Question 1
Limited liability companies are primarily designed to:
Multiple Choice
allow a portion of their owners to enjoy limited liability while granting the other portion of their owners control over the entity.
provide the benefits of the corporate structure only to foreign-based entities.
spin off a wholly owned subsidiary.
allow companies to reorganize themselves through the bankruptcy process.
provide limited liability while avoiding double taxation.
Question 2
A sole proprietorship:
Multiple Choice
provides limited financial liability for its owner.
involves significant legal costs during the formation process.
has an unlimited life.
has its profits taxed as personal income.
can generally raise significant capital from non-owner sources.
Question 3
Maria is the sole proprietor of an antique store that is located in a rented warehouse. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed?
I. Sell the inventory and apply the proceeds to the debt
II. Sell the lighting fixtures from the building and apply the proceeds to the debt
III. Withdraw funds from Maria's personal account at the bank to pay the store's debt
IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt
Multiple Choice
I only
III only
I and II only
I, II, and III only
I, III, and IV only
Question 4
The shareholders of Weil's Markets would benefit if the firm were to be acquired by Better Foods. However, Weil's board of directors rejects the acquisition offer. This is an example of:
Multiple Choice
a corporate takeover.
a capital structure issue.
a working capital decision.
an agency conflict.
a compensation issue.
Question 5
Which one of the following occupations best fits into the corporate area of finance?
Multiple Choice
Mortgage broker
Treasury bill analyst
Chief financial officer
Insurance risk manager
Local bank manager
Question 6
Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts?
Multiple Choice
Sole proprietorship
Limited partnership
Corporation
Joint stock company
General partnership
Question 7
An employee has a claim on the cash flows of Martin's Machines. This claim is defined as a claim by one of the firm's:
Multiple Choice
residual owners.
shareholders.
financiers.
provisional partners.
stakeholders.
Question 8
Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners?
Multiple Choice
Sole proprietorship
General partnership
Limited partnership
Limited liability company
Corporation
Question 9
Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?
Multiple Choice
Limited partnership
Corporation
Sole proprietorship
General partnership
Public company
Question 10
The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s?
Multiple Choice
Increased stock market volatility
Corporate accounting and financial fraud
Increased executive compensation
Increased foreign investment in U.S. stock markets
Increased use of tax loopholes
Question 11
Which one of the following is included in the market value of a firm but not in the book value?
Multiple Choice
Raw materials
Partially built inventory
Long-term debt
Reputation of the firm
Value of a partially depreciated machine
Question 12
Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:
Multiple Choice
had to increase.
had to decrease.
remained constant.
could have either increased, decreased, or remained constant.
was unaffected as the changes occurred in the firm's current accounts.
Question 13
Highly liquid assets:
Multiple Choice
increase the probability a firm will face financial distress.
appear on the right side of a balance sheet.
generally produce a high rate of return.
can be sold quickly at close to full value.
include all intangible assets.
Question 14
Cash flow from assets is defined as:
Multiple Choice
the cash flow to shareholders minus the cash flow to creditors.
operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.
operating cash flow minus the change in net working capital minus net capital spending.
operating cash flow plus net capital spending plus the change in net working capital.
cash flow to shareholders minus net capital spending plus the change in net working capital.
Question 15
A firm's liquidity level decreases when:
Multiple Choice
inventory is purchased with cash.
inventory is sold on credit.
inventory is sold for cash.
an account receivable is collected.
proceeds from a long-term loan are received.
Question 16
Given a profitable firm, depreciation:
Multiple Choice
increases net income.
increases net fixed assets.
decreases net working capital.
lowers taxes.
has no effect on net income.
Question 17
An income statement prepared according to GAAP:
Multiple Choice
reflects the net cash flows of a firm over a stated period of time.
reflects the financial position of a firm as of a particular date.
distinguishes variable costs from fixed costs.
records revenue when payment for a sale is received.
records expenses based on the matching principle.
Question 18
Which one of the following is an intangible fixed asset?
Multiple Choice
Inventory
Machinery
Copyright
Account receivable
Building
Question 19
Shareholders' equity is best defined as:
Multiple Choice
the residual value of a firm.
positive net working capital.
the net liquidity of a firm.
cash inflows minus cash outflows.
the cumulative profits of a firm over time.
Question 20
Cash flow to stockholders is defined as:
Multiple Choice
cash flow from assets plus cash flow to creditors.
operating cash flow minus cash flow to creditors.
dividends paid plus the change in retained earnings.
dividends paid minus net new equity raised.
net income minus the addition to retained earnings.
Question 21
Which one of these is the best example of systematic risk?
Multiple Choice
Discovery of a major gas field
Decrease in textile imports
Increase in agricultural exports
Decrease in gross domestic product
Decrease in management bonuses for banking executives
Question 22
Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security?
Multiple Choice
Security beta multiplied by the market rate of return
Market risk premium
Security beta multiplied by the market risk premium
Risk-free rate of return
Zero
Question 23
Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?
Multiple Choice
Systematic
Unsystematic
Diversification
Security market line
Capital asset pricing model
Question 24
A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?
Multiple Choice
An increase in the rate of return in a recessionary economy
An increase in the probability of an economic boom
A decrease in the probability of a recession occurring
A decrease in the probability of an economic boom
An increase in the rate of return for a normal economy
Question 25
Portfolio diversification eliminates:
Multiple Choice
all investment risk.
the portfolio risk premium.
market risk.
unsystematic risk.
the reward for bearing risk.
Question 26
Which statement is true?
Multiple Choice
The expected rate of return on any portfolio must be positive.
The arithmetic average of the betas for each security held in a portfolio must equal 1.0.
The beta of any portfolio must be 1.0.
The weights of the securities held in any portfolio must equal 1.0.
The standard deviation of any portfolio must equal 1.0.
Question 27
Which one of the following is the best example of unsystematic risk?
Multiple Choice
Inflation exceeding market expectations
A warehouse fire
Decrease in corporate tax rates
Decrease in the value of the dollar
Increase in consumer spending
Question 28
The systematic risk principle states that the expected return on a risky asset depends only on the asset's ___ risk.
Multiple Choice
unique
diversifiable
asset-specific
market
unsystematic
Question 29
Which one of the following best exemplifies unsystematic risk?
Multiple Choice
Unexpected economic collapse
Unexpected increase in interest rates
Unexpected increase in the variable costs for a firm
Sudden decrease in inflation
Expected increase in tax rates
Question 30
The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the:
Multiple Choice
squared deviation.
beta coefficient.
standard deviation.
mean.
variance.
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