,CHAPTER 1—AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
TRUE/FALSE
1. The form of organization for a business is not an important issue, as this decision has very little effect
on the income and wealth of the firm's owners.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Firm organization KEY: Bloom’s: Knowledge
2. The major advantage of a regular partnership or a corporation as a form of business organization is the
fact that both offer their owners limited liability, whereas proprietorships do not.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Firm organization KEY: Bloom’s: Knowledge
3. There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life
of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for
partnerships to attract large amounts of capital and thus to grow to a very large size.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Partnership KEY: Bloom’s: Knowledge
4. Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the
owner's unlimited personal liability for the business' debts.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Proprietorship KEY: Bloom’s: Knowledge
5. One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Limited liability KEY: Bloom’s: Knowledge
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
, 6. If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the
common stock and thus shareholders' wealth.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-3 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Value maximization KEY: Bloom’s: Knowledge
7. If Firm A's business is to obtain savings from individuals and then invest them in financial assets
issued by other firms or individuals, Firm A is a financial intermediary.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-4 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Financial intermediaries KEY: Bloom’s: Knowledge
8. If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary
market transaction.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-8 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial markets, institutions, and interest rates LOC: TBA
TOP: Financial markets KEY: Bloom’s: Knowledge
9. Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price
of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and
institutional investors. This is a primary market transaction.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-8 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial markets, institutions, and interest rates LOC: TBA
TOP: Financial markets KEY: Bloom’s: Knowledge
10. One of the functions of NYSE specialists is to facilitate trading by keeping an inventory of shares of
the stocks in which they specialize, buying when investors want to sell and selling when they want to
buy. They change the bid and ask prices of the securities so as to keep supply and demand in balance.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-11 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial markets, institutions, and interest rates LOC: TBA
TOP: Stock market transactions KEY: Bloom’s: Knowledge
11. The disadvantages associated with a proprietorship are similar to those under a partnership. One
exception relates to the more formal nature of the partnership agreement and the commitment of all
partners' personal assets. As a result, partnerships do not have difficulty raising large amounts of
capital.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
, ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Partnership KEY: Bloom’s: Comprehension
12. The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and
inexpensively formed, are two key advantages to that form of business.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Proprietorship KEY: Bloom’s: Comprehension
MULTIPLE CHOICE
13. Which of the following statements is CORRECT?
a. One of the disadvantages of incorporating a business is that the owners then become
subject to liabilities in the event the firm goes bankrupt.
b. Sole proprietorships are subject to more regulations than corporations.
c. In any type of partnership, every partner has the same rights, privileges, and liability
exposure as every other partner.
d. Sole proprietorships and partnerships generally have a tax advantage over many
corporations, especially large ones.
e. Corporations of all types are subject to the corporate income tax.
ANS: D
Sole proprietorships and partnerships pay personal income tax, but they avoid the corporate income
tax. Small corporations that meet certain requirements can elect to be classified as S Corporations, and
then the business is taxed as a partnership.
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 1-2
NAT: BUSPROG: Analytic
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Firm organization KEY: Bloom’s: Comprehension
MSC: TYPE: Multiple Choice: Conceptual
14. Which of the following statements is CORRECT?
a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to
unlimited liability.
b. It is generally easier to transfer one's ownership interest in a partnership than in a
corporation.
c. One of the advantages of the corporate form of organization is that it avoids double
taxation.
d. One of the advantages of a corporation from a social standpoint is that every stockholder
has equal voting rights, i.e., "one person, one vote."
e. Corporations of all types are subject to the corporate income tax.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
