Module I Assignment

Complete this assignment only after you finish reading Chapter 1 of the assigned textbook and the
corresponding class notes (Module I Handout).
Section I: Conceptual Multiple Choice Questions
Choose the best answer for the questions in this section. The answers are available at the end of the
document. Many (but not all) of the quiz/exam conceptual questions from this module will be similar to the
questions below.
It is vital that you understand, and not memorize, the answers. To do this, you must do at least three
things. First, do not look at the answers until you have spent sufficient time on each question. Second, for
each question, make sure you can not only explain why a particular choice is the correct answer but, just
as importantly, also explain why the remaining choices are incorrect. On the exams/quizzes, you may be
asked to provide such explanations. Third, go back to your text/class notes to understand the underlying
concept if you answer a question incorrectly since you probably have a gap in your intuition.
1. Which of the following types of firms do not have limited liability?
a. Sole proprietorships
b. Limited partnerships
c.

Corporations

d. None of the above

2. Over four-fifths of all U.S. business revenue is generated by which type of firm?
a. Sole proprietorships
b. Partnerships
c.

Limited partnerships

d. Corporations
3. What is the most common type (in terms of numbers) of firm in the United States and the world?
a. Sole proprietorships
b. Partnerships
c.

Limited partnerships

d. Corporations
4. Which of the following could explain why a business might choose to organize as a corporation rather
than as a sole proprietorship or a partnership?
a. Corporations generally face fewer regulations.
b. Corporations generally face lower taxes.
c.

Corporations generally find it easier to raise capital.

d. Corporations enjoy unlimited liability.

e. Statements c and d are correct.

5. Which of the following is typically the major factor in limiting the growth of a sole proprietorship?
a. The organization of such firms tends to become extremely complicated over time.
b. It is impossible to transfer control of such a firm to a new owner if the present owner dies or
wishes to sell the firm.
c.

The amount of money that can be raised by the firm is limited by the fact that there is a single
owner and that the single owner must make good on all debts.

d. Investors have a great deal of control over the day-to-day running of the firm, leading to confusion
when conflicts in direction arise.
6. Joe is a general partner in a limited partnership firm, while Jane is a limited partner in that same firm.
Which of the following statements regarding their respective relationships to the firm are correct?
a. Joe has no management authority within the partnership.
b. Jane is legally involved in the managerial decision making of the firm.
c.

Jane's liability for the firm's debts consists solely of her investment in the firm.

d. Withdrawal of Jane from the partnership will dissolve that partnership.

7. What is the major way in which the roles and obligations of the owners of a limited liability company
differ from the roles and obligations of limited partners in a limited partnership?
a. The owners of a limited liability company have personal obligation for debts incurred by the
company.
b. The owners in a limited liability company have tax obligations arising from only personal taxes.
c.

The owners of a limited liability company can withdraw from the company without the company
being dissolved.

d. The owners of a limited liability company can take an active role in running the company.
8. In which of the following ways is a limited liability company like a corporation?
a. Both types of firm were created and developed first in the United States.
b. Both can choose to be considered a partnership for tax purposes.
c.

All of its owners' liability is restricted to their investment in the firm.

d. It is directly managed by the owners of the firm.

9. What is the process of double taxation for the stockholders in a C corporation?
a. Their shares are taxed when they are both bought and sold.
b. The corporation is taxed on the profits it makes, and the owners are taxed when this profit is
distributed to them.
c.

The owners of a corporation are taxed when they receive dividend payments and when they
make a profit from the sale of shares.

d. The corporation must pay taxes on any profits it makes, and the capital raised by the sale of
shares is also subject to taxation.

10. Which of the following features of a corporation is LEAST accurate?

a. The owners' identity is separate from the corporation.
b. The owners of the corporation have limited liability for the corporations debts.
c.

Changes in ownership do not result in the dissolution of the corporation.

d. Earnings from the corporation are taxed only once.

11. What is the advantage corporations have over other business entities?
a. It is easier for a corporation to raise capital than other forms of businesses.
b. A corporation is treated as a separate legal entity in bankruptcy.
c.

A corporation's shares can be freely traded among its shareholders.

d. All of the above are advantages that a corporation has over other business forms.
12. Which of the following people may not manage the operations of a firm in which they are part or full
owners?
a. Stockholders in S corporations
b. Stockholders in C corporations
c.

Limited partners in a limited partnership

d. General partners in a limited partnership

13. The primary goal of a manager of a publicly-owned firm (corporation) interested in serving its
stockholders should be to
a. Maximize expected total corporate profit.
b. Maximize expected EPS.
c.

Minimize the chances of losses.

d. Maximize the stock price per share.

e. Maximize expected net income.
14. Which of the following statements is CORRECT?
a. A hostile takeover is the main method of transferring ownership interest in a corporation.
b. Unlimited liability and limited life are two key advantages of the corporate form over other forms of
business organization.
c.

A corporation is a legal entity that is generally created by a state, and it has a life and existence
that is separate from the lives of its individual owners and managers.

d. Limited liability of its stockholders is an advantage of the corporate form of organization, but
corporations have more trouble raising money in financial markets because of the complexity of
this form of organization.
e. Although its stockholders are insulated by limited legal liability, the legal status of the corporation
does not protect the firms managers in the same way, i.e., bondholders can sue its managers if
the firm defaults on its debt, even if the default is the result of poor economic conditions.

15. A sole proprietorship is owned by

a. One person.
b. Two or more persons.
c.

Shareholders.

d. Bankers.
16. Which of the following statements is CORRECT?
a. In a regular partnership, liability for other partners misdeeds is limited to the amount of a
particular partners investment in the business.
b. Partnerships have more difficulty attracting large amounts of capital than corporations because of
such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity
(difficulty buying and selling) of partnership interests.
c.

A slow-growth company, with little need for new capital, would be more likely to organize as a
corporation than would a faster growing company.

d. In a limited partnership, the limited partners have voting control, while the general partner has
operating control over the business. Also, the limited partners are individually responsible, on a
pro rata basis, for the firms debts in the event of bankruptcy.
e. A major disadvantage of all partnerships relative to all corporations is the fact that federal income
taxes must be paid by the partners rather than by the firm itself.
17. Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a
new business in the chemical waste management field. She will be the sole owner, and she has
enough funds to finance the operation. The business will have a relatively high degree of risk, and it
is expected that the firm will incur losses for the first few years. However, the prospects for growth
and positive future income look good, and Jane plans to have the firm pay out all of its income as
dividends to her once it is well established. Which of the legal forms of business organization would
probably best suit her needs?
a. Proprietorship, because of ease of entry.
b. S corporation, to gain some tax advantages and also to obtain limited liability.
c.

Partnership, but only if she needs additional capital.

d. Regular corporation, because of the limited liability.

e. In this situation, the various forms of organization seem equally desirable.
18. Which of the following are major duties of a financial manager?
I.

To make investment decisions

II. To make financing decisions

III. To manage cash flow from operating activities
a. I only
b. I and II only
c.

I and III only

d. All of the above

19. What is the most important duty of a financial officer?

a. To ensure that the firm has enough cash on hand to meet its commitments at any given time
b. To decide how to pay for investments
c.

To manage working capital

d. To make investment decisions

20. Why in general do financial managers make financial decisions in a corporation, rather than the
owners making these decisions themselves?
a. The control of the corporations finances should to be in the hands of a disinterested third party.
b. The interests of the various owners may conflict with each other.
c.

The owners may not be U.S. citizens or residents.

d. There are often many owners, and they can often change as they buy and sell stock.
21. A typical company has many types of shareholders, from individuals holding a few shares, to large
institutions that hold very large numbers of shares. How does a financial manager ensure that the
priorities and concerns of such disparate stockholders are met?
a. The financial manager should seek to make investments that do not harm the interests of the
stockholders.
b. The decisions taken by the financial manager should be solely influenced by the benefit to the
company since, by maximizing its fitness, he or she will also maximize the benefits of that
company to the shareholders.
c.

The financial manager should consider the interests and concerns of large shareholders a
priority, so the needs of those who hold a controlling interest in the company are met.

d. In general, all shareholders will agree that they are better off if the financial manager works to
maximize equity value.
22. Money markets are markets for
a. Foreign stocks.
b. Consumer automobile loans.
c.

U.S. stocks.

d. Short-term debt securities.

e. Long-term bonds.
23. What is the bid-ask spread?
a. The difference in price available for an immediate sale of a stock and the immediate purchase of
that stock
b. All of the costs and fees that a stock exchange charges in order to process a transaction
c.

The rise or fall in the value of a stock between the time it is acquired by an investor and sold by
that investor

d. The difference in the selling price of a stock between different exchanges

24. Whose interests should a financial manager consider paramount when making a decision?
a. The stockholders who have risked their money to become owners of the company
b. The employees and associated stakeholders who are employed by the company
c.

The public who consume the company's goods and services

d. The senior management and associated colleagues at the executive level within the company
25. How do the shareholders of most corporations exercise their control of that corporation?
a. By voting on issues that concern them
b. By electing members of a board of directors
c.

