1. This book is mainly about A. financial
decisions made by corporations. B. financial decisions made by households. C. financial decisions made by governments. D. financial decisions made by employees. Accessibility: Keyboard Keyboard Navigation Difficulty: Basic
2. Shareholders of a corporation may be, among others, . individuals. B. individuals and pension funds. C. pension funds. D. individuals, pension funds, and insurance companies. Accessibility: Keyboard Keyboard Navigation Difficulty: Intermediate
!. "enerally, a corporation is o#ned by its . managers. B. board of directors and shareholders. C. shareholders. D. managers, board of directors, and shareholders. Accessibility: Keyboard Keyboard Navigation Difficulty: Basic
$. corporation, potentially, potentially, has infinite life because it A. is
a legal entity. B. has the same o#nership and management. C. has limited liability. liability. D. is closely regulated. Accessibility: Keyboard Keyboard Navigation Difficulty: Intermediate
%. &imited liability is an important feature of . sole proprietorships. B. partnerships. C. corporations. D. both partnerships and corporations. Accessibility: Keyboard Keyboard Navigation Difficulty: Basic
'. s a legal entity, a corporation can perform the follo#ing functions except . borro# money and lend money. money. B. borro# money, lend money, money, and sue and be sued. C. vote. D. borro# money, lend money, money, sue and be sued, and vote. Accessibility: Keyboard Keyboard Navigation Difficulty: Intermediate
(. )hich of the follo#ing assets is tangible* A. +on-obils
corporate head/uarters building B. pple 0nc.s trademark C. e#lett3ackards most recent printer patent D. -icrosofts technical epertise Accessibility: Keyboard Navigation Difficulty: Intermediate
4. )hich of the follo#ing types of assets are intangible* . 3roduction machinery B. 5actories C. Trademarks D. 6ffice e/uipment Accessibility: Keyboard Navigation Difficulty: Intermediate
7. firms investment decision is also called its . financing decision. B. li/uidity decision. C. capital budgeting decision. D. leasing decision. Accessibility: Keyboard Navigation Difficulty: Intermediate
18. )hich of the follo#ing is not a financial asset* . Common stock B. Bank loans C. 3referred stock D. Buildings Accessibility: Keyboard Navigation Difficulty: Intermediate
11. )hich of the follo#ing is an important function of financial markets* . 3roviding financing B. 3roviding financing and li/uidity C. 3roviding financing, providing li/uidity, reducing risk, and providing information D. 3roviding information Accessibility: Keyboard Navigation Difficulty: Intermediate
12. Disadvantages of the corporate form include . agency costs. B. double taation. C. cost of managing the corporation. D. all of the options. Accessibility: Keyboard Navigation Difficulty: Intermediate
1!. 0n the principal9agent frame#ork, . shareholders are the principals. B. managers are the principals. C. managers are the agents.
D. shareholders
are the principals and managers are the agents. Accessibility: Keyboard Navigation Difficulty: Intermediate
1$. Costs associated #ith the conflicts of interest bet#een the bondholders and the shareholders of a corporation are called . legal costs. B. bankruptcy costs. C. administrative costs. D. agency costs. Accessibility: Keyboard Navigation Difficulty: Challenge
1%. corporation may incur agency costs because . managers may not attempt to maimi:e the value of the firm to shareholders. B. shareholders incur monitoring costs. C. of the separation of o#nership and management. D. all of the responses are correct. Accessibility: Keyboard Navigation Difficulty: Intermediate
1'. The follo#ing groups are some of the claimants to a firms income stream . shareholders and bondholders only. B. shareholders, bondholders, and employees only. C. shareholders, bondholders, employees, and management only. D. shareholders, bondholders, employees, management, and government. Accessibility: Keyboard Navigation Difficulty: Intermediate
