1.

Which of the following is most likely to motivate executives to maximize shareholder wealth?

Tying bonuses to cost reductions and meeting budget goals

Offering them relatively high salaries

Tying annual bonuses to increases in annual profits

Compensating them with stock options that can only be exercised after five years

2.

Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose?

Corporation

General Partnership

Sole proprietorship

Limited partnership

3.

Each year, shareholders receive a dividend equal to the firm's net earnings divided by the number of shares of common stock.

True

False

4. What is the BEST interpretation of a firm's negative cash flow?

The firm is profitable.

The firm is not profitable.

The firm may be unable to pay its bills.

The firm is unlikely to go bankrupt.

5. A firm's operating return on assets is more than its peer group's. Which of the following statements draws an INCORRECT implication from this comparison of asset utilization ratios?

The firm is producing more profits from their assets than its peers.

The firm's operations management and asset management merit shareholders' confidence.

The firm is generating fewer cents of operating profits for every $1 of assets, compared to that earned by the peer group.

The firm is earning a competitive return on the assets.

6. Which of the following is NOT a reason to monitor free cash flow in order to understand the value of a business?

		Free cash flow suggests a firm's maneuverability.
		Free cash flow is directly correlated with profit.
		Free cash flow involves less sophisticated analyses and fewer assumptions and thus is more accurate.
		Free cash flow explains the change in a firm's cash balance by identifying sources and uses of cash