Skip to content
Exam Guides

Test Bank for Principles of Managerial Finance, 15th Edition

  • Finance
  • 912 pages
  • Shared February 2025
  • 106 downloads

Sharpen your test-taking skills with Test Bank for Principles of Managerial Finance, 15th Edition, designed for maximum learning.

Preview 31 of 912 pages

See the first 31 pages exactly as they appear in the document.

  1. Page 1
    Read page 1 as text

    Test Bank for Principles of Managerial Finance 15 th Edition Chad J. Zutter University of Pittsburgh Scott B. Smart Indiana University

  2. Page 2
  3. Page 3
    Read page 3 as text

    1 Principles of Managerial Finance, 15e (Zutter) Chapter 1 The Role of Managerial Finance 1.1 Finance and the firm. 1) A firm is a business organization that sells goods and services. Answer: TRUE Diff: 1 Topic: Finance and the firm Learning Obj.: L G 1 Learning Outcome: F - 01 AACSB: Analytical Thinking 2) In finance we say that the goal of the firm ought to be to maximize profits. Answer: FALSE Diff: 1 Topic: Finance and the firm Learning Obj.: LG 1 Learning Outcome: F - 01 AACSB: Analytical Thi nking 3) Other things being equal, it is better to receive money sooner rather than later. Answer: TRUE Diff: 1 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking 4) Financial managers evaluating decision alternatives or potential actions must consider ________. A) only risk B) only return C) either risk or return D) risk, return, and the impact on share price Answer: D Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 5) If a firm earns a profit, it will necessarily also generate a positive cash flow. Answer: FALSE Diff: 2 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking

  4. Page 4
    Read page 4 as text

    2 6) If a firm's stockholders are risk averse, the firm can make its stockholders better off by earning the highest possible returns on its investments. Answer: FALSE Diff: 2 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinki ng 7) Which of the following is an example of a firm's stakeholder? A) suppliers B) Federal Reserve C) media D) competitors Answer: A Diff: 1 Topic: What About Stakeholders? Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 8) A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $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 1 B) Asset 2 C) Asset 3 D) Asset 4 Answer: A Diff: 2 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Reflective Thinking 9) In the most recent year, two different companies generated the same earnings per share. The stocks of these two companies should trade at the same price. Answer: FALSE Diff: 2 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking

  5. Page 5
    Read page 5 as text

    3 10) One reason that firms exist is that mos t investors are risk averse, so they are not willing to make the kinds of risky investments that firms typically undertake. Answer: FALSE Diff: 1 Topic: Finance and the firm Learning Obj.: LG 1 Learning Outcome: F - 01 AACSB: Analytical Thinking 11) Wh ich 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 stockholde rs, and preferred stockholders. Answer: C Diff: 1 Topic: What About Stakeholders? Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 12) Which of the following is true regarding cash flow? A) Profits do not necessarily result in ca sh flows available to the stockholders. B) It is guaranteed that the board of directors will increase dividends when net cash flows increase. C) A firm's income statement will never show a positive profit when its cash outflows exceed its cash inflows. D) An increase in revenue will always result in an increase in cash flow. Answer: A Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 13) Investors who are risk averse will make risky invest ments as long as they expect compensation for doing so. Answer: TRUE Diff: 1 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking

  6. Page 6
    Read page 6 as text

    4 14) 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: B Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 15) The goal of business ethics is to motivate business and market participants to adhere to both the letter a nd the spirit of laws and regulations in all aspects of business and professional practice. Answer: TRUE Diff: 1 Topic: The Role of Business Ethics Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Ethical Understanding and Reasoning 16) The primary goal of a financial manager is ________. A) minimizing risk B) maximizing profit C) maximizing wealth D) minimizing return Answer: C Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 17) Corporate owners earn a return ________. A) by realizing gains through increases in share price and interest earnings B) by realizing gains through increases in share price and cash dividends C) through capital appreciation and retained earnings D) throug h interest earnings and earnings per share Answer: B Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking

