Capital Management & Business Organization – Finance

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Capital Management & Business Organization – Finance

This chapter covers capital management and business organization of Finance.

Which of the following is NOT considered to be a disadvantage of the sole proprietorship form of business organization?          

fewer regulations and reporting requirements

Capital markets are all financial institutions that help a business raise long-term capital  


Organized stock exchanges provide the benefits of a continuous market, fair security pricing, and helping businesses raise new capital   


On the basis of number of shares traded, more stocks are traded over the counter than an organized exchanges         


One advantage of being listed on the NYSE is that all trades are made in an auction setting with face-to-face trading between individuals on the floor of the stock exchnage     


One advantage of organized stock exchanges is increased stock price volatility resulting from the efficient exchange of information  


Which of the following statements about the corporate form of business organizations is true?

The corporate form has the disadvantage of double taxation relative to a sole proprietorship

Limited partnerships are not prevalent as corporations because      

it is easier to transfer ownership by selling common stock than it is to sell partnership

Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money


One problem with maximizing shareholder wealth as a goal is that it ignores risk taken by the firms financial decisions        


The goal of profit maximization ignores the risk of financial decisions 


Shareholders react to poor investment or dividend decisions by causing the total value of the firms stock to fall, and they react to good decisions by bidding the price of the stock up    


The primary goal of a publicly owned corporation is to?

maximize shareholder wealth

Maximization of shareholder wealth     

provides benefits to society as scarce resources are directed to their most productive use

A financial manager is considering two projects, A and B. A is expected to add $2 million in profits this year, while B is expected to add $1 million to profits this year. Which of the following statements is most correct            

The manager should select the project that causes stock price to increase the most, which could be A or B

When making financial decisions, managers should always look at marginal, or incremental cash flows   


Profits represent money that can be spent, and as such form the basis for determining the value of financial decisions        


If the stock market is efficient, then investors do not need to read the Wall Street Journal or research companies before they select which stocks to but because market prices already reflect all publicly available information  


managers should not be concerned with business ethics because ethical behavior is inconsistent with the primary goal of maximizing shareholder value  


The risk-return tradeoff is seen in many areas of finance      


The sole proprietorship has no legal business structure separate from its owner       


An efficient market is one where the prices of the assets traded in that market fully reflect all available information at any instant in time.


The five basic principles of finance include all of the following except:   

Incremental profits determine value(included in basic principles: risk requires a reward, cash flow is what matters, money has a time value)

To measure vale, the concept of time value of money is used  

To bring the future benefits and cost of a project, measure by its cash flows, back to the present

All of the following contributed to recent financial crises except:      

relying on the efficiency of financial markets

Executive compensation in the U.S      

is dominated by performance-based compensation designed to reduce agency problems

The recent financial crises was exacerbated by 

managers who underestimated the real risks of their decisions and borrowed excessively

Financial management deals with the maintenance and creation of economic value or wealth 


The fundamental goal of a business is to maximize the retained earnings available to the corporations shareholders       


Shareholder wealth maximization means maximizing the price of the existing common stock   


Ethical behavior        

is essential in business because unethical behavior destroys trust and business relationships

Investors generally don’t like risk, Therefore, a typical investor

will only take an additional risk if he expects to be compensated in the form of additional returen

A corporate treasurer is typically responsible for cash management, credit management, and raising capital   


Determining how a firm should raise money to fund its long-term investments is referred to as capital structure decisions    


The Chief Financial Officer (CFO) is responsible for overseeing financial planning, corporate strategic planning, and controlling the firms cash flow  


The financial manager most directly responsible for producing the company’s financial statements and directing its cost accounting functions is the:   


The three basic types of issues addressed by the study of finances are

  capital budgeting, capital structure decisions, and working capital management

Working capital management is concerned with        

how a firm can best manage its cash flows as they arise in its day-to-day operations

Capital budgeting is concerned with  

what long-term investments a firm should undertake

Determining the best way to raise money to fund a firms long-term investment is called      

the capital structure decisions

The best form of business entity to attract new capital is the sole proprietorship because investors only need to deal with one owner      


S-type corporations and limited liability companies are taxed like partnerships, but have the advantage of limited liability for their owners       


If we invest money for 10 years at 8% interest, compounded semi-annually, we are really investing money for 20 six-month periods, and receiving 4% interest each period 


For a given stated interest rate, an investor would receive a greater future value with daily compounding as opposed monthly compunding 


It is never appropriate to compare nominal rates unless they include the same number of compounding periods per year     


A share of preferred stock that pays the same annual dividend forever is an example of perpetuity        


A limited liability company (LLC) is taxed like a partnership but provides limited liability for its owners similar to a corporation      


Owners of a corporation enjoy limited liabaility 


Limited partnership provides limited liability to:

only to limited partners who do not participate in the management of the business

All of the following business organizations provide limited liability to their owners except:  

general partnership

Which of the following is an advantage of the sole proprietorship?     

no significant legal requirements for starting the business

The true owners of the corporation are the… 

common stockholders

Which of the following forms of business organization has the greatest ability to attract new capital?  


