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FIN301 practice ch.1

capital budgeting
The process of planning and managing a firm’s long-term investments is called
capital structure
The mixture of debt and equity used by a firm to finance its operations is called
working capital management
The management of a firm’s short-term assets and liabilities is called
sole proprietorship
A business owned by a single individual is called a
general partnership
A business formed by two or more individuals who each have unlimited liability for business debts is called a
corporation
A business created as a distinct legal entity composed of one or more individuals or entities is called a
maximize the current value per share of the existing stock
The primary goal of financial management is to
the agency problem
A conflict of interest between the stockholders and management of a firm is called
the costs of any conflicts of interest between stockholders and management
Agency costs refer to
any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm
A stakeholder is
deciding whether or not to open a new store
Which one of the following is a capital budgeting decision?
I and II only
Capital structure decisions include consideration of the:
I. amount of long-term debt to assume.
II. cost of acquiring funds.
III. current assets and liabilities.
IV. net working capital.
the capital structure decision
The decision of which lender to use and which type of long-term loan is best for a project is part of
I, III, and IV only
Working capital management includes decisions concerning which of the following?
I. accounts payable
II. long-term debt
III. accounts receivable
IV. inventory
is concerned with the upper portion of the balance sheet
Working capital management
The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts
Which one of the following statements concerning a sole proprietorship is correct?
The life of the firm is limited to the life span of the owner
Which one of the following statements concerning a sole proprietorship is correct?
terminates at the death of any general partner
A partnership
I, II, and IV only
Which of the following are disadvantages of a partnership?
I. limited life of the firm
II. personal liability for firm debt
III. greater ability to raise capital than a sole proprietorship
IV. lack of ability to transfer partnership interest
I, III, and IV only
Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life
The largest firms are usually corporations
Which one of the following statements is correct concerning corporations?
Both sole proprietorships and partnerships are taxed in a similar fashion
Which one of the following statements is correct?
corporation
Which one of the following business types is best suited to raising large amounts of capital?
corporation
Which type of business organization has all the respective rights and privileges of a legal person?
the current stockholders are the owners of the corporation
Financial managers should strive to maximize the current value per share of the existing stock because
market value of the existing owners’ equity.
The decisions made by financial managers should all be ones which increase the
agreeing to expand the company at the expense of stockholders’ value
Which one of the following actions by a financial manager creates an agency problem?
I, II and III only
Which of the following help convince managers to work in the best interest of the stockholders?
I. compensation based on the value of the stock
II. stock option plans
III. threat of a proxy fight
IV. threat of conversion to a partnership
corporation
Which form of business structure faces the greatest agency problems?
preferred stockholder
Which one of the following parties is considered a stakeholder of a firm?
they are easily and cheaply setup.
the proprietorship life is limited to the business owner’s life.
all business taxes are paid as individual tax.
Sole proprietorships are predominantly started because
shareholder election of a board of directors who select management.
the threat of a takeover by another firm.
compensation contracts that tie compensation to corporate success.
Managers are encouraged to act in shareholders’ interests by

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