Test Bank for Principles of Managerial Finance, 15th Edition

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Test BankforPrinciples of ManagerialFinance15thEditionChad J. ZutterUniversity of PittsburghScott B. SmartIndiana University

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1Principles of Managerial Finance, 15e(Zutter)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 decisionalternatives 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 Thinking5) 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 Thinking

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26) If a firm'sstockholders are risk averse, the firm can make its stockholders better off by earning thehighest 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 Thinking8) Afinancial 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 wouldchoose ________.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 thesame earnings per share. The stocks ofthese two companies should trade at the same price.Answer: FALSEDiff: 2Topic: Managing the FirmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking

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310) One reason that firms exist is that most investors are risk averse, so they are not willing to make thekinds of risky investments that firms typically undertake.Answer: FALSEDiff: 1Topic: Finance and the firmLearning Obj.: LG 1Learning Outcome: F-01AACSB: Analytical Thinking11) 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 flows increase.C) A firm's income statement will never show a positive profit when its cash outflows exceed its cashinflows.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 expect compensation fordoing so.Answer: TRUEDiff: 1Topic: Managing the FirmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking

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414) Which of the following is true of cash flows and risk?A) Lower cash flowand 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 increasein share price.Answer: BDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking15) The goal of business ethics is to motivate business and market participants to adhere to both the letterand the spirit of laws and regulations in all aspects of business and professional practice.Answer: TRUEDiff: 1Topic: The Role of Business EthicsLearning Obj.: LG 3Learning Outcome: F-01AACSB: Ethical Understanding and Reasoning16) The primarygoal 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 retained earningsD) through interest earnings and earnings per shareAnswer: BDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking

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518) 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 Thinking19) 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 theaccounting period on each outstanding share of common stock iscalled ________.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 Firm A shouldbe 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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622) Which of the following is NOT a reason that a firm that maximizes profits may fail to maximizeshareholder wealth.A) The timing of profits matters. Shareholders might prefer lower profitsthat arrive sooner.B) Risk matters. Shareholders are risk averse, so they prefer less risky investments that generate lowerprofits.C) Shareholder wealth depends on cash flow which is not the same as profit.D) If a firm maximizes profits by engaging inunethical business practices, it's stock price may beadversely affected.Answer: BDiff: 2Topic: Managing the FirmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking23) ________ pool investment capital, make risky investment decisions, and manage risky investments onbehalf 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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725) In March 2017, Amazon and Clorox reported nearly identical earnings per share, but the stock price ofAmazon was more than six times higher than the Clorox stock price. The most likely explanation for thatdifference is that ________.A) Clorox is bad for the environmentB) 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 thekey determinants of share price, which representthe 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 the timing of returns,does not directly consider cash flows, andignores risk.Answer: TRUEDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Reflective Thinking

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830) When considering a firm's financial decision alternative, financial managers should accept only thoseactions 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 stockholder must becompensated 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 is no clear way to satisfy all stakeholders whose economic interests may be at odds with eachotherD) 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 Reasoning34) When considering a firm's financial decision alternative, financial managers should accept only thoseactions that are expected to increase the firm's profitability.Answer: FALSEDiff: 1Topic: Maximize Shareholder WealthLearning Obj.: LG 3Learning Outcome: F-01AACSB: Ethical Understanding and Reasoning

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935) ________ are the standards of conduct or moral judgment that apply to persons engaged in commerce.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) Cash flows and risk are the key determinants in share price. Increased risk, other things remaining thesame, 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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101.2Managing the firm.1) A treasurer is responsible for the firm's accounting activities, such as corporate accounting, taxmanagement, 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-term projectsthat 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 managers a great deal, managers need to use their time very effectivelyB) money received today is more valuable than money received in the future because money in the futureis more riskyC) money received today is more valuable than money received in the future because 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 to pay in thefuture will ever arriveAnswer: BDiff: 1Topic: Managing the FirmLearningObj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking4) 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 Thinking

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115) 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 firm holds?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 supply store. Today you sold construction materials to a contractor for $10,000 thatyou acquired a week ago for $8,000. You paid for the materials in cash, but you sold them to thecontractor on credit, and you expect him to pay his bill in a few months. Based on this informationduring the week you earned a positive profit but experienced a negative cash flow.Answer: TRUEDiff: 2Topic: Managing the FirmLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking8) There is a tendency for CEOs of larger companies toearn more money than CEOs of smallercompanies. Suppose a CEO decides to acquire another company, thus increasing the size of the CEO'sfirm. Suppose also that the price of the stock of the acquiring firm falls when it learns of the upcomingacquisition.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 Thinking

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129) 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 actions should betaken only when the added benefits exceed the added costs.Answer: TRUEDiff: 1Topic: Relationship to EconomicsLearning Obj.: LG 4Learning Outcome: F-03AACSB: Analytical Thinking12) The treasurer typically manages a firm's cash, investing surplus funds when available and securingoutside 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 more internal.Answer: TRUEDiff: 1Topic: Organization of the Finance FunctionLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking

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1314) The accrual method recognizes revenue at the point of sale and recognizes expenses when incurred.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 Thinking16) 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 product orservice.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 of merchandisepurchased during the year at a total cost of $7,000. Although the firm paid in full for the merchandiseduring the year, it is yet to collect at year end from the customer. The net profit and cash flow from thissale for the year are ________.A) $3,000 and $10,000, respectivelyB) $3,000 and-$7,000, respectivelyC) $7,000 and-$3,000, respectivelyD) $3,000and $7,000, respectivelyAnswer: BDiff: 2Topic: Relationship to AccountingLearning Obj.: LG 4Learning Outcome: F-02AACSB: Analytical Thinking

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1418) A firm has just ended its calendar year making a sale in the amount of $150,000 of merchandisepurchased during the year at a total cost of $112,500. Although the firm paid in full for the merchandiseduring the year, it is yet to collect at year end from the customer. The net profit and cash flow from thissale 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: AnalyticalThinking19) Stockholders expect to earn higher rates of return on investments with lower risk and lower rates ofreturn 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 Thinking

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1522) Which of the followingworks 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 FirmLearning Obj.: LG 3Learning Outcome: F-01AACSB: Analytical Thinking23) ________ decisions refer to how a firm manages its short-term resources on a day-to-day basis.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 to takemore 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 higher returnsC) to earn higher returns you have to make bigger investments and bigger investments are always riskierthan smaller onesD) investors care aboutreturns 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 that produceprofits 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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1626) The ________ has a role that focuses on budgeting, accounting, and tracking the performance of asingle business unit.A) controllerB) treasurerC) chief financial officerD) director of risk managementAnswer: ADiff: 1Topic: Managing the FirmLearning Obj.: LG 3Learning Outcome: F-01AACSB: ReflectiveThinking27) When managers are trying to create value for shareholders, their primary focus should be on earningsrather 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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173) 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 high organizational costsAnswer:BDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking6) Which of the following is a strength of a corporation?A) low taxesB) limited liabilityC) low organization costsD) lessgovernment regulationAnswer: BDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking

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187) 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) Which of the following is true of apartnership and a corporation?A) In a corporation, income is taxed at the corporate level; whereas, in a partnership, income is taxedtwice.B) In a partnership, income is taxed once at the individual level; whereas, in a corporation, income istaxed 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 istaxed twice.Answer: BDiff: 1Topic: TaxesLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking9) 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 by governmentbodies.D) In sole proprietorships, owners have unlimited liability; whereas, in corporations, owners have limitedliability.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 Thinking

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1911) A sole proprietor has unlimited liability; his or her total investment in the business, but not his or herpersonal 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 the partnership.Answer: TRUEDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking13) 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 a financialdecisionC) 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 sole proprietorships 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 that thecorporation distributes to themD) a corporation pays tax on the interest it pays to bondholders and then bondholders pay tax again onthe interest payments they receive from firmsAnswer: CDiff: 2Topic: TaxesLearning Obj.: LG 5Learning Outcome: F-01AACSB: Reflective Thinking

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2015) Suppose a certain business pays 10% tax on its first $10,000 in come, 12% tax on income above $10,000but below $40,000, and 22% tax on income above $40,000. Suppose the business earns $50,000 in incomethis 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 Thinking16)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 lobbying effortsC) the notion that corporations act like a democracy in the sense that every shareholder has an equal voteon corporate decisionsD) the idea that a corporate CEO is really accountable to no one and must be constrained by governmentactionAnswer: 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 government agenciesC) costs that are exempt from taxationD) costs that shareholders bear because managers pursue their own interests rather than acting in theinterests 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 interest paymentsto lenders.Answer: FALSEDiff: 1Topic: Legal Forms of Business OrganizationLearning Obj.: LG 5Learning Outcome: F-01AACSB: Reflective Thinking

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2119) Suppose a certain business pays 10% tax on its first $10,000 in come, 12% tax on income above $10,000but below $40,000, and 22% tax on income above $40,000. Suppose the business earns $50,000 in incomethis 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) Dividendsare 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 itsfirst $10,000 in come, 12% tax on income above $10,000but below $40,000, and 22% tax on income above $40,000. Suppose the business earns $50,000 in incomethis 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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2223) In partnerships, owners have unlimited liability and may have to cover debts of other less financiallysound 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 out thepolicies 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, andgovernment.Answer: TRUEDiff: 1Topic: Corporate GovernanceLearning Obj.: LG 6Learning Outcome: F-26AACSB: Analytical Thinking26) The major purpose of the Sarbanes-Oxley Act of 2002 was to place caps on the compensation thatcould be paid to corporate executives.Answer: FALSEDiff: 1Topic: Corporate GovernanceLearning Obj.: LG 6Learning Outcome: F-26AACSB:Analytical Thinking27) 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 Thinking

Test Bank for Principles of Managerial Finance, 15th Edition - Page 25 preview image

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2328) The responsibility for managing day-to-day operations and carrying out corporate policies belongs tothe ________.A) board of directorsB) chief executive officerC) stockholdersD) creditorsAnswer: BDiff: 1Topic: Corporate GovernanceLearning Obj.: LG 6Learning Outcome: F-26AACSB: Analytical Thinking29) Which of the following 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 IssueLearning Obj.: LG 6Learning Outcome:F-26AACSB: Ethical Understanding and Reasoning30) 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's perquisitesC) 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 taxes by itsnet income.Answer: FALSEDiff: 1Topic: Ordinary IncomeLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking

