.

higher profits does not necessarily mean a better rate of return.

C.

profits can b
e changed by using different accounting rules.

D.

All of these.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
5



Chapter 001
The Corporation and the Financial Manager

1
-
24


76.

A managerial objective to increase market share is more likely to be successful i
n the
long
-
run if the firm is:


A.

selling shares in the secondary market.

B.

the low
-
cost producer in the industry.

C.

managed by the board of directors.

D.

investing in capital budgeting projects.




AACSB: Reflective Thinking Skills

Bloom's: Understandi
ng

Difficulty: Medium

Learning Objective: 1
-
5



77.

WorldCom's failure to report $3.8 billion of operating expenses is an example of:


A.

an effort to conform to changed accounting rules.

B.

an attempt to maximize the value of the shareholders' investment
in the firm.

C.

an effort to serve the needs of the customer.

D.

an attempt to increase the company's market value in an unethical way.




AACSB: Ethical Understanding & Reasoning Abilities

Bloom's: Application

Difficulty: Easy

Learning Objective: 1
-
6



78.

A first
-
step in determining managerial objectives is to:


A.

develop appropriate compensation policies.

B.

eliminate agency problems.

C.

serve the needs of the customer.

D.

select an appropriate capital structure.




AACSB: Ethical Understanding & Reas
oning Abilities

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
5



Chapter 001
The Corporation and the Financial Manager

1
-
25


79.

Ethical decision
-
making by management has a payoff for shareholders in terms of:


A.

improved capital structure.

B.

enhanced reputation value.

C.

increased managerial benefits.

D.

higher dividend payments.




AACSB: Ethical Understanding & Reasoning Abilities

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
6



80.

Ethical decision making in business:


A.

reduces the firm's profits.

B
.

requires adherence to implied rules as well as written rules.

C.

is not in the best interests of shareholders.

D.

is less important than good capital budgeting decisions.




AACSB: Ethical Understanding & Reasoning Abilities

Bloom's: Understanding

Diffic
ulty: Hard

Learning Objective: 1
-
6



81.

The actions of Salomon Brothers during their 1991 Treasury bond bidding suggest that a
firm's reputation:


A.

cannot be expected to affect profitability.

B.

is determined by the firm's bondholders.

C.

is outside of
managerial control.

D.

can impact shareholders' wealth.




AACSB: Ethical Understanding & Reasoning Abilities

Bloom's: Application

Difficulty: Medium

Learning Objective: 1
-
6



Chapter 001
The Corporation and the Financial Manager

1
-
26


82.

In which of the following organizations would it be
least likely

to find t
he existence of
agency problems?


A.

A sole proprietorship

B.

A partnership

C.

A corporation

D.

A closely held corporation




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
7



83.

Sole proprietorships resol
ve the issue of agency problems by:


A.

avoiding excessive expense accounts.

B.

discharging those who violate the rules.

C.

allowing owners to share the cost of their actions with others.

D.

forcing owners to bear the full cost of their actions.




AACSB:
Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
7



84.

Agency problems can best be characterized as:


A.

dislike of firm's bondholders by its equity holders.

B.

differing incentives between managers and owners.

C
.

spending corporate resources.

D.

friction between the primary and secondary markets.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Medium

Learning Objective: 1
-
7



Chapter 001
The Corporation and the Financial Manager

1
-
27


85.

Which of the following is
least

likely to represent an agency problem?


A.

lavish spending on expense accounts.

B.

plush remodeling of the executive suite.

C.

excessive investment in "safe" projects.

D.

executive incentive compensation plans.




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Hard

Learning Objective: 1
-
7



86.

When managers' compensation plans are tied in a meaningful manner to the profits of the
firm, agency problems:


A.

can be reduced.

B.

will be created.

C.

are shifted to other stakeholders.

D.

are eliminated entirely from the firm.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
7



87.

The term "corporate stakeholder" typically refers to:


A.

a company's customers.

B.

anyone with a financ
ial interest in the firm.

C.

the equity holders of the firm.

D.

the management and Board of Directors of the firm.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Medium

Learning Objective: 1
-
7



Chapter 001
The Corporation and the Financial Manager

1
-
28


88.

Which of the following groups is leas
t likely to be considered a stakeholder of the firm?


