Introduction to Financial Management SEM 3 FIM

Agency theory deals with the issue of

• when to hire an agent to represent the firm in negotiations.

• the legal liabilities of a firm if an employee, acting as the firm's agent, injures someone.

• the limitations placed on an employee acting as the firm's agent to obligate or bind the firm.

• the conflicts that can arise between the viewpoints and motivations of a firm's owners and managers.

One of the major disadvantages of a sole proprietorship is

• unlimited liability to the owner.

• the simplicity of decision making.

• low organizational costs.

• low operating costs.

Choose TWO major advantages of a sole proprietorship

• the owner will have all profits.

• that stock in the proprietorship can be easily transferred.

• that it is exempt from many tax rules that would otherwise apply when employees are hired by the firm.

• low operating costs.

Agency theory examines the relationship between the

• shareholders of the firm and the firm's investment banker.

• owners of the firm and the managers of the firm.

• board of directors and large institutional investors.

• shareholders and the firm's transfer agent.

Which of the following statements is CORRECT?

• One of the advantages of the corporate form of organization is that it avoids double taxation.

• It is easier to transfer one's ownership interest in a partnership than in a corporation.

• One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.

• One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., 'one person, one vote.'

Maximization of shareholder wealth is a concept in which

• increased earnings is of primary importance.

• profits are maximized on a quarterly basis.

• all earnings are paid as dividends to common stockholders.

• optimally increasing the long-term value of the firm

The partnership form of organization

• avoids the double taxation of earnings and dividends found in the corporate form of organization.

• usually provides limited liability to the partners.

• has unlimited life.

• simplifies decision making.

What is the primary goal of financial management?

• Increased earnings

• Maximizing cash flow

• Maximizing shareholder wealth

• Minimizing risk of the firm

The increasing percentage ownership of public corporations by institutional investors has

• had no effect on corporate management.

• created higher returns for the stock market in general.

• created more pressure on public companies to manage their firms more efficiently.

• taken away the voice of the individual investor.

Which of the following statements is CORRECT?

• Corporations generally face fewer regulations than sole proprietor-ships.

• Corporate shareholders are exposed to unlimited liability.

• It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.

• Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.