Upgrade to remove ads
Chapter 1 Homework Study Questions
Terms in this set (15)
What is the most important difference between a corporation and all other organizations?
a corporation is a legal entity separate from its owners
What are the advantages and disadvantages of a corporation?
Advantages: Limited liability, liquidity, separation of ownership and control.
Disadvantages: Double taxation, separation of ownership and control.
Your answer is correct.
Advantages: Limited liability, liquidity, infinite life.
Your answer is correct.
Disadvantages: Double taxation, infinite life.
B and C
You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too high, but you will be the CEO of the combined, much larger company. You know that when the company gets bigger, your pay and prestige will increase. What is the nature of the agency conflict here and how is it related to ethical considerations?
(Select all the choices that apply.)
There is an ethical dilemma when the CEO of a firm has incentives that are opposite to those of the shareholders.
There is a legal issue when the CEO of a firm has incentives that are opposite to those of the shareholders.
In this case, you (as the CEO) have an incentive to potentially overpay for another company (which would be damaging to your shareholders) because the value of the combined company will improve.
In this case, you (as the CEO) have an incentive to potentially overpay for another company (which would be damaging to your shareholders) because your pay and prestige will improve
A and D
Are hostile takeovers necessarily bad for firms or their investors? Explain.
(Select the best choice below.)
Yes. They allow new investors to profit at the expense of employees and existing investors. If existing investors and employees were better off being taken over, there would be no reason for the takeover to be hostile.
No. They are a way to discipline managers who are not working in the interests of shareholders.
Yes. They allow the entity taking over, the raider, to make a quick profit. This profit must come from somewhere. The only place is existing shareholders and employees, so hostile takeovers must be bad for existing shareholders.
Both (A) and (B) are correct answers.
The shares of a ____________ corporation are traded on an exchange (or "over the counter" in an electronic trading system) while the shares of a __________ corporation are not traded on a public exchange
Explain why the bid-ask spread is a transaction cost.
Investors always buy at the ______ and sell at the ____. Since _____ prices always exceed
______ prices, investors "_____" this difference. It is one of the transaction costs. Since the market makers take the other side of the trade, they make this difference.
ask, bid, ask, bid, lose
What checks are there on the accuracy of 10k statements? (Select the best choice below.)
Financial statements are always sufficiently accurate so no checks are needed.
It is up to each investor to certify the accuracy of the financial statements.
Financial statements in form 10-K are required to be audited by a neutral third party, who checks them and ensures that the financial statements are prepared according to GAAP and that the information contained is reliable.
The accuracy of the firm's financial statements is certified by the firm's board of directors, which is the only required check.
What four financial statements can be found in a firm's 10-K filing? (Select the best choice below.)
Balance sheet, asset and liability statement, statement of cash flows, and statement of stockholders' equity
Balance sheet, income statement, statement of cash flows, and Statement of income and expenses
Balance sheet, cash budget, earnings statement, and statement of stockholders' equity
Balance sheet, income statement, statement of cash flows, and statement of stockholders' equity
____________ are concerned with the risk inherent in and return provided by their investments.
____________ use the firm's financial statements to assess the ability of the company to make its debt
______________use the statements to assess the firm's profitability and ability to make future dividend payments.
________________ gather financial information, analyze it, and make recommendations. They read financial statements to determine a firm's value and project future earnings, so that they can provide guidance to businesses and individuals to help them with their investment decisions.
_____________ use financial statement to look at trends in their own business, and to compare their own results with that of competitors.
Can a firm with positive net income run out of cash? Explain.
(Select all the choices that apply.)
A firm that has positive net income could never run out of cash.
A firm can have positive net income but still run out of cash.
For example, to expand its current production, a profitable company may spend more on investment activities than it generates from operating activities and financing activities. Net cash flow for that period would be negative, although its net income is positive.
It could also run out of cash if it spends a lot on financing activities, perhaps by paying off maturing long-term debt, repurchasing shares, or paying dividends.
b c and d
WorldCom reclassified $3.85 billion of operating expenses as capital expenditures. Explain the effect this reclassification would have on WorldCom's cash flows. (Hint: Consider taxes.) WorldCom's actions were illegal and clearly designed to deceive investors. But if a firm could legitimately choose how to classify an expense for tax purposes, which choice is truly better for the firm's investors?
By reclassifying $3.85 billion of operating expenses as capital expenditures, WorldCom ______________ its net income but lowered its cash flow for that period. If a firm could legitimately choose how to classify an expense, expensing as much as possible in a profitable period rather than capitalizing them will save more on taxes, which results in _____________ cash flows, and thus is better for the firm's investors.
THIS SET IS OFTEN IN FOLDERS WITH...
FIN Ch 2: Financial Statement Analysis
FIN Ch 1
Chapter 2 Homework Study questions
OTHER SETS BY THIS CREATOR
Mkt Final 10-14
MKT Exam 2
Chapter 10 Buying, Using, and Disposal
OTHER QUIZLET SETS
Chapter 1 - Introduction to Computers and Programm…
Pharm Ch 38 Antibiotics Part 1 NCLEX style Questio…
Jason Dion Practice Exam #1