16) Working capital management is the day-to-day management of the operating needs of the
company via current assets and current liabilities.
17) Provide definitions for capital budgeting, capital structure, and working capital management.
Give an example of a capital budgeting type decision and then do the same for capital structure
and working capital management.
1) When there are conflicts among managerial goals in U.S. markets, the most important priority
is to ________.
A) increase the current market value of equity
B) keep all of the company’s customers happy
C) foster good relationships with the community
D) maintain a safe and happy work place
2) Maximizing the market value of firm equity and which of the following are mutually
exclusive?
A) Maximizing market value and a safe and happy work place are mutually exclusive.
B) Maximizing market value and good relationships with the local community are mutually
exclusive.
C) Maximizing market value and customer satisfaction are mutually exclusive.
D) None of the above is mutually exclusive with maximizing the value of market equity.
3) A firm’s stock price most closely reflects which of the following?
A) Current interest rates
B) Expected risk, magnitude, and timing of future cash flows of the firm
C) The amount and maturity of debt held by the firm
D) current federal tax codes
4) Which of the following can lead to increased expected cash flow over time to the firm?
A) Open and collaborative relations with the community
B) Qualified and motivated employees
C) Greater customer satisfaction
D) All of the above
5) According to the textbook, a good manager treats shareholders, customers, creditors, and
employees equally.
6) The primary objective of the finance manager is to maximize the market value of equity of the
company.
7) Stock prices reflect the expected size, risk, and timing of future cash flow of the company.
8) What is the primary goal of a financial manager? When you see firms like Enron imploding
from the behavior of executive management, how can you justify your definition?
9) The author claims that the goals of keeping customers happy, employees happy, and
shareholders happy are not mutually exclusive, even though the first two goals identified may be
costly and come at the expense of shareholders. How can this be?
10) How does maximizing the long-run expected cash flows to the firm translate into
maximizing shareholders’ wealth?
1) Of the following activities, which is MOST likely to be an interaction between the financial
manager and the information systems manager?
A) Developing a system to bill customers, pay suppliers, and track inventory
B) Costing of products
C) Setting credit policies
D) Determining the appropriate pricing of products
2) Of the following activities, which is NOT likely to be an interaction between the financial
manager and the marketing manager?
A) Costing of products
B) Setting credit policies
C) Determining that there are a sufficient number of trained workers to develop the product
D) Setting advertising budgets
3) Of the following activities, which is MOST likely to be an interaction between the financial
manager and the manufacturing manager?
A) Setting of credit policies
B) Developing a system to bill customers, pay suppliers, and track inventory
C) Budgeting the timing and amount of cash needed for the production schedule
D) Determining that there are a sufficient number of trained workers to develop the product
4) Of the following which group would be considered INTERNAL PLAYERS of the firm?
A) The finance manager
B) The shop foreman
C) The human resources manager
D) All of the above
5) Of the following which group would be considered EXTERNAL PLAYERS of the firm?
A) The loan officer at the firm’s commercial bank
B) The shop foreman
C) The human resources manager
D) The head of payroll and accounts payable
6) On a basic organizational chart for a company, the Finance Manager would be on the third
line, where the first line is the CEO and the second line contains titles such as Marketing
Manager and Human Resources Manager.
7) The Finance Manager works with the Marketing Manager to set credit policies for targeted
customers.
8) The Finance Manager works with the Marketing Manager to set annual sales targets.
9) What does the standard organizational chart show? In your answer, point out the functions
needed for a successful business.
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1.7 The Legal Forms of Business
1) A ________ is a business that is owned entirely by an individual.
A) sole proprietorship
B) partnership
C) subchapter S corporation
D) corporation
2) Which of the following is NOT an ADVANTAGE of a sole proprietorship?
A) The owner receiving all the after-tax profit
B) Limited liability
C) Quick decision making
D) It is the simplest and least complicated form of business organization.
3) Which of the following is an ADVANTAGE of a sole proprietorship?
A) The owner’s unlimited liability
B) The lack of continuity upon death of the owner
C) The ease of start up
D) The ability to raise capital
4) A ________ has limited liability, is a legal entity, and has the greatest potential to raise
capital.
A) sole proprietorship
B) general partnership
C) limited partnership
D) corporation
5) A ________ is a business that is jointly owned by two or more individuals.
A) partnership
B) sole proprietorship
C) subchapter S corporation
D) corporation
6) Which of the following is NOT a DISADVANTAGE of a partnership?
A) Unlimited liability to at least some of the owners
B) The limited life of the business
C) The potential difficulty in transferring ownership
D) All are disadvantages of a partnership.
7) Which of the following is NOT an ADVANTAGE of a partnership?
A) A potential increase in available capital over a sole proprietorship
B) The commingling with the general partner’s personal assets
C) The potential for more talent and skills in the business
D) All are advantages of a partnership.
8) Which of the following is NOT true of a sole proprietorship?
A) Sole proprietorships are the least regulated form of business.
B) Sole proprietorships are the easiest form of business to establish.
C) Sole proprietorships are the most popular form of business organization (more sole
proprietorships than other forms of business).
D) Sole proprietors have limited liability.
9) ________ is a major disadvantage of the corporate form of business.
