Test Bank for Principles of Managerial Finance, 8th Edition

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Test BankforPrinciples of ManagerialFinance Brief8thEditionChad J. ZutterUniversity of PittsburghScott B. SmartIndiana University

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1Principles of Managerial Finance, Brief Ed., 8e(Zutter/Smart)Chapter 1The Role of Managerial Finance1.1Finance and the firm.1) A firm is a business organization that sells goods and services.Answer: TRUEDiff: 1Topic: Finance and the firmLearning Obj.: LG 1Learning Outcome: F-01AACSB: Analytical Thinking2) In finance we say that the goal of the firm ought to be to maximize profits.Answer: FALSEDiff: 1Topic: Finance and the firmLearning Obj.: LG 1Learning Outcome: F-01AACSB:Analytical Thinking3) Other things being equal, it is better to receive money sooner rather than later.Answer: TRUEDiff: 1Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking4) Financial managers evaluating decision alternatives or potential actions must consider________.A) only riskB) only returnC) either risk or returnD) risk, return, and the impact on share priceAnswer: DDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking

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25) If a firm earns a profit, it will necessarily also generate a positive cash flow.Answer: FALSEDiff: 2Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking6) If a firm's stockholders are risk averse, the firm can make its stockholders better off by earningthe highest possible returns on its investments.Answer: FALSEDiff: 2Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB:Analytical Thinking7) Which of the following is an example of a firm's stakeholder?A) suppliersB) Federal ReserveC) mediaD) competitorsAnswer: ADiff: 1Topic: What About Stakeholders?Learning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking

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38) A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each assetcosts $35,000 and is expected to provide earnings over a three-year period as described below.Based on the wealth maximization goal, the financial manager would choose ________.A) Asset 1B) Asset 2C) Asset 3D) Asset 4Answer: ADiff: 2Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Reflective Thinking9) In the most recent year, two different companies generated the same earnings per share. Thestocks of these two companies should trade at the same price.Answer: FALSEDiff: 2Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking10) One reason that firms exist is that most investors are risk averse, so they are not willing tomake the kinds of risky investments that firms typically undertake.Answer: FALSEDiff: 1Topic: Finance and the firmLearning Obj.: LG 1Learning Outcome: F-01AACSB: Analytical Thinking

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411) Which of the following is TRUE of stakeholders?A) They are the owners of a firm.B) They are groups to whom a firm has financial obligations.C) They are groups having a direct economic link to a firm.D) They include only the bondholders, common stockholders, and preferred stockholders.Answer: CDiff: 1Topic: What About Stakeholders?Learning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking12) Which of the following is TRUE regarding cash flow?A) Profits do not necessarily result in cash flows available to the stockholders.B) It is guaranteed that the board of directors will increase dividends when net cash flowsincrease.C) A firm's income statement will never show a positive profit when its cash outflows exceed itscash inflows.D) An increase in revenue will always result in an increase in cash flow.Answer: ADiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking13) Investors who are risk averse will make risky investments as long as they expectcompensation for doing so.Answer: TRUEDiff: 1Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking14) Which of the following is TRUE of cash flows and risk?A) Lower cash flow and lower risk result in an increase in share price.B) Higher cash flow and lower risk result in an increase in share price.C) Higher cash flow and higher risk result in an increase in share price.D) Lower cash flow and higher risk result in an increase in share price.Answer: BDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking

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515) The goal of business ethics is to motivate business and market participants to adhereto boththe letter and the spirit of laws and regulations in all aspects of business and professionalpractice.Answer: TRUEDiff: 1Topic: The Role of Business EthicsLearning Obj.: LG 3Learning Outcome: F-01AACSB: Ethical Understanding and Reasoning16) The primary goal of a financial manager is ________.A) minimizing riskB) maximizing profitC) maximizing wealthD) minimizing returnAnswer: CDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking17) Corporate owners earn a return ________.A) by realizing gains through increases in share price and interest earningsB) by realizing gains through increases in share price and cash dividendsC) through capital appreciation and retainedearningsD) through interest earnings and earnings per shareAnswer: BDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking18) The wealth of the owners of a corporation is represented by ________.A) profitsB) earnings per shareC) share valueD) cash flowAnswer: CDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking

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619) Wealth maximization as the goal of a firm implies enhancing the wealth of ________.A) the auditorsB) the creditorsC) the Federal ReserveD) the firm's stockholdersAnswer: DDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking20) The amount earned during the accounting period on each outstanding share of common stockis called ________.A) dividend per shareB) earnings per shareC) net profits after taxesD) book value per shareAnswer: BDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking21) Firm A generates more cash flow while taking less risk than Firm B. The stock price of FirmA should be higher than the stock price of Firm B.Answer: TRUEDiff: 2Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking

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722) Which of the following is NOT a reason that a firm that maximizes profits may fail tomaximize shareholder wealth.A) The timing of profits matters. Shareholders might prefer lower profits that arrive sooner.B) Risk matters. Shareholders are risk averse, so they prefer less risky investments that generatelower profits.C) Shareholder wealth depends on cash flow which is not the same as profit.D) If a firm maximizes profits by engaging in unethical business practices, it's stock price maybe adversely affected.Answer: BDiff: 2Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking23) ________ pool investment capital, makerisky investment decisions, and manage riskyinvestments on behalf of investors who would otherwise not be able to do so own their own.A) FirmsB) StockholdersC) StakeholdersD) RegulatorsAnswer: ADiff: 1Topic: Finance and the firmLearning Obj.:LG 1Learning Outcome: F-01AACSB: Analytical Thinking24) Finance is ________.A) the system of verifying, analyzing, and recording business transactionsB) the science of the production, distribution, and consumption of goods and servicesC) the science and art of how individuals and businesses raise, allocate, and invest moneyD) the art of merchandising products and servicesAnswer: CDiff: 1Topic: What is Finance?Learning Obj.: LG 1Learning Outcome: F-01AACSB: Analytical Thinking

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825) In March 2017, Amazon and Clorox reported nearly identical earnings per share, but thestock price of Amazon was more than six times higher than the Clorox stock price. The mostlikely explanation for that difference is that ________.A) Clorox is bad for theenvironmentB) Amazon is a riskier companyC) investors see better long-term prospects for AmazonD) Amazon has more shares of stock outstandingAnswer: CDiff: 1Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking26) The wealth of corporate owners is measured by the share price of the stock.Answer: TRUEDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking27) Risk, the magnitude and timing of cash flows are the key determinants of share price, whichrepresent the wealth of the owners in the firm.Answer: TRUEDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking28) A higher earnings per share (EPS) does not necessarily translate into a higher stock price.Answer: TRUEDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Reflective Thinking29) The profit maximization goal ignores thetiming of returns, does not directly consider cashflows, and ignores risk.Answer: TRUEDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Reflective Thinking

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930) When considering a firm's financial decision alternative, financial managers should acceptonly those actions that are expected to maximize shareholder value.Answer: TRUEDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Ethical Understanding and Reasoning31) An increase in a firm's risk will always result in a higher share price since the stockholdermust be compensated for the greater risk.Answer: FALSEDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking32) An objection to managing a firm on behalf of stakeholders rather than shareholders is that________.A) stakeholders have no economic interest in the firmB) stakeholders have an interest only in short-term outcomesC) there isno clear way to satisfy all stakeholders whose economic interests may be at odds witheach otherD) the goal of managing on behalf of stakeholders is too narrowAnswer: CDiff: 1Topic: Finance and the firmLearning Obj.: LG 1Learning Outcome: F-01AACSB: Analytical Thinking33) An effective ethics program ________.A) can weaken corporate valueB) has no effect on a corporation's valueC) can enhance a corporation's valueD) will result in high employee attrition rateAnswer: CDiff: 1Topic: Ethics and Share PriceLearning Obj.: LG 3Learning Outcome: F-01AACSB: Ethical Understanding and Reasoning