  7. Page 7
    Read page 7 as text

    5 18) The wealth of the owners of a corporation is represented by ________. A) profits B) earnings per share C) share value D) cash flow Answer: C Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 19) Wealth maximization as the goal of a firm implies enhancing the wealth o f ________. A) the auditors B) the creditors C) the federal reserve D) the firm's stockholders Answer: D Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 20) The amount earned during the accounting period on each outstanding share of common stock is called ________. A) dividend per share B) earnings per share C) net profits after taxes D) book value per share Answer: B Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Lear ning Outcome: F - 01 AACSB: Analytical Thinking 21) Firm A generates more cash flow while taking less risk than Firm B. The stock price of Firm A should be higher than the stock price of Firm B. Answer: TRUE Diff: 2 Topic: Managing the Firm Learning Ob j.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking

  8. Page 8
    Read page 8 as text

    6 22) Which of the following is NOT a reason that a firm that maximizes profits may fail to maximize 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 generate lower 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 may be adversely affected. Answer: B Diff: 2 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking 23) ________ pool investment capital, make risky investment de cisions, and manage risky investments on behalf of investors who would otherwise not be able to do so own their own. A) Firms B) Stockholders C) Stakeholders D) Regulators Answer: A Diff: 1 Topic: Finance and the firm Learning Obj.: LG 1 Learning Outcom e: F - 01 AACSB: Analytical Thinking 24) Finance is ________. A) the system of verifying, analyzing, and recording business transactions B) the science of the production, distribution, and consumption of goods and services C) the science and art of how in dividuals and businesses raise, allocate, and invest money D) the art of merchandising products and services Answer: C Diff: 1 Topic: What is Finance? Learning Obj.: LG 1 Learning Outcome: F - 01 AACSB: Analytical Thinking

  9. Page 9
    Read page 9 as text

    7 25) In March 2017, Amazon an d Clorox reported nearly identical earnings per share, but the stock price of Amazon was more than six times higher than the Clorox stock price. The most likely explanation for that difference is that ________. A) Clorox is bad for the environment B) Amaz on is a riskier company C) investors see better long - term prospects for Amazon D) Amazon has more shares of stock outstanding Answer: C Diff: 1 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking 26) The weal th of corporate owners is measured by the share price of the stock. Answer: TRUE Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 27) Risk, the magnitude and timing of cash flows are the key determinants of share price, which represent the wealth of the owners in the firm. Answer: TRUE Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 28) A higher earnings per share (EPS ) does not necessarily translate into a higher stock price. Answer: TRUE Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Reflective Thinking 29) The profit maximization goal ignores the timing of returns, does not directly consider cash flows, and ignores risk. Answer: TRUE Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Reflective Thinking

  10. Page 10
    Read page 10 as text

    8 30) When considering a firm's financial decision alternative, fina ncial managers should accept only those actions that are expected to maximize shareholder value. Answer: TRUE Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Ethical Understanding and Reasoning 31) An inc rease in a firm's risk will always result in a higher share price since the stockholder must be compensated for the greater risk. Answer: FALSE Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thi nking 32) An objection to managing a firm on behalf of stakeholders rather than shareholders is that ________. A) stakeholders have no economic interest in the firm B) stakeholders have an interest only in short - term outcomes C) there is no clear way to sa tisfy all stakeholders whose economic interests may be at odds with each other D) the goal of managing on behalf of stakeholders is too narrow Answer: C Diff: 1 Topic: Finance and the firm Learning Obj.: LG 1 Learning Outcome: F - 01 AACSB: Analytical T hinking 33) An effective ethics program ________. A) can weaken corporate value B) has no effect on a corporation's value C) can enhance a corporation's value D) will result in high employee attrition rate Answer: C Diff: 1 Topic: Ethics and Share Price Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Ethical Understanding and Reasoning 34) When considering a firm's financial decision alternative, financial managers should accept only those actions that are expected to increase the firm's profitabi lity. Answer: FALSE Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Ethical Understanding and Reasoning

