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Chapter 1 Introduction To CF - Student Version

This document discusses different types of business entities including sole proprietorships, general partnerships, limited partnerships, and corporations. It provides true/false and multiple choice questions about the characteristics and appropriate uses of these different business structures. The document also includes short answer questions about corporate financial management responsibilities, reasons for structuring as a sole proprietorship, liability differences, potential conflicts between manager and shareholder goals, and corporate ownership and agency issues.

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12 views

Chapter 1 Introduction To CF - Student Version

This document discusses different types of business entities including sole proprietorships, general partnerships, limited partnerships, and corporations. It provides true/false and multiple choice questions about the characteristics and appropriate uses of these different business structures. The document also includes short answer questions about corporate financial management responsibilities, reasons for structuring as a sole proprietorship, liability differences, potential conflicts between manager and shareholder goals, and corporate ownership and agency issues.

Uploaded by

namle999101
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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CHAPTER 1.

INTRODUCTION TO CORPORATE FINANCE

A. True/False Questions

1. The primary goal of financial management is to minimize corporate tax liability.


2. When owners are managers (such as in a sole proprietorship), a firm will have
agency costs
3. A goal or objective is a necessary first step for effective financial management.
4. Deciding on the total amount of assets needed by the firm is a key step in the
investment decision.
5. The goal of the firm should be to maximize earnings per share.

B. Multiple Choice Questions (25)


1. A business owned by a solitary individual who has unlimited liability for its debt is
called a:

A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.

2. A business formed by two or more individuals who each have unlimited liability for
all of the firm's business debts is called a:
A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited liability company.

3.A business partner whose potential financial loss in the partnership will not exceed
his or her investment in that partnership is called a:
A. generally partner.
B. sole proprietor.
C. limited partner.
D. corporate shareholder.

4.
A. articles of incorporation
B. corporate breakdown
C. agency problem
D. legal liability
b

24. Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the
venture but wants to limit his liability to his initial investment and has no interest in
the daily operations. Sam will contribute his full efforts on a daily basis but has
limited funds to invest in the business. Alfredo will be involved as an active
consultant and manager and will also contribute funds. Sam and Alfredo are willing
to accept liability for the firm's debts as they feel they have nothing to lose by doing
so. All three individuals will share in the firm's profits and wish to keep the initial
organizational costs of the business to a minimum. Which form of business entity
should these individuals adopt?
A. sole proprietorship
B. limited partnership
C. general partnership
D. corporation

25. Sally and Alicia currently are general partners in a business located in Atlanta,
Georgia. They are content with their current tax situation but are both very
uncomfortable with the unlimited liability to which they are each subjected. Which
form of business entity should they consider to replace their general partnership
assuming they wish to remain the only two owners of their business? Whichever
organization they select, they wish to be treated equally.
A. sole proprietorship
B. limited partnership
C. limited liability company
D. corporation

26. 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 purpose
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. Bond covenants are an effective way to resolve conflicts between shareholders
and managers

27. Which of the following statements is CORRECT?


A. One of the disadvantages of a sole proprietorship is that the proprietor is exposed
to unlimited liability
B. It is generally easier to transfer one’s ownership interest in a partnership than in a
corporation
C. One of the advantages of the corporate form of organization is that it avoids
double taxation
D. One of the advantages of a corporation from a social standpoint is that every
stockholder has equal voting rights, i.e., “one person, one vote”.
C. Short answer (5)

1. List and briefly describe the three general areas of responsibility for a financial
manager.

ed

2.Why are so many businesses structured as sole proprietorships when the corporate
form of business offers more advantages?

3. From a liability point of view, what is the difference between investing in a sole
proprietorship and a general partnership?

4. Give some examples of ways in which manager's goals can differ from those of
shareholders.

5. Who owns a corporation? Describe the process whereby the owners control the
firm’s management. What is the main reason that an agency relationship exists in the
corporate form of organization? In this context, what kinds of problems can arise?

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