978-0134083285 Chapter 1 Part 3

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66) The board of directors of Wireless, Inc. is considering two compensation plans for the CEO of the

company. The first would pay the CEO a salary of $250,000 for the upcoming year. The second would pay

the CEO a salary of $100,000 and provide the CEO with a stock option to buy 100,000 shares of stock for

$11 per share. The current price per share of Wireless, Inc. stock is $10 per share. The stock option expires

at the end of the year. Why might shareholders prefer the second payment plan? As part of your answer,

calculate the breakeven point for the CEO to obtain the same compensation under option two as he or she

would under option one.

Keywords: Agency Costs, Incentive Alignment, Stock Options

Learning Obj.: L.O. 1.2

AACSB: Reflective Thinking

Learning Objective 1.3

1) A corporate treasurer is typically responsible for cash management, credit management, and raising

capital.

Keywords: Treasurer, Financial Managers

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

2) Determining how a firm should raise money to fund its long-term investments is referred to as capital

structure decisions.

Keywords: Capital Structure Decisions

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

3) The chief financial officer (CFO) is responsible for overseeing financial planning, corporate strategic

planning, and controlling the firm’s cash flow.

Keywords: Chief Financial Officer

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

4) The financial manager most directly responsible for producing the company‘s financial statements and

directing its cost accounting functions is the

A) chief financial officer.

B) controller.

C) treasurer.

D) vice president-financier.

Keywords: Controller, Financial Managers

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

5) A corporate treasurer is typically responsible for each of the following duties EXCEPT

A) cash management.

B) credit management.

C) capital expenditures.

D) cost accounting.

Keywords: Treasurer, Financial Managers

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

6) The three basic types of issues addressed by the study of finance are

A) capital budgeting, capital structure decisions, and working capital management.

B) capital budgeting, working capital management, and investment analysis.

C) capital structure decisions, working capital management, and sustained profitability.

D) capital budgeting, investment analysis, and cash management.

Keywords: Capital Budgeting, Capital Structure, Working Capital Management

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

7) Cash and credit management are typically the responsibility of the

A) controller.

B) vice president of production and operations.

C) chief executive officer, or CEO.

D) treasurer.

Keywords: Treasurer

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

8) Working capital management is concerned with

A) how a firm can best manage its cash flows as they arise in its day-to-day operations.

B) how a firm should raise money to fund its investments.

C) what long-term investments a firm should undertake.

D) managing a firm’s capital stock.

Keywords: Working Capital Management

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

9) Capital budgeting is concerned with

A) whether a company‘s assets should be financed with debt or equity.

B) managing a firm’s cash budgeting procedures.

C) what long-term investments a firm should undertake.

D) planning sales of a corporation‘s equity capital.

Keywords: Capital Budgeting

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

10) Determining the best way to raise money to fund a firm’s long-term investments is called

A) the capital budgeting decision.

B) the portfolio decision.

C) the money flow processing decision.

D) the capital structure decision.

Keywords: Capital Structure Decisions

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

11) Your friend, John, believes that since capital markets are efficient, he doesn‘t need to read the financial

press or be involved in stock research before purchasing stocks for his portfolio. He simply throws darts

at the stock pages and buys the stocks the darts hit. Is stock research and analysis important when buying

and selling stocks in an efficient market?

Keywords: Efficient Capital Markets

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

12) What are the duties of a treasurer? Of a controller?

Keywords: Treasurer, Financial Managers

Learning Obj.: L.O. 1.3

AACSB: Reflective Thinking

Learning Objective 1.4

1) The sole proprietorship is for all practical purposes the absence of any formal legal business structure.

Keywords: Sole Proprietorship, Legal Forms of Business

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

2) A general partnership, unlike a limited partnership, is an entity that legally functions separate and

apart from its owners.

Keywords: General Partnership, Limited Partnership, Legal Forms of Business

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

3) The best form of business entity to attract new capital is the sole proprietorship because investors only

need to deal with one owner.