  11. Page 11
    Read page 11 as text

    9 35) ________ are the standards of conduct or moral judgment that apply to persons engaged in commerce . A) Government regulations B) The Uniform Commercial Codes C) The rules of fair play D) Business ethics Answer: D Diff: 1 Topic: Finance and the firm Learning Obj.: LG 1 Learning Outcome: F - 01 AACSB: Analytical Thinking 36) Cash flows and risk are th e key determinants in share price. Increased risk, other things remaining the same, results in ________. A) a lower share price B) a higher share price C) an unchanged share price D) an undetermined share price Answer: A Diff: 2 Topic: Maximize Sharehold er Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 37) 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 price B) a highe r share price C) an unchanged share price D) an undetermined share price Answer: B Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking

  12. Page 12
    Read page 12 as text

    10 1.2 Managing the firm. 1) A treasurer is responsi ble for the firm's accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting. Answer: FALSE Diff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 2 Learning Outcome: F - 01 AACSB: Anal ytical Thinking 2) ________ decisions focus on how a company will spend its financial resources on long - term projects that ultimately determine whether the firm successfully creates value for its owners. A) Investment B) Financing C) Working capital D) Ri sk management Answer: A Diff: 1 Topic: Managing the Firm Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 3) The principle of the time value of money basically says that ________. A) because firms pay managers a great deal, manage rs need to use their time very effectively B) money received today is more valuable than money received in the future because money in the future is more risky C) money received today is more valuable than money received in the future because firms and ind ividuals can invest money they have today and earn a return on that money D) because of the principal - agent problem, investors cannot trust that money firms promise to pay in the future will ever arrive Answer: B Diff: 1 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking 4) The primary principle that finance borrows from economics is ________. A) generally accepted accounting principles B) cash is king C) marginal cost - benefit analysis D) shareholder value m aximization Answer: C Diff: 1 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking

  13. Page 13
    Read page 13 as text

    11 5) Financing decisions deal with the left - hand side of the firm's balance sheet. Answer: FALSE Diff: 1 Topic: Primary Activi ties of the Financial Manager Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 6) Which of the following activities of a finance manager determines the types of assets the firm holds? A) budget allocation B) investment decisions C ) financing decisions D) analyzing and planning cash flows Answer: B Diff: 1 Topic: Primary Activities of the Financial Manager Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 7) You own a building supply store. Today you sold co nstruction materials to a contractor for $10,000 that you acquired a week ago for $8,000. You paid for the materials in cash, but you sold them to the contractor on credit, and you expect him to pay his bill in a few months. Based on this information dur ing the week you earned a positive profit but experienced a negative cash flow. Answer: TRUE Diff: 2 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking 8) There is a tendency for CEOs of larger companies to earn more money than CEOs of smaller companies. Suppose a CEO decides to acquire another company, thus increasing the size of the CEO's firm. Suppose also that the price of the stock of the acquiring firm falls when it learns of the upcoming acquisition. This appears to be an example of ________. A) a CEO pursuing profit maximization rather than wealth maximization B) the principal - agent problem C) a CEO behaving unethically D) the general principal that acquisitions are generally not good investments Answ er: B Diff: 2 Topic: Managing the Firm Learning Obj.: LG 6 Learning Outcome: F - 01 AACSB: Reflective Thinking

  14. Page 14
    Read page 14 as text

    12 9) A corporation's stockholders elect its CEO. Answer: FALSE Diff: 1 Topic: Managing the Firm Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Reflective Thinking 10) The money that firms raise to finance their activities is called ________. A) the capital budget B) working capital C) capital D) accruals Answer: C Diff: 1 Topic: Managing the Firm Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 11) Marginal cost - benefit analysis states that financial decisions should be made and actions should be taken only when the added benefits exceed the added costs. Answer: TRUE Diff: 1 Topic: Relationship to Economics Le arning Obj.: LG 4 Learning Outcome: F - 03 AACSB: Analytical Thinking 12) The treasurer typically manages a firm's cash, investing surplus funds when available and securing outside financing when needed. Answer: TRUE Diff: 1 Topic: Relationship to Acco unting Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking 13) A corporate treasurer's focus tends to be more external, while the controller's focus is more internal. Answer: TRUE Diff: 1 Topic: Organization of the Finance Function Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking

