BUS 530 FINancial Management

Exam 1 Sample Questions

Part I MULTIPLE CHOICE QUESTIONS

( ) 1. The principal-agent problem
A. Occurs when managers have more incentive to maximize profits than the stockholders-owners do.
B. Would not arise if the owners of the firm had complete information about the activities of the managers.
C. In financial markets helps to explain why equity is a relatively important source of finance for American business.
D. All of the above.
E. Only A and B of the above.

( ) 2. In a partnership form of organization, income tax liability, if any, is incurred by:
A. The partnership itself.
B. The partners individually.
C. Both the partnership and the partners.
D. Neither the partnership nor the partners.

( ) 3. One common reason for partnerships to convert to a corporate form of organization is that the partnership:
A. Faces rapidly growing financing requirements.
B. Wishes to avoid double taxation of profits.
C. Has issued all of its allotted shares.
D. Agreement expires after ten years of use.

( ) 4. When a corporation fails, the maximum that can lose by an investor protected by limited liability is:
A. The amount of the initial investment.
B. The amount of the profit on the investment.
C. The amount necessary to pay the corporation's debts.
D. The amount of the investor's personal wealth.

( ) 5. Which of the following is not an advantage to incorporating a business?
A. Easier access to financial markets.
B. Limited liability.
C. Becoming a permanent legal entity.
D. Profits taxed at the corporate level and the shareholder level.

( ) 6. Unlimited liability is faced by the owners of:
A. Corporations.
B. Partnerships and corporations.
C. Sole proprietorships and partnerships.
D. All forms of business organization.
( ) 7. "Double taxation" refers to:
A. All partners paying equal