A.

Government

B.

Bondholders

C.

Competitors

D.

Employees




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Easy

Learning Objective: 1
-
7



89.

A manager's compensation plan that off
ers financial incentives for increases in quarterly
profitability may create agency problems in that:


A.

the managers are not motivated by personal gain.

B.

the board of directors may claim the credit.

C.

short
-
term, not long
-
term profits become the focus
.

D.

investors desire stable profits.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Hard

Learning Objective: 1
-
7



90.

One continuing problem with managerial incentive
-
compensation plans is that:


A.

the plans increase agency prob
lems.

B.

managers prefer guaranteed salaries.

C.

effectiveness of the plans is difficult to evaluate.

D.

the plans do not reward shareholders.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
7



Chapter 001
The Corporation and the Financial Manager

1
-
29


91.

Wh
ich of the following forms of compensation is most likely to align the interests of
managers and shareholders?


A.

A fixed salary.

B.

A salary that is linked to company profits.

C.

A salary that is paid partly in the form of the company's shares.

D.

A salary that is linked to the company's total market value.




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Hard

Learning Objective: 1
-
7



92.

Profit
-
sharing plans may be beneficial when used to:


A.

reduce the impact of corporate in
come taxes.

B.

improve managers' incentives for effective decision making.

C.

divert financial resources from shareholders.

D.

reduce the payment of cash dividends.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Obj
ective: 1
-
7



93.

A corporate board of directors should provide support for the top management team:


A.

under all circumstances.

B.

in all decisions related to cash dividends.

C.

only when the board has confidence in management's actions.

D.

if shareholders are pleased with the firm's performance.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Difficulty: Medium

Learning Objective: 1
-
7



Chapter 001
The Corporation and the Financial Manager

1
-
30


94.

A corporation's board of directors:


A.

is selected by and can be removed by management.

B.

can be voted out of power by the shareholders.

C.

has a lifetime appointment to the board.

D.

is selected by a vote of all corporate stakeholders.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Medium

Learning Objective: 1
-
7



95.

Opt
ions are important instruments in the financial marketplace, and have been traded at
least since:


A.

1800 B.C.

B.

1000 B.C.

C.

1929.

D.

1972.




AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: Medium

Learning Objective: 1
-
1



96.

Which of th
e following are real assets?

I. A patent.

II. A share of stock issued by Bank of New York.

III. A blast furnace in a steel
-
making factory.

IV. A mortgage loan taken out to help pay for a new home.

V. After a successful advertising campaign, potential cust
omers' belief that FedEx will deliver
packages promptly and reliably.

VI. An IOU ("I owe you") from your brother
-
in
-
law.


A.

I only

B.

III only

C.

I and III only

D.

I, III & V




AACSB: Reflective Thinking Skills

Bloom's: Application

Difficulty: Medium

Lea
rning Objective: 1
-
2



Chapter 001
The Corporation and the Financial Manager

1
-
31




Essay Questions



97.

What general factors may influence the decision of whether to organize as a sole
proprietorship, a partnership, or a corporation?


Factors that may influence the decision concerning organizational form would include: amount
of capital needed in relation to amount of capital that can be raised, estimated sales volume, the
extent of managerial expertise, the willingness to share profits
, the importance of limited
liability, a desire for the permanence of the organization, the issue of double taxation.




AACSB: Analytical Skills

Bloom's: Analysis

Learning Objective: 1
-
3



98.

Discuss why corporations typically exhibit separation of owner
ship and management, as
distinguished from sole proprietorships or partnerships.


One reason corporations typically exhibit a separation of ownership and management is that
ownership often includes a diverse amount of relatively small investors. Thus, it w
ould be
nearly impossible to coordinate these owners into decision makers. Also, many small investors
are pleased in being relieved of management responsibilities. Therefore, the quality of
management is likely to be better if those managers have been hire
d specifically for that
function. Finally, the separation minimizes managerial disruptions that would occur with
changing or deceased investors. Most sole proprietorships and partnerships are smaller firms
that do not need, may not be able to afford, and m
ay not desire even if they could afford, the
existence of a separate management.




AACSB: Analytical Skills

Bloom's: Analysis

Learning Objective: 1
-
3



Chapter 001
The Corporation and the Financial Manager

1
-
32


99.

