Finance Management Overview

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CHAPTER 1

AN OVERVIEW OF FINANCIAL MANAGEMENT

Forms of business organizationAnswer: c

[i].Which of the following could explain why a business might choose to organize as a corporation rather than as a sole proprietorship or a partnership?

a.Corporations generally face fewer regulations.
b.Corporations generally face lower taxes.
c.Corporations generally find it easier to raise capital. d.Corporations enjoy unlimited liability.
e.Statements c and d are correct.

Firm organizationAnswer: a
[ii].Which of the following statements is most correct?

a.One advantage of forming a corporation is that you have limited liability. b.Corporations face fewer regulations than sole proprietorships. c.One disadvantage of being a sole proprietor is that you have to pay corporate taxes, even though you don’t realize the benefits of being a corporation. d.Statements b and c are correct.

e.None of the statements above is correct.

Firm organizationAnswer: c
[iii].Which of the following statements is most correct?

a.Corporations generally face fewer regulations than sole proprietor-ships do. b.Corporate shareholders have unlimited liability.
c.It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship. d.All of the above statements are correct.
e.None of the above statements is correct.

Goal of firmAnswer: d
[iv].The primary goal of a publicly-owned firm interested in serving its stockholders should be to

a.Maximize expected total corporate profit.
b.Maximize expected EPS.
c.Minimize the chances of losses.
d.Maximize the stock price per share.
e.Maximize expected net income.

AgencyAnswer: d

[v].Which of the following statements is most correct?

a.Compensating managers with stock can reduce the agency problem between stockholders and managers. b.Restrictions are included in credit agreements to protect bondholders from the agency problem that exists between bondholders and stockholders. c.The threat of a takeover can reduce the agency problem between bondholders and stockholders. d.Statements a and b are correct.

e.All of the statements above are correct.

AgencyAnswer: a
[vi].Which of the following work to reduce agency conflicts between stockholders and bondholders?

a.Including restrictive covenants in the company’s bond contract. b.Providing managers with a large number of stock options. c.The passage of laws that make it easier for companies to resist hostile takeovers. d.Statements b and c are correct.

e.All of the statements above are correct.

AgencyAnswer: b
[vii].Which of the following actions are likely to reduce agency conflicts between stockholders and managers?

a.Paying managers a large fixed salary.
b.Increasing the threat of corporate takeover.
c.Placing restrictive covenants in debt agreements.
d.All of the statements above are correct.
e.Statements b and c are correct.

Managerial incentivesAnswer: e

[viii].Which of the following mechanisms is used to motivate managers to act in the interest of shareholders?

a.Bond covenants.
b.The threat of a takeover.
c.Pressure from the board of directors.
d.Statements a and b are correct.
e.Statements b and c are correct.

Managerial incentivesAnswer: e
d.Statements a and b are correct.
e.Statements a and c are correct.

Miscellaneous conceptsAnswer: c
[ix].Which of the following statements is most correct?

a.A good goal for a corporate manager is maximization of expected EPS. b.Most business in the U.S. is conducted by corporations; corpo-rations’ popularity results primarily from their favorable tax treatment. c....
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