Unit 8_ Final Exam With Answers_ FI 360_Financial Management

Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership? Corporate investors are exposed to unlimited liability. Corporations generally find it easier to raise large amounts of capital. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. Less of a corporation's income is generally subject to federal taxes. Corporations generally face fewer regulations. Rationale: Outsiders thinking about investing in a business are generally not willing to be subjected to unlimited liability, and they also want to be able to sell their shares should they choose to do so. Corporations provide these advantages; hence, firms that need large amounts of capital that must be raised in capital markets generally choose to incorporate. Rationale: Outsiders thinking about investing in a business are generally not willing to be subjected to unlimited liability, and they also want to be able to sell their shares should they choose to do so. Corporations provide these advantages; hence, firms that need large amounts of capital that must be raised in capital markets generally choose to incorporate. Question 2 5.5 / 5.5 pts Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT? The company will probably be subject to fewer regulations and required disclosures. The firm will find it more difficult to raise additional capital to support its growth. Assuming the firm is profitable, none of its income will be subject to federal income taxes. Relaxant's shareholders (the ex-partners) will now be exposed to less liability. The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership. Question 3 5.5 / 5.5 pts The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to Minimize the firm's risks because most stockholders dislike risk. In turn, this will maximize the firm's stock price. Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers. Maximize the firm's expected EPS, which must also maximize the firm's price per share. Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth. Question 4 5.5 / 5.5 pts Which of the following statements is CORRECT? If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors. Capital market instruments include both long-term debt and common stocks. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. Question 5 5.5 / 5.5 pts Which of the following is an example of a capital market instrument? U.S. Treasury bills. Commercial paper. Preferred stock. Money market mutual funds. Banker's acceptances. Question 6 5.5 / 5.5 pts Last year Besset Company's operations provided a negative cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles (GAAP)? The company retired a large amount of its long-term debt. The company had high depreciation expenses. The company dramatically increased its capital expenditures. The company sold some of its fixed assets. The company repurchased some of its common stock. Question 7 5.5 / 5.5 pts Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation? The company issued new common stock. The company sold a division and received cash in return. The company made large investments in fixed assets. The company issued new long-term debt. The company cut its dividend.