1. A disadvantage of the corporate form of organization is that corporate stockholders are more exposed topersonal liabilities in the event of bankruptcy than are investors in a typical partnership.

False

2. A financial intermediary is a corporation that takes funds from investors and then provides those funds to thosewho need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgageloans is one example of a financial intermediary.

True

3. A hostile takeover is said to occur when another corporation or group of investors gains voting control over afirm and replaces the old managers. If the old managers were managing the firm inefficiently, then hostiletakeovers can improve the economy. However, hostile takeovers are controversial, and legislative actions havebeen taken to make them more difficult to undertake.

True

4. A loss incurred by a corporation

a. Must be carried forward unless the company has had 2 loss years in a row.b. Can be carried back 2 years, then carried forward up to 20 years following the loss.c. Can be carried back 5 years and forward 3 years.d. Cannot be used to reduce taxes in other years except with special permission from the IRS.e. Can be carried back 3 years or forward 10 years, whichever is more advantageous to the firm.

B

5. A publicly owned corporation is a company whose shares are held by the investing public, which may includeother corporations as well as institutional investors.

True

6. A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of theoption is derived from the value of the stock.

True

7. A start-up firm is making an initial investment in new plant and equipment. Assume that currently itsequipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation thatwould require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of thefollowing would occur in the year following the change?

a. The firm's operating income (EBIT) would increase.b. The firm's taxable income would increase.c. The firm's cash flow would increase.d. The firm's tax payments would increase.e. The firm's reported net income would increase.

C

8. A stock's market price would equal its intrinsic value if all investors had all the information that is availableabout the stock. In this case the stock's market price would equal its intrinsic value.

True

9. An advantage of the corporate form of organization is that corporations are generally less highly regulated thanproprietorships and partnerships.

False

10. An increase in accounts payable represents an increase in net cash provided by operating activities just likeborrowing money from a bank. An increase in accounts payable has an effect similar to taking out a new bankloan. However, these two items show up in different sections of the statement of cash flows.

True

11. An increase in accounts receivable represents an increase in net cash provided by operating activities becausereceivables will produce cash when they are collected.

False

12. Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cashprovided from operations increased, yet cash as reported on the balance sheet decreased. Which of the followingfactors could explain this situation?

a. The company cut its dividend.b. The company made large investments in fixed assets.c. The company sold a division and received cash in return.d. The company issued new common stock.e. The company issued new long-term debt.44

B

13. Assets other than cash are expected to produce cash over time, but the amount of cash they eventually producecould be higher or lower than the amounts at which the assets are carried on the books.

True

Principles of FinanceStudy online at quizlet.com/_caxhm

14. Assume that Besley Golf Equipment commenced operations on January 1, 2008, and it was granted permissionto use the same depreciation calculations for shareholder reporting and income tax purposes. The companyplanned to depreciate its fixed assets over 15 years, but in December 2008 management realized that the assetswould last for only 10 years. The firm's accountants plan to report the 2008 financial statements based on thisnew information. How would the new depreciation assumption affect the company's financial statements?

a. The firm's reported net fixed assets 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 position in 2008 and 2009 would increase.e. The provision will increase the company's tax payments.

D

15. Assume that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI) to double itsdepreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate. Prior tothe new provision, BBI's net income was forecasted to be $4 million. Which of the following best describes theimpact of the new provision on BBI's financial statements versus the statements without the provision? Assumethat the company uses the same depreciation method for tax and stockholder reporting purposes.

a. The provision will reduce the company's cash flow.b. The provision will increase the company's tax payments.c. The provision will increase the firm's operating income (EBIT).d. The provision will increase the company's net income.e. Net fixed assets on the balance sheet will decrease.

E

16. Assume that two firms are both following generally accepted accounting principles. Both firms commencedoperations two years ago with $1 million of identical fixed assets, and neither firm either sold any of those assetsor purchased any new fixed assets. The two firms would be required to report the same amount of net fixedassets on their balance sheets as those statements are presented to investors.

