Q&A Hero

Q: Savings by _____ in small dollar amounts is the origin of much of the money that funds business loans in an economy. A) consumers B) the U.S. government C) small businesses D) none of the above

Q: Financial markets and financial institutions are both part of: A) the U.S. Treasury. B) the financial system. C) the SEC. D) none of the above.

Q: An economy with a large flow of funds requires: A) a lot of gold reserves. B) a frictionless market. C) an efficient financial system. D) all of the above.

Q: It is impossible for the nominal rate of interest to be below the real rate of interest. A) True B) False

Q: Real rates of interest are perfectly observable. A) True B) False

Q: The nominal rate of interest is the rate of interest that is adjusted for inflation. A) True B) False

Q: Business finance companies obtain the majority of their funds by selling equity. A) True B) False

Q: Most companies use indirect market from a financial institution to fund their needs. A) True B) False

Q: Equities with maturity of greater than one year are generally traded in the capital market. A) True B) False

Q: The term money market reflects the idea that the instruments traded in the money market are highly marketable and easily converted into cash. A) True B) False

Q: Brokers are market specialists who do not bear risk of ownership of securities. A) True B) False

Q: The downside to a private placement transaction is that, it does not require the fees and expenses associated with an SEC registration. A) True B) False

Q: The existence of an active secondary market for a security will help to enhance the price of that particular security in the primary market. A) True B) False

Q: The vast preponderance of securities sales on the New York Stock Exchange are secondary market transactions. A) True B) False

Q: A primary market is any financial market in which owners of outstanding securities can resell them to other investors. A) True B) False

Q: Today, major money center banks in U.S have been allowed back to provide investment banking services. A) True B) False

Q: The law that prohibited commercial banks from engaging investment banking activities is the Financial Services Modernization Act of 1999. A) True B) False

Q: A privately held corporation securing a loan from its regional commercial bank is an example of a direct market transaction. A) True B) False

Q: Direct financial markets could be broadly labeled as wholesale markets for funding. A) True B) False

Q: Businesses are the principal borrower-spenders in the economy. A) True B) False

Q: Governments are the principal lender-savers in the economy. A) True B) False

Q: Without a financial market, purchasing a house would require a cash purchase. A) True B) False

Q: The financial system is nothing more than a collection of financial markets. A) True B) False

Q: The role of the financial system is to gather money from people, businesses and government that have funds to invest and to channel that money to those who need it. A) True B) False

Q: You have a friend who tells you that ethics are completely unimportant in business since a number of laws have been set up for us to know the rules of the game. Comment.

Q: Explain how agency costs might be found within a firm whose CEO owns no shares in the firm and whose compensation package is unaffected by the profits (cash or accounting profits) of the firm.

Q: Explain what should be the goal of a firm.

Q: The legal system and market forces impose substantial costs on individuals and institutions that engage in unethical behavior. Which of the following would not be an example of the above? A) Financial losses B) Legal fines C) Agency conflicts D) Jail time

Q: With regard to information, a central idea of fairness suggests that: A) decisions should be made on an even playing field. B) insiders should be able to trade whenever they want. C) insiders should never be able to trade. D) outsiders should not be allowed to trade since, by definition, they are at a disadvantage.

Q: _____ occur(s) when one party in a business transaction has information that is unavailable to the other parties in the transaction. A) Profits B) Information asymmetry C) Information efficiency D) None of the above

Q: An officer of a firm who is a majority owner in a competing firm will probably be subject to A) an IRS audit. B) a conflict of interest with his stockholders. C) arbitrage profit returns to the SEC. D) an FBI investigation.

Q: Which corporate officer, when he or she is guilty of serious misconduct, can subject the firm to the heavy losses in financial wealth? A) Marketing Manager B) CFO C) Chief Technology Officer D) Chief Risk Officer

Q: Corruption in business A) creates inefficiencies in an economy. B) inhibits growth in an economy. C) slows the rate of economic growth in a country. D) all of the above

Q: An example of an economy that had trouble in establishing a stock market and attracting foreign investment is A) Russia. B) China. C) The Czech Republic. D) Japan.