Why is limited liability such an important aspect to investors?


Many investors would not be willing to commit their investment funds into projects if it were
known they were risking more than those specific funds. Specifically in the case of separated
ownership and management, shareholders may be unwilling to remain li
able for decisions they
did not have a hand in making. With the aversion to risk that is witnessed in general for many
investors, it is questionable whether investors would direct their funds into financial assets that
did not offer limited liability. Thus
, the existence of limited liability may greatly affect the
demand for corporate shares.




AACSB: Analytical Skills

Bloom's: Analysis

Learning Objective: 1
-
3



100.

Provide at least three examples each of real and financial assets that might appear on the

balance sheet of General Motors.


Examples of real assets for General Motors: cash, raw materials inventory, production
facilities, tools and machines, finished inventory of automobiles. Examples of financial assets
that could have been issued by General
Motors: common stock (different classes), preferred
stock, corporate bonds, bank loans, et cetera. Of course, GM could show financial assets on the
left side of their balance sheet also, such as: short
-
term investments in U.S. government
securities, contra
cts receivable from the financing of their automobiles, or possibly residential
mortgages (GM, through its subsidiaries, is a large originator of residential mortgages, although
most would eventually be sold in the secondary market).




AACSB: Reflective T
hinking Skills

Bloom's: Application

Learning Objective: 1
-
2



Chapter 001
The Corporation and the Financial Manager

1
-
33


101.

Distinguish between a firm's capital budgeting decision and financing decision.


Examples of the capital budgeting decision for a firm could include: a decision to replace all of
the firm
's personal computers, a decision to expand the size of the production facility, a decision
to buy a corporate jet, a decision to expand production into two new product lines, et cetera.
Examples of the financing decision for a firm could include: a decisi
on to issue corporate bonds
rather than expand a bank loan, a decision to float a new issue of common stock, a decision to
denominate a loan in Japanese yen rather than U.S. dollars, a decision to roll over short
-
term
financing rather than borrow for a lon
ger term, et cetera.




AACSB: Communication Abilities

Bloom's: Knowledge

Learning Objective: 1
-
1



102.

Discuss the interrelationship between a firm's financing and capital structure decisions.


Although the capital budgeting decision considers what to in
vest in and specifically how much
to invest, this decision is importantly related to how the necessary funds should be raised. For
example, if many other firms of similar risk have recently issued bonds, the supply of loanable
funds may be low, which could

affect the interest rate on such funds. Or, the current market
value of common stock may be so low that management would prefer not to issue additional
shares at this time. Alternatively, the existence of loan or bond covenants could restrict certain
form
s of borrowing. Finally, although certain forms of financing may appear attractive, they
may not represent the targeted capital structure. Thus, elements of the financing decision need
to be considered simultaneously with the capital budgeting decision.




AACSB: Analytical Skills

Bloom's: Analysis

Learning Objective: 1
-
1



Chapter 001
The Corporation and the Financial Manager

1
-
34


103.

Who are the financial managers in large corporations?


The treasurer is responsible for looking after the firm's cash, raising new capital, and
maintaining relationships with bank
s and other investors who hold the firm's securities. Larger
corporations usually also have a controller, who prepares the financial statements, manages the
firm's internal budgets and accounting, and looks after its tax affairs. Large corporations often
a
ppoint a chief financial officer (CFO) to oversee both the treasurer's and the controller's work.




AACSB: Communication Abilities

Bloom's: Knowledge

Learning Objective: 1
-
4



104.

Fritz and Frieda went to business school together 10 years ago. They have
just been hired
by a midsized corporation that wants to bring in new financial managers. Fritz studied finance,
with an emphasis on financial markets and institutions. Frieda majored in accounting and
became a CPA 5 years ago. Who is more suited to be trea
surer and who controller? Briefly
explain.


Fritz would more likely be the treasurer and Frieda the controller. The treasurer raises money
from the financial markets and requires a background in financial institutions. The controller
requires a background
in accounting.




AACSB: Analytical Skills

Bloom's: Analysis

Learning Objective: 1
-
4



Chapter 001
The Corporation and the Financial Manager

1
-
35


105.

Provide examples of managerial goals other than the maximization of market value.