False

17. Austin Financial recently announced that its net income increased sharply from the previous year, yet its netcash provided from operations declined. Which of the following could explain this performance?

a. The company's dividend payment to common stockholders declined.b. The company's expenditures on fixed assets declined.c. The company's cost of goods sold increased.d. The company's depreciation expense declined.e. The company's interest expense increased.

D

18. Because the U.S. tax system is a progressive tax system, a taxpayer's marginal and average tax rates are thesame.

False

19. Below are the 2007 and 2008 year-end balance sheets for Tran Enterprises:

Assets: 2008 2007 Cash $ 200,000 $ 170,000Accounts receivable 864,000 700,000Inventories 2,000,000 1,400,000Total current assets $3,064,000 $2,270,000Net fixed assets 6,000,000 5,600,000Total assets $9,064,000 $7,870,000

Liabilities and equity:Accounts payable $1,400,000 $1,090,000Notes payable 1,600,000 1,800,000Total current liabilities $3,000,000 $2,890,000Long-term debt 2,400,000 2,400,000Common stock 3,000,000 2,000,000Retained earnings 664,000 580,000Total common equity $3,664,000 $2,580,000Total 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, long-term debt in 2007. As of the end of 2008, none of the principal on this debt had been repaid. Assume that thecompany's sales in 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 issued new common stock in 2008.d. The firm repurchased some common stock in 2008.e. The firm had negative net income in 2008.

C

20. Below is the common equity section (in millions) of Timeless Technology's last two year-end balance sheets:

2008 2007 Common stock $2,000 $1,000Retained earnings 2,000 2,340Total 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 higher than in 2007.b. The firm issued common stock in 2008. c. The market price of the firm's stock doubled in 2008.d. The firm had positive net income in both 2007 and 2008, but its net income in 2008 was lower than it was in2007.e. The company has more equity than debt on its balance sheet.

B

21. Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease thefirm's taxes.

False

22. Companies typically provide four basic financial statements: the fixed income statement, the current incomestatement, 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 earnings, weknow that the company would be able to pay cash to buy an asset with a cost of $200,000.

Cash $ 50,000 Accounts payable $ 100,000Inventory 200,000 Accruals 100,000Accounts receivable 250,000 Total CL $ 200,000Total CA $ 500,000 Debt 200,000Net fixed assets $ 900,000 Common stock 200,000Retained earnings 800,000Total assets $1,400,000 Total L & E $1,400,000

False

24. Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gainsyield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. Asimple average of those returns is then calculated, and that average is called "the return on the S&P Index," andit 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 dividend yield (which might be zero) plus a capital gainsyield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. Aweighted average of those returns, using each stock's total market value, is then calculated, and that averagereturn is often used as an indicator of the "return on the market."

True

26. EBIT stands for earnings before interest and taxes, and it is often called "operating income." True27. EBITDA stands for earnings before interest, taxes, debt, and assets. False28. 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 financialcorporations offer a variety of services, ranging from checking accounts, to insurance, to underwritingsecurities, to stock brokerages.

True

29. For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value. False30. Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company

has made the investments in current and fixed assets 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 producefuture cash flows.

False

32. Globalization of business has been facilitated by improvements in telecommunications. True33. Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly

regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy,sophisticated individuals and institutions.

True

34. If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federaltaxes. This provision 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, itsstockholders will have to pay personal taxes on the firm's net income.

True

36. If a firm is reporting its income in accordance with generally accepted accounting principles, then its net incomeas reported on the income statement should be equal to its free cash flow.

False

37. If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to somespecific stockholders), it should design an executive compensation system whose goal is to maximize the stock'sintrinsic value rather than the stock's current market price.

True

38. If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and therebyincrease profits above the correct profits because he or she was told to do so by a superior, the lower level personcannot be prosecuted but the superior can be prosecuted.

False

39. If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold. False40. If a stock's market price is above its intrinsic 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, thiswill also maximize the stockholders' wealth as of the current year.

False

42. If someone deliberately understates costs and thereby increases profits, then this can cause the price of the stockto rise above its intrinsic value. The stock price will probably fall in the future. Also, those who participated inthe 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 paid by a corporation was allowed as atax-deductible expense, this would probably encourage companies to use more debt financing than theypresently 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 incomestatement is more like a video while the balance sheet is more like a snapshot.