Q: The golden rule is an example of A) a current law. B) a civil law. C) an unworkable rule in financial markets. D) an ethical norm.

Q: A society's ideas about what actions are right and wrong are termed as: A) rules and policies. B) ethics. C) laws. D) unwritten laws.

Q: What is the major complaint concerning the Sarbanes-Oxley Act of 2002 by firms? A) The legislative maximum allowable compensation for a CEO. B) The legal requirement to disclose project information. C) The cost of compliance. D) The cost of maintaining an SEC employed officer at the firm's premises.

Q: Which of the following unconditional powers does the audit committee have the authority to do? A) Audit the personal bank account of the CEO B) Question any person employed by the firm C) Audit the compensation files of firms in the same industry D) None of the above

Q: Which of the following is NOT one of the strategies incorporated in the Sarbanes-Oxley Act of 2002? A) Attain greater board independence B) Establish compliance programs C) Establish ethics programs D) Dictate maximum compensation levels

Q: A director who is not an employee of the firm is called A) an executive director. B) an inside director. C) an independent director. D) an official director.

Q: Who among the following is responsible for setting an agenda at meetings of the board of directors? A) Chairperson of the board of directors B) President C) Nominating committee D) Manager

Q: Executives that repeatedly put their own interests before that of the firm may find that they have difficulty in finding another job after their current one. This is an example of A) the managerial labor market disciplining managers. B) the market for corporate control. C) the board of directors affecting the prospects of a manager. D) none of the above.

Q: If a firm has had an agency conflict which is reflected in a poor performing stock for a long period of time, then the firm may become a target of _____ A) an SEC investigation. B) a corporate raider. C) an IRS investigation. D) a bankruptcy lawyer.

Q: Which of the following mechanisms can help to align the behavior of managers with the goals of stockholders? A) Well-designed management compensation B) Managerial labor market C) An independent board of directors D) All of the above

Q: An example of an agency cost is, A) a manager turning down a value-contributing project because of its risks. B) a manager expensing a lavish dinner on the company expense report. C) a manager using too little debt within the firm's capital structure because of the additional risk associated with debt. D) all of the above.

Q: _____ has (have) a legal responsibility to represent stockholders' interests. A) A chairman B) A CEO C) A corporation's board of directors D) all of the above

Q: Who among the following is the principal in the agency relationship of a corporation? A) A company engineer B) The CEO of the firm C) A stockholders D) The board of directors

Q: One reason for the existence of agency problems between managers and stockholders is that: A) there is a significant degree of separation between management and ownership. B) managers know how to manage the firm better than stockholders. C) stockholders have unreasonable expectations about managerial performance. D) none of the above.

Q: Which of the following factors or activities can be controlled by the management of a firm? A) Capital budgeting B) The level of economic activity C) The level of market interest rates D) Stock market conditions

Q: Which of the following helps in maximizing stockholder's wealth not usually account for? A) Risk. B) Government regulation. C) The timing of cash flows. D) Amount of cash flows.

Q: If a firm establishes maximizing profits as the most important goal of the firm, which of the following would not be given proper consideration? A) Sales revenues B) Profits C) Risk of bankruptcy D) Cost of goods sold

Q: When analysts and investors determine the value of a firm's stock, they should consider: A) the size of the expected cash flows associated with owning the stock. B) the timing of the cash flows. C) the riskiness of the cash flows. D) all of the above.

Q: Which of the following is an appropriate goal for a firm? A) Profit maximization B) Revenue maximization C) Stockholder's wealth maximization D) Tax minimization

Q: Who among the following is typically responsible for managing a large corporation's financial function? A) The CEO B) The Chairman of the board C) The Vice-President - Production D) The CFO

Q: How is a CPA firm insulated from being pressurized by management? A) The audit committee approves hiring, firing, and paying fees to external auditors. B) The chairman of the board approves the external auditor's fees as well as the engagement letter. C) The IRS approves the external auditor's fees as well as the engagement letter. D) The CPA firm is not insulated from management.

