You can buy the complete file from http://testbankexpress.comFoundations of Finance, 7e (Keown/Martin/Petty)Chapter 1 An Introduction to the Foundations of Financial Management1.1 Learning Objective 11) inancial management !eals "ith the maintenance an! creation of economic value or "ealth.#ns"er:$%&'(ey"or!s:inancial )anagement##*+,:%eflective thinking skills-) 'ach financial !ecision ma!e by a corporate manager can be evaluate! by its !irect impact on the corporation.s stock price. #ns"er:#L+'(ey"or!s:/oal of the irm##*+,:%eflective thinking skills0) $he fun!amental goal of a business is to maximi1e the retaine! earnings available to the corporation.s sharehol!ers. #ns"er:#L+'(ey"or!s:/oal of the irm##*+,:%eflective thinking skills2) +harehol!er "ealth maximi1ation means maximi1ing the price of the existing common stock.#ns"er:$%&'(ey"or!s:+harehol!er 3ealth4 /oal of the irm##*+,:%eflective thinking skills5) 6t is important to evaluate a corporate manager.s financial !ecision by measuring the effect the!ecision should have on the corporation.s stock price if everything else "ere hel! constant. #ns"er:$%&'(ey"or!s:/oal of the firm4 +harehol!er 3ealth )aximi1ation##*+,:%eflective thinking skills7) *orporate managers shoul! accept investment projects that maximi1e profits int he short run because of the time value of money. #ns"er:#L+'(ey"or!s:/oal of the irm4 8rofits4 $ime 9alue of )oney##*+,:%eflective thinking skills:) $he goal of the firm.s financial managers shoul! be the maximi1ation of the total value of the firm.s stock. #ns"er:$%&'(ey"or!s:/oal of the irm##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com;) $he payment of a !ivi!en! to current sharehol!ers "ill have no impact on a corporation.s share price because the cash pai! is not available to future potential sharehol!ers "ho may "ant to buy the corporation.s stock. #ns"er:#L+'(ey"or!s:/oal of the irm##*+,:%eflective thinking skillseterminants of +tock 8rice##*+,:%eflective thinking skills1-) +harehol!ers react to poor investment or !ivi!en! !ecisions by causing the total value of the firm.s stock to fall4 an! they react to goo! !ecisions by bi!!ing the price of the stock up. #ns"er:$%&'(ey"or!s:>eterminants of +tock 8rice##*+,:%eflective thinking skills10) $he primary goal of a publicly o"ne! corporation is to ????????.#) maximi1e !ivi!en!s per share,) maximi1e sharehol!er "ealth *) maximi1e earnings per share after taxes>) minimi1e sharehol!er risk #ns"er:,(ey"or!s:/oal of the irm4 *orporation##*+,:%eflective thinking skills12) )aximi1ation of sharehol!er "ealth#) represents a 1ero sum game in "hich one corporation gains at the expense of others.,) provi!es benefits to society as scarce resources are !irecte! to their most pro!uctive use.*) is not a practical goal since it cannot be measure! effectively.>) is achieve! only if cash flo"s excee! accounting profits.#ns"er:#(ey"or!s:/oal of the irm4 )aximi1e +harehol!er 3ealth##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com15) # financial manager is consi!ering t"o projects4 # an! ,. # is expecte! to a!! @- million to profits this year "hile , is expecte! to a!! @- million to profits this year "hile , is expecte! to a!! @1 million to profits this year. 3hich of the follo"ing statements is most correctA #) $he manager shoul! select project # because it maximi1es profits.,) $he manager shoul! select the project that maximi1es longBterm profits4 not just one year of profits.*) $he manager shoul! select project # or he is irrational.>) $he manager shoul! select the project that causes the stock price to increase the most4 "hich coul! be # or ,. #ns"er:>(ey"or!s:/oal of the irm##*+,:#nalytic skills17) +harehol!er "ealth maximi1ation means#) maximi1ing earnings per share.,) maximi1ing !ivi!en!s per share.*) maximi1ing the price of existing common stock.>) maximi1ing stockhol!ers eCuity.