For each of these questions, could you explain why that would be the answer? - 1
ID: 2815678 • Letter: F
Question
For each of these questions, could you explain why that would be the answer?
-
1. An example of a capital budgeting decision is deciding:
(A) How Many Shares of Stock to Issue
(B) Whether or not to purchase a new machine for the production line
(C) How to refinance a debt issue that is maturing
(D) How much inventory to keep on hand
(E) How much money should be kept in the checking account
-
2. Capital structure decisions include determining:
(A) Which one of two projects to accept
(B) How to allocate investment funds to multiple projects
(C) The amount of funds needed to finance customer purchases of a new product
(D) How much debt should be assumed to fund a project
-
3. Which one of the following questions is a working capital management decision?
(A) Should the company issue new shares of stock or borrow money?
(B) Should the company update or replace its older equipment?
(C) How much inventory should be on hand for immediate sales?
(D) Should the company close one of its current stores?
(E) How much should the company borrow to buy a new building?
-
4.Which one of the following terms is defined as the mixture of a firm's debt and equity financing?
(A) Working Capital Management
(B) Cash Management
(C) Cost Analysis
(D) Capital Budgeting
(E) Capital Structure
-
5. One disadvantage of the corporate form of business ownership is the:
(A) Limited liability of its shareholders for the firm's debts
(B) Double taxation of distributed profits
(C) Firm's greater ability to raise capital than other forms of ownership
(D) Firm's potential for an unlimited life.
(E) Firm's ability to issue additional shares of stock
-
(6) Agency problems are most associated with:
(A) Sole Proprietorships
(B) General Partnerships
(C) Limited Partnerships
(D) Corporations
(E) Limited Liability companies
-
7. Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:
(A) Took place in the primary Market.
(B) Occured in a dealer market
(C) Was facilitated in the secondary market.
(D) Involved a proxy
(E) Was a private placement
Explanation / Answer
Question - 1
(B) Whether or not to purchase a new machine for the production line
Capital budgeting is the process of verifying the profitability in taking up certain capital expenditure decisions. Puchase of new machine is a capital expenditure. So its an example of capital budgeting
Question - 2
(D) How much debt should be assumed to fund a project
Capital structure means the mix between debt and equity. In other words, it is the debt equity ratio decided to finance (i.e fund ) a given project
Question - 3
(C) How much inventory should be on hand for immediate sales?
Working capital management deals with management of current assets and Inventory is an important component of such current assets. Thus all Inventory related concepts are inventory management issues and are part of working capital management.
Question - 4
(E) Capital Structure
The other term for Debt Equity ratio is called capital structure, when we assume only two sources.
Question - 5
(B) Double taxation of distributed profits
All other options are infact advantages which a non - corporation cannot generally enjoy. But we see that dividends are paid by corporations from after tax profits and they are again taxed in the hands of investors when they include such dividend income in their returns. Thus double taxation of profits is the main disadvantage with corporation style of business.
Question - 6
(D) Corporations
Corporations, we see there is seperation of ownership from management. Hence there is scope to some extent that management does not act in best interest of owners ( share holders ). This problem is called agency - problem.
Question - 7
(C) Was facilitated in the secondary market.
Stock markets are called as secondary market, because stocks that are bought and sold here are already issued by corporation. There will not be any fresh issue in stock exchanges.
All the answers will be 100% correct. Hope you like the explanation as well. For any further assistancy kindly comment .......... all the best.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.