33) A ________ has all the respective rights and privileges of a legal person.
A) sole proprietorship
B) general partnership
C) limited partnership
D) corporation
E) limited liability company
34) 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) Joint stock company
C) Limited partnership
D) General partnership
E) Corporation
35) Sally and Alicia are equal general partners in a business. They are content with their current
management and tax situation but are uncomfortable with their unlimited liability. Which form
of business entity should they consider as a replacement to their current arrangement assuming
they wish to remain the only two owners of the business?
A) Sole proprietorship
B) Joint stock company
C) Limited partnership
D) Limited liability company
E) Corporation
36) The growth of both sole proprietorships and partnerships is frequently limited by the firm’s:
A) double taxation.
B) bylaws.
C) inability to raise cash.
D) limited liability.
E) agency problems.
37) Corporate dividends are:
A) tax-free because the income is taxed at the personal level when earned by the firm.
B) tax-free because they are distributions of aftertax income.
C) tax-free since the corporation pays tax on that income when it is earned.
D) taxed at both the corporate and the personal level when the dividends are paid to
shareholders.
E) taxable income of the recipient even though that income was previously taxed.
38) Financial managers should primarily focus on the interests of:
A) stakeholders.
B) the vice president of finance.
C) their immediate supervisor.
D) shareholders.
E) the board of directors.
39) Which one of the following best states the primary goal of financial management?
A) Maximize current dividends per share
B) Maximize the current value per share
C) Increase cash flow and avoid financial distress
D) Minimize operational costs while maximizing firm efficiency
E) Maintain steady growth while increasing current profits
40) Which one of the following best illustrates that the management of a firm is adhering to the
goal of financial management?
A) An increase in the amount of the quarterly dividend
B) A decrease in the per unit production costs
C) An increase in the number of shares outstanding
D) A decrease in the net working capital
E) An increase in the market value per share
41) Financial managers should strive to maximize the current value per share of the existing
stock to:
A) guarantee the company will grow in size at the maximum possible rate.
B) increase employee salaries.
C) best represent the interests of the current shareholders.
D) increase the current dividends per share.
E) provide managers with shares of stock as part of their compensation.
42) Decisions made by financial managers should primarily focus on increasing the:
A) size of the firm.
B) growth rate of the firm.
C) gross profit per unit produced.
D) market value per share of outstanding stock.
E) total sales.
43) The Sarbanes-Oxley Act of 2002 is a governmental response to:
A) decreasing corporate profits.
B) the terrorist attacks on 9/11/2001.
C) a weakening economy.
D) deregulation of the stock exchanges.
E) management greed and abuses.
44) Which one of the following is an unintended result of the Sarbanes-Oxley Act?
A) More detailed and accurate financial reporting
B) Increased management awareness of internal controls
C) Corporations delisting from major exchanges
D) Increased responsibility for corporate officers
E) Identification of internal control weaknesses
45) A firm which opts to “go dark” in response to the Sarbanes-Oxley Act:
A) must continue to provide audited financial statements to the public.
B) must continue to provide a detailed list of internal control deficiencies on an annual basis.
C) can provide less information to its shareholders than it did prior to “going dark”.
D) can continue publicly trading its stock but only on the exchange on which it was previously
listed.
E) ceases to exist.
46) The Sarbanes-Oxley Act of 2002 holds a public company’s ________ responsible for the
accuracy of the company’s financial statements.
A) managers
B) internal auditors
C) external legal counsel
D) internal legal counsel
E) Securities and Exchange Commission agent
47) Which one of the following actions by a financial manager is most apt to create an agency
problem?
A) Refusing to borrow money when doing so will create losses for the firm
B) Refusing to lower selling prices if doing so will reduce the net profits
C) Refusing to expand the company if doing so will lower the value of the equity
D) Agreeing to pay bonuses based on the market value of the company’s stock rather than on its
level of sales
E) Increasing current profits when doing so lowers the value of the company’s equity
48) Which one of the following is least apt to help convince managers to work in the best interest
of the stockholders? Assume there are no golden parachutes.
A) Compensation based on the value of the stock
B) Stock option plans
C) Threat of a company takeover
D) Threat of a proxy fight
E) Increasing managers’ base salaries
49) Agency problems are most associated with:
A) sole proprietorships.
B) general partnerships.
C) limited partnerships.
D) corporations.
E) limited liability companies.
50) Which one of the following is an agency cost?
A) Accepting an investment opportunity that will add value to the firm
B) Increasing the quarterly dividend
C) Investing in a new project that creates firm value
D) Hiring outside accountants to audit the company’s financial statements
E) Closing a division of the firm that is operating at a loss
51) Which one of the following is a means by which shareholders can replace company
management?
A) Stock options
B) Promotion
C) Sarbanes-Oxley Act
D) Agency play
E) Proxy fight
52) Which one of the following grants an individual the right to vote on behalf of a shareholder?
A) Proxy
B) By-laws
C) Indenture agreement
D) Stock option
E) Stock audit
53) Which one of the following parties has ultimate control of a corporation?
A) Chairman of the board
B) Board of directors
C) Chief executive officer
D) Chief operating officer
E) Shareholders
54) Which of the following parties are considered stakeholders of a firm?
A) Employees and the government
B) Long-term creditors
C) Government and common stockholders
D) Common stockholders
E) Long-term creditors and common stockholders
55) Which one of the following represents a cash outflow from a corporation?
A) Issuance of new securities
B) Payment of dividends
C) New loan proceeds
D) Receipt of tax refund
E) Initial sale of common stock
56) Which one of the following is a cash flow from a corporation into the financial markets?
A) Borrowing of long-term debt
B) Payment of government taxes
C) Payment of loan interest
D) Issuance of corporate debt
E) Sale of common stock
57) Which one of the following is a primary market transaction?
A) Sale of currently outstanding stock by a dealer to an individual investor
B) Sale of a new share of stock to an individual investor
C) Stock ownership transfer from one shareholder to another shareholder
D) Gift of stock from one shareholder to another shareholder
E) Gift of stock by a shareholder to a family member
58) Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This
transaction:
A) took place in the primary market.
B) occurred in a dealer market.
C) was facilitated in the secondary market.
D) involved a proxy.
E) was a private placement.
59) Public offerings of debt and equity must be registered with the:
A) New York Board of Governors.
B) Federal Reserve.
C) NYSE Registration Office.
D) Securities and Exchange Commission.
E) Market Dealers Exchange.
60) Which one of the following statements is generally correct?
A) Private placements must be registered with the SEC.
B) All secondary markets are auction markets.
C) Dealer markets have a physical trading floor.
D) Auction markets match buy and sell orders.
E) Dealers arrange trades but never own the securities traded.
61) Which one of the following statements concerning stock exchanges is correct?
A) NASDAQ is a broker market.
B) The NYSE is a dealer market.
C) The exchange with the strictest listing requirements is NASDAQ.
D) Some large companies are listed on NASDAQ.
E) Most debt securities are traded on the NYSE.
62) Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is
listed on the NYSE. This trade occurred in which one of the following?
A) Primary, dealer market
B) Secondary, dealer market
C) Primary, auction market
D) Secondary, auction market
E) Secondary, OTC market
63) Which one of the following statements is correct concerning the NYSE?
A) The publicly traded shares of a NYSE-listed firm must be worth at least $250 million.
B) The NYSE is the largest dealer market for listed securities in the United States.
C) The listing requirements for the NYSE are more stringent than those of NASDAQ.
D) Any corporation desiring to be listed on the NYSE can do so for a fee.
E) The NYSE is an OTC market functioning as both a primary and a secondary market.