#ns"er:*(ey"or!s:/oal of the firm4 +harehol!er 3ealth )aximi1ation##*+,:%eflective thinking skills1:) $he goal of the firm shoul! be#) maximi1ation of profits Dnet income per share).,) maximi1ation of sharehol!er "ealth.*) maximi1ation of market share.>) maximi1ation of sales.#ns"er:,(ey"or!s:/oal of the irm4 )aximi1e +harehol!er 3ealth##*+,:%eflective thinking skills1;) 3hich of the follo"ing goals of the firm are synonymous DeCuivalent) to the maximi1ation ofsharehol!er "ealthA#) profit maximi1ation,) risk minimi1ation*) maximi1ation of the total market value of the firm.s common stock>) none of the above#ns"er:*(ey"or!s:/oal of the irm4 )aximi1e +harehol!er 3ealth##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com1irectors##*+,:%eflective thinking skills11) )anagers shoul! not be concerne! "ith business ethics because ethical behavior is inconsistent "ith the primary goal of maximi1ing sharehol!er value. #ns"er:#L+'(ey"or!s:'thics4 /oal of the irm##*+,:'thical un!erstan!ing an! reasoning abilities1-) One of the problems associate! "ith maximi1ation of total current stock value is that it ignores the timing of a project.s return.#ns"er:#L+'(ey"or!s:)aximi1ing +harehol!er 9alue4 $iming of %eturns##*+,:%eflective thinking skills10) $he riskBreturn tra!eoff is seen in many areas of finance. #ns"er:$%&'(ey"or!s:%isk4 %eturn##*+,:%eflective thinking skills12) $he risk/return tra!eoff implies that the return on a riskless asset must be 1ero. #ns"er:#L+'(ey"or!s:%iskB%eturn $ra!eoff##*+,:%eflective thinking skills15) $he sole proprietorship has no legal business structure separate from its o"ner.#ns"er:$%&'(ey"or!s:+ole 8roprietorship##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com17) #n efficient market is one "here the prices of the assets tra!e! in that market fully reflect all available information at any instant in time. #ns"er:$%&'(ey"or!s:'fficient )arkets##*+,:%eflective thinking skills1:) $he opportunity cost of any choice you make is the highestBvalue! alternative that you ha! togive up "hen you ma!e the choice. #ns"er:#L+'(ey"or!s:Opportunity *ost4 $ime 9alue of )oney##*+,:%eflective thinking skills1;) $he five basic principles of finance inclu!e all of the follo"ing except:#) *ash flo" is "hat matters.,) )oney has a time value.*) %isk reCuires a re"ar!.>) 6ncremental profits !etermine value.#ns"er:>(ey"or!s:,asic 8rinciples of inance##*+,:%eflective thinking skills1(ey"or!s:$ime 9alue of )oney##*+,:#nalytic skills-;) *ompany # reports sales of @1==4=== an! net income of @154===. *ompany , reports sales of @1==4=== an! net income of @1=4===. $herefore4 #) *ompany #.s cash flo" may be higher or lo"er than *ompany ,.s cash flo" even though #.s net income is higher.,) *ompany #.s cash flo" is @54=== more than *ompany ,.s cash flo".*) *ompany , is creating less value for its sharehol!ers than *ompany #.>) *ompany ,.s accounts receivable must be higher than *ompany #.s accounts receivable.#ns"er:#(ey"or!s:*ash lo"4 Fet 6ncome##*+,:#nalytic skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com-) 6f the stock price increases4 the stock market is efficient.#ns"er:,(ey"or!s:'fficient )arkets##*+,:#nalytic skills0=) #ll of the follo"ing statements about agency problems are true except: #) #gency problems interfere "ith the goal of maximi1ing sharehol!er value. ,) #gency costs are pai! by the managers "ho !o not act in the sharehol!ers. best interest.*) #gency problems result from the separation of management an! the o"nership of a firm. >) $he root cause of agency problems is conflicts of interest.#ns"er:,(ey"or!s:#gency 8roblems##*+,:%eflective thinking skills01) #ll of the follo"ing contribute! to recent financial crises except:#) ocusing on earnings instea! of cash flo".,) ocusing on the short run.*) %elying on the efficiency of financial markets.