Chapter 1 – GBG 333 - Review Questions
(1) Capital Structure Theory can be described as:
(a) explaining the reasons why firms use secondary financial markets to raise capital.
(b) the ability to explain the differences in motives between ownership and management of a corporation.
(c) the rationale for dividing the line between money and capital markets.
(d) the study of the relative importance of debt and equity in financing a corporation.
(2) The phenomenon of prices increasing over time can be referred to as:
(a) disinflation.
(b) inflation.
(c) insider trading.
(d) agency theory.
(3) A sole proprietorship has one outstanding advantage over other forms of business organization.
(a) Unlimited liability for the owner.
(b) The ability to raise financial capital from investors.
(c) Simplicity of decision-making.
(d) The ability to sell shares of the business to the public to raise additional financial capital.
(4) A partnership has the following advantages:
(a) it can pool the resources and expertise of two or more people.
(b) it can sell shares of the business to the public to raise additional financial capital.
(c) unlimited liability for all the partner-owners.
(d) simplicity of decision-making.
(5) A limited partnership has some particular advantages over a partnership:
(a) it can pool the resources and expertise of two or more people.
(b) it has advantages for raising capital from other partners who can be protected by limited liability.
(c) it can draw in limited partners who can take an active role in the business.
(d) it can sell shares of the business to the public to raise additional financial capital.
(6) A corporation can be best described as:
(a) a legal entity unto itself.
(b) a means to avoid personal liability in the conduct of business.
(c) a means to avoid double taxation of earnings, once at the corporate level, and the second time at the personal level.
(d) a form of ownership that always makes sense for small business.
(7) An "S" corporation is an advantage to:
(a) very large organizations that want to raise financial capital from a large number of potential shareholders.
(b) smaller business units that can avoid double-taxation at the corporate and personal level.
(c) smaller business units as a foolproof way to limit liability.
(d) All of the above are true.
(8) Institutional investors can be described as follows:
(a) They are responsible for the reduction in incentives for management to act in the interests of shareholders.
(b) They exercise control over large blocks of shares and have a major voice in the management of public corporations.
(c)
They are investors based in
public institutions such as the
(d) They are involved primarily in the activities of small, privately-held corporations.
(9) Which of the following statements describes the objective of financial management best?
(a) Shareholder Wealth Maximization involves maximizing the firm's profits at all times and without regard to external influences such as public opinion and social issues.
(b) Shareholder Wealth Maximization achieves the highest possible value for the firm in the marketplace.
(c) Maximizing short term profit, even at the expense of long term success of the firm.
(d) Creating the best value for management, in terms of pay and benefits.
(10) As a corporate financial manager, I would use money markets for the following purposes:
(a) to finance the construction of a new office building with a life of 20 years.
(b) to finance inventory for the upcoming Christmas rush.
(c) to finance the purchase of a new machine to manufacture door handles for General Motors, as I have a 10 year contract with them to supply this product.
(d) to finance a plan to reduce long term debt within the company.
(11) As a corporate financial manager, I would use capital markets for the following purposes:
(a) to finance the construction of a new office building with a life of 20 years.
(b) to finance inventory for the upcoming Christmas rush.
(c) to finance a plan to reduce long term debt within the company.
(d) Both (a) and (c).
(12) A primary market for securities is associated with the following events or characteristics:
(a) IBM issues an announcement that there will be an increase in dividends for all outstanding shares of stock.
(b) Yahoo announces a new issue of stock.
(c) US Steel announces a buy back of stock, as it will offer $25 for anyone who wants to sell their stock back to US Steel.
(d) None of the above involves a primary market transaction.
(13) A secondary market for securities can be described as:
(a) a less important market than the primary market.
(b) the trade of outstanding issues of stock, and not new issues of stock.
(c)
a market based outside of the
(d) a market that does not have importance in determining the market value of a stock.
(14) Agency theory can be applied in the following circumstances:
(a) to explain the reasons why corporate managers may not act in the interests of shareholders.
(b) to explain that there is a difference in the objectives of shareholders and managers of the corporation.
(c) to explain that incentives need to be developed to ensure that managers act in the interests of shareholders of the corporation.
(d) All of the above are true.
(15) Insider trading:
(a) is a problem that can be overcome without regulation.
(b) is not a problem as markets work best with certain people exercising market power at the expense of others.
(c) is a requirement for well-functioning markets, to create public confidence.
(d) should be eliminated to ensure more efficient and effective financial markets.
(16) Real capital can be defined as:
(a) a share of General Motors stock.
(b) a share in a mutual fund.
(c) a savings account balance.
(d) a machine that can manufacture artificial hip parts in plastic.
(17) Financial markets can be best described as:
(a) a meeting place for those who need money, and for those who have money to invest.
(b) a meeting place for corporations to exchange needs and requirements for financial capital.
(c)
a meeting place only within the
(d) a meeting place among bankers who determine short term needs for financial capital for US business.