Question 1

Which of the following statements is MOST CORRECT?

Select one:

a. It is easier to transfer ones ownership interest in a partnership than in a corporation.

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

c. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.

d. In part due to limited liability and ease of ownership transfer, corporations have more trouble raising money in financial markets than other organizational forms.

e. Sole proprietorships are subject to less regulations than corporations.

Question 2

Which of the following statements is correct?

Select one:

a. Hedge funds have traditionally been unregulated.

b. Private equity companies operate much like hedge funds. They buy some of the stocks of a firm, but never plan to manage the entire firm.

c. If an investor sells shares of stock through a broker, it would be a primary market transaction.

d. Derivative transactions can only be used to speculate market movements.

e. A larger bid-ask spread means that the dealer will realize a smaller profit.

Question 3

Which of the following statements is MOST CORRECT?

Select one:

a. Agency conflicts between stockholders and managers are not really a problem when non-managers own shares in a firm.

b. Compensating managers with stock options can do nothing to help eliminate potential conflicts between stockholders and managers.

c. The threat of takeovers reduces conflict of interest problems, but only between bondholders and stockholders.

d. The conflicts between bondholders and stockholders can be reduced with the use of restrictive bond covenants.

e. Managers may not operate in stockholders best interests. As long as managers stay within the law, there are no effective controls that stockholders can implement to control managerial decision making.

Question 4

Which of the following statements is CORRECT?

Select one:

a. The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.

b. The income statement shows us the firms financial situation over a period of time.

c. Because companies are required to follow GAAP, two firms in exactly the same operating situation will have exactly the same financial statement.

d. The emphasis in finance is on the determination of accounting income since the value of a firm is determined by the net income generated.

e. If a firm follows generally accepted accounting principles (GAAP), then its reported net income will be identical to its reported net cash flow.

Question 5

Complete the Income Statement. What was the companys interest expense for the year?

Milos To Go, Inc.

Income Statement

	2008
EBIT	20
Interest Expense	??
EBT	?
Taxes (35%)	?
Net Income	10

Select one:

a. $4.615 million.

b. $10.00 million

c. $11.25 million

d. $15.50 million

e. $5.714 million.

Question 6

Last year, Blanda Brothers had positive cash flow from operation; however, cash on its balance sheet decreased. Which of the following could explain this?

Select one:

a. The company eliminated its dividend.

b. The company issued new common stock.

c. The company issued new long-term debt.

d. The company purchased a lot of new fixed assets.

e. The company sold off some of its assets.

Question 7

A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?

Select one:

a. The firms net cash flow would increase.

b. The companys depreciation would decrease.

c. The firms tax payments would increase.

d. The firms operating income (EBIT) would increase.

e. The firms taxable income would increase.