Principles of Finance Study online at quizlet.com/_caxhm
1.
A disad vantage of the corporate form of of organization is that corporate stockholders stockholders are more exposed to personal liabilities in the event event of bankruptcy than are investors in a typical pa rtnership .
False
2.
A financia l intermediar intermediar y is a corporation that takes funds funds from investors and then provides those funds to those who need need capital. A bank that takes in demand demand deposits an d then uses uses that money money to make long-term long-term mortgage mortgage loans is one example of of a financi al intermediary.
True
3.
A hostile takeover takeover is said to occur when another corporation or group of of investors gains gains voting control over over a firm and replaces the old managers. If the old managers were managing the firm i nefficiently, nefficiently, then hostile takeovers takeovers can improve the economy. However, However, hostile takeovers takeovers are a re controversial, and legislative legislative ac tions have been been taken to make them more difficult to undertake. undertake.
True
4.
A loss loss incur red by a corporation
B
a. Must be carried forward unless the company has had 2 loss years years in i n a row. b. Can be carri ed back 2 years, years, then carried forward up to 20 years following following the loss. loss. c. Can be carried back 5 years and forward 3 years. d. Cannot be used to reduce taxes in other years except with sp ecial permissi on from the IRS. IRS. e. Can be carried back 3 years or forward 10 years, years, whic hever hever is more advantageous advantageous to the firm. 5.
A publicly owned corporati corporati on is a company whose whose shares are held held by the investing investing public, which may include other corporations as well as instituti onal investors.
True
6.
A share of common stock is not a derivative, but but an option to buy the stock is a derivative because because the value of the option is derived from the value of the stock.
True
7.
A start-up firm is making an ini tial investment investment in new plant and equipment. Assume that currently currently its equip equipment ment must be depreciated on a straight-l strai ght-line ine basis over over 10 years, but Congress Congress is i s consi dering legislation legislation that would would require the firm to depreciate depreciate the equipment equipment over over 7 years. years. If the legislation legislation becomes becomes law, law, which of the following would occur in the year following the change?
C
a. The firm's operating inc ome (EBIT) would would increase. in crease. b. The firm's taxable taxable income would increase. c. The firm's cas h flow would would increase. i ncrease. d. The firm's tax p ayments would would incr ease. e. The firm's reported net income would increase. 8.
A stock's stock's market price pri ce would would equal equal its intrins ic value if all investors had all the information that is available available about the stock. In this case the stock's stock's market pri ce would would equal its intri nsic value.
True
9.
An advantage of of the corporate form of of organization is that corporations ar e generall generally y less less highly regulated regulated than proprietorships proprietorships and partnerships.
False
10. An
increase in accounts payable represents represents an increase in net cash provided by operating activities just like borrowing money from a bank. bank. An increase in accounts payable has an effect effect similar to taking out a new new bank loan. However, However, these two items show up in different sections of the statement of cash flows. flows.
True
11. An
False
12. Analysts
B
increase in accounts receivable receivable represents represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected. who follow follow Howe Howe Industries recently recently noted noted that, relative relative to the previous year, year, the company's net net cash provided from operations increased, yet cash as reported on the balance sheet sheet decreased. Which of the follow following ing factors could explain this situation?
a. The company cut its dividend. b. The company company made large investments in fixed assets. c. The company sold a division and received cash in return. d. The company i ssued new common stock. e. The company issued new long-term debt. 44 13. Assets
other other than cash are expected to to produce cash over over time, but the amount of cash they eventuall eventually y produce could be higher higher or lower than the amounts at which the as sets are carr ied on the books. books.
True
14. Assume
that Besley Golf Equipment commenced operations on January 1, 2008, and it was granted permissi on to use the same depreciation calculations for sha reholder reporting and income tax purp oses. The company planned to depreciate its fixed assets over 15 years, but in December 2008 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2008 financial statements based on this new information. How would the new depreciation ass umption affect the company's financi al statements?
