A few practice questions from chapters 1-5
Go over the problems below, provide an answer, bring your questions to class. Correct
answers in bold.
1. The mixture of debt and equity by the firm to finance its operations is called:
•Working capital management.
•Financial depreciation.
•Agency cost analysis
•Capital structure.
2. The management of the firm’s short-term assets and liabilities is called:
•Working capital management.
•Financial depreciation.
•Agency cost analysis.
•Capital budgeting.
•Capital structure.
3. The possibility of conflict of interest between the stockholders and management of the
firm is called:
•The shareholder’s conundrum.
•Corporate breakdown.
•The agency problem.
•Corporate activism.
•Legal liability.
4. Which of the following help ensure managers act in the best interest of owners?
•A compensation package for managers that ties their salary to the firm’s share
price.
•Managers are promoted only if the firm prospers.
•The threat that if the firm does poorly, shareholders will use a proxy to fight to
replace the existing management.
•There is a high degree of likelihood the firm will become a takeover candidate if
the firm does poorly.
•I and II only
•II and III only
•I, III, and IV only
•I, II, III, and IV
•I, II, III, and IV
5. Which of the following is a true statement concerning corporations?
•The equity that can be raised by the corporation is limited to the current
shareholders’ personal wealth.
•The life of the corporation is unlimited.
•The corporation has limited liability for business debts.
•When dividends are paid, corporate profits are taxed once.
•It is difficult to transfer ownership of corporate shares.
6. Which of the following would be considered a primary market transaction?
•A buy order to an investment banker for a new public stock offering.
•A buy order to a broker for shares of a company on NYSE.
•A buy order to a broker for shares of a company on AMEX.
•A buy order to a dealer for shares of a company on OTC.
•A buy order for a stock listed on a regional exchange.
7. The financial statement showing a firm’s accounting value on a particular date is the:
•Income statement.
•Balance sheet.
•Statement of cash flows.
•Tax reconciliation statement.
•Shareholder’s equity sheet.
8. The financial statement summarizing a firm’s performance over a period of time is the:
•Income Statement.
•Balance sheet.
•Statement of cash flows.
•Tax reconciliation statement.
•Shareholder’s equity sheet.
9. ___________ refers to the difference between a firm’s current assets and its current