Q: Which of the following is responsible for performing an independent audit of a firm's financial statements? A) CFO B) CEO C) CPA firm D) Audit committee

Q: Which of the following is primarily responsible for managing all aspects of a firm's financial side? A) CFO B) CEO C) Board of directors D) Audit committee

Q: Which of the following reports directly to the owners of a firm? (Assume that the firm is a public corporation.) A) CFO B) CEO C) Board of directors D) Audit committee

Q: Which of the following is considered a hybrid organizational form? A) Sole proprietorship B) Partnership C) Corporation D) Limited liability partnership

Q: Which organizational form best enables the owners of a firm to monitor the professional conduct of each other owners of the firm? A) Sole proprietorship B) Partnership C) Private corporation D) Public corporation

Q: Which of the following organizational forms is subject to the Securities and Exchange Commission (SEC) regulations? A) Sole proprietorship B) Partnership C) Private corporation D) Public corporation

Q: Which organizational form best enables a firm to sell its securities to the market? A) Sole proprietorship B) Partnership C) Private corporation D) Public corporation

Q: Which form of business organization generate(s) the majority of business revenues and profits in the United States? A) Sole proprietorship B) Partnership C) Corporation D) Both A and B

Q: Which of the following cannot be engaged in managing the business? A) A sole proprietor B) A general partner C) A limited partner D) None of the above

Q: Which of the following owners is protected by limited liability? A) A sole proprietor B) A general partner C) Owner of a corporation D) None of the above

Q: Which of the following business organizational form(s) is/are the easiest one(s) to raise capital? A) Sole proprietorship B) Partnership C) Corporation D) Both A and B

Q: Which of the following business organizational form(s) create(s) a tax liability on income at the personal income tax rate? A) Sole proprietorship B) Partnership C) Corporation D) Both A and B

Q: Which of the following business organizational form(s) subject(s) the owner(s) to unlimited liability? A) Sole proprietorship B) General partnership C) Corporation D) Both A and B

Q: The profitability of a firm can be negatively affected by: A) too much inventory. B) too little inventory. C) either A or B. D) neither A nor B.

Q: Financial markets in which equity and debt instruments with maturities greater than one year are traded are called: A) money markets. B) capital markets. C) Over the counter exchange. D) none of the above.

Q: A good capital budgeting decision is: A) one in which the benefits of the project are equal to the cost of the asset. B) one in which the benefits of the project are less than the cost of the asset. C) one in which the benefits of the project are more than the cost of the asset. D) all of the above.

Q: Capital budgeting decisions generally impact more on: A) the asset portion of the balance sheet. B) the short-term portion of the balance sheet. C) the current liability portion of the balance sheet. D) all of the above.

Q: Working capital management decisions help to determine: A) how a firm's day-to-day financial matters should be managed. B) how a firm should finance its assets. C) which productive assets a firm should purchase. D) all of the above.

Q: The capital budgeting decision process addresses A) how a firm's day-to-day financial matters should be managed. B) how a firm should finance its assets. C) which productive assets a firm should purchase. D) all of the above.

Q: Current liabilities are liabilities that: A) will be converted to cash within a year. B) must be paid within a year. C) will be converted to equity within a year. D) none of the above.

Q: Cash dividends are paid out of: A) residual cash flows. B) liquidated assets. C) long-term debt. D) all of the above.

Q: The cash remaining with the firm after paying its operating expenses, making payments to creditors, and taxes is called: A) earnings per share. B) capital contributed in excess of par. C) residual cash flows. D) assets.

Q: Which of the following is a basic source of funds for a firm? A) Debt B) Equity C) Asset liquidations D) Both A and B

Q: A trademark is an example of: A) a liquid asset. B) an intangible asset. C) a contingent asset. D) none of the above.

Q: Which of the following is a stakeholder? A) An employee B) A lender C) The IRS D) All of the above