By vetting every decision made by the board of directors

d. By providing oversight of the day to day running of the corporation

26. Which of the following is NOT a function of the board of directors?
a. Determining how top executives should be compensated
b. Monitoring the performance of the company
c.

Answering to shareholders of the company

d. Day-to-day running of the company

27. Which of the following need be true for an asset to be considered liquid?
a. It pays regular dividends.
b. It can be bought and sold at an organized stock market or bourse.
c.

It is offered for sale on both primary and secondary markets.

d. It can be easily bought and sold without affecting the assets price.
28. Why is a stock exchange like NASDAQ considered a secondary market?
a. It trades the second largest volume of shares in the world.
b. Shares sold on it are exchanged between investors without any involvement of the issuing
corporation.
c.

The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart

d. NASDAQ is called a secondary market because NYSE is considered a primary market.

29. You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a
broker, and the trade occurred on the NYSE. This is an example of
a. A futures market transaction.
b. A primary market transaction.
c.

A secondary market transaction.

d. A money market transaction.

e. An over-the-counter market transaction.

30. Which of the following is a primary market transaction?

a. You sell 200 shares of IBM stock on the NYSE through your broker.
b. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment
banker.
c.

You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you
just give him cash and he gives you the stock.

d. One financial institution buys 200,000 shares of IBM stock from another institution. An investment
banker arranges the transaction.
e. You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares
on the NYSE.
31. Which of the following statements is CORRECT?
a. If General Electric were to issue new stock this year it would be considered a secondary market
transaction since the company already has stock outstanding.
b. Capital market transactions only include preferred stock and common stock transactions.
c.

If an investor sells shares of stock through a broker, then this would be a primary market
transaction.

d. Both Nasdaq "dealers" and NYSE specialists hold inventories of stocks.

e. An electronic communications network (ECN) is a physical location exchange.
32. Which of the following statements is CORRECT?
a. Corporations generally are subject to fewer regulations and more favorable tax treatment than
sole proprietorships and partnerships. This is why corporations do most of the business in the
United States.
b. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize
shareholder value than are managers who do not face the threat of hostile takeovers.
c.

One advantage of the corporate form of organization is that liability of the owners of the firm is
limited to their investment in the firm.

d. Because of their simplified organization, it is easier for sole proprietorships and partnerships to
raise large amounts of outside capital than it is for corporations.
e. A good goal for a firms management is maximization of expected EPS.

33. Put the following steps of the financial cycle in the correct order:
I.

Money flows to companies who use it to fund growth through new products

II. People save and invest their money

III. Money flows back to savers and investors
a. I, II, III
b. II, I, III
c.

III, II, I

d. II, III, I

34. Which of the following is not a role of financial institutions?

a. Moving funds from savers to borrowers.
b. Spreading out risk-bearing.
c.

Printing money for borrowers.

d. Moving funds though time.

35. Which of the following statements is CORRECT?
a. One disadvantage of operating as a corporation rather than as a partnership is that corporate
shareholders are exposed to more personal liability than partners.
b. There is no good reason to expect a firm's stockholders and bondholders to react differently to
the types of new asset investments a firm makes.
c.

Bondholders are generally more willing than stockholders to have managers invest in risky
projects with high potential returns as opposed to safer projects with lower expected returns.

d. Stockholders are generally more willing than bondholders to have managers invest in risky
projects with high potential returns as opposed to safer projects with lower expected returns.
e. Relative to sole proprietorships, corporations generally face fewer regulations, and this makes it
easier for corporations to raise capital.

Section II: Long Answer Problems

Answer the problems below. The solutions to these problems are available at the end of the document.
Many (but not all) of the quiz/exam problems from this module will be similar to those below some will
be converted to multiple choice format while others will remain as long problems.
It is vital that you understand, and not memorize, the solutions. To do this, you must do at least three
things. First, do not look at the solution until you have spent sufficient time attempting to solve each
problem. Second, for each problem, make sure you can not only get the correct answer but, just as
importantly, also understand the steps you followed. Third, go back to your text/class notes to understand
the underlying concept if you solve a problem incorrectly since you probably have a gap in your intuition.

There are no problems for this module.

Answers to Section I
1. A
2. D
3. A
4. C
5. C
6. C
7. D
8. C
9. B
10. D
11. D
12. C
13. D
14. C
15. A
16. B
17. B
18. D
19. D
20. D
21. D
22. D
23. A
24. A
25. B
26. D
27. D
28. B
29. C
30. B
31. D
32. C
33. B
34. C
35. D

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Answers to Section II

There are no problems for this module.

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