D
a. The firm's reported net fixed ass ets would increase. b. The firm's EBIT would increase. c. The firm's reported 2008 earnings per share would increase. d. The firm's cash posi tion in 2008 an d 2009 would increase. e. The provision will increase the company's tax p ayments. 15. Assume
that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI) to double its depreciation expense for the upcoming year but will have no effect on its sa les revenue or the tax rate. Prior to the new provision, BBI's net income was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BBI's financ ial statements versus the statements without the provisi on? Assume that the company uses the same depreciation method for tax and stockholder reporting purp oses.
E
a. The provision will reduce the company's cash flow. b. The provision will increase the company's tax payments. c. The provision wi ll increase the firm's operating income (EBIT). d. The provisi on will increase the company's net income. e. Net fixed assets on the balance sheet will decrease. 16. Assume
that two firms are both following generally accepted accounting prin ciples. Both firms commenced operations two years ago with $1 million of identical fixed ass ets, and neither firm either sold any of those assets or purchased any new fixed a ssets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.
False
17. Austin
D
Financial recently announced that its net income increased sharply from the previous year, yet its net cash p rovided from operations d eclined. Which of the following could explain thi s performance?
a. The company's di vidend payment to common stockholders declined. b. The company's expenditures on fixed assets declined. c. The company's cost of goods sold inc reased. d. The company's depreciation exp ense declined. e. The company's interest expense increased. 18.
Because the U.S. tax system is a progressive tax system, a taxp ayer's marginal and average tax ra tes are the same.
False
19.
Below are the 2007 and 2008 year-end balance sheets for Tran Enterpri ses:
C
Assets: 2008 2007 Cash $ 200,000 $ 170,000 Accounts receivable 864,000 700,000 Inventories 2,000,000 1,400,000 Total current assets $3,064,000 $2,270,000 Net fixed assets 6,000,000 5,600,000 Total assets $9,064,000 $7,870,000 Liabilities and equity: Accounts payable $1,400,000 $1,090,000 Notes payable 1,600,000 1,800,000 Total current liabilities $3,000,000 $2,890,000 Long-term debt 2,400,000 2,400,000 Common stock 3,000,000 2,000,000 Retained earnings 664,000 580,000 Total common equity $3,664,000 $2,580,000 Total liabilities and equity $9,064,000 $7,870,000 The firm has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year, non-callable, longterm debt in 2007. As of the end of 2008, none of the princi pal on this debt had been repaid. Assu me that the company's sales i n 2007 and 2008 were the same. Which of the following statements must be CORRECT? a. The firm increased its short-term bank debt in 2008. b. The firm issued long-term debt in 2008. c. The firm iss ued new common stock in 2008. d. The firm repur chased some common stock in 2008. e. The firm had negative net income in 2008. 20.
Below is the common equity section (in millions) of Timeless Technology's last two year-end balance sheets:
B
2008 2007 Common stock $2,000 $1,000 Retained earnings 2,000 2,340 Total common equity $4,000 $3,340 The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT? a. The company's net income in 2008 was hi gher than in 2007. b. The firm issued common stock in 2008. c. The market pric e of the firm's stock doubled in 2008. d. The firm had p ositive net income in both 2007 and 2008, but its net income in 2008 was lower than it was i n 2007. e. The company has more equity than d ebt on its balance sheet. 21.
Both interest and divid ends pai d by a corporation ar e deductible operating expenses, hence they decrease the firm's taxes.
False
22.
Companies typica lly provide four basi c financi al statements: the fixed i ncome statement, the current income statement, the balance sheet, and the cash flow statement.
False
23.
Consider the following balance sheet, for Games Inc. Because Games has $800,000 of retained earni ngs, we know that the company would be able to pay ca sh to buy an asset with a cost of $200,000.