  15. Page 15
    Read page 15 as text

    13 14) The accrual method recognizes revenue at the point of sale and recognizes expenses when incurred. Answer: TRUE Diff: 1 Topic: Relationship to Accounting Learning Obj.: LG 4 L earning Outcome: F - 01 AACSB: Analytical Thinking 15) A treasurer is commonly responsible for handling ________. A) tax management B) corporate accounting C) investing surplus funds D) cost accounting Answer: C Diff: 1 Topic: Organization of the Financ e Function Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking 16) 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 cu stomer 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 product or service. Answer: C Diff: 1 Topic: Relationship to Accounting Learning Obj.: LG 4 Learnin g Outcome: F - 01 AACSB: Analytical Thinking 17) Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Although the firm paid in full for the merchandise d uring the year, it is yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are ________. A) $3,000 and $10,000, respectively B) $3,000 and - $7,000, respectively C) $7,000 and - $3,000, respectively D) $3,000 and $7,000, respectively Answer: B Diff: 2 Topic: Relationship to Accounting Learning Obj.: LG 4 Learning Outcome: F - 02 AACSB: Analytical Thinking

  16. Page 16
    Read page 16 as text

    14 18) A firm has just ended its calendar year making a sale in the amount of $150,000 of merchandise pu rchased during the year at a total cost of $112,500. Although the firm paid in full for the merchandise during the year, it is yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are ________. A) $0 and $1 50,000, respectively B) $37,500 and - $150,000, respectively C) $37,500 and - $112,500, respectively D) $150,000 and $112,500, respectively Answer: C Diff: 2 Topic: Relationship to Accounting Learning Obj.: LG 4 Learning Outcome: F - 02 AACSB: Analytical Thinking 19) Stockholders expect to earn higher rates of return on investments with lower risk and lower rates of return on investments with higher risk. Answer: FALSE Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 20) As the risk of a stock investment increases, investors' ________. A) return will increase B) return will decrease C) required rate of return will decrease D) required rate of return will increase Answer: D Diff: 1 Topic: Maximize Shareholder Wealth Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Analytical Thinking 21) The principal - agent problem arises when ________. A) the owners of the firm are not the people managing the firm B) the owners of the firm also mana ge the firm C) managers serve on a firm's board of directors D) a firm is organized as a sole proprietorship Answer: A Diff: 2 Topic: Managing the Firm Learning Obj.: LG 6 Learning Outcome: F - 01 AACSB: Reflective Thinking

  17. Page 17
    Read page 17 as text

    15 22) Which of the following works as a conduit of information between the firm and its investors? A) the treasurer B) the controller C) the director of internal audit D) the director of investor relations Answer: D Diff: 1 Topic: Managing the Firm Learning Obj.: LG 3 Learning Outc ome: F - 01 AACSB: Analytical Thinking 23) ________ decisions refer to how a firm manages its short - term resources on a day - to - day basis. A) Financing B) Investment C) Working capital D) Managerial finance Answer: C Diff: 1 Topic: Managing the Firm Lear ning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Reflective Thinking 24) There is a tradeoff between risk and return (i.e., to earn higher returns you generally have to take more risk) because ________. A) investors like risk and return and want more of bo th B) investors are risk averse, so they will not accept riskier investments unless they offer higher returns C) to earn higher returns you have to make bigger investments and bigger investments are always riskier than smaller ones D) investors care about returns but not about risks Answer: A Diff: 2 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Reflective Thinking 25) The time value of money principle implies that all other things being equal, investments that produce pro fits faster are preferred over those that produce more distant profits. Answer: TRUE Diff: 1 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking

