CHAPTER 1

        1.     Of the following, which statement regarding agency costs is NOT correct?

        A)    An agency problem exists when there is a conflict of interest between the stockholders and management of a firm

        B)    An agency problem exists when there is a conflict of interest between a principal and an agent

        C)    An indirect agency cost occurs when firm management avoids risky projects that would favorably affect the stock price because the managers are worried about keeping their jobs

        D)    A corporate expenditure that benefits stockholders but costs management is an agency cost

        E)     If agency costs get too high in the eyes of shareholders, they can begin a proxy fight to replace existing management

        2.        Finance is important to you personally because ________________.

                I. in many firms today, you are asked to decide how you want to invest your retirement funds

                II. it will likely be helpful if you start your own business

                III. it will help you be able to compute loan payments such as how much you will have to pay on your student loans

        A)    Only I correctly completes this sentence

        B)    Only I and II correctly complete this sentence

        C)    Only I and III correctly complete this sentence

        D)    Only II and III correctly complete this sentence

        E)     I, II, and III correctly complete this sentence

        3.     The Board of Directors of Beeline, Inc. have decided to base the salary of its financial manager entirely upon the market share (i.e. sales) of the firm. Accordingly,

        A)    the firm may incur some agency costs since the manager will be focused on the market share of the firm rather than acting to maximize earnings

        B)    the financial manager will always act in the best interest of the shareholders since all agency costs have been eliminated through salary incentives

        C)    this arrangement may be unnecessary, since the goal of the firm is to maximize earnings for shareholders, and that is most likely accomplished through larger market share

        D)    the manager may not act to maximize the current value of the firm's stock, resulting in agency costs for the firm's stockholders.

        E)     the firm will incur some agency costs only if the manager does not act to maximize market share.

        4.        Generally speaking, when the buyers and sellers in a securities market transact on the behalf of others, we say that the market is a(n) ____________ market.

        A)        dealer

        B)        organized

        C)        equity

        D)        auction

        E)        over-the-counter

        5.        When the Small Business Administration (SBA) makes a loan to a sole proprietorship, it typically requires life insurance be carried on the business owner in an amount sufficient to cover the loan. Why might the SBA demand such coverage?

        6.     The secondary market is

        A)    the market for the original sale of securities by governments and corporations

        B)    the market in which dealers buy and sell for themselves, at their own risk

        C)    the market in which purchasers are matched with those who wish to sell

        D)    a market which has no central location

        E)     the market in which securities are bought and sold after original sale

        7.     The study of which of the following areas of finance would help you determine the price of a share of stock and determine what is the best mixture of different types of financial assets to hold?

        A)        Corporate finance

        B)        Investments

        C)        Financial institutions

        D)        Commercial bank management

        E)        International finance

        8.        Which of the following is a true statement concerning a general partnership?

                I. Partners are not responsible for the debts of the partnership

                II. Partners generally do not manage the partnership

                III. The income of a partnership is taxed at the partners' income tax rate

        A)    I only

        B)    III only

        C)    I and II only

        D)    I and III only

        E)     I, II, and III

        9.        Which of the following is NOT considered one of the basic questions of corporate finance?

        A)        What long-term investments should the firm take

        B)    At what rate of interest should the firm borrow

        C)        Where will the firm get the long-term financing to pay for its investments

        D)        What mixture of debt and equity should the firm use to fund its operations

        E)     How should the firm manage its working capital, i.e., its everyday financial activities

        10.   In a ____________, none of the owners are offered the protection of limited liability.

        A)    sole proprietorship

        B)        limited liability company

        C)        corporation

        D)        limited partnership

        E)     S corporation

        11.   A financial manager is responsible for determining the firm's appropriate level of inventory. Which of the financial management areas addresses this decision?

                I. Capital budgeting

                II. Capital structure management

                III. Working capital management

        A)    I only

        B)    II only

        C)    III only

        D)    I and II only

        E)     I, II and III

        12.        Which of the following is considered a primary market transaction?

        A)    A firm sells stock to the public for the first time in an IPO

        B)    An investor buys stock in Chrysler from his buddy

        C)        Chrysler's stockholders sell some of their shares to Kirk Kirkorian, another investor

        D)    On September 25, 1995, 370.8 million shares of stock changed hands on the New York Stock Exchange, and none of them involved an IPO

        E)     IBM just announced what their upcoming quarterly dividend payment will be

        13.   Do you think agency problems arise in sole proprietorships and/or partnerships?

        14.   The total market value of the firm's equity is determined by ______________ .

        A)    the corporate treasurer

        B)    the firm's bondholders

        C)    the firm's stakeholders

        D)    the firm's stockholders

        E)        regulatory authorities

        15.        According to the balance sheet model of the firm, corporate finance may be thought of as the analysis of three primary subject areas. Which of the following groups correctly lists these three areas?

        A)        Capital structure, capital budgeting, security analysis

        B)        Capital budgeting, capital structure, capital spending

        C)        Capital budgeting, capital structure, net working capital

        D)        Capital structure, net working capital, capital rationing

        E)        Capital budgeting, capital spending, net working capital

        16.        Which of the following is NOT correct?

        A)        Agency problems do NOT exist in corporations

        B)    A secondary market transaction is a trade of stock between two investors

        C)    The cash flow generated by a firm generally goes to three groups: the government and other stakeholders; dividend and interest payments to stock and bondholders; and reinvested back into the firm

        D)    A stakeholder is someone other than a stockholder or bondholder who potentially has a claim on the cash flows of the firm

        E)        There are two types of secondary markets: auction markets and dealer markets

        17.   Net working capital includes inventory, cash, marketable securities, and accounts payable.

        A)    True

        B)    False

        18.        Tasks related to tax management, cost accounting, financial accounting, and data processing are the responsibility of which corporate officer?

        A)    The Corporate Treasurer

        B)    The Board of Directors

        C)    The Corporate Controller

        D)    The Chairman of the Board

        E)     The Vice President of Production

        19.   Cost accounting and finance are closely related.

        A)    True

        B)    False

        20.        Maximization of the current earnings of the firm should be the main goal of the financial manager.

        A)    True

        B)    False

Answer Key

        1.     D    

        2.     E     

        3.     D    

        4.     D    

        5.     The SBA knows that the heart of a small business is the owner. If the owner dies, it is likely the business will be severely harmed. Thus, the SBA wants to get out in the case of such a tragedy. This also underscores the limited life of the sole proprietorship.

        6.     E     

        7.     B     

        8.     B     

        9.     B     

        10.   A    

        11.   C    

        12.   A    

        13.        Agency conflicts typically arise when there is a separation of ownership and management of a business. In a sole proprietorship and a small partnership, such separation is not likely to exist to the degree it does in a corporation. However, there is still potential for agency conflicts. For example, as employees are hired to represent the firm, there is once again a separation of ownership and management.

        14.   D    

        15.   C    

        16.   A    

        17.   A    

        18.   C    

        19.   A