>) 'xcessive risk taking !ue to un!erestimation of risk. #ns"er:*(ey"or!s:ive 8rinciples of inance##*+,:%eflective thinking skills0-) # corporate financial manager trying to maximi1e sharehol!er value #) is not concerne! "ith ethics but rather "ith "riting ironBcla! contracts.,) can safely ignore ethics as long as no la"s are broken. *) must behave ethically in or!er to stay out of jail. >) is concerne! "ith ethics because unethical behavior !estroys trust4 an! businesses cannot function "ithout a certain !egree of trust#ns"er:>(ey"or!s:'thics4 )aximi1ing +harehol!er 9alue##*+,:'thical un!erstan!ing an! reasoning abilitiesYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com00) Gohn investe! @14=== in a risky investment an! ,6ll investe! @14=== in a less risky investment. One year later4 ,ill.s investment is "orth @14=0=. 3hich of the follo"ing statements is most correctA #) 6f Gohn.s investment is "orth less than @14=0=4 then Gohn "as irrational to invest in the risky project. ,) Gohn.s investment must be "orth more than @14=0= because of the riskBreturn tra!eoff4 given that Gohn.s investment "as more risky. *) 6f Gohn.s investment is "orth more than @14=0=4 then ,ill "as irrational to invest in the less risky investment. >) $he "orth of Gohn.s investment cannot be !etermine! "ith the information given. #ns"er:>(ey"or!s:%iskB%eturn $ra!eoff4 'xpecte! %eturn4 #ctual %eturn##*+,:#nalytic skills02) 6n or!er to re!uce agency problems4 managers may be provi!e! compensation that inclu!es: #) a fixe! salary so managers. pay is not at risk4 allo"ing managers to focus on the company.s business.,) a bonus base! on the level of profit achieve! !uring the year.*) an option to buy the company.s stock. >) incentive pay for achieving higher sales than last year.#ns"er:*(ey"or!s:#gency 8roblems4 +tock Option4 6ncentive *ompensation ##*+,:%eflective thinking skills05) #n investor is consi!ering t"o eCually risky investments. 6nvestment # is expecte! to return @14=== per year for the next 5 years. 6nvestment , is expecte! to return @74=== at the en! of 5 years. 3hich of the follo"ing statements is most correct if both investments # an! , have the same costA #) # risk averse investor "ill select investment , because it is expecte! to provi!e the most cashD@74=== K @54===).,) # risk averse investor "ill select investment # because it provi!es cash earlier than investment ,.*) $he investor "ill select investment # only if the cost is less than @14===.>) $he investor may select investment # or investment , !epen!ing on the opportunity cost of money. #ns"er:>(ey"or!s:$ime 9alue of )oney4 *ash lo"s##*+,:#nalytic skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com07) $he *'O of Eigh $ech 6nternational !eci!es to change an accounting metho! at the en! of the current year. $he change results in reporte! profits increasing by 5L4 but the company.s cash flo"s are not change!. 6f capital markets are efficient4 then #) the stock price "ill not be affecte! by the accounting change.,) the stock price "ill increase !ue to higher profits.*) the stock price "ill increase only if the accounting change "ill also result in higher profits in the next year.>) the stock price "ill !ecrease because accounting metho! changes are not permitte! un!er generally accepte! accounting principles.#ns"er:#(ey"or!s:'fficient )arkets##*+,:#nalytic skills0:) 3hen evaluating an investment project4 "hich of the follo"ing best !escribes the financial information nee!e! by the !ecision makerA #) afterBtax accounting profits,) afterBtax incremental cash flo"s to the company as a "hole*) incremental cash flo"s before taxes so the !ecision "ill not be biase! by a tax co!e that may change in the future>) preBtax accounting profits a!juste! for any accounting metho! changes#ns"er:,(ey"or!s:#fterB$ax 6ncremental *ash lo"s##*+,:%eflective thinking skills0;) $he *'O of GL6 *orp. !eci!e! to expan! into a ne" market in -=1=. #t the en! of -=1=4 GL6.s stock price ha! !ecrease! 