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1034) When considering a firm's financial decision alternative, financial managers should acceptonly those actions that are expected to increase the firm's profitability.Answer: FALSEDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Ethical Understanding and Reasoning35) ________ are the standards of conduct or moral judgment that apply to personsengaged incommerce.A) Government regulationsB) The Uniform Commercial CodesC) The rules of fair playD) Business ethicsAnswer: DDiff: 1Topic: Finance and the firmLearning Obj.: LG 1Learning Outcome: F-01AACSB: Analytical Thinking36) Cashflows and risk are the key determinants in share price. Increased risk, other thingsremaining the same, results in ________.A) a lower share priceB) a higher share priceC) an unchanged share priceD) an undetermined share priceAnswer: ADiff: 2Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking37) Cash flows and risk are the key determinants in share price. Increased cash flow results in________, other things remaining the same.A) a lower share priceB) a higher share priceC) an unchanged share priceD) an undetermined share priceAnswer: BDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking

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111.2Managing the firm.1) A treasurer is responsible for the firm's accounting activities, such as corporate accounting,tax management, financial accounting, and cost accounting.Answer: FALSEDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 2Learning Outcome: F-01AACSB: Analytical Thinking2) ________ decisions focus on how a company will spend its financial resources on long-termprojects that ultimately determine whether the firm successfully creates value for its owners.A) InvestmentB) FinancingC) Working capitalD) Risk managementAnswer: ADiff: 1Topic: Managing the firmLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking3) The principle of the time value of money basically says that ________.A) because firms pay managersa great deal, managers need to use their time very effectivelyB) money received today is more valuable than money received in the future because money inthe future is more riskyC) money received today is more valuable than money received in the futurebecause firms andindividuals can invest money they have today and earn a return on that moneyD) because of the principal-agent problem, investors cannot trust that money firms promise topay in the future will ever arriveAnswer: BDiff: 1Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking

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124) The primary principle that finance borrows from economics is ________.A) generally accepted accounting principlesB) cash is kingC) marginal cost-benefit analysisD) shareholder value maximizationAnswer: CDiff: 1Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking5) Financing decisions deal with the left-hand side of the firm's balance sheet.Answer: FALSEDiff: 1Topic: Primary Activities of the Financial ManagerLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking6) Which of the following activities of a finance manager determines the types of assets the firmholds?A) budget allocationB)investment decisionsC) financing decisionsD) analyzing and planning cash flowsAnswer: BDiff: 1Topic: Primary Activities of the Financial ManagerLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking7) You own a building supplystore. Today you sold construction materials to a contractor for$10,000 that you acquired a week ago for $8,000. You paid for the materials in cash, but yousold them to the contractor on credit, and you expect him to pay his bill in a few months. Basedon this information during the week you earned a positive profit but experienced a negative cashflow.Answer: TRUEDiff: 2Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking

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138) There is a tendency for CEOsof larger companies to earn more money than CEOs of smallercompanies. Suppose a CEO decides to acquire another company, thus increasing the size of theCEO's firm. Suppose also that the price of the stock of the acquiring firm falls when it learns oftheupcoming acquisition. This appears to be an example of ________.A) a CEO pursuing profit maximization rather than wealth maximizationB) the principal-agent problemC) a CEO behaving unethicallyD) the general principal that acquisitions are generally not good investmentsAnswer: BDiff: 2Topic: Managing the firmLearning Obj.: LG 6Learning Outcome: F-01AACSB: Reflective Thinking9) A corporation's stockholders elect its CEO.Answer: FALSEDiff: 1Topic: Managing the firmLearning Obj.: LG 3Learning Outcome: F-01AACSB: Reflective Thinking10) The money that firms raise to finance their activities is called ________.A) the capital budgetB) working capitalC) capitalD) accrualsAnswer: CDiff: 1Topic: Managing the firmLearning Obj.:LG 3Learning Outcome: F-01AACSB: Analytical Thinking11) Marginal cost-benefit analysis states that financial decisions should be made and actionsshould be taken only when the added benefits exceed the added costs.Answer: TRUEDiff: 1Topic: Relationship to EconomicsLearning Obj.: LG 4Learning Outcome: F-03AACSB: Analytical Thinking

