978-0132757089 Chapter 01 Part 1

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Financial Management: Principles and Applications, 11e (Titman)

Chapter 1 Getting Started-Principles of Finance

1) Which of the following statements best represents what finance is about?

A) How political, social, and economic forces affect corporations

B) Maximizing profits

C) Creation and maintenance of economic wealth

D) Reducing risk

Topic: 1.1 Finance: An Overview

Keywords: what is finance?

Principles: Principle 3: Cash Flows Are the Source of Value

2) The goal of the firm should be:

A) maximization of profits.

B) maximization of shareholder wealth.

C) maximization of consumer satisfaction.

D) maximization of sales.

Topic: 1.1 Finance: An Overview

Keywords: shareholder

Principles: Principle 3: Cash Flows Are the Source of Value

3) Which of the following factors enable a public corporation to grow to a greater extent, and

perhaps at a faster rate, than a partnership or a proprietorship?

A) Unlimited liability of shareholders

B) Access to the capital markets

C) Limited life

D) Elimination of double taxation on corporate income

E) All of the above

Topic: 1.1 Finance: An Overview

Keywords: corporation

4) Which of the following reasons is most responsible for corporations being the most important

form of business organization in the United States?

A) Corporations have limited life.

B) Stockholders have unlimited liability.

C) Corporations are subject to less government regulation than the other forms of business

organization.

D) Corporations have the ability to raise larger sums of capital than the other forms of business

organization.

E) Corporations are subjected to less taxation than the other forms of business organization.

Topic: 1.1 Finance: An Overview

Keywords: corporation

5) Difficulty in finding profitable projects is due to:

A) social responsibility.

B) competitive markets.

C) ethical dilemmas.

D) opportunity costs.

Topic: 1.1 Finance: An Overview

Keywords: competitive markets

Principles: Principle 2: There Is a Risk-Return Tradeoff

6) Which of the following is NOT a principle of basic financial management?

A) Risk/return tradeoff

B) Incremental cash flow counts

C) Efficient capital markets

D) Profit is king

Topic: 1.1 Finance: An Overview

Keywords: basic financial management principles

7) The corporation is the most effective form of organization in terms of raising capital.

Topic: 1.1 Finance: An Overview

Keywords: corporation

8) Ethical dilemmas frequently exist in finance.

Topic: 1.1 Finance: An Overview

Keywords: what is finance?

9) Compare and contrast primary market and secondary market transactions as it relates to the

flow of funds in the transactions.

Topic: 1.1 Finance: An Overview

Keywords: primary market transactions, secondary market transactions

1) Which of the following is NOT an advantage of the sole proprietorship?

A) Limited liability

B) No time limit imposed on its existence

C) No legal requirements for starting the business

D) None of the above

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

2) What is the chief disadvantage of the sole proprietorship as a form of business organization

when compared to the corporate form?

A) Sole proprietorships are subject to double taxation of profits.

B) The cost of formation.

C) Inadequate profit sharing.

D) Owners have unlimited liability.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

3) Which of the following is NOT true for limited partnerships?

A) Limited partners can only manage the business.

B) One general partner must exist who has unlimited liability.

C) Only the name of general partners can appear in the name of the firm.

D) Limited partners may sell their interest in the company.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

4) The true owners of the corporation are the:

A) holders of debt issues of the firm.

B) preferred stockholders.

C) board of directors of the firm.

D) common stockholders.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

5) In terms of organizational costs, which of the following sequences is generally correct,

moving from lowest to highest cost?

A) General partnership, sole proprietorship, limited partnership, corporation

B) Sole proprietorship, general partnership, limited partnership, corporation

C) Corporation, limited partnership, general partnership, sole proprietorship

D) Sole proprietorship, general partnership, corporation, limited partnership

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

6) Assume that you are starting a business. Further assume that the business is expected to grow

very quickly and a great deal of capital will be needed soon. What type of business organization

would you choose?

A) Corporation

B) General Partnership

C) Sole proprietorship

D) Limited partnership

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

7) Which one of the following categories of owners enjoys limited liability?

A) General partners in a limited partnership

B) Shareholders (common stock) of a corporation

C) Sole proprietors

D) Both A and B

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

8) Which of the following is a characteristic of a limited partnership?

A) It allows one or more partners to have limited liability.

B) It requires one or more of the partners to be a general partner to whom the privilege of limited

liability does not apply.

C) It prohibits the limited partners from participating in the management of the partnership.

D) All of the above.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

9) Which of the following categories of owners have limited liability?

