QUIZ ON FINANCE

QUESTIONS :

 

Which of the following statements is CORRECT?

    

a.Corporations generally face fewer regulations than sole proprietorships.

b.Corporate shareholders are exposed to unlimited liability.

c.Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.

d.It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.

e.Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.

    

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?

    

a.The economy moves from a boom to a recession.

b.Households start saving a larger percentage of their income.

c.The Federal Reserve uses monetary policy in an attempt to stimulate the economy.

d.Corporations step up their expansion plans and thus increase their demand for capital.

e.The level of inflation begins to decline.

     Which of the following statements is CORRECT?    

a.Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned.

b.Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership.

c.In a regular partnership, liability for the firm’s debts is limited to the amount a particular partner has invested in the business.

d.A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation.

e.A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.

    

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?

    

a.There would be no changes in either prices or interest rates.

b.Prices would rise and interest rates would decline.

c.Prices and interest rates would both decline.

d.Prices and interest rates would both rise.

e.Prices would decline and interest rates would rise.

      Which of the following statements is CORRECT?    

a.Consumer automobile loans are evidenced by legal documents called “promissory notes,” and these individual notes are traded in the money market.

b.While the distinctions are blurring as investment banks are today buying commercial banks, and vice versa, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

c.The New York Stock Exchange is an auction market with a physical location.

d.If an investor sells shares of stock through a broker, then this would be a primary market transaction.

e.Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.

        Which of the following statements is CORRECT?    

a.Corporations of all types are subject to the corporate income tax.

b.In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.

c.Sole proprietorships are subject to more regulations than corporations.

d.Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.

e.One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.

     Which of the following statements is CORRECT?

a.The proper goal of the financial manager should be to attempt to maximize the firm’s expected cash flows, because this will add the most to the wealth of the individual shareholders.

b.The riskiness inherent in a firm’s earnings per share (EPS) depends on the characteristics of the projects the firm selects, and thus on the firm’s assets. However, EPS is not affected by the manner in which those assets are financed.

c.The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year.

d.Large, publicly-owned firms like AT&T and GM are controlled by their management teams. Ownership is generally widely dispersed, hence managers have great freedom in how they manage the firm. Managers may operate in stockholders’ best interests, but they may also operate in their own personal best interests. As long as managers stay within the law, there is no way to either force or motivate them to act in the stockholders’ best interests.

e.Potential agency problems can arise between stockholders and managers, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders.