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Practice test for final exam 2

by: Leosinh

Practice test for final exam 2 FIN 323

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Practice test for final exam 2
Principles of Finance
Dr. Shaorong Zhang
Class Notes
Corporate Finance
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This 12 page Class Notes was uploaded by Leosinh on Tuesday April 26, 2016. The Class Notes belongs to FIN 323 at Marshall University taught by Dr. Shaorong Zhang in Spring 2016. Since its upload, it has received 291 views. For similar materials see Principles of Finance in Business at Marshall University.


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Date Created: 04/26/16
Practice test for Final Exam : Part 2 A board of directors is elected as a representative of the corporation's: 1. A. top management. 2. B. stakeholders. 3. C. shareholders. 4. D. customers. Corporations that issue financial securities such as stock or debt obligations to the public do so primarily to: 1. A. increase sales. 2. B. become profitable. 3. C. increase their access to funds. 4. D. avoid double taxation of their profits. A corporation is considered to be closely held when: 1. A. only a few shareholders exist. 2. B. the market value of the shares is stable. 3. C. it operates in a small geographic area. 4. D. management also serves as the board of directors. Which of the following is a capital budgeting decision? 1. A. Should the firm borrow money from a bank or sell bonds? 2. B. Should the firm shut down an unprofitable factory? 3. C. Should the firm buy or lease a new machine that it is committed to acquiring? 4. D. Should the firm issue preferred stock or common stock? Which one of the following is a real asset? 1. A. A patent 2. B. A personal IOU 3. C. A checking account balance 4. D. A share of stock Which form of organization provides limited liability for the firm but yet allows the professionals working within that firm to be sued personally? 1. A. Limited liability partnership 2. B. Limited liability company 3. C. Sole proprietorship 4. D. Professional corporation When the management of a business is conducted by individuals other than the owners, the business is most likely to be a: 1. A. corporation. 2. B. sole proprietorship. 3. C. partnership. 4. D. general partner. Which one of these statements correctly applies to a limited partnership? 1. A. All partners share the daily management duties. 2. B. All partners enjoy limited personal liability. 3. C. General partners have unlimited personal liability. 4. D. Taxes are imposed at both the firm and the personal level on profits earned. Corporate raiders will be looked upon most favorably if they: 1. A. divide up large profitable entities. 2. B. take actions that increase current shareholder wealth. 3. C. create value for themselves through their actions. 4. D. change the capital structure of a firm by increasing its debt. A financial analyst in a corporation may be involved with all of the following EXCEPT: 1. A. analyzing a new investment project. 2. B. monitoring risk. 3. C. managing investment of the company's cash. 4. D. purchasing the firm's plant and equipment. A manager's compensation plan that offers financial incentives for increases in quarterly profitability may create agency problems in that: 1. A. the managers are not motivated by personal gain. 2. B. the board of directors may claim the credit. 3. C. short-term, not long-term profits become the focus. 4. D. investors desire stable profits. A corporate board of directors should provide support for the top management team: 1. A. under all circumstances. 2. B. in all decisions related to cash dividends. 3. C. only when the board approves of management's actions. 4. D. if shareholders are pleased with the firm's performance. Which one of the following statements more accurately describes the controller than the treasurer? 1. A. Reports directly to the chief executive officer 2. B. Monitors capital expenditures to make sure that they are not misappropriated 3. C. Responsible for investing the firm's spare cash 4. D. Responsible for arranging any issue of common stock In which of the following organizations would agency problems be least likely to occur? 1. A. A sole proprietorship 2. B. A partnership 3. C. A corporation 4. D. A closely held corporation Which one of these determines the minimum acceptable rate of return on a capital investment? 1. A. The available alternative investment opportunities 2. B. The profit margin of the existing firm 3. C. The rate of return on the firm's outstanding shares 4. D. The rate of return on risk-free debt securities Ethical decision making by management has a payoff for shareholders in terms of: 1. A. improved capital structure. 2. B. enhanced firm reputation value. 3. C. increased managerial benefits. 4. D. higher current dividend payments. How may a reduction in cash dividends be in the best interests of current shareholders? 1. A. A reduction of cash dividends is always in the best interests of current shareholders. 2. B. The firm will have available cash to increase current investment and future profits. 3. C. Reduced dividends increase managerial compensation, thus increasing managers' motivation. 4. D. A reduction of cash dividends cannot be in the best interests of current shareholders. Financial managers should only accept investment projects that: 1. A. increase the current profits of the firm. 2. B. can increase the firm's market share. 3. C. earn a higher rate of return than the firm currently earns on its existing projects. 4. D. earn a higher rate of return than shareholders can get by investing on their own. Which of the following is least likely to represent an agency problem? 