5L since the beginning of the year. 3hich of the follo"ing statements is most correctA #) $he *'O ma!e a poor !ecision to expan! because the stock price !ecrease! !uring the year.,) $he *'O ma!e a poor !ecision to expan! because the company.s profits for the year obviously !ecrease!4 causing the !rop in stock price. *) $he *'O.s !ecision may have been optimal4 keeping the stock price from falling more than 5L for the year.>) *'O !ecisions are irrelevant because the efficient market !etermines the value of a company.s stock. #ns"er:*(ey"or!s:+tock 8rice )aximi1ation4 'fficient )arkets##*+,:#nalytic skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com0) extremely high interest rates in the &nite! +tates that stifle! investment.#ns"er:,(ey"or!s:%isk %eCuires a %eturn##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com20) 'thical behavior #) is the fifth basic principles of finance.,) cannot be a concern to managers "ho are expecte! to maximi1e sharehol!er value. *) in the corporate "orl! means not breaking any la"s.>) is essential in business because unethical behavior !estroys trust an! business relationships.#ns"er:>(ey"or!s:'thics##*+,:'thical un!erstan!ing an! reasoning abilities22) 6nvestors generally !on.t like risk. $herefore4 a typical investor#) "ill not be in!uce! to take on any risk.,) "ill only take on the least risk possible.*) "ill only take on a!!itional risk if he expects to be compensate! in the form of a!!itional return.>) "ill only accept a 1ero return if the risk is 1ero.#ns"er:*(ey"or!s:%iskB%eturn $ra!eoff##*+,:%eflective thinking skills25) 6n finance4 "e assume that investors are generally #) neutral to risk. ,) averse to risk. *) fon! of risk. >) none of the above#ns"er:,(ey"or!s:%iskB%eturn $ra!eoff##*+,:%eflective thinking skills27) *onsi!er the afterBtax cash flo"s for 8roject + an! 8roject L:8roject + 8roject LYear 1 @0=== =Year - = @0===8roject + 8roject LYear 1 @0=== =Year - = @0===# rational person "oul! prefer ????????.#) 8roject + because the money can be reinveste! sooner,) 8roject L because they can avoi! taxes by receiving cash flo"s later*) information about profits instea! of cash flo"s>) neither investment over the other#ns"er:#(ey"or!s:$ime 9alue of )oney##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com2:) #ssume that an investor is offere! a choice of a riskBfree government bon! or a highBrisk corporate stock. urther assume that the expecte! return is the same for both. #ccor!ing to one of the axioms of finance4 "hich investment "oul! be chosenA #) the corporate stock ,) the government bon!*) neither4 the investor "oul! be in!ifferent>) none of the above#ns"er:,(ey"or!s:%iskB%eturn $ra!eoff##*+,:%eflective thinking skills2;) #ssume that an investor is offere! a choice of a riskBfree government bon! that is expecte! toreturn 0.5L or a highBrisk corporate stock. #ccor!ing to one of the principles of finance4 "hat "oul! in!uce the investor to purchase the corporate stockA #) a return that is substantially lo"er than 0.5L,) cash !ivi!en!s*) a return that is substantially higher than 0.5L>) none of the above#ns"er:*(ey"or!s:%iskB%eturn $ra!eoff##*+,:%eflective thinking skills2(ey"or!s:$ime 9alue of )oney##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com5=) #ssume that you "on the Lotta >ough Lotto jackpot for @-= million. urther assume that you "ere offere! a choice to receive the @-= million to!ay4 or receive it in eCual installments of @1 million per year for -= years. #ccor!ing to one of the principles of finance4 "hich "oul! you takeA #) $he @-= million in eCual installments of @1 million per year for -= years because you "oul! be afrai! of spen!ing it all right a"ay. ,) $he @-= million to!ay because it "oul! be "orth more than if you "oul! receive it in eCual installments of @1 million per year for -= years.*) You "oul! be in!ifferent as to "hen you "oul! receive the @-= million since the total numberof !ollars receive! is the same either "ay.