Northern Caribbean University College of Business and Hospitality Management Department of Business Administration & Hospitality Management FNCE

341: Financial Management Principles Worksheet #1

Name:__________________________________ Due Date: January 23 ,2014
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. (15 marks) 1) Which of the following is NOT an advantage of the sole proprietorship? A) No legal requirements for starting the business B) No time limit imposed on its existence C) Limited liability D) None of the above 2) The true owners of the corporation are the: A) common stockholders. C) board of directors of the firm. 1)

B) holders of debt issues of the firm. D) preferred stockholders.

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3) In terms of organizational costs, which of the following sequences is generally correct, moving from lowest to highest cost? A) General partnership, sole proprietorship, limited partnership, corporation B) Corporation, limited partnership, general partnership, sole proprietorship C) Sole proprietorship, general partnership, limited partnership, corporation D) Sole proprietorship, general partnership, corporation, limited partnership 4) Which one of the following categories of owners enjoys limited liability? A) Shareholders (common stock) of a corporation B) Sole proprietors C) General partners in a limited partnership D) Both A and B 5) Which of the following types of business forms is the most ideal in terms of attracting new capital? A) General partnership B) A public corporation C) Sole proprietorship D) Limited partnership 6) A limited liability company (LLC) is: A) able to retain limited liability for owners. B) taxed like a corporation. C) a cross between a partnership and a corporation. D) A and C. E) all of the above. 7) In regard to the agency problem, ________ are the principal owners of a corporation. A) suppliers B) employees C) shareholders D) managers 1

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8) Maximization of shareholder wealth as a goal is superior to profit maximization because: A) it considers the time value of the money. B) following the shareholder wealth maximization goal will ensure high stock prices. C) it considers uncertainty. D) A and C. 9) If an investor had a choice of receiving $1,000 today, or $1,000 in five years, which would the average investor prefer? A) $1,000 in five years because they are not good at saving money. B) Investors would be indifferent to when they would receive the $1,000. C) $1,000 in five years because it will be worth more than $1,000 received today. D) $1,000 today because it will be worth more than $1,000 received in five years. E) None of the above. 10) Why do investors prefer receiving cash sooner rather than later, according to finance theory? A) Diversification leads to increased value. B) Incremental profits are greater than accounting profits. C) Tax considerations are important when investing. D) Money received earlier can be reinvested and returns can be increased. 11) Which of the following is a characteristic of an efficient market? A) Small number of individuals B) Security prices reflect fair value of the firm. C) Opportunities exist for investors to profit from publicly available information. D) Immediate response occurs for new public information. 12) If one security has a greater risk than another security, how will investors respond? A) They will require a higher rate of return for the investment that has greater risk. B) They will require a lower rate of return for the investment that has greater risk. C) They would be indifferent regarding their expectation of rates of return for either investment. D) None of the above. 13) What does the agency problem refer to? A) The conflict that exists between the board of directors and the employees of the firm. B) The problem that results from potential conflicts of interest between the manager of a business and the stockholders. C) The problem associated with financial managers and Internal Revenue agents. D) The conflict that exists between stockbrokers and investors. E) None of the above. 14) Diversification increases when ________ decreases. A) risk B) return C) variability D) A and C E) all of the above 15) How could you compensate an investor for taking on a significant amount of risk? A) Increase sales B) Increase the expected rate of return C) Offer stock at a higher price D) Raise more debt capital

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SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. (5 marks) 16) Discuss the risk/return tradeoff and how it relates to finance. 16)