Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) One of the most important disadvantages of the corporate form of business is: 1)
A) ease of transferring ownership. B) unlimited owner liability.
C) limited owner liability. D) double taxation.
2) An important advantage a general partner usually has is: 2)
A) unlimited liability. B) only one person in control.
C) larger share of profit distribution. D) limited liability.
3) Which statement is correct about limited partners? 3)
A) They have management control limited to their percent of investment.
B) They can lose only one half of their initial investment.
C) They take no part in running the business.
D) They have no tax liability.
4) Profit maximization: 4)
A) is avoided because it is a long-run concept.
B) does not consider cash flow or risk.
C) maximizes the wealth of the owners.
D) is an economic principle only.
5) Wealth maximization: 5)
A) is usually discounted by bondholders.
B) is an accounting number.
C) is a long-run perspective used by financial managers for internal use only.
D) takes a long-run perspective that focuses on the owners.
6) Which of the following is false? 6)
A) Earlier cash inflows are generally preferable to later cash flows of similar size.
B) In the long run reported profits are always more important than cash flow.
C) Risk levels will affect the valuation of the firm.
D) Less certain cash flows will result in lower valuation of the firm.
7) An agent has a fiduciary responsibility to the principals: 7)
A) for legal obligations only. B) always.
C) never D) for ethical obligations only.
8) In a very large corporation, the financial planner usually reports directly to the: 8)
A) financial accountant. B) chief financial officer.
C) controller. D) treasurer.
1
, 9) Which of the following would least affect the value of a firm's stock? 9)
A) timing on cash flows
B) risk associated with receiving cash flows
C) cashflows
D) number of shareholders
10) Cash flow is generally considered more important in finance than profits because: 10)
A) accountants can't agree on profit reporting.
B) profit goals involve timing issues.
C) profit doesn't pay the bills.
D) they are basically the same thing but cash flow is easier to calculate.
11) Larger corporate profit and cash inflows than what had been expected usually: 11)
A) have no effect on the stock price.
B) mean a higher stock price.
C) mean a lower stock price.
D) will reduce the fluctuations of the stock price.
12) Both financial managers and accountants: 12)
A) examine statements only for the firm they work for.
B) use financial statements.
C) interpret financial statements for internal use only.
D) work in the area of applied economics.
13) With respect to cash payments: 13)
A) cash earns interest in the short term only.
B) you would agree to pay a larger amount if the cash payment were due in the future than if
it were due right now.
C) less cash would be required if you were asked to wait for money to be received.
D) because of the time value of money, the later cash is received, the better.
14) A principal of the firm is: 14)
A) the chairman of the board. B) the owner or owners.
C) the agent. D) the CEO.
15) Which of the following is not a problem with profit maximization as a goal? 15)
A) Profit maximization is an accounting principle.
B) Profit cannot be spent.
C) Sometimes profit and cash flow move in opposite directions.
D) There is not always a single definition of profit.
16) Which of the following would not impose constraints on the firm? 16)
A) environmental laws B) company pricing decisions
C) worker safety laws D) civil rights laws
2
,17) The sole proprietor: 17)
A) has unlimited liability relating to the business.
B) has limited liability relating to injuries on the premises.
C) has unlimited liability but avoids federal taxation.
D) is liable for all obligations of the business equal to the investment in the firm.
18) The articles of partnership: 18)
A) are usually just a formality; and rarely needed among consenting individuals.
B) are required by all partnerships.
C) define the terms of the partnership.
D) are used primarily for limited partners to protect their investment.
19) All of the following are true about corporations with the exception of: 19)
A) shareholders of all corporations take an active role in the management of the business.
B) corporations are a separate legal entity.
C) the owners are not liable for the debts of the corporation.
D) it is a form of business that results in double taxation of earnings.
20) In a large corporation, the controller reports to the: 20)
A) financial planner. B) chief financial officer.
C) CEO. D) treasurer.
21) An agency problem could occur if: 21)
A) the company sells the executive jet and uses the funds to increase dividends.
B) the company announces the company will not pay for first class fares for company travel.
C) executive bonuses are tied to share price.
D) senior executives set up a bonus system for themselves based on reported earnings per
share.
22) What is the primary reason for forming your business as a sole proprietorship? 22)
A) It's the simplest way to start out.
B) You will have unlimited liability.