Three ways that savings can be transferred through financial markets to those in need of funds include direct transfers, indirect transfers using the investment banker, and indirect transfers using the financial intermediary 


Each purchase occurring in the secondary markets increases the total stock of financial assets that exist in the economy      


The money market includes transactions in short-term financial instruments 


Over-the-counter markets include all security markets, with the exception of organized exchanges   


For a firm to have its securities listed on an exchange, it must meet certain requirements. These usually include measures of profitability, size, market value, and a public ownership       


A seasoned equity offering is the sale of additional shares by a company whose shares are already publicly traded     


Financial intermediaries issue their own indirect securities and use the proceeds to purchase the direct securities of other economic units


general Electric (GE) has been a public company for many years with its common stock traded on the NYSE. If GE decides to sell 500,000 shares of new common stock, the transaction will be described as: 

a seasoned equity offering because GE has sold common stock before

A wealthy private investor providing a direct transfer of funds is called?   

an angel investor

common examples of financial intermediaries include all of the following except    

Venture Capital Firms

John calls his stockbroker and instructs him to purchase 100 shares of Microsoft Corporation common stock. This transaction occurs in the         

secondary market

General Motors raises money by selling a new issue of common stock. This transaction occur in

the capital market

All of the following securities are sold in money markets EXCEPT:      

common stock(Are sold in money markets: commercial paper, 6 month certificates of deposit, 3 month U.S Treasury bills)

Which of the fol.lowing is an advantage of organized stock exchanges? 

providing a continuous market

The telecommunications system that provides a national information linkup among brokers and dealers operating in the over-the-counter market is called:      


In August 2004, Google first sold its common stock to the public at $85 per share and raised $1.76 billion. This is an example of   

primary market transaction

The Securities and Exchange Commission (SEC)

regulates both primary and secondary markets

The investment banker performs three basic functions:          

(1) underwriting (2) distributing (3) advising

The negotiated purchased is the most prevalent method of securities distribution in the private sector


Investment banking firms are prohibited from selling securities due to conflicts of interest       


It is common practice among the largest corporations to sell their securities directly to investors      


The competitive bid purchase is largely confined to railroad, public utility, and municipal bond issues   


Because they occur in private, stricter regulations are placed on the private placements of securities   


Investment firms, such as Goldman Sachs, assist the transfer of capital by     

facilitating indirect transfers from savers (investing public) to borrowers (corporations needing capital)

The investment banker does NOT underwrite the securities to be issued in which of the following?  

best efforts

A “Dutch auction” was used by Google to raise money in 2004. A Dutch auction involves      

Allowing investors to submit bids saying how many shares they’d like to buy and at what price

In private placement, the securities are offered and sold to a limited number of investors        



Over time, there has been a high correlation between actual rates of return on securities and the securities’ standard deviations of return   


Investors expect to receive the highest returns from government-issued securities because the government will not default on securities that it has issued   


The real rate of return is the return earned above the 

Inflation risk premium

Which of the following represents the correct ordering of returns over the period 1926 to 2008 (from lowest to highest return)?         

Treasury bills, Long-term corporate bonds, Common stocks, Small firm common stocks

In response to the banking crisis and economic collapse of 2007 and 2008, the U.S government moved to increase interest rates in order to attract foreign capital seeking high returns in U.S banks    


The time value of money is the opportunity cost of passing up the earning potential of a dollar today  


A rational investor would receive $1,200 today rather than $100 per month for 12 months     


When using a financial calculator, cash outflows generally have to be entered as negative numbers, because a financial calculator sees money leaving your hands.   


John has to pay $1,000 per month for his mortgage for another 5 years, but he is considering paying the mortgage off in one lump sum. John cannot calculate the present value of the payments using the annuity formulas because his payments are monthly and not once per year    


To evaluate or compare investment proposals, we must adjust the value of cash flows to a common date    


An example of an annuity is the interest received from binds 


Bill saves $3,000 per year in his IRA starting at age 25 and continuing to age 65, when he retires. The amount Bill has in his IRA at age 65 can be characterized as the future value of annuity           


When repaying an amortized loan, the interest payments increase over time due to compounding process     


The future value of annuity due is greater than the future value of an otherwise identical ordinary annuity 


A return of 12% compounded annually is the same as a return of 1% per month