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1412) The treasurer typically manages a firm's cash, investing surplus funds when available andsecuring outside financing when needed.Answer: TRUEDiff: 1Topic: Relationship to AccountingLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking13) A corporate treasurer's focus tends to be more external, while the controller's focus is moreinternal.Answer: TRUEDiff: 1Topic: Organizationof the Finance FunctionLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking14) The accrual method recognizes revenue at the point of sale and recognizes expenses whenincurred.Answer: TRUEDiff: 1Topic: Relationship to AccountingLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking15) A treasurer is commonly responsible for handling ________.A) tax managementB) corporate accountingC) investing surplus fundsD) cost accountingAnswer: CDiff: 1Topic: Organization of the Finance FunctionLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking

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1516) Which of the following is TRUE of accrual basis accounting?A) Expenses are recognized either when they are incurred or cash is paid.B) Revenue is recognized when a customer pays cash.C) Expenses are recognized when they are incurred.D) Revenue is recognized when a customer pays cash or shows interest to purchase the productor service.Answer: CDiff: 1Topic: Relationship to AccountingLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking17) Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 ofmerchandise purchased during the year at a total cost of $7,000. Although the firm paid infullfor the merchandise during the year, it is yet to collect at year end from the customer. The netprofit and cash flow from this sale for the year are ________.A) $3,000 and $10,000, respectivelyB) $3,000 and-$7,000, respectivelyC) $7,000 and-$3,000, respectivelyD) $3,000 and $7,000, respectivelyAnswer: BDiff: 2Topic: Relationship to AccountingLearning Obj.: LG 4Learning Outcome: F-02AACSB: Analytical Thinking18) A firm has just ended its calendar year making a sale in the amount of $150,000 ofmerchandise purchased during the year at a total cost of $112,500. Although the firm paid in fullfor the merchandise during the year, it is yet to collect at year end from the customer. The netprofit and cash flow from this sale for the year are ________.A) $0 and $150,000, respectivelyB) $37,500 and-$150,000, respectivelyC) $37,500 and-$112,500, respectivelyD) $150,000 and $112,500, respectivelyAnswer: CDiff: 2Topic: Relationship to AccountingLearning Obj.: LG 4Learning Outcome:F-02AACSB: Analytical Thinking

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1619) Stockholders expect to earn higher rates of return on investments with lower risk and lowerrates of return on investments with higher risk.Answer: FALSEDiff: 1Topic: Maximize Shareholder WealthLearning Obj.:LG 3Learning Outcome: F-01AACSB: Analytical Thinking20) As the risk of a stock investment increases, investors' ________.A) return will increaseB) return will decreaseC) required rate of return will decreaseD) required rate of return will increaseAnswer: DDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking21) The principal-agent problem arises when ________.A) the owners of the firm are not the people managing the firmB) the owners of the firm also manage the firmC) managers serve on a firm's board of directorsD) a firm is organized as a sole proprietorshipAnswer: ADiff: 2Topic: Managing the firmLearning Obj.: LG 6Learning Outcome: F-01AACSB: Reflective Thinking22) Which of the following works as a conduit of information between the firm and its investors?A) the treasurerB) the controllerC) the director of internal auditD) the director of investor relationsAnswer: DDiff: 1Topic: Managing the firmLearningObj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking

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1723) ________ decisions refer to how a firm manages its short-term resources on a day-to-daybasis.A) FinancingB) InvestmentC) Working capitalD) Managerial financeAnswer: CDiff: 1Topic: Managing the firmLearning Obj.: LG 3Learning Outcome: F-01AACSB: Reflective Thinking24) There is a tradeoff between risk and return (i.e., to earn higher returns you generally have totake more risk) because ________.A) investors like risk and return and want more of bothB) investors are risk averse, so they will not accept riskier investments unless they offer higherreturnsC) to earn higher returns you have to make bigger investments and bigger investments arealways riskier than smalleronesD) investors care about returns but not about risksAnswer: ADiff: 2Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Reflective Thinking25) The time value of money principle implies that all other things being equal,investments thatproduce profits faster are preferred over those that produce more distant profits.Answer: TRUEDiff: 1Topic: Managing the firmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking

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1826) The ________ has a role thatfocuses on budgeting, accounting, and tracking theperformance of a single business unit.A) controllerB) treasurerC) chief financial officerD) director of risk managementAnswer: ADiff: 1Topic: Managing the firmLearning Obj.: LG 3Learning Outcome: F-01AACSB: Reflective Thinking27) When managers are trying to create value for shareholders, their primary focus should be onearnings rather than cash flow.Answer: FALSEDiff: 1Topic: Managing the firmLearning Obj.: LG 4Learning Outcome:F-01AACSB: Analytical Thinking1.3Organization forms, taxation, and the principal-agent relationship.1) Which of the following legal forms of organization is most expensive to organize?A) sole proprietorshipsB) partnershipsC) corporationsD) limited partnershipAnswer: CDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking2) Which of the following legal forms of organization has the ease of dissolution?A) sole proprietorshipsB) partnershipsC) limited partnershipsD) corporationsAnswer: ADiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking

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193) Under which of the following legal forms of organization is ownership readily transferable?A) sole proprietorshipsB) partnershipsC) limited partnershipsD) corporationsAnswer: DDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking4) Which of the following forms of organizations is the easiest to form?A) sole proprietorshipsB) limited liability corporationC) limited partnershipD) S-corporationsAnswer: ADiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking5) A major weakness of a partnership is ________.A) the difficulty in maintaining owners' controlB) the difficulty in liquidating or transferring ownershipC) the double taxation of incomeD) its highorganizational costsAnswer: BDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking

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206) Which of the following is a strength of a corporation?A) low taxesB) limited liabilityC)low organization costsD) less government regulationAnswer: BDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking7) Which of the following legal forms of organizations is characterized by unlimited liability?A) sole proprietorshipB) limited partnershipC) corporationD) C-corporationAnswer: ADiff: 2Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking8) Whichof the following is TRUE of a partnership and a corporation?A) In a corporation, income is taxed at the corporate level; whereas, in a partnership, income istaxed twice.B) In a partnership, income is taxed once at the individual level; whereas, in a corporation,income is taxed twice.C) Income from both forms of organizations are double-taxed.D) In a partnership, income is exempted from tax up to $10 million; whereas, in a corporation,income is taxed twice.Answer: BDiff: 1Topic: TaxesLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking

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219) Which of the following is TRUE of sole proprietorships and corporations?A) It is difficult to transfer ownership of corporations compared to that of sole proprietorships.B) Income from both forms of organizations are taxed only at the corporate level.C) Both sole proprietorships and corporations are equally scrutinized and regulated bygovernment bodies.D) In sole proprietorships, owners have unlimited liability; whereas, in corporations, ownershave limited liability.Answer: DDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking10) In partnerships, partners can readily transfer their wealth to other partners.Answer: FALSEDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking11) A sole proprietor has unlimited liability; his or her total investment in the business, but nothis or her personal assets, can be taken to satisfy creditors.Answer: FALSEDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking12) In a limited partnership, all partners' liabilities are limited to their investment in thepartnership.Answer: TRUEDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking

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2213) Under a progressive tax structure in which tax rates rise with income levels ________.A) the marginal tax rate and the average tax rate are the sameB) the average tax rate is what really matters when an individual or business is making afinancial decisionC) the marginal tax rate is usually less than the average tax rateD) the marginal tax rate is usually greater than the average tax rateAnswer: DDiff: 2Topic: TaxesLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking14) The term "double taxation" means that ________.A) partnerships and soleproprietorships pay tax on the income that they earn, and then incomedistributed from the business to the owner is taxed again at the individual levelB) the highest federal income tax rate faced by corporations is twice the highest tax rate faced byindividualsC) corporations pay tax on the income they earn and then shareholders pay tax on income thatthe corporation distributes to themD) a corporation pays tax on the interest it pays to bondholders and then bondholders pay taxagain on the interest payments they receive from firmsAnswer: CDiff: 2Topic: TaxesLearning Obj.: LG 5Learning Outcome: F-01AACSB: Reflective Thinking15) Suppose a certain business pays 10% tax on its first $10,000 in come, 12% tax on incomeabove $10,000 but below $40,000, and 22% tax on income above $40,000. Suppose the businessearns $50,000 in income this year. It's marginal tax rate is ________.A) 10%B) 12%C) 22%D) greater than 22%Answer: CDiff: 2Topic: TaxesLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking

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2316) Corporate governance refers to ________.A) the rules, processes, and laws by which companies are operated, controlled, and regulatedB) the fact that corporations heavily influence the actions of governments through their lobbyingeffortsC) the notion that corporations act like a democracy in the sense that every shareholder has anequal vote on corporate decisionsD) the idea that a corporate CEO is really accountable to no one and must be constrained bygovernment actionAnswer: ADiff: 1Topic: Corporate GovernanceLearning Obj.: LG 6Learning Outcome: F-01AACSB: Reflective Thinking17) Agency costs are ________.A) costs that managers bear when they do not act in the interests of shareholdersB) costs that firms must pay to comply with the regulations imposed by federal governmentagenciesC) costs that are exempt from taxationD) costs that shareholders bear because managers pursue their own interests rather than acting inthe interests of shareholdersAnswer: DDiff: 2Topic: Legal Forms of Business OrganizationLearning Obj.: LG 6Learning Outcome: F-01AACSB: Reflective Thinking18) Firms are legally required to pay dividends to stockholders just as they must make interestpayments to lenders.Answer: FALSEDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Reflective Thinking

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2419) Suppose a certain business pays 10% tax on its first $10,000 in come, 12% tax on incomeabove $10,000 but below $40,000,and 22% tax on income above $40,000. Suppose the businessearns $50,000 in income this year. Its average tax rate is closest to ________.A) 22%B) 14%C) 10%D) 17%Answer: BDiff: 2Topic: TaxesLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking20) Dividends are periodic distributions of cash to the stockholders of a firm.Answer: TRUEDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Reflective Thinking21) Suppose a certain business pays 10% tax on its first $10,000 in come, 12% tax on incomeabove $10,000 but below $40,000, and 22% tax on income above $40,000. Suppose the businessearns $50,000 in income this year. It tax liability is ________.A) $6,800B) $11,000C) $9,800D) $5,800Answer: ADiff: 2Topic: TaxesLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking22) Under a flat tax structure, where the same tax rate applies to all income levels ________.A) the marginal tax rate is greater than the average tax rateB) the marginal tax rate is less than the average tax rateC) the marginal tax rate is equal to the average tax rateD) the marginal tax rate is irrelevantAnswer: CDiff: 2Topic: TaxesLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking

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2523) In partnerships, owners have unlimited liability and may have to cover debts of other lessfinancially sound partners.Answer: TRUEDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking24) The board of directors is responsible for managing day-to-day operations and carrying outthe policies established by the chief executive officer.Answer: FALSEDiff: 1Topic: Corporate GovernanceLearning Obj.:LG 6Learning Outcome: F-26AACSB: Analytical Thinking25) Institutional investors are professional investors who work on behalf of individuals, business,and government.Answer: TRUEDiff: 1Topic: Corporate GovernanceLearning Obj.: LG 6LearningOutcome: F-26AACSB: Analytical Thinking26) The major purpose of the Sarbanes-Oxley Act of 2002 was to place caps on thecompensation that could be paid to corporate executives.Answer: FALSEDiff: 1Topic: Corporate GovernanceLearning Obj.: LG 6Learning Outcome: F-26AACSB: Analytical Thinking