C) If you buy a corporate jet you will not create an agency problem.
D) You don't have to worry about taxes.
23) Hillary Rotteneggs wishes to form a company that will specialize in toxic waste removal and 23)
storage. Which type of business form would be most advantageous?
A) A partnership due to its low cost and diversification of ownership.
B) A sole proprietorship due to its low cost and ease of formation.
C) A corporation due to its limited liability.
D) Any of the above would be acceptable.
24) Which of the following is true? 24)
A) As the riskiness of the cash flow increases, the stock price increases.
B) As the length of time until an expected cash flow increases, the stock price decreases.
C) As the size of the expected cash flow decreases, the stock price increases.
D) All of the above are true statements.
3
, 25) Which of the following is false? 25)
A) Agency problems are not pronounced in sole proprietorships.
B) Maximization of owner value and societal benefits are not always consistent.
C) Each form of business has its distinct advantages and disadvantages.
D) Corporate earnings are subject to the same tax as partnership earnings.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
26) Compare and contrast the roles of the financial manager and accountant.
27) Why is it important for the financial manager to understand the cash flow position of the firm?
28) What is the fiduciary responsibility of an agent?
29) What is meant by double taxation?
30) Explain which type of business organization form affords the most control to the owner?
31) Why would someone choose a limited partnership share over a sole proprietorship?
32) How are partnerships, corporations, and proprietorships taxed?
33) What are the major problems with using profit maximization as a goal of the firm?
34) What are the constraints a firm operates under as it seeks wealth maximization?
35) Explain the difference between an agent and a principal.
36) Why must every firm have a general partner?
37) Why might a company report increasing earnings per share and declining cash flow per share?
38) How do agency problems arise? What are some examples of agency problems? What can corporations do to
monitor these costs?
39) What is the main danger, in an agency sense, of setting up an executive bonus system based on profits?
40) Agency problems were not a major factor in business before the 19 th century. Why not?
41) Why are cash flows received today worth more than cash flows received in the future? Would your answer
change the interest rate was 0%? Discuss
42) When the degree of risk associated with future cash flows goes down, share prices go up. When the degree
of risk associated with future cash flows goes up, share prices go down. Why?
4
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) One of the most important disadvantages of the corporate form of business is: 1)
A) ease of transferring ownership. B) unlimited owner liability.
C) limited owner liability. D) double taxation.
2) An important advantage a general partner usually has is: 2)
A) unlimited liability. B) only one person in control.
C) larger share of profit distribution. D) limited liability.
3) Which statement is correct about limited partners? 3)
A) They have management control limited to their percent of investment.
B) They can lose only one half of their initial investment.
C) They take no part in running the business.
D) They have no tax liability.
4) Profit maximization: 4)
A) is avoided because it is a long-run concept.
B) does not consider cash flow or risk.
C) maximizes the wealth of the owners.
D) is an economic principle only.
5) Wealth maximization: 5)
A) is usually discounted by bondholders.
B) is an accounting number.
C) is a long-run perspective used by financial managers for internal use only.
D) takes a long-run perspective that focuses on the owners.
6) Which of the following is false? 6)
A) Earlier cash inflows are generally preferable to later cash flows of similar size.
B) In the long run reported profits are always more important than cash flow.
C) Risk levels will affect the valuation of the firm.
D) Less certain cash flows will result in lower valuation of the firm.
7) An agent has a fiduciary responsibility to the principals: 7)
A) for legal obligations only. B) always.
C) never D) for ethical obligations only.
8) In a very large corporation, the financial planner usually reports directly to the: 8)
A) financial accountant. B) chief financial officer.
C) controller. D) treasurer.
1
, 9) Which of the following would least affect the value of a firm's stock? 9)
A) timing on cash flows
B) risk associated with receiving cash flows
C) cashflows
D) number of shareholders
10) Cash flow is generally considered more important in finance than profits because: 10)
A) accountants can't agree on profit reporting.
B) profit goals involve timing issues.
C) profit doesn't pay the bills.
D) they are basically the same thing but cash flow is easier to calculate.
11) Larger corporate profit and cash inflows than what had been expected usually: 11)
A) have no effect on the stock price.
B) mean a higher stock price.
C) mean a lower stock price.
D) will reduce the fluctuations of the stock price.
12) Both financial managers and accountants: 12)
A) examine statements only for the firm they work for.
