finance test 1

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1. ... ... 19. Corporations that do not issue may not be able to
financial securities such as stock or generate sufficient
2. Agency problems can best be differing incentives
debt obligations: funds to fulfill their
characterized as: between managers
needs.
and owners.
20. The cost of capital: for risky
3. Banks cover the costs of the an interest rate
investments is
service they provide primarily via: differential.
normally higher
4. The best criterion for success in a maximize the than the firm's
capital budgeting decision would difference between borrowing rate.
be to: cash inflows and cost.
21. "Double taxation" refers to: paying taxes on
5. A board of directors is elected as a shareholders profits at the
representative of the corporation's: corporate level and
6. A bond differs from a share of a bond has a maturity dividends at the
stock in that: date. personal level.

7. A capital investment that generates corporate bonds of 22. An example of a firm's financing issuing 10-year
a 10% rate of return is worthwhile if: similar risk offer 8% decision would be: versus 20-year
rates of return. bonds

8. A chief financial officer would supervise both the 23. An example of how financial providing a line of
typically treasurer and intermediaries can assist in shifting an credit.
controller. individual's consumption forward in
time is:
9. A common problem for closely lack of access to
held corporations is: substantial amounts 24. An example of how financial opening a savings
of capital intermediaries can assist in shifting an account.
individual's consumption to the future
10. A common problem for closely lack of access to
is:
held corporations is substantial amounts
of capital. 25. Excess cash held by a firm should be: reinvested by the
firm in projects
11. A company can pay for its by purchasing bonds
offering rates of
expansion in all the following ways in the secondary
return higher than
except: market.
the cost of capital.
12. Compared to buying stocks and Mutual funds are
26. A financial analyst in a corporation managing
bonds directly, what are the efficiently diversified
may be involved in: investment of the
advantages of investing in a mutual and professionally
company's cash.
fund? managed
27. A financial manager facing a capital buy new machinery
13. A corporate board of directors only when the board
budgeting decision must decide or repair the old.
should provide support for the top has confidence in
whether to:
management team: management's actions.
28. Financial markets and intermediaries: all of the other
14. Corporate debt instruments are in the over-the-
choices.
most commonly traded: counter market.
29. Financial markets are used for trading securities, such as
15. Corporate financing comes savings by
shares of IBM.
ultimately from: households and
foreign investors. 30. A firm decides to pay for a small financing decision.
investment project through a $1
16. A corporation is considered to be only a few
million increase in short-term bank
closely held when: shareholders exist.
loans. This is best described as an
17. Corporations are referred to as stock is publicly example of a(n):
public companies when their: traded.
31. Firms can alter their capital structure issuing stock to
18. A corporation's board of directors: can be voted out of by: repay debt.
power by the
32. For the consumer, a credit card all of the other
shareholders.
choices.
33. How may a reduction in cash The firm will have 48. The primary distinction between previous issuance
dividends be in the best interests available cash to securities sold in the primary and of the securities
of current shareholders? increase current secondary markets is the:
investment and future
49. The primary goal of corporate maximize the
profits.
management should be to: shareholders'
34. In a firm having both a treasurer Internal auditing wealth.
and a controller, which of the
50. A primary market would be utilized securities are
following would most likely be
when: initially issued.
handled by the controller?
51. Profit maximization is not a well- all of the other
35. In a large corporation, budget controller
defined corporate objective because: choices.
preparation would most likely be
conducted by the: 52. Property insurance companies protect buying
themselves against the extensive reinsurance
36. In the case of a professional only the business
damage caused by hurricanes and against such
corporation, ________ has/have
earthquakes by: catastrophes.
limited liability.
53. "Reinvestment" means additional
37. Investment banks like Merrill help companies sell
investment by
Lynch or Goldman Sachs: their securities to
existing
investors
shareholders
38. In which of the following A sole proprietorship
54. A share of IBM stock is purchased by The first investor
organizations would agency
an individual investor for $75 and later
problems be least likely to occur?
sold to another investor for $125. Who
39. The legal "life" of a corporation is: permanent, regardless profits from this sale?
of current ownership.
55. The short-term decisions of financial both investment
40. Liquidity is important to a mutual the fund's managers are comprised of: and financing
fund because: shareholders may decisions.
want to redeem their
56. Short-term financing decisions money markets.