  18. Page 18
    Read page 18 as text

    16 26) The ________ has a role that focuses on budgeting, accoun ting, and tracking the performance of a single business unit. A) controller B) treasurer C) chief financial officer D) director of risk management Answer: A Diff: 1 Topic: Managing the Firm Learning Obj.: LG 3 Learning Outcome: F - 01 AACSB: Reflective Thinking 27) When managers are trying to create value for shareholders, their primary focus should be on earnings rather than cash flow. Answer: FALSE Diff: 1 Topic: Managing the Firm Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Think ing 1.3 Organization forms, taxation, and the principal - agent relationship. 1) Which of the following legal forms of organization is most expensive to organize? A) sole proprietorships B) partnerships C) corporations D) limited partnership Answer: C Di ff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 2) Which of the following legal forms of organization has the ease of dissolution? A) sole proprietorships B) partnerships C) limit ed partnerships D) corporations Answer: A Diff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking

  19. Page 19
    Read page 19 as text

    17 3) Under which of the following legal forms of organization is ownership readily tran sferable? A) sole proprietorships B) partnerships C) limited partnerships D) corporations Answer: D Diff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 4) Which of the following fo rms of organizations is the easiest to form? A) sole proprietorships B) limited liability corporation C) limited partnership D) S - corporations Answer: A Diff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACS B: Analytical Thinking 5) A major weakness of a partnership is ________. A) the difficulty in maintaining owners' control B) the difficulty in liquidating or transferring ownership C) the double taxation of income D) its high organizational costs Answer: B Diff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 6) Which of the following is a strength of a corporation? A) low taxes B) limited liability C) low organization costs D) less government regulation Answer: B Diff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking

  20. Page 20
    Read page 20 as text

    18 7) Which of the following legal forms of organizations is characterized by unlimited liability? A) sole proprietorship B) limited partnership C) corporation D) C - corporation Answer: A Diff: 2 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 8) Which of 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 is taxed twice. B) In a partnership, income is taxed once at the individual level; whereas, in a corporation, income is taxed twic e. 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: B Diff: 1 Topic: Taxes Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 9) 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 ta xed only at the corporate level. C) Both sole proprietorships and corporations are equally scrutinized and regulated by government bodies. D) In sole proprietorships, owners have unlimited liability; whereas, in corporations, owners have limited liability . Answer: D Diff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 10) In partnerships, partners can readily transfer their wealth to other partners. Answer: FALSE Diff: 1 Topic: Le gal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking

  21. Page 21
    Read page 21 as text

    19 11) A sole proprietor has unlimited liability; his or her total investment in the business, but not his or her personal assets, can be taken to sa tisfy creditors. Answer: FALSE Diff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 12) In a limited partnership, all partners' liabilities are limited to their investment in the pa rtnership. Answer: TRUE Diff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 13) Under a progressive tax structure in which tax rates rise with income levels ________. A) the margin al tax rate and the average tax rate are the same B) the average tax rate is what really matters when an individual or business is making a financial decision C) the marginal tax rate is usually less than the average tax rate D) the marginal tax rate is us ually greater than the average tax rate Answer: D Diff: 2 Topic: Taxes Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 14) The term "double taxation" means that ________. A) partnerships and sole proprietorships pay tax on the in come that they earn, and then income distributed from the business to the owner is taxed again at the individual level B) the highest federal income tax rate faced by corporations is twice the highest tax rate faced by individuals C) corporations pay tax o n the income they earn and then shareholders pay tax on income that the corporation distributes to them D) a corporation pays tax on the interest it pays to bondholders and then bondholders pay tax again on the interest payments they receive from firms Ans wer: C Diff: 2 Topic: Taxes Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Reflective Thinking

