1. The liability of sole proprietors is limited to the amount of their investment in the company.
2. The separation of ownership and management is one distinctive feature of corporations.
3. A major disadvantage of partnerships is that they have "double taxation" of profits.
4. Financial assets have value because they are claims on the firm's real assets and the cash that those assets will produce.
5. Capital budgeting decisions are used to determine how to raise the cash necessary for investments.
6. A successful investment is one that increases the value of the firm.
7. Boards of directors are often portrayed as active supporters of top management.
8. Financial analysts are involved in monitoring and controlling the risk associated with investment projects and financing decisions.
9. The primary goal of any company should be to maximize current period profit.
10. Maximizing profits is the same as maximizing the value of the firm.
11. Ethical decision making in business can be viewed as a long-term investment in reputation.
12. Real assets can be intangible assets.
13. Making good investment and financing decisions is the chief task of the financial manager.
14. Pfizer's spending of $7.6 billion in 2006 on research and development of new drugs is a capital budgeting decision but not a financing decision.
15. LVMH's Issuance of a 7-year bond in 2005, raising 600 million euros is a financing decision.
16. The separation of ownership and management is one distinctive feature of both corporations and sole proprietors.
Multiple Choice Questions
17. The stockholders in a sole proprietorship are represented by: A. the owner of the firm. B. the general partner of the firm. C. the Board of Directors of the firm. D. no one; sole proprietorships have no stockholders.
18. Which of the following would be considered an advantage of the sole proprietorship form of organization? A. Wide access to capital markets B. Unlimited liability C. A pool of expertise D. Profits taxed at only one level
19. One common reason for partnerships to convert to a corporate form of organization is that the partnership: A. faces rapidly growing financing requirements. B. wishes to avoid double taxation of profits. C. has issued all of its allotted shares. D. agreement expires after ten years of use.
20. Which of the following is not an advantage to incorporating a business? A. Easier access to financial markets. B. Limited liability. C. Becoming a permanent legal entity. D. Profits taxed at the corporate level and the shareholder level.
21. Unlimited liability is faced by the owners of: A. corporations. B. partnerships and corporations. C. sole proprietorships and partnerships. D. all forms of business organization.
22. Which of the following would not be considered a real asset? A. A corporate bond B. A machine C. A patent D. A factory
23. Which of the following statements best distinguishes the difference between real and financial assets? A. Real assets have less value than financial assets. B. Real assets are tangible; financial assets are not. C. Financial assets represent claims to income that is generated by real assets. D. Financial assets appreciate in value; real assets depreciate in value.
24. Financial markets are used for trading: A. both real assets and financial assets. B. the goods and services produced by a firm. C. securities, such as shares of IBM. D. the raw materials used in manufacturing.
25. Which of the following would be considered a capital budgeting decision? A. Planning to issue common stock rather than issuing preferred stock B. A decision to expand into a new line of products, at a cost of $5 million C. Repurchasing shares of common stock D. Issuing debt in the form of long-term bonds
26. A financial manager facing a capital budgeting decision must decide whether to: A. issue stock or debt securities. B. use the money market or capital market. C. use primary markets or secondary markets. D. buy new machinery or repair the old.
27. The best criterion for success in a capital budgeting decision would be to: A. minimize the cost of the investment. B. maximize the number of capital budgeting projects. C. maximize the difference between cash inflows and cost. D. finance all capital budgeting projects with debt.
28. An example of a firm's financing decision would be: A. acquisition of a competitive firm. B. how much to pay for a specific asset. C. the issuance of ten-year versus twenty-year bonds. D. whether or not to increase the price of its products.
29. Which of the following is NOT a financing decision? A. Should the firm borrow money from a bank or sell bonds? B. Should the firm shut down an unprofitable factory? C. Should the firm buy or lease a new machine that it is committed to acquiring? D. Should the firm issue preferred stock or common stock?
30. The term "capital structure" refers to: A. the manner in which a firm obtains its long-term sources of funding. B. the length of time needed to repay debt. C. whether the firm invests in capital budgeting projects. D. which specific assets the firm should invest in.
31. The term "capital structure" refers to: A. the manner in which a firm obtains its long-term sources of funding. B. the length of time needed to repay debt. C. whether the firm invests in capital budgeting projects. D. which specific assets the firm should invest in.
32. A firm decides to pay for a small investment project through a $1 million increase in short-term bank loans. This is best described as an example of a(n): A. financing decision. B. investment decision. C. capital budgeting decision. D. capital market decision.
33. The short-term decisions of financial managers are comprised of: A. capital structure decisions. B. investment decisions. C. financing decisions. D. both investment and financing decisions.
34. Which of the following represents a financing decision? A. A decision to borrow $10 million through a bank loan. B. A decision to invest in the common stock of another corporation. C. A decision to buy a new mainframe computer. D. A decision to pay $1 million of accounts payable.
35. The primary goal of corporate management should be to: A. maximize the number of shareholders. B. maximize the firm's profit. C. minimize the firm's costs. D. maximize the shareholders' wealth.
36. What general factors may influence the decision of whether to organize as a sole proprietorship, a partnership, or a corporation?
37. Discuss why corporations typically exhibit separation of ownership and management, as distinguished from sole proprietorships or partnerships.
38. Why is limited liability such an important aspect to investors?
39. Distinguish between a firm's capital budgeting decision and financing decision.
40. Discuss the interrelationship between a firm's financing and capital structure decisions.
41. Who are the financial managers in large corporations?
42. What does "real asset" mean?
43. Who is the financial manager?
44. Why does it make sense for corporations to maximize their market value?