A) Double taxation
B) Unlimited liability
C) Lack of ability to raise capital
D) Transfer of ownership
10) The form of business organization in the United States that has the greatest amount of capital
is ________.
A) the sole proprietorship
B) the partnership
C) the subchapter S corporation
D) the publicly traded corporation
11) Double taxation refers to which of the following scenarios?
A) Both bondholders AND shareholders of a corporation must pay taxes on proceeds received.
B) The corporation pays taxes on its earnings, and creditors pay taxes on interest received.
C) The corporation pays taxes on its earnings, and shareholders pay taxes on dividends received.
D) All of the above
12) In practice, ________.
A) the structure of the corporation separates owners from managers
B) the corporate board selects the main corporate officers
C) the corporate board is elected by the shareholders
D) all of the above are true
13) Limited liability is an advantage of the sole proprietorship.
14) The ability to raise capital is an advantage of the corporate form of business organization.
15) The sum of all the market value of publicly traded corporations in the United States exceeds
the combined value of partnerships and sole proprietorships.
16) Why are sole proprietorships so much more popular in terms of the number of firms than
corporations? (This answer should identify the significant advantages to the sole proprietorship
versus those of other forms of business organization.)
17) Define the term “limited liability” and state why you think it is an important feature of the
corporate form of organization.
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1.8 The Financial Management Setting: The Agency Model
1) ________ is the name given to the processes surrounding recognition of the principal-agent
problem and ways to align agents with the interests of the principals.
A) Principal theory
B) Interested party theory
C) Agency theory
D) Compensation process theory
2) In agency theory, the owners of the business are referred to as ________, and the managers
are referred to as ________.
A) bondholders, principals
B) stockholders, bondholders
C) agents, principals
D) principals, agents
3) Which of the following is NOT an example of an agency cost?
A) Paying an accounting firm to audit your financial statements
B) Paying an insurance company to assure that building codes have been met for new
construction
C) Paying a landscaping firm to maintain your firm’s grounds
D) The cost of designing contracts that satisfy creditors that their concerns will be met
4) The problem of motivating one party to act in the best interest of another party is known as the
________.
A) leadership directive
B) management priority
C) principal-agent problem
D) sigma six structure
5) Which of the following compensation packages is likely to work best for executive managers?
A) Piecemeal
B) Stock options
C) Quarterly bonuses
D) Commission
6) According to the annual Fortune Magazine list of top paid executives in America, what
percentage of annual compensation for the very highest paid managers comes in the form of
performance bonuses or stock options?
A) Less than 10%
B) Between 10% and 40%
C) Between 50% and 60%
D) Nearly 70%
7) In the agency model, the owners of corporations are the agents and the stockholders are the
principals.
8) The principal-agent problem is most severe for the sole proprietorship because there are fewer
owners who can monitor the relationship.
9) The problem of motivating one party to act in the best interest of another party is known as the
principal-agent problem.
10) Describe the principal-agent relationship. In your answer, give an example of how a
principal-agent problem arises in the corporate world. Can such a problem become costly?
Explain.
1) ________ is the area of business that deals with how a company conducts its business and
implements controls to ensure proper procedures and ethical behavior.
A) Leadership
B) Agency Relationship
C) Corporate Governance
D) Capital Budgeting
2) Of the following, which is the most recent example of legislation passed by the federal
government to deal with a major economic or highly visible corporate event?
A) The Federal Deposit Insurance Corporation Improvement Act
B) The Securities and Exchange Act
C) The Sarbanes-Oxley Act
D) The Securities Act of 1933
3) Which of the following is NOT a feature of the Sarbanes-Oxley Act?
A) The company and auditors must annually assess the effectiveness of financial controls.
B) The company must maintain effective internal financial controls.
C) The CEO and CFO must attest to the fairness of the financial reports.
D) Each of the above are features of the Sarbanes-Oxley Act.
4) Which of the following is NOT a generally accepted way to remove ineffective management
of a publicly traded firm?
A) The Board of Directors can vote to remove management.
B) The shareholders can vote out directors who won’t discipline managers.
C) Outside management teams can “take over” the company.
D) Each of the above are recognized methods for the removal of ineffective management.
5) The ________ removed the last segments of Federal law that separated investment banking
activities from commercial banking activities.
A) Gramm-Leach-Bliley Act
B) Sarbanes-Oxley Act
C) Federal Deposit Insurance Corporation Improvement Act
D) Glass-Steagall Act
6) The Sarbanes-Oxley Act (SOX) establishes requirements for documentation and procedures
within a company, especially as they relate to financial reporting.
7) The Sarbanes-Oxley Act (SOX) established the Securities and Exchange Commission (SEC).
8) What three major requirements resulted from the Sarbanes-Oxley Act?
1) Your finance text and this course can help you hone your problem-solving skills in part by
________.
A) learning that all factors in a decision are relevant and of equal importance
B) helping weigh the importance of various decision-making factors
C) assigning points to quantitative measures and grades to qualitative measures
D) helping to maximize factors of lesser importance to the decision-making process
2) This course may harm your chances of employability because of an unreasonable reliance of
technology for problem solving.
3) Perhaps the most important thing this course will help you develop is ________.
A) your skill set as a contract negotiator
B) your ability to manipulate a calculator
C) your set of analytical skills
D) your ability to distinguish among different types of financial statements