1. A. Lavish spending on expense accounts 2. B. Plush remodeling of the executive suite 3. C. Excessive avoidance of taxes 4. D. Executive incentive compensation plans A corporate director: 1. A. is selected by and can be removed by management. 2. B. can be voted out of power by the shareholders. 3. C. has a lifetime appointment to the board. 4. D. is selected by a vote of all corporate stakeholders. One continuing problem with managerial incentive compensation plans is that: 1. A. the plans increase agency problems. 2. B. managers prefer guaranteed salaries. 3. C. their effectiveness is difficult to evaluate. 4. D. the plans do not reward shareholders. Which one of the following forms of compensation is most apt to align the interests of managers and shareholders? 1. A. A fixed salary 2. B. A salary that is linked to current company profits 3. C. A salary that is paid partly in the form of the company's shares 4. D. A salary that is linked to the company's market share A firm's reputation: 1. A. has no value. 2. B. is an important firm asset. 3. C. is irrelevant to shareholders. 4. D. can be easily restored once damaged. Agency problems can best be characterized as: 1. A. dislike of firm's bondholders by its equityholders. 2. B. differing incentives between managers and owners. 3. C. spending of corporate resources. 4. D. friction between managers and employees. Which of the following groups is least likely to be considered a stakeholder of the firm? 1. A. Government 2. B. Customers 3. C. Competitors 4. D. Employees Agency problems can least be controlled by: 1. A. establishing good internal controls and procedures. 2. B. designing compensation packages that align manager's goals with those of the shareholders. - Given 3. C. corporate governance. 4. D. electing senior managers to the board of directors. Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm? 1. A. Treasurer 2. B. Controller - Given 3. C. Chief Operating Officer 4. D. Board of directors The short-term decisions of financial managers are comprised of: 1. A. capital structure decisions only. 2. B. investment decisions only. 3. C. financing decisions only. 4. D. both investment and financing decisions. The primary goal of corporate management should be to: 1. A. maximize the number of shareholders. 2. B. maximize the firm's profits. 3. C. minimize the firm's costs. 4. D. maximize the shareholders' wealth. Short selling involves selling a security: 1. A. you do not own. 2. B. that you have owned for less than one year. 3. C. at a price below current market value. 4. D. for less than you originally paid to purchase it. Which one of these best defines the objective of a well-functioning financial market? 1. A. Establishing accurate security prices 2. B. Creating higher security prices 3. C. Eliminating short-selling profits 4. D. Increasing shareholder value by any means possible Ethical decision making in business: 1. A. reduces the firm's profits. 2. B. requires adherence to implied rules as well as written rules. 3. C. is not in the best interests of shareholders. 4. D. is less important than good capital budgeting decisions. Which of the following is a real asset? 1. A. A patent 2. B. A share of stock issued by Bank of New York 3. C. An IOU ("I owe you") from your brother-in-law 4. D. A mortgage loan taken out to help pay for a new home Which one of these statements is correct? 1. A. A dollar received next year has the same value as a dollar received today. 2. B. Risky cash flows are more valuable than certain cash flows. 3. C. Smart investment decisions create more value than smart financing decisions. 4. D. Corporate governance is irrelevant. When managers' compensation plans are tied in a meaningful manner to the profits of the firm, agency problems: 1. A. can be reduced. 2. B. will be created. 3. C. are shifted to other stakeholders. 4. D. are eliminated entirely from the firm. A block holder is commonly defined as an investor who: 1. A. owns 5 percent or more of a firm's outstanding shares. 2. B. invests in more than one firm within the same industry. 3. C. is another corporation. 4. D. is also one of the firm's managers or directors. In a large corporation, budget preparation would most likely be conducted by the: 1. A. treasurer. 2. B. controller. 3. C. chief financial officer. 4. D. financial manager. A chief financial officer would typically: 1. A. report to the treasurer, but supervise the controller. 2. B. report to the controller, but supervise the treasurer. 3. C. report to both the treasurer and controller. 4. D. supervise both the treasurer and controller. Which of the following appears to be the most appropriate goal for corporate management? 1. A. Maximizing market value of the company's shares 2. B. Maximizing the company's market share 3. C. Maximizing the current profits of the company 4. D. Minimizing the company's liabilities In a firm having both a treasurer and a controller, which of the following would most likely be handled by the controller? 1. A. Internal auditing 2. B. Credit management 3. C. Banking relationships 4. D. Insurance Investment banks like Morgan Stanley or Goldman Sachs: 1. A. collect deposits and relend the cash to corporations and individuals. 2. B. help companies sell their securities to investors. 3. C. design and sell insurance policies for businesses. 4. D. lend to corporations and investors in commercial real estate. Sole proprietorships resolve the issue of agency problems primarily by: 1. A. avoiding excessive expense accounts. 2. B. discharging those who violate the rules. 3. C. allowing owners to share the cost of their actions with others. 4. D. forcing owners to bear the full cost of their actions.


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