  22. Page 22
    Read page 22 as text

    20 15) Suppose a certain business pays 10% tax on its first $10,000 in come, 12% tax on income above $10,000 but below $40,000, and 22% tax on income abov e $40,000. Suppose the business earns $50,000 in income this year. It's marginal tax rate is ________. A) 10% B) 12% C) 22% D) greater than 22% Answer: C Diff: 2 Topic: Taxes Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 16) Corporate governance refers to ________. A) the rules, processes, and laws by which companies are operated, controlled, and regulated B) the fact that corporations heavily influence the actions of governments through their lobbying efforts C) the notion t hat corporations act like a democracy in the sense that every shareholder has an equal vote on corporate decisions D) the idea that a corporate CEO is really accountable to no one and must be constrained by government action Answer: A Diff: 1 Topic: Corp orate Governance Learning Obj.: LG 6 Learning Outcome: F - 01 AACSB: Reflective Thinking 17) Agency costs are ________. A) costs that managers bear when they do not act in the interests of shareholders B) costs that firms must pay to comply with the regul ations imposed by federal government agencies C) costs that are exempt from taxation D) costs that shareholders bear because managers pursue their own interests rather than acting in the interests of shareholders Answer: D Diff: 2 Topic: Legal Forms of B usiness Organization Learning Obj.: LG 6 Learning Outcome: F - 01 AACSB: Reflective Thinking 18) Firms are legally required to pay dividends to stockholders just as they must make interest payments to lenders. Answer: FALSE Diff: 1 Topic: Legal Forms o f Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Reflective Thinking

  23. Page 23
    Read page 23 as text

    21 19) Suppose a certain business pays 10% tax on its first $10,000 in come, 12% tax on income above $10,000 but below $40,000, and 22% tax on income above $40,0 00. Suppose the business earns $50,000 in income this year. Its average tax rate is closest to ________. A) 22% B) 14% C) 10% D) 17% Answer: B Diff: 2 Topic: Taxes Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 20) Dividends are periodic distributions of cash to the stockholders of a firm. Answer: TRUE Diff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Reflective Thinking 21) Suppose a certain business pays 10% tax on its first $10,000 in come, 12% tax on income above $10,000 but below $40,000, and 22% tax on income above $40,000. Suppose the business earns $50,000 in income this year. It tax liability is ________. A) $6,800 B) $11,000 C) $9,800 D) $5,800 Answer: A Diff: 2 Topic: Taxes Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 22) 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 rate B) the m arginal tax rate is less than the average tax rate C) the marginal tax rate is equal to the average tax rate D) the marginal tax rate is irrelevant Answer: C Diff: 2 Topic: Taxes Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking

  24. Page 24
    Read page 24 as text

    22 23) In partnerships, owners have unlimited liability and may have to cover debts of other less financially sound partners. Answer: TRUE Diff: 1 Topic: Legal Forms of Business Organization Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Th inking 24) The board of directors is responsible for managing day - to - day operations and carrying out the policies established by the chief executive officer. Answer: FALSE Diff: 1 Topic: Corporate Governance Learning Obj.: LG 6 Learning Outcome: F - 26 AACSB: Analytical Thinking 25) Institutional investors are professional investors who work on behalf of individuals, business, and government. Answer: TRUE Diff: 1 Topic: Corporate Governance Learning Obj.: LG 6 Learning Outcome: F - 26 AACSB: Analyti cal Thinking 26) The major purpose of the Sarbanes - Oxley Act of 2002 was to place caps on the compensation that could be paid to corporate executives. Answer: FALSE Diff: 1 Topic: Corporate Governance Learning Obj.: LG 6 Learning Outcome: F - 26 AACSB: Analytical Thinking 27) The board of directors is typically responsible for ________. A) approving strategic goals and plans B) managing day - to - day operations C) arranging finance for approved long - term investments D) maintaining and controlling the firm' s daily cash balances Answer: A Diff: 1 Topic: Corporate Governance Learning Obj.: LG 6 Learning Outcome: F - 26 AACSB: Analytical Thinking