>) $he @-= million in eCual installments of @1 million per year for -= years because it "oul! be "orth more than if you "oul! receive it to!ay. #ns"er:,(ey"or!s:$ime 9alue of )oney##*+,:%eflective thinking skills51) 3hich of the follo"ing statements best represents the M#gency 8roblemAM #) )anagers might attempt to benefit themselves in terms of salary an! perCuisites at the expense of sharehol!ers.,) $he agency problem results from the separation of management an! the o"nership of the firm. *) $he agency problem may interfere "ith the implementation of maximi1ing sharehol!er "ealth. >) all of the above#ns"er:>(ey"or!s:#gency 8roblems##*+,:%eflective thinking skills5-) +hortBterm &nite! +tates $reasury ,ills are "i!ely use! as proxies for riskBfree assets4 yet the returns on these $Bbills are consistently greater than 1ero. 6s this consistent "ith the concept of a riskBreturn tra!eoffA #ns"er:Yes. 6nvestors also reCuire a return for !elaying consumption as "ell as a return for taking on risk. (ey"or!s:%iskB%eturn $ra!eoff4 %eturn for >elaying *onsumption##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com50) Gohn "on the lottery on )on!ay an! can take either @5=4=== per year for -= years4 or @5==4=== to!ay.,ill "on the same lottery on $ues!ay an! has the same options for receiving thecash.# "ell respecte! financial a!visor is hire! by both Gohn an! ,ill.$he a!visor recommen!sthat Gohn take the @5=4=== per year for -= years but a!vises ,ill to take the @5==4=== up front payment. Eo" is it possible to give !ifferent a!vice to t"o clients regar!ing the exact same cash flo"sA#ns"er:$he time value of money is base! on opportunity cost.6f Gohn an! ,ill have !ifferent opportunity costs for fun!s4 they can each be making rational choices.or example4 suppose ,illcan earn -=L on the fun!s he receives by investing them in his business4 but Gohn expects to earn only -L by investing the lottery "innings in a certificate of !eposit. ,ill "ill en! up "ith more cash if he takes the @5==4=== up front an! invests it "isely4 even though he is giving up @5==4=== of future "innings.Gohn4 ho"ever4 is better off taking the @5=4=== per year4 for a total of @14===4=== over -= years4 because he "oul! not be able to make up the lost @5==4=== by earning only -L per year.(ey"or!s:Opportunity *ost4 $ime 9alue of )oney##*+,:%eflective thinking skills52) $he manager of /ol!en %ay *orporation receives a bonus if company profits excee! @14===4=== this year.>uring the final "eek of the year4 the manager changes an accounting policy that "ill increase reporte! profits from @iscuss the above situation as it relates to both an agency problem an! efficient markets.#ns"er:#n agency problem exists "hen a manager Dagent) acts in his or her o"n selfBinterest rather than in the best interests of the sharehol!ers Dprincipals).6n or!er to re!uce agency problems4 management activity may be monitore!4 such as through au!its an! performance revie"s4 an! management compensation can be !esigne! to align the interests of the managers "ith the interests of the sharehol!ers.# bonus base! on profits encourages the manager to focus on profits4 rather than on sharehol!er value.# better compensation scheme may inclu!e !irect stock o"nership by managers4 stock options for managers4 or performance incentives base! on the company.s stock price./iven efficient markets4 one "oul! expect the increase in profits to have little effect on the company.s stock price.+tock values are base! on cash flo"s4 not profits4 an! the stock market isnot foole! by an accounting change that artificially increases shortBterm profits.6n this case4 the stock price coul! go !o"n because the company has to pay higher compensation to the manager even though the company.s cash flo"s have not increase!.(ey"or!s:#gency 8roblems4 'fficient )arkets4 6ncentive #lignment4 *ash lo" 9ersus 8rofits##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com55) Your frien! %icky took a finance class an! learne! about the risk/return tra!eoff.3anting a high return4 %icky investe! in a risky4 startBup technology company.