shares at any time.
commonly occur in the:
41. Long-term financing decisions capital markets
57. Sole proprietorships resolve the issue forcing owners to
commonly occur in the
of agency problems by: bear the full cost
42. Long-term financing decisions capital markets. of their actions.
commonly occur in the:
58. The stockholders in a sole no one, sole
43. A managerial objective to increase the low-cost producer proprietorship are represented by proprietorship
market share is more likely to be in the industry. have no
successful in the long run if the stockholders
firm is
59. The term "capital structure" refers to the manner in
44. One common reason for faces rapidly growing which a firm
partnerships to convert to a financing requirements obtains its long-
corporate form of organization is term sources of
that the partnership: funding.
45. One corporate activity that is declaration of 60. Unlimited liability is faced by the sole
specifically reserved for the board dividends. owners of: proprietorships
of directors is the: and partnerships.
46. One reason suggesting that banks have information to 61. U.S. bonds and other debt securities institutional
may be better than individuals at evaluate are mostly held by: investors.
matching lenders to borrowers is creditworthiness.
62. When a corporation decides to issue financing
that banks:
long-term debt in order to pay for the decision.
47. The opportunity cost of capital: is the minimum acquisition of real assets, it has made a:
acceptable rate of
63. When a corporation fails, the maximum the amount of the
return on a project.
that can be lost by an investor initial investment.
protected by limited liability is:
64. When corporations need to raise primary market. 79. Which of the following groups is Competitors
funds through stock issues, they rely least likely to be considered a
on the: stakeholder of the firm?
65. When managers' compensation plans can be reduced. 80. Which of the following is least Rare coins
are tied in a meaningful manner to the liquid?
profits of the firm, agency problems:
81. Which of the following is not a Should the firm shut
66. When the management of a business corporation. financing decision? down an unprofitable
is conducted by individuals other than factory?
the owners, the business is more likely
82. Which of the following is not an Profits taxed at the
to be a:
advantage to incorporating a corporate level and
67. Which of the firm's financial managers Treasurer business? the shareholder level
is most likely to be involved with
83. Which of the following mutual funds Pension funds
obtaining financing for the firm?
have a tax advantage?
68. Which of the following actions does Converting your
84. Which of the following statements Financial assets
not help reduce risk? money market
best distinguishes the difference represent claims to
account to a
between real and financial assets? income that is
mutual fund
generated by real
account
assets.
69. Which of the following appears to be Maximizing market
85. Which of the following statements Financial assets
the most appropriate goal for value of the
best distinguishes the difference represent claims to
corporate management? company's shares
between real and financial assets income that is
70. Which of the following are both a Insurance generated by real
financial intermediary and a financial companies assets.
institution?
86. Which of the following statements The investor is
71. Which of the following are real A patent is generally not true for an investor subject to double
assets? who faces unlimited liability on an taxation.
investment?
72. Which of the following financial assets Bank loans made
might be least likely to have an active to smaller firms 87. Which of the following statements They are financial
secondary market? is not characteristic of mutual institutions.
funds?
73. Which of the following financial Insurance
intermediaries can loan money companies 88. Which of the following statements Monitors capital
directly to businesses? more accurately describes the expenditures to make
controller than the treasurer? sure that they are not
74. Which of the following financial Insurance
misappropriated
intermediaries has shown a companies
preference for investing in long-term 89. Which of the following would be Deciding to expand
financial assets? considered a capital budgeting into a new line of
decision? products, at a cost of
75. Which of the following financial NYSE
$5 million
markets is in one centralized
location? 90. Which of the following would be Profits taxed at only
considered an advantage of the one level
76. Which of the following financial NASDAQ
sole proprietorship form of
markets is not located in one
organization?
centralized location?
91. Which of the following would General partners
77. Which of the following forms of A salary that is
correctly differentiate general have unlimited
compensation is most likely to align paid partly in the
partners from limited partners in a personal liability.
the interests of managers and form of the
limited partnership?
shareholders? company's shares
92. Which of the following would not A corporate bond
78. Which of the following functions does Transporting of
be considered a real asset?
not require financial markets? cash across time
93. You can buy silver in the: commodities markets.