Basic Finance W2b (MIT)

Which of the following is false regarding debt capital?

• Debt holders receive interest payments at fixed intervals.

• Debt holders receive the amount of their loan (principal) at the debt's maturity date.

• Debt holders can force the company into bankruptcy if interest payments are not made.

• Debt holders have voting rights for the company's board of directors.

Shareholders are said to have a residual claim on a company's assets. What does this mean?

• Shareholders have limited liability in their investment.

• Shareholders do not receive any payoff from the company until all creditors are paid.

• Shareholders are allowed to recover their investment first if the company experiences financial distress.

• Shareholders have priority in electing the board of directors for the company.

Which of the following is a strength of a sole proprietorship?

• Unlimited life

• Easy to form

• Limited liability

• Limited access to capital

Which of the following is a weakness of a sole proprietorship?

• Unlimited life

• Easy to form

• Limited liability

• Limited access to capital

What is the proper goal for a company's management?

• To maximise shareholder wealth

• To maximise net income or earnings

• To maximise sales revenue

• To minimise expenses

Which type of finance position focuses on preparing company financial plans and the evaluation of the company's financial ratios?

• Financial analyst

• Capital budgeting analyst

• Cash manager

• Portfolio manager

Which of the following is a basic guideline for financial decision making?

• Make decisions where the benefits exceed the costs.

• Make decisions where the total benefits exceed the total costs.

• Make decisions where the average benefits exceed the fixed costs.

• Make decisions where the average benefits exceed the average costs.

Which of the following is false regarding equity capital?

• Common shareholders bear most of the company's business and financial risk.

• Preferred shareholders receive a fixed annual payment on their invested capital.

• Common shareholders have ownership in the company by voting for the company's management.

• Preferred shareholders can force the company into bankruptcy if dividend payments are not paid.

Which market transactions generate new cash flow for the company?

• Primary market transactions

• Secondary market transactions

• Commodities market transactions

• Initial public offering (IPO) transactions

Which of the following describes the collective action problem?

• When a CEO fails to represent the interest of shareholders in daily decisions of the company

• When the shareholders of a company fail to act in their own best interests

• When the managers of a company lack incentive to maximise shareholder wealth

• When an individual shareholder spends time and resources monitoring managers - and bearing the cost of this - while the benefits go to all the shareholders in the company