Corporate Finance A Focused Approach 5th Edition By Ehrhardt, Michael C. – Test Bank
CHAPTER 1—AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL ENVIRONMENT
TRUE/FALSE
- The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm’s owners.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Firm organization KEY: Bloom’s: Knowledge
- The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Firm organization KEY: Bloom’s: Knowledge
- There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Partnership KEY: Bloom’s: Knowledge
- Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner’s unlimited personal liability for the business’ debts.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Proprietorship KEY: Bloom’s: Knowledge
- One key value of limited liability is that it lowers owners’ risks and thereby enhances a firm’s value.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Limited liability KEY: Bloom’s: Knowledge
- If a firm’s goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders’ wealth.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-3 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Value maximization KEY: Bloom’s: Knowledge
- If Firm A’s business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-4 NAT: BUSPROG: Reflective Thinking
STA: DISC: Goals of the firm, role of finance, and analysis of public information
LOC: TBA TOP: Financial intermediaries KEY: Bloom’s: Knowledge
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