Which of the following is legal duty between two parties where one party must act in the interest of the other party?

. This should be the primary objective of a firm as it may actually be the most beneficial for society
in the long run.
A. Minimizing layoffs
B. Maximizing market share
C. Minimizing costs
D. Maximizing shareholder value
26. Nonwage compensation that might actually enhance owner value, in that such items may boost
managers’ productivity.
A. Agency theory
B. Angel investor
C. Invisible hand
D. Perks or perquisites
27. Which of these are NOT basic approaches to minimizing the agency problem?
A. Ignore the conflict of interest
B. Monitor managers’ actions
C. Align managers’ personal interest with those of the owners by making the managers owners
D. All of these are basic approaches to minimizing the agency problem.
28. Which of the following is an example of aligning managers’ personal interests with those of the
owners?
A. Allow the managers to have as many perks as they request.
B. Pay the managers high salaries.
C. Offer the managers an equity stake in the firm.
D. Trust the managers’ actions as they will always act in the owners’ best interest.
29. This is the set of laws, policies, incentives, and monitors designed to handle the issues arising
from the separation of ownership and control.
A. Agency theory
B. Corporate governance
C. Defined benefit plan
D. Invisible hand
30. This group is elected by stockholders to oversee management in a corporation.
A. Chief counselors
B. Chief executives
C. Board of directors
D. Auditors
31. These individuals examine the firm’s accounting systems and comment on whether financial
statements fairly represent the firm’s financial position.
A. Accounting departments
B. Chief financial officers
C. Board of directors
D. Auditors
32. These individuals follow a firm, conduct their own evaluations of the company’s business
activities, and report to the investment community.
A. Auditors
B. Investment analysts
C. Investment bankers
D. Credit analysts
33. These individuals help firms access capital markets and advise managers about how to interact
with those capital markets.
A. Auditors
B. Investment analysts
C. Investment bankers
D. Credit analysts
34. These individuals examine a firm’s financial strength for its debt holders.
A. Auditors
B. Investment analysts
C. Investment bankers
D. Credit analysts
35. Which of the following is legal duty between two parties where one party must act in the interest
of the other party?
A. Agency theory
B. Angel investor
C. Fiduciary
D. Investment banker
36. Which of the following can create ethical dilemmas between corporate managers and
stockholders?
A. Agency relationship
B. Auditors
C. Boards of directors
D. Venture capitalist
37. Individuals who provide small amounts of capital and expert business advice to small firms in
exchange for an ownership stake in the firm are referred to as:
A. institutional investors.
B. corporate investors.
C. angel investors.
D. capital investors.
38. The opportunity to buy stock at a fixed price over a specific period of time is referred to as:
A. stock opportunities.
B. stock options.
C. real assets.
D. restricted stock.
39. The portion of a company’s profits that are kept by the company rather than distributed to the
stockholders as cash dividends is referred to as:
A. restricted earnings.
B. venture capital.
C. retained earnings.
D. institutional investment.
40. An employee stock option plan is:
A. a perk usually only given to the board of directors as compensation.
B. a plan that only partnerships can use to defer compensation to partners.
C. a way to align the interests of employees with those of the owners.
D. None of these answers is correct.
41. Outside parties that monitor the firm include all of the following EXCEPT:
A. credit agencies.
B. the New York Stock Exchange.
C. analysts.
D. bankers.
42. Which of the following is NOT a function of the board of directors?
A. Hire the CEO
B. Evaluate the CEO
C. Design compensation contracts for the CEO
D. Provide reports to the auditors
43. The overall goal of the financial manager is to:
A. minimize total costs.
B. maximize net income.
C. maximize earnings per share.
D. maximize shareholder wealth.
44. Maximizing owners’ equity value means carefully considering all of the following EXCEPT:
A. how to best bring additional funds into the firm.
B. which projects to invest in.
C. how best to increase the firm’s risk.
D. how best to return the profits from those projects to the owners over time.
45. The agency relationship in corporate finance refers to:
A. when the shareholders hire a manager to run their company.
B. when the corporate hires an advertising agency to market their new product or service.
C. when the board of directors are elected to staggered terms.
D. when the board of directors oversee the CEO.
46. The most common type of business in the United States is the:
A. corporation.
B. partnership.
C. sole proprietorship.
D. hybrid organization such as a limited liability company.
47. The biggest disadvantage of the sole proprietorship is:
A. unlimited liability.
B. double taxation.
C. limited access to capital.
D. total control.
48. Which of the following statements is incorrect?
A. Sole proprietorships are subject to less regulation.
B. Both angel investors and venture capitalists exchange capital for ownership.
C. Shareholders are responsible for paying off the corporate bonds in the event of a bankruptcy.
D. All of these statements are correct.
49. All of the following are advantages to organizing as a corporation EXCEPT:
A. limited liability.
B. double taxation.
C. easy access to capital.
D. easy to transfer ownership.
50. Which of the following statements is correct?
A. Sole proprietorships are easy to start.
B. If the sole proprietorship gets sued, the owner is not liable.
C. It is relatively easy for sole proprietorships to raise money.
D. Profits from the sole proprietorship are subject to double taxation.
51. From a taxation perspective, the form of business organization with the highest business level
taxes is the:
A. sole proprietorship.
B. corporation.
C. partnership.
D. S corporation.
52. From the perspective of access to capital, the best form of business organization is the:
A. sole proprietorship.
B. corporation.
C. partnership.
D. S corporation.

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