False
Cash $ 50,000 Accounts payable $ 100,000 Inventory 200,000 Accruals 100,000 Accounts receivable 250,000 Total CL $ 200,000 Total CA $ 500,000 Debt 200,000 Net fixed assets $ 900,000 Common stock 200,000 Retained earnings 800,000 Total assets $1,400,000 Total L & E $1,400,000 24.
Each stock's rate of return in a given year consists of a d ividend yield (which might be zero) plus a capi tal gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A simple average of those returns is then calculated, and that a verage is called "the return on the S&P Index," and it is often used as an indicator of the "return on the market."
False
25.
Each stock's rate of return in a given year consists of a d ividend yield (which might be zero) plus a capi tal gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an i ndicator of the "return on the market."
True
26.
EBIT stands for earnings before interest and taxes, and it is often called "operating i ncome."
True
27.
EBITDA stand s for earnings before interest, taxes, debt, and assets.
False
28.
Financial institutions are more diversified today than they were in the past, when federal laws kept investment banking houses, commercial banks, insurance companies, and so on quite separate. Today the larger financial corporations offer a variety of services, ranging from checking accounts, to insurance, to underwritin g securities, to stock brokerages.
True
29.
For a stock to be in equilibrium as the book defines it, its mar ket price should exceed its intri nsic value.
False
30.
Free cash flow (FCF) is , essentially, the cash flow that is avai lable for interest and d ividends after the company has made the investments in cur rent and fixed as sets that are necessary to sustain ongoing operations.
True
31.
Free cash flow is the amount of cash that if withdrawn would harm the firm's ability to operate and to pr oduce future cash flows.
False
32.
Globalization of business has been facilitated by improvements in telecommunications.
True
33.
Hedge funds are somewhat similar to mutual funds. The pr imary di fferences are that hedge funds are less hi ghly regulated, have more flexibility regarding what they can buy, and r estrict their investors to wealthy, sophisticated i ndividuals and i nstitutions.
True
34.
If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This p rovision was put into the Federal Tax Code in order to encourage the formation of small businesses.
False
35.
If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income.
True
36.
If a firm is reporting its i ncome in accordance with generally accepted accounting pri nciples, then its net income as r eported on the in come statement should be equal to its free cash flow.
False
37.
If a fir m's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design a n executive compensation system whose goal is to maximize the stock's intrinsic value rather than the stock's current market pric e.
True
38.
If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.
False
39.
If a stock's intri nsic value is greater than its market pri ce, then the stock is overvalued and should be sold.
False
40.
If a stock's market price i s above its intri nsic value, then the stock can be thought of as being undervalued, and it would be a good buy.
False
41.
If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year.
False
42.
If someone deliberately understates costs and thereby increases p rofits, then this ca n cause the price of the stock to rise above its intri nsic value. The stock price will probably fall in the future. Also, those who parti cipated in the fraud can be prosecuted, and the firm itself can be penalized.
True
43.
If the tax laws were changed so that $0.50 out of every $1.00 of interest pai d by a corporation was allowed as a tax-deductible expense, this would probably encourage compani es to use more debt financing tha n they presently do, other things held constant.
False
44.
If we were describing the income statement and the balance sheet, it would be correct to say that the in come statement is more like a video while the balance sheet is more like a snaps hot.
True
45.
If you decide to buy 100 sha res of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a s econdary market transaction, not a p rimary market transaction.
True
46.
If you wanted to know what rate of return stocks have pr ovided in the pa st, you could examine data on the Dow Jones Industri al Index, the S&P 500 Index, or the Nasdaq Index.
True
47.
In finance, we are generally more interested in cash flows than in accounting pr ofits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciati on less the sum of capi tal expenditures and cha nges in net working capital.
True
48.
In most corporations, the CFO ranks u nder the CEO.
True
49.
In order to maximize i ts shareholders' value, a firm's management must attempt to maximize the expected EPS.
False
50.