Managers may attempt to maximize profits, or to maximize market share, or even to maximize
their own benefits! Problems with maximizing profits can include the method of maximizing
(i.e., is it in the long
-
run or short
-
run best interests of the firm?), the

maintenance of product
quality, ethical decision making, customer satisfaction, et cetera. Problems with market share
can include economies of scale (i.e., low average cost of production), maintained profitability,
increased liabilities, et cetera. Agency

problems that relate to managerial compensation or
perquisites that are not in the long
-
run interest of shareholders are another example of
misguided goals.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Learning Objective: 1
-
5



106.

Are the
re companies that have attempted to increase their market value in unethical ways
recently?


The years 2001 and 2002 revealed an unusual number of bad apples. For example, telecom
giant WorldCom admitted that it failed to report $3.8 billion of operating e
xpenses, such that its
income became significantly overstated. When the company's true profitability was discovered,
it became bankrupt within a month. In late 2001, Enron, the energy trading and investment
company, announced over $1.7 billion in losses th
at had previously been concealed in "special
purpose entities" (SPEs). One of Enron's top financial executives allegedly used SPEs to pocket
millions at the expense of Enron and its shareholders. Enron also become bankrupt by the end
of the year.




AACSB:

Ethical Understanding & Reasoning Abilities

Bloom's: Application

Learning Objective: 1
-
6



Chapter 001
The Corporation and the Financial Manager

1
-
36


107.

Develop a case for the interrelationship of ethical decision making by corporate
management and profitability of the firm.


Ethical decision making can have
an important impact on employee attitudes, investor actions,
and customer retention. Further, all of these factors can have a large impact on the bottom line.
The list of potential benefits for a firm that has developed a reputation for ethical operations
can
be long


easier employee recruitment, lower employee turnover, easier issue of primary
securities, repeat business, good word of mouth, et cetera. In other words, the actions of all
stakeholders can be positively affected when they perceive the firm t
o be ethical in its
decisions.




AACSB: Ethical Understanding & Reasoning Abilities

Bloom's: Analysis

Learning Objective: 1
-
6



108.

Is there a conflict between "doing well" and "doing good"? When there are conflicts, how
may government regulations or law
s tilt the firm toward doing good?


As the text notes, the first step in doing well is doing good by your customers. Businesses
cannot prosper for long if they do not provide to their customers the products and services they
desire. In addition, reputation

effects often make it in the firm's own interest to act ethically
toward its business partners and employees since the firm's ability to make deals and to hire
skilled labor depends on its reputation for dealing fairly. In some circumstances, when firms
h
ave incentives to act in a manner inconsistent with the public interest, taxes or fees can align
private and public interests. For example, taxes or fees charged on pollution make it more costly
for firms to pollute, thereby affecting the firm's decisions
regarding activities that cause
pollution. Other "incentives" used by governments to align private interests with public
interests include: legislation to provide for worker safety and product, or consumer, safety,
building code requirements enforced by lo
cal governments, and pollution and gasoline mileage
requirements imposed on automobile manufacturers.




AACSB: Ethical Understanding & Reasoning Abilities

Bloom's: Analysis

Learning Objective: 1
-
6



Chapter 001
The Corporation and the Financial Manager

1
-
37


109.

Describe agency problems in general, and offer at

least three examples from corporations.


Whenever the firm's managers are different from the firm's owners, the potential exists for
agency problems. Management may be taking advantage of the fact that corporate ownership is
often quite diverse, such that

none of the owners appears to be "minding the store." In those
cases, it may be easy for top management to vote itself an excessive raise, or to redecorate the
corporate suite, or to be lax on the justification of expense reports, or even to invest in pro
jects
that are "too safe." Why might managers choose safe projects? For example, the executive may
have one year remaining on an employment contract and be more concerned with stable profits
than with rising profits.




AACSB: Reflective Thinking Skills

Bl
oom's: Understanding

Learning Objective: 1
-
7



110.

Tabulate and compare the differences among corporations, proprietorships and
partnerships.








AACSB: Reflective Thinking Skills

Bloom's: Understanding

Learning Objective: 1
-
3



Chapter 001
The Corporation and the Financial Manager

1
-
38


111.