Keywords: Legal Forms of Business, Sole Proprietorship

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

4) S-type corporations and limited liability companies are taxed like partnerships, but have the advantage

of limited liability for their owners.

Keywords: Legal Forms of Business, S-Corporation, Limited Liability Company

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

5) Limited liability companies are more flexible than S-type Corporations because limited liability

companies operate under state laws.

Keywords: Legal Forms of Business, S-Corporation, Limited Liability Company

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

6) A limited liability company (LLC) is taxed like a partnership but provides limited liability for its

owners, similar to a corporation.

Keywords: Limited Liability Company, Partnership, Corporation, Limited Liability

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

7) Its ability to raise capital by selling stock makes the corporation the best form of organization in terms

of raising capital.

Keywords: Corporation, Advantages of Corporate Form

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

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

the owners in the limited partnership.

Keywords: Limited Partnership

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

9) The owners of a corporation enjoy limited liability.

Keywords: Corporation, Limited Liability

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

10) The corporation is a legal entity separate from its owners; thus it is possible for the corporation to

continue even upon the death of one or more shareholders.

Keywords: Corporation, Unlimited Life

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

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

incurred.

Keywords: Sole Proprietorship, Unlimited Liability

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

12) The procedure by which significant changes may be made to a partnership, such as admission of a

new partner or termination of the partnership, are governed by each state so no partnership agreement is

needed.

Keywords: Partnership, Partnership Agreement

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

13) In a limited partnership at least one general partner must exist; that general partner has unlimited

liability.

Keywords: Limited Partnership, General Partner, Unlimited Liability

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

14) A limited partnership provides limited liability to

A) all general partners.

B) only limited partners responsible for day to day management of the firm.

C) only to limited partners who do not participate in the management of the business.

D) all partners.

Keywords: Limited Partnership, Legal Forms of Business

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

15) Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it. If

Joe invests and the business loses the lawsuits, the most Joe can lose is

A) $10,000 if Joe is a general partner.

B) $10,000 if Joe is a sole proprietor.

C) $10,000 if Joe is a limited partner.

D) $10,000 plus his share of the lawsuits if Joe is a limited partner.

Keywords: Limited Partnership, Legal Forms of Business

Learning Obj.: L.O. 1.4

AACSB: Analytical Thinking

16) S-type corporations have all of the following advantages EXCEPT

A) they are taxed as partnerships.

B) the owners have limited liability.

C) distributions are taxed twice, similar to corporate dividend payments.

D) all owners must be people, no corporations.

Keywords: S-type Corporations, Legal Forms of Business

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

17) All of the following business organizations provide limited liability to their owners EXCEPT

A) general partnership.

B) S-type corporation.

C) corporation.

D) limited liability company.

Keywords: General Partnership, Legal Forms of Business

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking

18) Bill, a local inventor, developed a diet pill that he believes will solve the obesity problem in the United

States. Bill wants to create a new company, 50% owned by Bill and 50% owned by a major drug company.

Although he believes the pills are safe, Bill is concerned about liability if someone becomes sick or dies.

The best form of business organization for the new company is

A) sole proprietorship with Bill as owner and the drug company as creditor.

B) general partnership with Bill and the drug company as equal partners.

C) S-type corporation with Bill and the drug company owning equal shares.

D) limited liability company with Bill and the drug company owning equal shares.

Keywords: Limited Liability Company, Legal Forms of Business

Learning Obj.: L.O. 1.4

AACSB: Analytical Thinking

19) Which of the following statements about the corporate form of business organization is true?

A) The corporate form has the disadvantage of double taxation relative to a sole proprietorship.

B) The corporate form is preferred over the sole proprietorship because a corporation is easier to form

and faces less regulation.

C) Sole proprietorships are the most common form of business organization because liability is limited to

the amount invested in the business by the sole proprietor.

D) The corporate form has the advantage of unlimited liability.

Keywords: Corporation, Sole Proprietorship

Learning Obj.: L.O. 1.4

AACSB: Reflective Thinking