In order to maxi mize its sh areholders' value, a firm's management must attempt to maximize the stock pri ce in the long run, or the stock's "intrins ic value".
True
51.
In order to maxi mize its sh areholders' value, a firm's management must attempt to maximize the stock pri ce on a specific target date.
False
52.
Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.
True
53.
Investment banking houses today often have di visions that engage in tradi tional investment banking and other divisi ons that engage in regular commercial banking.
True
54.
It is generally harder to transfer one's ownership interest in a partnership than in a corporation.
True
55.
It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.
False
56.
Its retained earni ngs is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has suffici ent retained earnings, it can purchas e assets and pay for them with cash from retained earnings.
57.
Last year Besset Company's operations p rovided a negative cash flow, yet the cash sh own on its balance sheet increased. Whi ch of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting pri nciples (GAAP)?
False
D
a. The company repurcha sed some of its common stock. b. The company dramati cally increased its cap ital expenditures. c. The company retired a large amount of its long-term debt. d. The company sold some of its fixed as sets. e. The company had hi gh depreciation expenses. 58.
Last year, Delip Indu stries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in ca sh as r eported on its balance sheet. Which of the following factors could explain this situati on? a. The company had a sharp increase in its inventories. b. The company had a shar p increase in its accr ued liabilities. c. The company sold a new issue of common stock. d. The company mad e a large capi tal investment early in the year. e. The company had a sharp increase in depreciation expenses.
C
59.
Managers always attempt to maximi ze the long-run value of their fi rms' stocks, or the stocks' intrin sic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not p ossible. However, there can be conflicts between stockholders and bondholders.
False
60.
Money markets are markets for
E
a. Foreign currencies. b. Consumer automobile loans. c. Common stocks. d. Long-term bonds. e. Short-term debt securities such as Treasury bills and commercial paper. 61.
Net working capital is equal to current assets minus accounts payable and accr uals.20
True
62.
On the balance sheet, total assets must always equal the sum of total liabilities plus equity.
True
63.
One advantage of the corporate form of organization is that it avoids double taxation.
True
64.
One danger of starting a prop rietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.
True
65.
One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership i nterests.
False
66.
Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt an d also because it is easier to transfer shares of stock than partnership interests.
True
67.
Other things h eld constant, whi ch of the following actions would increase the amount of cash on a company's balance sheet?
C
a. The company repurcha ses common stock. b. The company pays a di vidend. c. The company is sues new common stock. d. The company gives customers more time to pay their bills. e. The company purchases a new piece of equipment. 68.
Partnerships and proprietorships generally have a tax advantage over corporations.
True
69.
Primary markets are large and i mportant, while secondary markets are smaller and less important.
False
70.
Private markets are those like the NYSE, where transactions a re handled by members of the organiz ation, while public markets are those like the Nasdaq, where anyone can make transactions .
False
71.
Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.
True
72.
The "over-the-counter" market received its name years a go because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer.
True
73.
The alternative minimum tax (AMT) was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
True
74.
The amount shown on the December 31, 2009 balance sheet as "retained ear nings" i s equal to the firm's net income for 2009 minus any dividends it paid.
False
75.
The annual rate of return on any given stock can be found as the stock's divid end for the year plus the change in the stock's price duri ng the year, divided by its beginning-of-year price.
True
76.
The annual rate of return on any given stock can be found as the stock's divid end for the year plus the change in the stock's price duri ng the year, divided by its beginning-of-year price. If you obtain such data on a large portfolio of stocks, like those in the S&P 500, find the rate of return on each stock, and then average those returns, this would give you an idea of stock market returns for the year in question.
True
77.
The annual report contain s four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders' equity.
True
78.
The balance sheet measures the flow of funds i nto and out of various accounts over time, while the income statement measures the firm's financial posi tion at a point in time.
False
79.
