FINC 3610 Harrelson Exam 1 – 250-Question
Practice Bank
1. Corporation
Answer: A business created as a distinct legal entity composed of one or
more individuals or entities.
2. Corporation (pros and cons)
Answer: Advantages: limited liability, separation of ownership and
management (unlimited life & easy transfer of ownership), and easier to
raise capital. Disadvantages: Difficult to start up (Article of incorporation, By
law) and double taxation.
3. Article of incorporation
Answer: Stating your companies name, location of headquarters (big deal).
4. By Law
Answer: How you run the business, how we are structured/ governed.
,5. Cash management
Answer: Cash doesn't grow or gain interest.
6. Credit management
Answer: Do we accept? risk bad debt, credit card companies keep
percentage.
7. The Agency Problem
Answer: Principal (stockholder) hires an agent (manager) to represent their
interest. Conflict of interest may occur between principal and agent.
8. Direct Agency Cost
Answer: 1. Wasteful spending 2. Monitoring and Auditing.
9. Indirect Agency Cost
Answer: Missed opportunities.
10. What is the primary goal of financial management in a corporation?
Answer: To maximize the current value of the existing stock.
11. Which business form is characterized by unlimited liability for its owners?
,Answer: Sole proprietorship.
12. What does the term "double taxation" refer to in the context of a
corporation?
Answer: Corporate earnings are taxed at the corporate level, and then
dividends are taxed again at the personal level.
13. In the agency relationship, who is the principal?
Answer: The stockholder.
14. In the agency relationship, who is the agent?
Answer: The manager.
15. What is a key advantage of a corporation regarding ownership transfer?
Answer: Easy transfer of ownership.
16. What is a key disadvantage of a sole proprietorship?
Answer: Limited life and unlimited liability.
17. What document outlines the rules and regulations for running a
corporation?
, Answer: Bylaws.
18. What document is filed with a state to establish a corporation?
Answer: Articles of incorporation.
19. Which type of business organization is best suited for raising large
amounts of capital?
Answer: Corporation.
20. What is the term for the costs associated with the conflict of interest
between stockholders and managers?
Answer: Agency costs.
21. What is a primary disadvantage of a partnership?
Answer: Unlimited liability for general partners.
22. Which of the following is an example of a direct agency cost?
A. A manager purchasing a corporate jet for personal use
B. A missed investment opportunity due to poor management
C. The cost of auditing the company's financial statements
D. A decline in the company's stock price
Practice Bank
1. Corporation
Answer: A business created as a distinct legal entity composed of one or
more individuals or entities.
2. Corporation (pros and cons)
Answer: Advantages: limited liability, separation of ownership and
management (unlimited life & easy transfer of ownership), and easier to
raise capital. Disadvantages: Difficult to start up (Article of incorporation, By
law) and double taxation.
3. Article of incorporation
Answer: Stating your companies name, location of headquarters (big deal).
4. By Law
Answer: How you run the business, how we are structured/ governed.
,5. Cash management
Answer: Cash doesn't grow or gain interest.
6. Credit management
Answer: Do we accept? risk bad debt, credit card companies keep
percentage.
7. The Agency Problem
Answer: Principal (stockholder) hires an agent (manager) to represent their
interest. Conflict of interest may occur between principal and agent.
8. Direct Agency Cost
Answer: 1. Wasteful spending 2. Monitoring and Auditing.
9. Indirect Agency Cost
Answer: Missed opportunities.
10. What is the primary goal of financial management in a corporation?
Answer: To maximize the current value of the existing stock.
11. Which business form is characterized by unlimited liability for its owners?
,Answer: Sole proprietorship.
12. What does the term "double taxation" refer to in the context of a
corporation?
Answer: Corporate earnings are taxed at the corporate level, and then
dividends are taxed again at the personal level.
13. In the agency relationship, who is the principal?
Answer: The stockholder.
14. In the agency relationship, who is the agent?
Answer: The manager.
15. What is a key advantage of a corporation regarding ownership transfer?
Answer: Easy transfer of ownership.
16. What is a key disadvantage of a sole proprietorship?
Answer: Limited life and unlimited liability.
17. What document outlines the rules and regulations for running a
corporation?
, Answer: Bylaws.
18. What document is filed with a state to establish a corporation?
Answer: Articles of incorporation.
19. Which type of business organization is best suited for raising large
amounts of capital?
Answer: Corporation.
20. What is the term for the costs associated with the conflict of interest
between stockholders and managers?
Answer: Agency costs.
21. What is a primary disadvantage of a partnership?
Answer: Unlimited liability for general partners.
22. Which of the following is an example of a direct agency cost?
A. A manager purchasing a corporate jet for personal use
B. A missed investment opportunity due to poor management
C. The cost of auditing the company's financial statements
D. A decline in the company's stock price