# year later the company "ent bankrupt an! %icky lost his entire investment.%icky is furious "ith his finance professor for mislea!ing him4 claiming he "as taught that higher return goes "ith higher risk.'xplain ho" %icky misinterprete! the risk/return tra!eoff.#ns"er:$he risk/return tra!eoff !eals "ith expecte! returns4 not actual returns.or risk averse investors4 higher expecte! returns are reCuire! before they "ill take on higher risks.Eo"ever4 higher expecte! returns !o not al"ays materiali1e.%isky projects sometimes result in lo"er actual returns.$his is "hat makes them risky.(ey"or!s:%isk/%eturn $ra!eoff4 #ctual %eturn4 'xpecte! %eturn4 %isk ##*+,:%eflective thinking skills57) $he boar! of !irectors of 3ireless4 6nc. is consi!ering t"o compensation plans for the *'O of the company.$he first "oul! pay the *'O a salary of @-5=4=== for the upcoming year.$he secon! "oul! pay the *'O a salary of @1==4=== an! provi!e the *'O "ith a stock option to buy 1==4=== shares of stock for @11 per share.$he current price per share of 3ireless4 6nc. stock is @1= per share.$he stock option expires at the en! of the year.3hy might sharehol!ers prefer the secon! payment planA#s part of your ans"er4 calculate the breakeven point for the *'O to obtain the same compensation un!er option t"o as he or she "oul! un!er option one.#ns"er:+harehol!ers may prefer the compensation package that inclu!es stock options becausethe options give the *'O the incentive to maximi1e the price of the company.s stock4 thus benefiting the sharehol!ers.# fixe! salary4 regar!less of stock price performance4 can lea! to a *'O "ho is "illing to !o the minimum necessary to maintain the job4 but "ho is not motivate! to "ork extra har! for the sharehol!ers.or every !ollar the price of the stock excee!s @11 per share4 the *'O "ill make an a!!itional @1==4===.$hus4 if the share price increases to @1-.5=4 the profit on the stock option ND@1-.5= B @11.==) O 1==4=== sharesP of @15=4=== plus the fixe! salary of @1==4=== "ill eCual the total compensation from option one of @-5=4===.+tock optionshelp to align the incentives of managers "ith the goals of sharehol!ers.(ey"or!s:#gency *osts4 6ncentive #lignment4 +tock Options##*+,:%eflective thinking skills1.0 Learning Objective 01) # corporate treasurer is typically responsible for cash management4 cre!it management4 an! raising capital.#ns"er:$%&'(ey"or!s:$reasurer4 inancial )anagers##*+,:%eflective thinking skills-) >etermining ho" a firm shoul! raise money to fun! its longBterm investments is referre! to ascapital structure !ecisions. #ns"er:$%&'(ey"or!s:*apital +tructure >ecisions##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com0) $he chief financial officer D*O) is responsible for overseeing financial planning4 corporate strategic planning4 an! controlling the firm.s cash flo". #ns"er:$%&'(ey"or!s:*hief inancial Officer##*+,:%eflective thinking skills2) $he financial manager most !irectly responsible for pro!ucing the company.s financial statements an! !irecting its cost accounting functions is the #) chief financial officer.,) controller.*) treasurer.>) vice presi!ent B financer.#ns"er:,(ey"or!s:*ontroller4 inancial )anagers##*+,:%eflective thinking skills5) # corporate treasurer is typically responsible for each of the follo"ing !uties except: #) cash management.,) cre!it management.*) capital expen!itures.>) cost accounting.#ns"er:>(ey"or!s:$reasurer4 inancial )anagers##*+,:%eflective thinking skills7) $he three basic types of issues a!!resse! by the stu!y of finance are #) capital bu!geting4 capital structure !ecisions4 an! "orking capital management.,) capital bu!geting4 "orking capital management4 an! investment analysis.*) capital structure !ecisions4 "orking capital management4 an! sustaine! profitability. >) capital bu!geting4 investment analysis4 an! cash management.#ns"er:#(ey"or!s:*apital ,u!geting4 *apital +tructure4 3orking *apital )anagement##*+,:%eflective thinking skills:) *ash an! cre!it management are typically the responsibility of the#) *ontroller.,) 9ice 8resi!ent of 8ro!uction an! Operations.