The board of directors is the highest ranking body in a corp oration, and the chair man of the board is the highest ranking ind ividual. The CEO generally works under the board a nd its chairman, and the board generally has the authority to r emove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict ar ise. It is possible for a person to simultaneously serve as CEO and chai rman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
80.
The CFO of Daves Indus tries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstandin g bonds that carr y a 7% interest rate. Assume that the company, which does not pay any dividends , takes this action, and that total assets, operating income (EBIT), and i ts tax rate all remain constant. W hich of the following would occur?
True
D
a. The company's taxable income would fall. b. The company's interest expense would remain constant. c. The company would have less common equity than before. d. The company's net income would increase. e. The company would have to pay less taxes. 81.
The Chairman of the Board must also be the CEO.
False
82.
The fact that 70% of the interest i ncome received by corporati ons is excluded from its tax able income encourages firms to fina nce with more debt than they would in the absence of this tax law p rovision.
False
83.
The first major section of a typic al statement of cash flows is "Op erating Activities," and the first entry in this section is " Net Income." Then, also in the fir st section, we show some items that represent incr eases or decreases to cash, and the last entry is called "Net Cash Provided by Operati ng Activities." This n umber can be either positive or negative, but if it is negative, the firm is a lmost certain to s oon go bankrupt.
False
84.
The income statement shows the difference between a firm's income and its costs--i.e., its profits--d uring a specified period of ti me. However, not all reported income comes in the form of cas h, and reported costs likewise may not be consis tent with cas h outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.
True
85.
The more capital a fi rm is likely to require, the greater the probability that it will be organized as a corporation.
True
86.
The Nantell Corporation ju st purchased an expensive piece of equipment. Assume that the firm p lanned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a pr ovision that requires the company to depreciate the equipment on a s traight-line basis over 7 years. Other thi ngs held constant, which of the following will occur as a result of this Congressional acti on? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
B
a. Nantell's taxable income will be lower. b. Nantell's operating income (EBIT) will increase. c. Nantell's cash p osition will improve (incr ease). d. Nantell's reported net income for the year will be lower. e. Nantell's tax liability for the year will be lower. 87.
The next-to-last line on the i ncome statement shows the fir m's earnings, while the last line shows the divi dends the company paid. Therefore, the divid ends ar e frequently called "the bottom line."
False
88.
The NYSE is defined as a " primary" market because it is one of the largest and most imp ortant stock markets in the world.
False
89.
The NYSE is defined as a " spot" market purely and simply because it has a p hysical location. The Nasdaq, on the other hand, is not a spot mar ket because it has no one central location.
False
90.
The primar y operating goal of a publicly-owned firm interested in serving its stockholders should be to
D
a. Maximize i ts expected total corporate income. b. Maximize its expected EPS. c. Minimize the chances of losses. d. Maximize the stock pri ce per shar e over the long run, which is the stock's intri nsic value. e. Maximize the stock price on a s pecific target date.
91.
The primary reason the annual report is importa nt in finance is that it i s used by investors when they form expectations about the firm's future earnings and dividends, and the ris kiness of those cash flows.
True
92.
The retained earnings a ccount on the balance sheet does not represent cash. Rather, it represents p art of the stockholders' claim against the fir m's existing assets. Put another way retained earni ngs are stockholders' reinvested earnings.
True
93.
The statement of cash flows has four ma in sections, one each for operating, investing, and fi nancing activities, and one that shows a summary of the cash and cash equivalents at the end of the year.
True
94.
The term "Dutch auction" in a new stock offering refers to a situation where each potential bidder i ndicates the price they are willing to pay and how many shares they will buy at that price. The highest pri ce that permits the company to sell all the shares it wants to sell is determined--it is the "market clearing price," and all bidders who specified that price or higher are allowed to buy their shar es at the market clearing price.
True
95.
The term "marginal investor" means an i nvestor who is active in the market and would tend to buy a stock if i ts price fell and sell it if it r ose, barring any new information coming out about the stock.
True
96.