  25. Page 25
    Read page 25 as text

    23 28) The responsibility for managing day - to - day operations and carrying out corporate policies belongs to the __ ______. A) board of directors B) chief executive officer C) stockholders D) creditors Answer: B Diff: 1 Topic: Corporate Governance Learning Obj.: LG 6 Learning Outcome: F - 26 AACSB: Analytical Thinking 29) Which of the following is an example of age ncy cost? A) costs incurred for setting up an agency B) failure to make an investment that would make shareholders wealthier C) payment of income tax D) payment of interest Answer: B Diff: 1 Topic: The Agency Issue Learning Obj.: LG 6 Learning Outcome: F - 26 AACSB: Ethical Understanding and Reasoning 30) Which of the following is a routine way that boards try to align the interests of managers and stockholders? A) fire managers who are inefficient B) remove management's perquisites C) tie management co mpensation to the performance of the company's common stock price D) tie management compensation to the level of dividend per share Answer: C Diff: 1 Topic: The Agency Issue Learning Obj.: LG 6 Learning Outcome: F - 26 AACSB: Ethical Understanding and R easoning 31) The marginal tax rate paid on a firm's ordinary income can be calculated by dividing its taxes by its net income. Answer: FALSE Diff: 1 Topic: Ordinary Income Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking

  26. Page 26
    Read page 26 as text

    24 32) T he average tax rate paid on the firm's ordinary income can be calculated by dividing its taxes by its taxable income. Answer: TRUE Diff: 1 Topic: Ordinary Income Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 33) The tax deduc tibility of various expenses such as general and administrative expenses ________. A) increases their pretax cost B) reduces their after - tax cost C) has no effect on their after - tax cost D) has an unpredictable effect on their after - tax cost Answer: B Dif f: 1 Topic: Ordinary Income Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking 34) Jennings, Inc. has a tax liability of $170,000 on pretax income of $500,000. What is the average tax rate for Jennings, Inc.? A) 34 percent B) 46 perc ent C) 25 percent D) 40 percent Answer: A Diff: 2 Topic: Ordinary Income Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 35) The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 i s ________. A) 46 percent B) 23 percent C) 34 percent D) 15 percent Answer: B Diff: 2 Topic: Ordinary Income Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking

  27. Page 27
    Read page 27 as text

    25 36) If a corporation sells certain capital equipment for more than its initial purchase price, the difference between the sale price and the purchase price is called a(n) ________. A) ordinary gain B) revenue gain C) capital gain D) abnormal gain Answer: C Diff: 1 Topic: Capital Gains Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 37) In general, most corporate capital gains are taxed at ________ tax rate. A) the average B) the regular corporate C) the historic D) a 30 percent Answer: B Diff: 1 Topic: Capital Gains Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking 38) Corporation X needs $1,000,000 and can raise this through debt at an annual rate of 6 percent, or preferred stock at an annual cost of 8 percent. If the corporation has a 21 percent tax rate, the after - tax cos t of each is ________. A) debt: $60,000; preferred stock: $80,000 B) debt: $47,400; preferred stock: $63,200 C) debt: $47,400; preferred stock: $80,000 D) debt: $60,000; preferred stock: $63,200 Answer: C Diff: 2 Topic: Ordinary Income Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 39) The marginal tax rate represents the rate at which the next dollar of income is taxed. Answer: TRUE Diff: 1 Topic: Ordinary Income Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking

  28. Page 28
    Read page 28 as text

    26 40) All dividend income received by a corporation is exempted from taxation. Answer: FALSE Diff: 1 Topic: Ordinary Income Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking 41) The tax liability of a sole proprietorship with ordinary income of $105,000 is closest to ________. Range of taxable income Marginal rate $ 0 to $ 9,525 10% 9,525 to 38,700 12 38,700 to 82,500 22 82,500 to 157,500 24 A) $25,200 B) $22,050 C) $32,090 D) $19,490 Answer: D Diff: 2 Topic: Ordinary Income Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 42) The tax liability of a sole proprietorship with ordinary income of $450,000 is closest to ________. Range of taxable income Marginal rate $ 0 to $ 9,525 10% 9,525 to 38,700 12 38,700 to 82,500 22 82,500 to 157,500 24 157,500 to 200,000 32 200,000 to 500,000 35 A) $157,500 B) $133,190 C) $94,500 D) $114,700 Answer: B Diff: 2 Topic: Ordinary Income Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking

