Business: Financial Markets

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BUS 530 FINancial Management

Homework 1

Note: Your answer for homework 1 must be or handed in class within 10 minutes of Wednesday class (1:10PM), January 25, 2012. No late assignment will be accepted. You only need to answer the questions in black.

Name: qinyu wu


( A) 1. The principal-agent problem
A. Occurs when managers have more incentive to maximize profits than the stockholders-owners do. B. Would not arise if the owners of the firm had complete information about the activities of the managers. C. In financial markets helps to explain why equity is a relatively important source of finance for American business. D. All of the above.

E. Only A and B of the above.

( B ) 2. In a partnership form of organization, income tax liability, if any, is incurred by:  A. The partnership itself.
B. The partners individually.
C. Both the partnership and the partners.
D. Neither the partnership nor the partners.

( A ) 3. One common reason for partnerships to convert to a corporate form of organization is that the partnership:  A. Faces rapidly growing financing requirements.
B. Wishes to avoid double taxation of profits.
C. Has issued all of its allotted shares.
D. Agreement expires after ten years of use.

( A) 4. When a corporation fails, the maximum that can lose by an investor protected by limited liability is:  A. The amount of the initial investment.
B. The amount of the profit on the investment.
C. The amount necessary to pay the corporation's debts.
D. The amount of the investor's personal wealth.

( A) 5. Which of the following is not an advantage to incorporating a business?  A. Easier access to financial markets.
B. Limited liability.
C. Becoming a permanent legal entity.
D. Profits taxed at the corporate level and the shareholder level. ( C ) 6. Unlimited liability is faced by the owners of:  A. Corporations.
B. Partnerships and corporations.
C. Sole proprietorships and partnerships.
D. All forms of business organization.

( C ) 7. "Double taxation" refers to: 
A. All partners paying equal taxes on profits.
B. Corporations paying taxes on both dividends and retained earnings. C. Paying taxes on profits at the corporate level and dividends at the personal level. D. The fact that marginal tax rates are doubled for corporations.

( C ) 8. Corporations are referred to as public companies when their:  A. Shareholders have no tax liability.
B. Shares are held by the federal or state government.
C. Stock is widely traded.
D. Products or services are available to the public.

( A) 9. In which of the following organizations would it be least likely to find the existence of agency problems?  A. A sole proprietorship.
B. A partnership.
C. A corporation.
D. A closely held corporation.

( B) 10. Which of the following is least likely to represent an agency problem?  A. Lavish spending on expense accounts.
B. Plush remodeling of the executive suite.
C. Excessive investment in "safe" projects.
D. Executive incentive compensation plans.

(D) 11. Money market securities generally have _______ liquidity. Capital market securities are typically expected to have a _______ annualized return. A. Less; higher
B. More; lower
C. Less; lower
D. More; higher

( C) 12. A dealer offers to buy shares of IBM at $126 and sell to investors at $128. The bid-ask spread is: A. $126
B. $128
C. $2
D. none of the above

( C) 13. Which of the following is not an example of capital market securities? A. Common stocks
B. Convertible bonds
C. Commercial paper
D. Mortgages

( C ) 14. Which of the following is not a characteristic of money market instruments? A. Short-term to maturity
B. Small denomination
C. Low default risk
D. High marketability

( B) 15. Investment banks like Morgan Stanley or Goldman Sachs:  A. Collect deposits and relend the cash to corporations and...
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