The term IPO stands for "individual purchase order", as when an individual (as opposed to an institution) places an order to buy a s tock.
False
97.
The time dimension is imp ortant in fina ncial statement analysis. The balance sheet shows the firm's financi al position at a given point i n time, the income statement shows results over a period of time, and the statement of cash flows reflects specific chan ges in accounts over that peri od of time.
True
98.
The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.
True
99.
There are many types of unethical business behavior. One example is where executives pr ovide information that they know is incorrect to banks and to stockholders. It is i llegal to provide such information to banks, but it i s not illegal to provide it to stockholders because they are the owners of the firm, not outsid ers.
False
100.
To estimate the cash flow from operations, deprecia tion must be added back to net income because it is a noncash charge that has been deducted from revenue.
True
101.
Trades on the NYSE are generally completed by having a brokerage firm acti ng as a "dealer" buy securiti es and adding them to its inventory or selling from its inventory. The Nasdaq, on the other hand, operates as an auction market, where buyers offer to buy, and sellers to sell, and the price is negotiated on the floor of the exchange.
False
102.
Two metrics that are used to measure a c ompany's financi al performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income.
True
103.
Typically, the statement of stockholders' equity starts with retained earnings at the beginning of the year, ad ds net income, subtracts di vidends paid, and ends up with r etained earnings at the end of the year. Over time, a profitable company will have earnings in excess of the dividends i t pays out, and the series of annual retained earnings will result in a su bstantial amount of retained earni ngs as shown on the balance sheet.
True
104. When
a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is closely held.
True
105. Which
C
of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders? a. The percentage of executive compensation that comes in the form of cash is increased a nd the percentage coming from long-term stock options i s reduced. b. The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. c. The percentage of the firm's stock that is held by institutional investors such as mutual funds , pension funds , and hedge funds ra ther than by small individ ual investors ri ses from 10% to 80%. d. The firm's founder, who is also pr esident and chairman of the board, sells 90% of her shares. e. The firm's board of di rectors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board app roval.
106. Which
of the following actions would be likely to reduce conflicts of interest between stockholders and managers?
E
a. Congress pass es a law that severely restricts hostile takeovers. b. A firm's compensation system is changed so that managers receive larger cash salari es but fewer long-term options to buy stock. c. The company cha nges the way executive stock options a re handled, with all options vesting after 2 years ra ther than having 20% of the options award ed vest every 2 years over a 10-year peri od. d. The company's outside audi ting firm is given a lucrative year-by-year consulting contract with the company. e. The composition of the board of directors is changed from all inside di rectors to all outside directors, and the directors are compensated with stock rather than cash. 107. Which
of the following actions would be most likely to reduce conflicts between stockholders and bondholders?
A
a. Including restri ctive covenants i n the company's bond indenture (which is the contract between the company and its bondholders). b. Compensating managers with more stock options and less cash income. c. The passage of laws that make it ha rder for hosti le takeovers to succeed. d. A government regulation that banned the use of convertible bonds. e. The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more, rather than debt that matures in less than one year. 108. Which
of the following actions would be most likely to reduce conflicts of interest between stockholders and bondholders?
D
a. If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby artificially increase profits because he or she was ordered to do so by a sup erior, the lower level person cannot be prosecuted but the superior ca n be prosecuted. b. There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsi ders. It i s illegal to provide such i nformation to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm. c. The bankruptcy of Enron Corporation, and the fraud committed by some of its officers, was much discussed, but it did not lead to any important changes in business practices. d. If someone deliberately understates costs an d thereby causes reported profits to increase, then this can cause the price of the stock to ri se above its intri nsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted. e. Ethical behavior is not influenced by training and auditi ng procedures. People are either ethical or they are not, and this is what determines ethical behavior in business. 109. Which
of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?