Test Bank for Principles of Managerial Finance, 15th Edition - Page 26 preview image

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2432) The average tax rate paid on the firm's ordinary income can be calculated by dividing its taxes by itstaxable 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 their after-tax costAnswer: BDiff: 1Topic: Ordinary IncomeLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking34) Jennings, Inc. has a tax liability of $170,000 on pretax income of $500,000. What is the average tax ratefor 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 $105,000 and 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 Thinking

Test Bank for Principles of Managerial Finance, 15th Edition - Page 27 preview image

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2536) If a corporation sells certain capital equipment for more than itsinitial purchase price, the differencebetween 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 Thinking37) 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 4LearningOutcome: F-01AACSB: Analytical Thinking38) Corporation X needs $1,000,000 and can raise this through debt at an annual rate of 6 percent, orpreferred stock at an annual cost of 8 percent. If the corporation has a 21 percent tax rate, the after-tax costof 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.: LG5Learning 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 5Learning Outcome: F-01AACSB: AnalyticalThinking

Test Bank for Principles of Managerial Finance, 15th Edition - Page 28 preview image

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2640) All dividend income received by a corporation is exempted from taxation.Answer: FALSEDiff: 1Topic: Ordinary IncomeLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking41) The tax liability of a sole proprietorshipwith ordinary income of $105,000 is closest to ________.Range of taxable incomeMarginal rate$0to$9,52510%9,525to38,7001238,700to82,5002282,500to157,50024A) $25,200B) $22,050C) $32,090D) $19,490Answer: DDiff: 2Topic: Ordinary IncomeLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking42) The tax liability of a sole proprietorship with ordinary income of $450,000 is closest to ________.Range of taxable incomeMarginal rate$0to$9,52510%9,525to38,7001238,700to82,5002282,500to157,50024157,500to200,00032200,000to500,00035A) $157,500B) $133,190C) $94,500D) $114,700Answer: BDiff: 2Topic: Ordinary IncomeLearning Obj.: LG 5Learning Outcome:F-01AACSB: Analytical Thinking

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2743) Prior to the Tax Cuts and Jobs Act, corporations faced a progressive tax rate schedule with ratesranging from 15% to 39%. Under that old tax law, a firm with taxable income of $100 million would haveowed taxes of $35 million. Under the Tax Cuts and Jobs Act, the corporate tax rate is a flat 21%. For afirm that makes $100 million in taxable income, the size of the tax reduction that the firm enjoys becauseof the new tax law is closest to ________.A) $18 millionB)$21 millionC) $14 millionD) $35 millionAnswer: CDiff: 2Topic: Ordinary IncomeLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking44) Corporation A owns a small percentage of the stock of corporation B. Corporation B pays corporationA $100,000 in dividends. Corporation A pays tax at a 21% rate and is allowed to exclude from taxableincome 50% of dividends received from other firms. The incremental taxes that Corporation A must payon the dividends received are ________.A) $21,000B) $10,500C) $0D) $1,050Answer: BDiff: 2Topic: Ordinary IncomeLearning Obj.: LG 4Learning Outcome: F-01AACSB: Analytical Thinking

Test Bank for Principles of Managerial Finance, 15th Edition - Page 30 preview image

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2845) Consider two firms, Go Debt corporation and No Debt corporation. Both firms are expected to haveearnings before interest and taxes of $100,000 during the coming year. In addition, Go Debt is expected toincur $40,000 in interest expenses as a result of its borrowings whereas No Debt will incur no interestexpense because it does not use debt financing. Both firms are in the 21 percent tax bracket. Calculate theearnings after tax for both firms. Compare the difference in after-tax earnings to the difference in interestexpense. Can you reconcile that difference?Answer:Go Debt has lower earnings aftertaxes 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 thanthe difference in interest expense is that the interest expense that Go Debt pays saves the company $8,400in taxes (a number which you can calculate by multiplying 21% time the $40,000 interest expense).Diff: 3Topic: TaxesLearning Obj.: LG 5Learning Outcome: F-01AACSB: Analytical Thinking

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291.4Developing skills for yourcareer.1) Communication skills are very important to financial and nonfinancial managers because ________.A) they will be communicating with the investment community regularlyB) they work together in cross-functional teams and need to understand how members of their teamsthinkC) they will write reports that are disclosed in the firm's financial reportsD) they are all responsible for selling the firms goods and services to customersAnswer: BDiff: 1Topic: Developing skills for your careerLearning Obj.: LG 1Learning Outcome: F-01AACSB: Reflective Thinking2) 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 successB) everyone in the firm needs to understand financial reports and models at some level, and those areusually constructed and presented in ExcelC) there are no good alternatives to ExcelD) mistakes are more likely to occur when people do financial work by hand rather than using a productlike ExcelAnswer: BDiff: 1Topic: Developing skills for your careerLearning Obj.: LG 1Learning Outcome: F-01AACSB: Analytical Thinking

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