Version A FIN 350, 11S
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Fin 350 – Business Finance
Quiz 1
NAME:______________________ SECTION: _______________ Due date: February 21, 2011
Answer All Questions. Read all the answers carefully and select the best answer for each question.
1. Which of the following statements is MOST CORRECT?
a) Unlimited liability and limited life are two key advantages of the corporate form over other forms of business
organization.
b) Sole proprietorships are subject to less regulations than corporations.
c) In part due to limited liability and ease of ownership transfer, corporations have more trouble raising money in financial
markets than other organizational forms.
d) One of the advantages of the corporate form of organization is that it avoids double taxation.
e) It is easier to transfer one’s ownership interest in a partnership than in a corporation.
2. Which of the following statements is MOST CORRECT?
a) The threat of takeovers reduces conflict of interest problems, but only between bondholders and stockholders.
b) Agency conflicts between stockholders and managers are not really a problem when non-managers own shares in a firm.
c) Managers may not operate in stockholders’ best interests. As long as managers stay within the law, there are no effective
controls that stockholders can implement to control managerial decision making.
d) Compensating managers with stock options can do nothing to help eliminate potential conflicts between stockholders and
managers.
e) The conflicts between bondholders and stockholders can be reduced with the use of restrictive bond covenants.
3. Which of the following statements is correct?
a) The NASDAQ is a physical location auction market.
b) Derivative transactions can only be used to speculate market movements.
c) A larger bid-ask spread means that the dealer will realize a smaller profit.
d) Hedge funds have traditionally been unregulated.
e) Private equity companies operate much like hedge funds. They buy some of the stocks of a firm, but never plan to
manage the entire firm.
4. Which of the following statements is CORRECT?
a) The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
b) The income statement gives us a picture of the firm’s financial situation over a period of time.
c) The emphasis in finance is on the determination of accounting income since the value of a firm is determined by the net
income generated.
d) If a firm follows generally accepted accounting principles (GAAP), then its reported net income will be identical to its
reported net cash flow.
e) Because companies are required to follow GAAP, two firms in exactly the same operating situation will have exactly the
same financial statement.
5. Complete the Income Statement. What was the company’s interest expense for the year?
Milos To Go, Inc.
Income Statement
2008
EBIT 20
Interest Expense ??
EBT ?
Taxes (30%) ?
Net Income 10
a) $4.615 million.
b) $15.50 million
c) $10.00 million
d) $11.25 million
e) $5.714 million.