*) *hief 'xecutive Officer4 or *'O.>) $reasurer.#ns"er:>(ey"or!s:$reasurer##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com;) 3orking capital management is concerne! "ith #) ho" a firm can best manage its cash flo"s as they arise in its !ayBtoB!ay operations.,) ho" a firm shoul! raise money to fun! its investments.*) "hat longBterm investments a firm shoul! un!ertake.>) managing a firms capital stock. #ns"er:#(ey"or!s:3orking *apital )anagement##*+,:%eflective thinking skills) planning sales of a corporation.s eCuity capital.#ns"er:*(ey"or!s:*apital ,u!geting##*+,:%eflective thinking skills1=) >etermining the best "ay to raise money to fun! a firm.s longBterm investments is calle! #) the capital bu!geting !ecision. ,) the portfolio !ecision. *) the money flo" processing !ecision. >) the capital structure !ecision. #ns"er:>(ey"or!s:*apital +tructure >ecisions##*+,:%eflective thinking skills11) Your frien!4 Gohn4 believes that since capital markets are efficient4 he !oesn.t nee! to rea! thefinancial press or be involve! in stock research before purchasing stocks for his portfolio.Ee simply thro"s !arts at the stock pages an! buys the stocks the !arts hit.6s stock research an! analysis important "hen buying an! selling stocks in an efficient marketA#ns"er:YesQ'fficient capital markets theory suggests that investors "ill not be able to outperform the market in the longBrun using just publicly available information.$his is !ue to the fact that market prices very Cuickly a!just to information.6f an investor only kno"s "hat all other investors kno"4 then he or she cannot use that information to earn abnormal returns.Eo"ever4 an uninforme! investor can certainly un!erperform the market.(ey"or!s:'fficient *apital )arkets##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com1.2 Learning Objective 21) $he sole proprietorship is for all practical purposes the absence of any formal legal business structure. #ns"er:$%&'(ey"or!s:+ole 8roprietorship4 Legal orms of ,usiness##*+,:%eflective thinking skills-) # general partnership4 unlike a limite! partnership4 is an entity that legally functions separate an! apart from its o"ners. #ns"er:#L+'(ey"or!s:/eneral 8artnership4 Limite! 8artnership4 Legal orms of ,usiness##*+,:%eflective thinking skills0) $he best form of business entity to attract ne" capital is the sole proprietorship because investors only nee! to !eal "ith one o"ner. #ns"er:#L+'(ey"or!s:Legal orms of ,usiness4 +ole 8roprietorship##*+,:%eflective thinking skills2) +Btype corporations an! limite! liability companies are taxe! like partnerships4 but have the a!vantage of limite! liability for their o"ners. #ns"er:$%&'(ey"or!s:Legal orms of ,usiness4 +B*orporation4 Limite! Liability *ompany##*+,:%eflective thinking skills5) Limite! liability companies are more flexible than +Btype *orporations because limite! liability companies operate un!er state la"s. #ns"er:#L+'(ey"or!s:Legal orms of ,usiness4 +B*orporation4 Limite! Liability *ompany##*+,:%eflective thinking skills7) # limite! liability company DLL*) is taxe! like a partnership but provi!es limite! liability for its o"ners similar to a corporation. #ns"er:$%&'(ey"or!s:Limite! Liability *ompany4 8artnership4 *orporation4 Limite! Liability##*+,:%eflective thinking skills:) 6ts ability to raise capital by selling stock makes the corporation the best form of organi1ation in terms of raising capital.#ns"er:$%&'(ey"or!s:*orporation4 #!vantages of *orporate orm##*+,:%eflective thinking skillsYou can buy the complete file from http://testbankexpress.comYou can buy the complete file from http://testbankexpress.com;) $here is no legal !istinction ma!e bet"een the assets of the business an! the personal assets ofany of the o"ners in the limite! partnership. #ns"er:#L+'(ey"or!s:Limite! 8artnership##*+,:%eflective thinking skills