1(. The financial goal of a corporation is to . maimi:e profits. B. maimi:e sales. C. maimi:e the value of the firm for the shareholders. D. maimi:e managers benefits. Accessibility: Keyboard Navigation Difficulty: Challenge
14. The firms purchase of real assets is also referred to a s the . capital structure decision. B. C56 decision. C. financing decision. D. capital investment decision. Accessibility: Keyboard Navigation Difficulty: Basic
17. The sale of financial assets by a corporation is also referred to as the . capital budgeting decision. B. C56 decision. C. financing decision. D. investment decision. Accessibility: Keyboard Navigation Difficulty: Basic
28. The choice of the proper miture of debt and e/uity, used to finance a corporation, is also referred to as the . capital budgeting decision. B. capital structure decision. C. investment decision. D. li/uidity decision. Accessibility: Keyboard Navigation Difficulty: Basic
21. )hich of the follo#ing groups are referred to as stakeholders* . +mployees, customers, and suppliers only B. Shareholders only C. +mployees and customers only D. +mployees, customers, shareholders, and suppliers Accessibility: Keyboard Navigation Difficulty: Intermediate
22. The follo#ing are eamples of real assets; A. machinery,
office buildings, and #arehouses only. B. machinery and office buildings only. C. common stock only. D. machinery only. Accessibility: Keyboard Navigation Difficulty: Basic
2!. The follo#ing are eamples of tangible assets except . machinery only. B. machinery and office buildings only. C. training courses for employees only. D. machinery, office buildings, and #arehouses only. Accessibility: Keyboard Navigation Difficulty: Basic
2$. The ultimate financial goal of a corporation is to . minimi:e stockholder risk. B. maimi:e profit. C. maimi:e the value of the corporation to the stockholders. D. increase the si:e of the firm. Accessibility: Keyboard Navigation Difficulty: Basic
2%. -r. 5ree has <188 income this year and :ero income net year. The market interest rate is 18 percent per year. 0f -r. 5ree consumes
2'. -r. Bird has <188 income this year and :ero income net year. The market interest rate is 18 percent per year. -r. Bird also has an investment opportunity in #hich he can invest <%8 today and receive <48 net year. Suppose -r. Bird consumes
2(. -s. >enus has <188 income this year and <118 net year. The market interest rate is 18 percent per year. Suppose -s. >enus consumes <'8 this year. )hat #ill be her consumption net year* . <128 B. <1%$ C. <1(8 D. 218 Accessibility: Keyboard Navigation Difficulty: Challenge
24. -r. Thomas has <188 income this year and :ero income net year. The market interest rate is 18 percent per year. -r. Thomas also has an investment opportunity in #hich he can invest <%8 this year and receive <48 net year. Suppose -r. Thomas consumes <%8 this year and invests in the pro=ect. )hat #ill be his consumption net year* . <%8 B. <%% C. <48 D. <118 Accessibility: Keyboard Navigation Difficulty: Challenge
27. -r. Dell has <188 income this year and :ero income net year. The epected return from investing in the stock market is 18 percent a year. -r. Dell also has an investment opportunity?having the same risk as the market in #hich he can invest <%8 this year and receive <48 net year. Suppose -r. Dell consumes <%8 this year and invests in the pro=ect. )hat is the @3> of the investment opportunity* . <8 B. <% C. <22.(! D. @one of the options Accessibility: Keyboard Navigation Difficulty: Challenge
!8. -s. nderson has <'8,888 income this year and <$8,888 net year. The market interest rate is 18 percent per year. Suppose -s. nderson consumes <48,888 this year. )hat #ill be h er consumption net year* A. <14,888
B.
!1. The line that connects the maimum that one can consume this year Ano#, on the hori:ontal ais and the maimum one can consume net year . has a slope of A1 r .