B
a. Pay managers large cash salari es and give them no stock options. b. Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. c. Beef up the restricti ve covenants i n the firm's d ebt agreements. d. Eliminate a r equirement that members of the board of di rectors must hold a high percentage of their personal wealth in the firm's stock. e. For a fi rm that compensates ma nagers with stock opti ons, reduce the time before options a re vested, i.e., the time before options can be exercised and the shares that are received can be sold. 110. Which
of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership? a. Corporati ons generally face fewer regulations. b. Less of a corporation's income is generally subject to federal taxes. c. Corporate shareholders are exposed to unlimited liability, but this factor i s offset by the tax advantages of incorporation. d. Corporate investors are exposed to unlimited liability. e. Corporati ons generally find it easi er to raise large amounts of capi tal.
E
111. Which
of the following factors could explain why Michigan Energy's cash balance increased even though it had a negative cash flow last year?
A
a. The company sold a new iss ue of bonds. b. The company made a large investment in new plant and equipment. c. The company paid a large dividend. d. The company had high depreciation expenses. e. The company repurcha sed 20% of its c ommon stock. 112. Which
of the following is a primary market transaction?
C
a. You sell 200 shares of IBM stock on the NY SE through your broker. b. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you just give him cash and he gives you the stock. c. IBM is sues 2,000,000 shares of new stock and sells them to the public through an investment banker. d. One financi al institution buys 200,000 shares of IBM stock from another instituti on. An investment banker arranges the transaction. e. IBM sells 2,000,000 shares of treasur y stock to its employees when they exercise options that were granted in prior years. 113. Which
of the following is an example of a capital market instrument?
B
a. Commercial paper. b. Preferred stock. c. U.S. Treasury bills. d. Banker's acceptances. e. Money market mutual funds. 114. Which
of the following items cannot be found on a firm's balance sheet under current liabilities?
D
a. Accounts pa yable. b. Short-term notes payable to the bank. c. Accrued wages. d. Cost of goods sold. e. Accrued payroll taxes. 115. Which
of the following items is NOT normally considered to be a current asset?
C
a. Accounts receivable. b. Inventory. c. Bonds. d. Cash. e. Short-term, highly-liquid, marketable securities. 116. Which
of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?
a. Decrease the use of restricti ve covenants i n bond agreements. b. Take actions that reduce the possibility of a hostile takeover. c. Elect a board of directors tha t allows managers greater freedom of action. d. Increase the prop ortion of executive compensation that comes from stock options an d reduce the proporti on that is paid as cash salaries. e. Eliminate a requirement that members of the board of di rectors have a s ubstantial investment in the firm's stock.
D
117. Which
of the following statements would most people in business agree with?
E
a. A corpora tion's short-run p rofits will almost always increase if the firm takes acti ons that the government has determined are in the best interests of the nation. b. Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiri ng and firing employees. c. "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees. d. It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. e. Although people's moral characters are probably developed before they are admitted to a busi ness school, it is still useful for business sc hools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, an d the nation. 118. Which
of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced compani es to depreciate equipment over longer lives? Assume that sa les, other operating costs, and tax r ates are not affected, and assume that the same depreciati on method is used for tax and stockholder reporting purp oses.
D
a. Companies' after-tax operating p rofits would decline. b. Companies' physical stocks of fixed assets would increase. c. Companies' cash flows would increase. d. Companies' cash posi tions would decline. e. Compani es' reported net incomes would decline. 119. You
recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock an d you gave your brother the s tock certificates. Whi ch of the following best descri bes this transaction?
A
a. This is an example of a direct transfer of capital. b. This is an example of a primary market transaction. c. This is an example of an exchange of physical ass ets. d. This i s an example of a money market transaction. e. This is an example of a derivative market transaction. 120. You
recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:
a. A money market transaction. b. A primary market transaction. c. A secondary market transaction. d. A futures market transaction. e. An over-the-counter market transaction. e. It is possi ble for a firm to go public and yet not raise any addi tional new capital for the firm itself.
C