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2627) The board of directors is typically responsible for ________.A) approving strategic goals and plansB) managing day-to-day operationsC) arranging finance for approved long-term investmentsD) maintaining and controlling the firm's daily cash balancesAnswer: ADiff: 1Topic: Corporate GovernanceLearning Obj.: LG 6Learning Outcome: F-26AACSB: Analytical Thinking28) The responsibility for managing day-to-day operations and carrying out corporate policiesbelongs to the ________.A) board of directorsB) chief executive officerC) stockholdersD) creditorsAnswer: BDiff: 1Topic: Corporate GovernanceLearning Obj.: LG 6Learning Outcome: F-26AACSB: Analytical Thinking29) Which of thefollowing is an example of agency cost?A) costs incurred for setting up an agencyB) failure to make an investment that would make shareholders wealthierC) payment of income taxD) payment of interestAnswer: BDiff: 1Topic: The Agency IssueLearningObj.: LG 6Learning Outcome: F-26AACSB: Ethical Understanding and Reasoning

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2730) Which of the following is a routine way that boards try to align the interests of managers andstockholders?A) fire managers who are inefficientB) remove management'sperquisitesC) tie management compensation to the performance of the company's common stock priceD) tie management compensation to the level of dividend per shareAnswer: CDiff: 1Topic: The Agency IssueLearning Obj.: LG 6Learning Outcome: F-26AACSB: Ethical Understanding and Reasoning31) The marginal tax rate paid on a firm's ordinary income can be calculated by dividing its taxesby its net income.Answer: FALSEDiff: 1Topic: Ordinary IncomeLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking32) The average tax rate paid on the firm's ordinary income can be calculated by dividing itstaxes by its taxable income.Answer: TRUEDiff: 1Topic: Ordinary IncomeLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking33) The tax deductibility of various expenses such as general and administrative expenses________.A) increases their pretax costB) reduces their after-tax costC) has no effect on their after-tax costD) has an unpredictable effect on theirafter-tax costAnswer: BDiff: 1Topic: Ordinary IncomeLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking

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2834) Jennings, Inc. has a tax liability of $170,000 on pretax income of $500,000. What is theaverage tax rate for Jennings, Inc.?A) 34 percentB) 46 percentC) 25 percentD) 40 percentAnswer: ADiff: 2Topic: Ordinary IncomeLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking35) The average tax rate of a corporation with ordinary income of $105,000and a tax liability of$24,200 is ________.A) 46 percentB) 23 percentC) 34 percentD) 15 percentAnswer: BDiff: 2Topic: Ordinary IncomeLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking36) If a corporation sells certain capital equipment for more than its initial purchase price, thedifference between the sale price and the purchase price is called a(n) ________.A) ordinary gainB) revenue gainC) capital gainD) abnormal gainAnswer: CDiff: 1Topic: Capital GainsLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking

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2937) In general, most corporate capital gains are taxed at ________ tax rate.A) the averageB) the regular corporateC) the historicD) a 30 percentAnswer: BDiff: 1Topic: Capital GainsLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking38) Corporation X needs $1,000,000 and can raise this through debt at an annual rate of 6percent, or preferred stock at an annual cost of 8 percent. If the corporation has a 21 percent taxrate, the after-tax cost of each is ________.A) debt: $60,000; preferred stock: $80,000B) debt: $47,400; preferred stock: $63,200C) debt: $47,400; preferred stock: $80,000D) debt: $60,000; preferred stock: $63,200Answer: CDiff: 2Topic: Ordinary IncomeLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking39) The marginal tax rate represents the rate at which the next dollar of income is taxed.Answer: TRUEDiff: 1Topic: Ordinary IncomeLearning Obj.: LG 5LearningOutcome: F-01AACSB: Analytical Thinking40) All dividend income received by a corporation is exempted from taxation.Answer: FALSEDiff: 1Topic: Ordinary IncomeLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking

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