UO BA 318 Online Midterm Exam Study Guide
T/F: Sole proprietorships are the most common form of business organization
because liability is limited to the amount invested in the business by the sole
proprietor. - ANSWER F
T/F: The corporate form has the disadvantage of double taxation relative to a
sole proprietorship. - ANSWER T
T/F: The corporate form has the advantage of unlimited liability. - ANSWER F
T/F: The corporate form is preferred over the sole proprietorship because a
corporation is easier to form and faces less regulation. - ANSWER F
Sole Proprietorship - ANSWER a business owned and managed by a single
individual
Corporation - ANSWER A business owned by stockholders who share in its
profits but are not personally responsible for its debts
The goal of the firm should be: - ANSWER maximization of shareholder wealth
Agency Problem - ANSWER the possibility of conflict of interest between the
stockholders and management of a firm
Which of the following statements are true regarding "Agency Problem"?
1. Managers might attempt to benefit themselves in terms of salary and
perquisites at the expense of shareholders
2. The agency problem results from the separation of management and the
ownership of the firm.
3. The agency problem may interfere with the implementation of maximizing
shareholder wealth. - ANSWER All of these are true
T/F: The corporation is a legal entity separate from it owners; thus it is possible
for the corporation to continue even upon the death of one or more
shareholders. - ANSWER T
Capital structure decisions include all of the following EXCEPT:
1. Deciding the total amount of debt the firm should take on.
2. Deciding the mix of debt and equity for the firm.
3. Deciding what assets to purchase.
4. Deciding how to pay for long term projects. - ANSWER Deciding what assets
to purchase.
, capital structure decision - ANSWER minimizing the cost of capital by using the
right mix of debt and equity
equity financing - ANSWER funds provided by the owners of a company
Working Capital - ANSWER short term assets and liabilities
4 Ways to Reduce Agency Problems - ANSWER 1. Compensation based on firm
performance
2. Board of Directors oversees managers
3. Threat of takeover
4. Bank & Credit Analysis
Sarbanes-Oxley Act - ANSWER A law passed by Congress that requires the CEO
and CFO to certify that their firm's financial statements are accurate.
Stakeholders - ANSWER Anyone other than the firm's stockholders or creditors
that might have a claim on the cash flows of a firm
Capital Budgeting - ANSWER the process of planning and managing a firm's
long-term investments
Capital Structure - ANSWER long-term debt & . equity
Which of the following are advantages of the corporate form of organization?
I. ability to raise large sums of capital
II. ease of ownership transfer
III. corporate taxation
IV. unlimited firm life - ANSWER I, II, & IV
T/F: The shareholders of common stock of a corporation share equally in any
losses created by the firm. - ANSWER F
T/F: The shareholders of common stock of a corporation are protected from any
losses exceeding their equity investment in the firm. - ANSWER T
$1,000 is expected to be received 10 years from now. If interest rates go up, the
present value of this $1,000 future cash flow is: (less or more than $1000) -
ANSWER less
At what rate must $400 be compounded annually for it to grow to $950 in 12
years? - ANSWER 7.47%
T/F: Sole proprietorships are the most common form of business organization
because liability is limited to the amount invested in the business by the sole
proprietor. - ANSWER F
T/F: The corporate form has the disadvantage of double taxation relative to a
sole proprietorship. - ANSWER T
T/F: The corporate form has the advantage of unlimited liability. - ANSWER F
T/F: The corporate form is preferred over the sole proprietorship because a
corporation is easier to form and faces less regulation. - ANSWER F
Sole Proprietorship - ANSWER a business owned and managed by a single
individual
Corporation - ANSWER A business owned by stockholders who share in its
profits but are not personally responsible for its debts
The goal of the firm should be: - ANSWER maximization of shareholder wealth
Agency Problem - ANSWER the possibility of conflict of interest between the
stockholders and management of a firm
Which of the following statements are true regarding "Agency Problem"?
1. Managers might attempt to benefit themselves in terms of salary and
perquisites at the expense of shareholders
2. The agency problem results from the separation of management and the
ownership of the firm.
3. The agency problem may interfere with the implementation of maximizing
shareholder wealth. - ANSWER All of these are true
T/F: The corporation is a legal entity separate from it owners; thus it is possible
for the corporation to continue even upon the death of one or more
shareholders. - ANSWER T
Capital structure decisions include all of the following EXCEPT:
1. Deciding the total amount of debt the firm should take on.
2. Deciding the mix of debt and equity for the firm.
3. Deciding what assets to purchase.
4. Deciding how to pay for long term projects. - ANSWER Deciding what assets
to purchase.
, capital structure decision - ANSWER minimizing the cost of capital by using the
right mix of debt and equity
equity financing - ANSWER funds provided by the owners of a company
Working Capital - ANSWER short term assets and liabilities
4 Ways to Reduce Agency Problems - ANSWER 1. Compensation based on firm
performance
2. Board of Directors oversees managers
3. Threat of takeover
4. Bank & Credit Analysis
Sarbanes-Oxley Act - ANSWER A law passed by Congress that requires the CEO
and CFO to certify that their firm's financial statements are accurate.
Stakeholders - ANSWER Anyone other than the firm's stockholders or creditors
that might have a claim on the cash flows of a firm
Capital Budgeting - ANSWER the process of planning and managing a firm's
long-term investments
Capital Structure - ANSWER long-term debt & . equity
Which of the following are advantages of the corporate form of organization?
I. ability to raise large sums of capital
II. ease of ownership transfer
III. corporate taxation
IV. unlimited firm life - ANSWER I, II, & IV
T/F: The shareholders of common stock of a corporation share equally in any
losses created by the firm. - ANSWER F
T/F: The shareholders of common stock of a corporation are protected from any
losses exceeding their equity investment in the firm. - ANSWER T
$1,000 is expected to be received 10 years from now. If interest rates go up, the
present value of this $1,000 future cash flow is: (less or more than $1000) -
ANSWER less
At what rate must $400 be compounded annually for it to grow to $950 in 12
years? - ANSWER 7.47%