B. has
a slope of A1 r . C. has a slope of r . D. has a slope of 1 r . Accessibility: Keyboard Navigation Difficulty: Challenge
!2. -s. @e#castle has <'8,888 income this year and <$8,888 net year. The market interest rate is 18 percent per year. Suppose -s. @e#castle #ishes to consume <'2,888 net year. )hat #ill be her consumption this year* . <17,888 B. <$8,888 C. <'8,888 D. <(8,888 Accessibility: Keyboard Navigation Difficulty: Challenge
!!. -r. Smith has an income of <$8,888 this year and <'8,888 net year. e can invest in a pro=ect that costs
!$. The board of directors is ultimately responsible for all large investment decisions. TRUE
Accessibility: Keyboard Navigation Difficulty: Intermediate
!%. corporation has a legal eistence of its o#n and is based on Earticles of incorporation. TRUE
Accessibility: Keyboard Navigation Difficulty: Basic
!'. Feal assets of a corporation are claims on their financial assets. FALSE
Accessibility: Keyboard Navigation Difficulty: Intermediate
!(. firms total asset value belongs entirely to the shareholders. FALSE
Accessibility: Keyboard Navigation Difficulty: Intermediate
!4. -anagers, shareholders, and the firms debtholders have identical information about the value of the firm. FALSE
Accessibility: Keyboard Navigation Difficulty: Intermediate
!7. +plain the term corporation. corporation is a legal entity and has an eistence of its o#n. "enerally, large businesses are organi:ed as corporations. Difficulty: Basic
$8. Briefly eplain the term limited liability. The shareholders of a corporation cannot be held personally responsible for the debts of the corporation. This is called limited liability. ence, a shareholders loss is limited to the amount he or she has invested in a corporation. This is an attractive feature for investors. Difficulty: Intermediate
$1. Briefly eplain the advantages of a corporation as a form of business organi:ation. Corporations have infinite life. Corporations have very many o#ners called shareholders and therefore corporations can raise funds more easily than other forms of business. There is a separation of o#nership and management that is helpful in running the corporation on a dayto day basis. 0t is relatively easy to transfer o#nership in a corporation. Corporations have limited liability. Difficulty: Intermediate
$2. Briefly eplain the se/uence of cash flo#s bet#een financial markets and the firm. Cash is raised by selling financial assets to investors. Cash is invested in the firms operation and used to purchase real assets. Cash is generated by the firms operations. Cash is reinvested or returned to investors. Difficulty: Intermediate
$!. Briefly eplain the functions of financial markets. There are five important functions of financial markets. They are providing financing for corporations. providing li/uidity for investors. reducing risk for investors. providing information. monitoring firms financial performance. Difficulty: Intermediate
$$. Briefly discuss the role of financial managers. Chief financial officer AC56; Supervises the treasurer and the controller in a large corporation. The C56 is involved in corporate planning and financial policy.
Treasurer; 0s responsible for obtaining funds and managing cash, banking relationships, and investor relationships. Controller; 0s responsible for accounting functions, payroll, and taes. Difficulty: Intermediate
$%. Briefly eplain the term agency costs as related to a corporation gency costs arise in a corporation as a result of principal9agent problems. 5or eample, managers may not act in the best interests of shareholders #hile making decisions. ence, shareholders incur monitoring costs that are called agency costs. gency costs also arises as a result of informational asymmetry bet#een managers and other stakeholders of a firm. gency costs tend to reduce the value of a firm. Difficulty: Intermediate
$'. Briefly discuss principal9agent problems as related to a corporation. 3rincipal9agent problems arise in a corporation as a result of the separation of o#nership and management. -anagers may not act in the best interests of the shareholders #hile making decisions. ence, shareholders incur monitoring and bonding costs, #hich are a part of agency costs. 0t also arises as a result of informational asymmetry bet#een managers and other stakeholders of a firm. gency costs tend to reduce the value of a firm. Difficulty: Intermediate
$(. +plain #hy Gmaimi:ation of shareholders #ealthH is the appropriate ultimate longterm goal o f the firm. Inder perfect market conditions, everyone can borro# or lend at the same interest rate. This implies that differences in consumption patterns can be ad=usted in the financial markets. "iven this, all investors #ill agree that they are better off if the firm maimi:es their current #ealth Ai.e., maimi:ing shareholders #ealth. Difficulty: Challenge
$4. Briefly eplain some of the institutional arrangements that ensure that managers #ork to#ard increasing the value of a firm. The board of directors, elected by shareholders, #hich scrutini:es managers actions Competition among managers The threat of takeover that brings a ne# management team 0ncentive schemes that are closely tied to the value of the firm like stock options Difficulty: Intermediate
$7. Briefly eplain ho# individuals can ad=ust their current and future consumption according to their preferences. 0ndividuals can ad=ust their preferences for consumption by borro#ing or lending in the financial market. The appropriate balance bet#een present and future consumption that each individual #ill choose depends on personal preferences. @evertheless, individuals #ith different preferences can ad=ust their preferences using the financial market. 0ndividuals desiring current consumption can borro# from future income. -ean#hile, individuals favoring future consumption can refrain from current consumption and invest in the same financial market. Difficulty: Challenge
Category
ccessibility; Jeyboard @avigation
of !uestions !4
Difficulty; Basic
11
Difficulty; Challenge
1!
Difficulty; 0ntermediate
2%