True

45. If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or herto execute the trade for you. This would be defined as a secondary market transaction, not a primary markettransaction.

True

46. If you wanted to know what rate of return stocks have provided in the past, you could examine data on the DowJones Industrial 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 profits. Free cash flow (FCF) iscalculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes innet working capital.

True

48. In most corporations, the CFO ranks under the CEO. True49. In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS. False50. In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in

the long run, or the stock's "intrinsic value".True

51. In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price ona specific target date.

False

52. Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are notdeductible. This treatment, other things held constant, tends to encourage the use of debt financing bycorporations.

True

53. Investment banking houses today often have divisions that engage in traditional investment banking and otherdivisions 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. True55. 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 earnings is the actual cash that the firm has generated through operations less the cash that hasbeen paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assetsand pay for them with cash from retained earnings.

False

57. Last year Besset Company's operations provided a negative cash flow, yet the cash shown on its balance sheetincreased. Which of the following statements could explain the increase in cash, assuming the company'sfinancial statements were prepared under generally accepted accounting principles (GAAP)?

a. The company repurchased some of its common stock.b. The company dramatically increased its capital expenditures.c. The company retired a large amount of its long-term debt.d. The company sold some of its fixed assets.e. The company had high depreciation expenses.

D

58. Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) anincrease in cash as reported on its balance sheet. Which of the following factors could explain this situation?

a. The company had a sharp increase in its inventories.b. The company had a sharp increase in its accrued liabilities.c. The company sold a new issue of common stock.d. The company made a large capital investment early in the year.e. The company had a sharp increase in depreciation expenses.

C

59. Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values.This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.However, there can be conflicts between stockholders and bondholders.

False

60. Money markets are markets for

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.

E

61. Net working capital is equal to current assets minus accounts payable and accruals.20 True62. On the balance sheet, total assets must always equal the sum of total liabilities plus equity. True63. One advantage of the corporate form of organization is that it avoids double taxation. True64. One danger of starting a proprietorship 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 thefirm's investors to transfer their ownership interests.

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 and also because it is easier totransfer shares of stock than partnership interests.

True

67. Other things held constant, which of the following actions would increase the amount of cash on a company'sbalance sheet?

a. The company repurchases common stock.b. The company pays a dividend.c. The company issues new common stock.d. The company gives customers more time to pay their bills.e. The company purchases a new piece of equipment.

C

68. Partnerships and proprietorships generally have a tax advantage over corporations. True69. Primary markets are large and important, while secondary markets are smaller and less important. False70. Private markets are those like the NYSE, where transactions are handled by members of the organization, 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. True72. The "over-the-counter" market received its name years ago 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 toavoid paying taxes through the use of various deductions.

True

74. The amount shown on the December 31, 2009 balance sheet as "retained earnings" is equal to the firm's netincome 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 dividend for the year plus the change inthe stock's price during 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 dividend for the year plus the change inthe stock's price during the year, divided by its beginning-of-year price. If you obtain such data on a largeportfolio of stocks, like those in the S&P 500, find the rate of return on each stock, and then average thosereturns, this would give you an idea of stock market returns for the year in question.

True

77. The annual report contains four basic financial statements: the income statement, the balance sheet, the cashflow statement, and statement of stockholders' equity.

True

78. The balance sheet measures the flow of funds into and out of various accounts over time, while the incomestatement measures the firm's financial position at a point in time.

False

79. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highestranking individual. The CEO generally works under the board and its chairman, and the board generally has theauthority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he orshe can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for aperson to simultaneously serve as CEO and chairman of the board, though many corporate control expertsbelieve it is bad to vest both offices in the same person.

True

80. The CFO of Daves Industries plans to have the company issue $300 million of new common stock and use theproceeds to pay off some of its outstanding bonds that carry a 7% interest rate. Assume that the company, whichdoes not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate allremain constant. Which of the following would occur?

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.