  29. Page 29
    Read page 29 as text

    27 43) Prior to the Tax Cuts and Jobs Act, corporations faced a progressive tax rate schedule with rates ranging from 15% to 39%. Under that old tax law, a firm with taxable income of $100 million would have owed taxes of $3 5 million. Under the Tax Cuts and Jobs Act, the corporate tax rate is a flat 21%. For a firm that makes $100 million in taxable income, the size of the tax reduction that the firm enjoys because of the new tax law is closest to ________. A) $18 million B) $21 million C) $14 million D) $35 million Answer: C Diff: 2 Topic: Ordinary Income Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking 44) Corporation A owns a small percentage of the stock of corporation B. Corporation B pays corp oration A $100,000 in dividends. Corporation A pays tax at a 21% rate and is allowed to exclude from taxable income 50% of dividends received from other firms. The incremental taxes that Corporation A must pay on the dividends received are ________. A) $21 ,000 B) $10,500 C) $0 D) $1,050 Answer: B Diff: 2 Topic: Ordinary Income Learning Obj.: LG 4 Learning Outcome: F - 01 AACSB: Analytical Thinking

  30. Page 30
    Read page 30 as text

    28 45) Consider two firms, Go Debt corporation and No Debt corporation. Both firms are expected to have earnin gs before interest and taxes of $100,000 during the coming year. In addition, Go Debt is expected to incur $40,000 in interest expenses as a result of its borrowings whereas No Debt will incur no interest expense because it does not use debt financing. Bot h firms are in the 21 percent tax bracket. Calculate the earnings after tax for both firms. Compare the difference in after - tax earnings to the difference in interest expense. Can you reconcile that difference? Answer: Go Debt has lower earnings after taxes compared to No Debt, and the difference is $31,600 ($79,000 - $47,400). The difference in interest expense is $40,000. The recent the difference in earnings is less than the difference in interest expense is that the interest expense that Go Debt p ays saves the company $8,400 in taxes (a number which you can calculate by multiplying 21% time the $40,000 interest expense). Diff: 3 Topic: Taxes Learning Obj.: LG 5 Learning Outcome: F - 01 AACSB: Analytical Thinking

  31. Page 31
    Read page 31 as text

    29 1.4 Developing skills for your career. 1) Communication skills are very important to financial and nonfinancial managers because ________. A) they will be communicating with the investment community regularly B) they work together in cross - functional teams and need to understand how m embers of their teams think C) they will write reports that are disclosed in the firm's financial reports D) they are all responsible for selling the firms goods and services to customers Answer: B Diff: 1 Topic: Developing skills for your career Learnin g Obj.: LG 1 Learning Outcome: F - 01 AACSB: Reflective Thinking 2) Developing financial computing skills, such as expertise with software like Excel, is important because ________. A) everyone in the firm must be an Excel expert to have success B) everyo ne in the firm needs to understand financial reports and models at some level, and those are usually constructed and presented in Excel C) there are no good alternatives to Excel D) mistakes are more likely to occur when people do financial work by hand ra ther than using a product like Excel Answer: B Diff: 1 Topic: Developing skills for your career Learning Obj.: LG 1 Learning Outcome: F - 01 AACSB: Analytical Thinking

881 more pages in the full document

Unlock it once and it stays in your library, ready to chat with or turn into flashcards.

Unlock the full document

More Finance study materials

See all

Study this document with CramX

Once it is in your library, every tool can work from it.