B) use financial statements.
C) interpret financial statements for internal use only.
D) work in the area of applied economics.
13) With respect to cash payments: 13)
A) cash earns interest in the short term only.
B) you would agree to pay a larger amount if the cash payment were due in the future than if
it were due right now.
C) less cash would be required if you were asked to wait for money to be received.
D) because of the time value of money, the later cash is received, the better.
14) A principal of the firm is: 14)
A) the chairman of the board. B) the owner or owners.
C) the agent. D) the CEO.
15) Which of the following is not a problem with profit maximization as a goal? 15)
A) Profit maximization is an accounting principle.
B) Profit cannot be spent.
C) Sometimes profit and cash flow move in opposite directions.
D) There is not always a single definition of profit.
16) Which of the following would not impose constraints on the firm? 16)
A) environmental laws B) company pricing decisions
C) worker safety laws D) civil rights laws
2
,17) The sole proprietor: 17)
A) has unlimited liability relating to the business.
B) has limited liability relating to injuries on the premises.
C) has unlimited liability but avoids federal taxation.
D) is liable for all obligations of the business equal to the investment in the firm.
18) The articles of partnership: 18)
A) are usually just a formality; and rarely needed among consenting individuals.
B) are required by all partnerships.
C) define the terms of the partnership.
D) are used primarily for limited partners to protect their investment.
19) All of the following are true about corporations with the exception of: 19)
A) shareholders of all corporations take an active role in the management of the business.
B) corporations are a separate legal entity.
C) the owners are not liable for the debts of the corporation.
D) it is a form of business that results in double taxation of earnings.
20) In a large corporation, the controller reports to the: 20)
A) financial planner. B) chief financial officer.
C) CEO. D) treasurer.
21) An agency problem could occur if: 21)
A) the company sells the executive jet and uses the funds to increase dividends.
B) the company announces the company will not pay for first class fares for company travel.
C) executive bonuses are tied to share price.
D) senior executives set up a bonus system for themselves based on reported earnings per
share.
22) What is the primary reason for forming your business as a sole proprietorship? 22)
A) It's the simplest way to start out.
B) You will have unlimited liability.
C) If you buy a corporate jet you will not create an agency problem.
D) You don't have to worry about taxes.
23) Hillary Rotteneggs wishes to form a company that will specialize in toxic waste removal and 23)
storage. Which type of business form would be most advantageous?
A) A partnership due to its low cost and diversification of ownership.
B) A sole proprietorship due to its low cost and ease of formation.
C) A corporation due to its limited liability.
D) Any of the above would be acceptable.
24) Which of the following is true? 24)
A) As the riskiness of the cash flow increases, the stock price increases.
B) As the length of time until an expected cash flow increases, the stock price decreases.
C) As the size of the expected cash flow decreases, the stock price increases.
D) All of the above are true statements.
3
, 25) Which of the following is false? 25)
A) Agency problems are not pronounced in sole proprietorships.
B) Maximization of owner value and societal benefits are not always consistent.
C) Each form of business has its distinct advantages and disadvantages.
D) Corporate earnings are subject to the same tax as partnership earnings.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
26) Compare and contrast the roles of the financial manager and accountant.
27) Why is it important for the financial manager to understand the cash flow position of the firm?
28) What is the fiduciary responsibility of an agent?
29) What is meant by double taxation?
30) Explain which type of business organization form affords the most control to the owner?
31) Why would someone choose a limited partnership share over a sole proprietorship?
32) How are partnerships, corporations, and proprietorships taxed?
33) What are the major problems with using profit maximization as a goal of the firm?
34) What are the constraints a firm operates under as it seeks wealth maximization?
35) Explain the difference between an agent and a principal.
36) Why must every firm have a general partner?
37) Why might a company report increasing earnings per share and declining cash flow per share?
38) How do agency problems arise? What are some examples of agency problems? What can corporations do to
monitor these costs?
39) What is the main danger, in an agency sense, of setting up an executive bonus system based on profits?
40) Agency problems were not a major factor in business before the 19 th century. Why not?
41) Why are cash flows received today worth more than cash flows received in the future? Would your answer
change the interest rate was 0%? Discuss
42) When the degree of risk associated with future cash flows goes down, share prices go up. When the degree
of risk associated with future cash flows goes up, share prices go down. Why?
4