D

81. The Chairman of the Board must also be the CEO. False82. The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages

firms to finance with more debt than they would in the absence of this tax law provision.False

83. The first major section of a typical statement of cash flows is "Operating Activities," and the first entry in thissection is "Net Income." Then, also in the first section, we show some items that represent increases ordecreases to cash, and the last entry is called "Net Cash Provided by Operating Activities." This number can beeither positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt.

False

84. The income statement shows the difference between a firm's income and its costs--i.e., its profits--during aspecified period of time. However, not all reported income comes in the form of cash, and reported costs likewisemay not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm'sreported profits and its actual cash flow for the same period.

True

85. The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation. True86. The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to

depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision thatrequires the company to depreciate the equipment on a straight-line basis over 7 years. Other things heldconstant, which of the following will occur as a result of this Congressional action? Assume that the companyuses the same depreciation method for tax and stockholder reporting purposes.

a. Nantell's taxable income will be lower.b. Nantell's operating income (EBIT) will increase.c. Nantell's cash position will improve (increase).d. Nantell's reported net income for the year will be lower.e. Nantell's tax liability for the year will be lower.

B

87. The next-to-last line on the income statement shows the firm's earnings, while the last line shows the dividendsthe company paid. Therefore, the dividends are frequently called "the bottom line."

False

88. The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets inthe world.

False

89. The NYSE is defined as a "spot" market purely and simply because it has a physical location. The Nasdaq, on theother hand, is not a spot market because it has no one central location.

False

90. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

a. Maximize its expected total corporate income.b. Maximize its expected EPS.c. Minimize the chances of losses.d. Maximize the stock price per share over the long run, which is the stock's intrinsic value.e. Maximize the stock price on a specific target date.

D

91. The primary reason the annual report is important in finance is that it is used by investors when they formexpectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

True

92. The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of thestockholders' claim against the firm's existing assets. Put another way retained earnings are stockholders'reinvested earnings.

True

93. The statement of cash flows has four main sections, one each for operating, investing, and financing 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 indicates theprice they are willing to pay and how many shares they will buy at that price. The highest price that permits thecompany to sell all the shares it wants to sell is determined--it is the "market clearing price," and all bidderswho specified that price or higher are allowed to buy their shares at the market clearing price.

True

95. The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if itsprice fell and sell it if it rose, 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 stock.

False

97. The time dimension is important in financial statement analysis. The balance sheet shows the firm's financialposition at a given point in time, the income statement shows results over a period of time, and the statement ofcash flows reflects specific changes in accounts over that period 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 abusiness is able to provide to its investors is its free cash flow. This is the reason that FCF is so important infinance.

True

99. There are many types of unethical business behavior. One example is where executives provide information thatthey know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it isnot illegal to provide it to stockholders because they are the owners of the firm, not outsiders.

False

100. To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.

True

101. Trades on the NYSE are generally completed by having a brokerage firm acting as a "dealer" buy securities andadding them to its inventory or selling from its inventory. The Nasdaq, on the other hand, operates as an auctionmarket, 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 company's financial 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, addsnet income, subtracts dividends paid, and ends up with retained earnings at the end of the year. Over time, aprofitable company will have earnings in excess of the dividends it pays out, and the series of annual retainedearnings will result in a substantial amount of retained earnings 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 of the following actions would be likely to encourage a firm's managers to make decisions that are in thebest interests of shareholders?

a. The percentage of executive compensation that comes in the form of cash is increased and the percentagecoming from long-term stock options is 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 rather than by small individual investors rises from 10% to 80%.d. The firm's founder, who is also president and chairman of the board, sells 90% of her shares.e. The firm's board of directors gives the firm's managers greater freedom to take whatever actions they thinkbest without obtaining board approval.

C

106. Which of the following actions would be likely to reduce conflicts of interest between stockholders and managers?

a. Congress passes a law that severely restricts hostile takeovers.b. A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-termoptions to buy stock.c. The company changes the way executive stock options are handled, with all options vesting after 2 years ratherthan having 20% of the options awarded vest every 2 years over a 10-year period.d. The company's outside auditing 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 directors to all outside directors, and thedirectors are compensated with stock rather than cash.