A) General partners

B) Sole proprietors

C) Shareholders of a corporation

D) Both A and B

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

10) Which of the following types of business forms is the most ideal in terms of attracting new

capital?

A) Sole proprietorship

B) Limited partnership

C) General partnership

D) A public corporation

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

11) Which forms of organization are free of initial legal requirements?

A) Sole proprietorship

B) General partnership

C) Corporation

D) Both A and B

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

12) For these types of organization, no distinction is made between business and personal assets.

A) Sole proprietorship

B) General partnership

C) Limited partnership

D) All of the above

E) Both A and B

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

13) Which of the following is a significant disadvantage of a general partnership?

A) The cost of forming it is high.

B) Each partner is fully responsible for the liabilities incurred by the partnership.

C) There is a risk associated with the industry in which it operates.

D) Forming the business is very complex.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

14) Which of the following forms of business organization is the dominant economic force in the

United States?

A) The sole proprietorship

B) The general partnership

C) The limited partnership

D) The joint venture

E) The corporation

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

15) A limited liability company (LLC) is:

A) able to retain limited liability for owners.

B) taxed like a corporation.

C) a cross between a partnership and a corporation.

D) A and C.

E) all of the above.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

16) Purchasing a security of a company that is issuing their stock for the first time publicly

would be considered:

A) a secondary market transaction.

B) an initial public offering.

C) a seasoned new issue.

D) both A and B.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

17) Corporations receive money from investors with:

A) initial public offerings.

B) seasoned new issues.

C) primary market transactions.

D) A and B.

E) all of the above.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

18) IBM issuing new shares of common stock would be classified as:

A) a new seasoned issue.

B) an initial public offering.

C) a secondary market transaction.

D) A and B.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

19) The sole proprietorship is the same as the individual for liability purposes.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

20) In a general partnership, all partners have unlimited liability for the actions of any one

partner when that partner is conducting business for the firm.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

21) There is no legal distinction made between the assets of the business and the personal assets

of the owners in the limited partnership.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

22) The owners of a corporation are liable for the corporation’s obligations up to the amount of

their investment.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

23) General partners have unrestricted transferability of ownership, while limited partners must

have the consent of all partners to transfer their ownership.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

24) Ultimate control in a corporation is vested in the board of directors.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

25) Owners must register and pay yearly fees to their State of residence when establishing a sole

proprietorship.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

26) Limited partners may actively manage the business.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

27) The life of a corporation is not dependent upon the status of the investors.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

28) A sole proprietorship is the most desirable business form in all circumstances.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

29) In a sole proprietorship, the owner is personally responsible without limitation for the

liabilities incurred.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

30) In a limited partnership, at least one general partner must remain in the association; the

privilege of limited liability still applies to this partner.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

31) In a general partnership, each partner is liable for the partnership’s obligations only up to a

percentage of the obligation equal to that partner’s percentage of ownership of the partnership.

Topic: 1.2 Three Types of Business Organizations

Keywords: corporation

Principles: Principle 1: Money Has a Time Value

1) Maximization of shareholder wealth as a goal is superior to profit maximization because:

A) it considers the time value of the money.

B) following the shareholder wealth maximization goal will ensure high stock prices.

C) it considers uncertainty.

D) A and C.

Topic: 1.3 The Goal of the Financial Manager

Keywords: shareholder wealth maximization

Principles: Principle 3: Cash Flows Are the Source of Value

2) Which of the following best describes the goal of the firm?

A) The maximization of the total market value of the firm’s common stock

B) Profit maximization

C) Risk minimization

D) None of the above

Topic: 1.3 The Goal of the Financial Manager

Keywords: goal of the firm

Principles: Principle 3: Cash Flows Are the Source of Value

3) Profit maximization does not adequately describe the goal of the firm because:

A) profit maximization does not require the consideration of risk.

B) profit maximization ignores the timing of a project’s return.

C) maximization of dividend payout ratio is a better description of the goal of the firm.

D) A and B.

Topic: 1.3 The Goal of the Financial Manager

Keywords: profit maximization

Principles: Principle 3: Cash Flows Are the Source of Value

4) Which of the following goals of the firm is equivalent to the maximization of shareholder

wealth?

A) Profit maximization

B) Risk minimization

C) Maximization of the total market value of the firm’s common stock

D) None of the above

Topic: 1.3 The Goal of the Financial Manager

Keywords: goal of the firm

Principles: Principle 3: Cash Flows Are the Source of Value