What are the two major decisions made by financial managers?


Financial management can be broken down into (1) the investment,

or capital budgeting,
decision and (2) the financing decision. The firm has to decide (1) how much to invest and
which real assets to invest in and (2) how to raise the necessary cash.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Learning O
bjective: 1
-
1



112.

What does "real asset" mean?


Real assets include all assets used in the production or sale of the firms' products or services.
Real assets can be tangible (plant and equipment, for example) or intangible (patents or
trademarks, for ex
ample).




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Learning Objective: 1
-
2



113.

Who is the financial manager?


Almost all managers are involved to some degree in investment decisions, but some managers
specialize in finance, for example,

the treasurer, controller, and CFO.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Learning Objective: 1
-
4



114.

Why does it make sense for corporations to maximize their market value?


Value maximization is the natural financial goal of the

firm. Maximizing value maximizes the
wealth of the firm's owners, its shareholders. Shareholders can invest or consume that wealth as
they wish.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Learning Objective: 1
-
5



Chapter 001
The Corporation and the Financial Manager

1
-
39


115.

Is value maximiza
tion always ethical?


Modern finance does not condone attempts to pump up stock price by unethical means. But
there need be no conflict between ethics and value maximization. The surest route to maximum
value starts with products and services that satisfy
customers. A good reputation with
customers, employees, and other stakeholders is also important for the firms' long
-
run
profitability and value.




AACSB: Ethical Understanding & Reasoning Abilities

Bloom's: Application

Learning Objective: 1
-
6



116.

How do corporations ensure that managers' and stockholders' interests coincide?


Conflicts of interest between managers and stockholders can lead to agency problems. These
problems are kept in check by compensation plans that link the well
-
being of employe
es to that
of the firm; by monitoring of management by the board of directors, security holders, and
creditors; and by the threat of takeover.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Learning Objective: 1
-
7



117.

What actions can share
holders take when the corporation is underperforming and the
board of directors is not aggressive in holding managers to task?


If shareholders believe that the corporation is underperforming and the board of directors is not
sufficiently aggressive in hol
ding managers to task, they can try to replace the board in the next
election. The dissident shareholders will attempt to convince the other shareholders to vote for
their slate of candidates to the board. If they succeed, a new board will be elected and i
t can
replace the current management team. Short of that, unhappy shareholders can attempt to elect
representatives to the board to make their voices heard. In 2006, for example, dissatisfied
shareholders of the H. J. Heinz food company voted in two direct
ors proposed by an outside
investor, Nelson Peltz. With over $1 trillion of assets under management, hedge funds have
become increasingly aggressive and successful in pursuing this strategy.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Learn
ing Objective: 1
-
7



Chapter 001
The Corporation and the Financial Manager

1
-
40


118.

What is a Japanese keiretsu, e.g., the Mitsubishi keiretsu? What are the advantages and
disadvantages of performing corporate governance in a keiretsu?


In Japan major industrial and financial companies have traditionally been l
inked together in a
group called a keiretsu. For example, the Mitsubishi keiretsu contains 29 core companies
including a bank, two insurance companies, an automobile manufacturer, a brewery, and a steel
company. Members of the keiretsu are tied together in

several ways. First, managers may sit on
the boards of directors of other group companies, and a "president's council" of chief executives
meets regularly. Second, each company in the group holds shares in many of the other
companies. And third, companies

generally borrow from the keiretsu's bank or from elsewhere
within the group.


These links may have several advantages. Companies can obtain funds from other members of
the group without the need to reveal confidential information to the public, and if a
member of
the group runs into financial heavy weather, its problems can be worked out with other
members of the group rather than in the bankruptcy court. The more stable and concentrated
shareholder base of large Japanese corporations may make it easier f
or them to resist pressures
for short
-
term performance and allow them to focus on securing long
-
term advantage.


But the Japanese system of corporate governance also has its disadvantages, for the lack of
market discipline can allow lagging or inefficient
corporations to put off painful surgery. As the
Japanese economy languished in the 1990s, these disadvantages became more apparent, the
links that bound keiretsus together began to weaken, and companies began to sell their shares in
other members of the gr
oup.




AACSB: Reflective Thinking Skills

Bloom's: Understanding

Learning Objective: 1
-
7