E

107. Which of the following actions would be most likely to reduce conflicts between stockholders and bondholders?

a. Including restrictive covenants in the company's bond indenture (which is the contract between the companyand its bondholders).b. Compensating managers with more stock options and less cash income.c. The passage of laws that make it harder for hostile 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 thatmatures in less than one year.

A

108. Which of the following actions would be most likely to reduce conflicts of interest between stockholders andbondholders?

a. If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and therebyartificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot beprosecuted but the superior can be prosecuted.b. There are many types of unethical business behavior. One example is where executives provide information thatthey know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it isnot 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, butit did not lead to any important changes in business practices.d. If someone deliberately understates costs and thereby causes reported profits to increase, then this can causethe price of the stock to rise above its intrinsic value. The stock will probably fall in the future. Both those whoparticipated in the fraud and the firm itself can be prosecuted.e. Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not,and this is what determines ethical behavior in business.

D

109. Which of the following actions would be most likely to reduce potential conflicts of interest between stockholdersand managers?

a. Pay managers large cash salaries and give them no stock options.b. Change the corporation's formal documents to make it easier for outside investors to acquire a controllinginterest in the firm through a hostile takeover.c. Beef up the restrictive covenants in the firm's debt agreements.d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personalwealth in the firm's stock.e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the timebefore options can be exercised and the shares that are received can be sold.

B

110. Which of the following could explain why a business might choose to operate as a corporation rather than as a soleproprietorship or a partnership? a. Corporations 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 is offset by the tax advantages ofincorporation.d. Corporate investors are exposed to unlimited liability.e. Corporations generally find it easier to raise large amounts of capital.

E

111. Which of the following factors could explain why Michigan Energy's cash balance increased even though it had anegative cash flow last year?

a. The company sold a new issue 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 repurchased 20% of its common stock.

A

112. Which of the following is a primary market transaction?

a. You sell 200 shares of IBM stock on the NYSE 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 himcash and he gives you the stock.c. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.d. One financial institution buys 200,000 shares of IBM stock from another institution. An investment bankerarranges the transaction.e. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted inprior years.

C

113. Which of the following is an example of a capital market instrument?

a. Commercial paper.b. Preferred stock.c. U.S. Treasury bills.d. Banker's acceptances.e. Money market mutual funds.

B

114. Which of the following items cannot be found on a firm's balance sheet under current liabilities?

a. Accounts payable.b. Short-term notes payable to the bank.c. Accrued wages.d. Cost of goods sold.e. Accrued payroll taxes.

D

115. Which of the following items is NOT normally considered to be a current asset?

a. Accounts receivable.b. Inventory.c. Bonds.d. Cash.e. Short-term, highly-liquid, marketable securities.

C

116. Which of the following mechanisms would be most likely to help motivate managers to act in the best interests ofshareholders?

a. Decrease the use of restrictive covenants in bond agreements.b. Take actions that reduce the possibility of a hostile takeover.c. Elect a board of directors that allows managers greater freedom of action.d. Increase the proportion of executive compensation that comes from stock options and reduce the proportionthat is paid as cash salaries.e. Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

D

117. Which of the following statements would most people in business agree with?

a. A corporation's short-run profits will almost always increase if the firm takes actions that the government hasdetermined are in the best interests of the nation.b. Firms and government agencies almost always agree with one another regarding the restrictions that should beplaced on hiring and firing employees.c. "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly thanother 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 business school, it isstill useful for business schools to cover ethics, if only to give students an idea about the adverse consequences ofunethical behavior to themselves, their firms, and the nation.

E

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 companies to depreciate equipment over longer lives? Assume that sales, otheroperating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax andstockholder reporting purposes.

a. Companies' after-tax operating profits would decline.b. Companies' physical stocks of fixed assets would increase.c. Companies' cash flows would increase.d. Companies' cash positions would decline.e. Companies' reported net incomes would decline.

D

119. You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brothergave you a check for the stock and you gave your brother the stock certificates. Which of the following best describesthis transaction?

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 assets.d. This is an example of a money market transaction.e. This is an example of a derivative market transaction.

A

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 possible for a firm to go public and yet not raise any additional new capital for the firm itself.

C

Principles of Finance