Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is listed on the NYSE. This trade occurred in which one of the following?

61. Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is listed on the NYSE. This trade occurred in which one of the following?
A. primary, dealer market
B. secondary, dealer market
C. primary, auction market
D. secondary, auction market
E. secondary, OTC market

Refer to section 1.5

AACSB: N/A
Difficulty: Intermediate
Learning Objective: 1-3
Section: 1.5
Topic: Secondary auction market
 

62. Which one of the following statements is correct concerning the NYSE?
A. The publicly traded shares of a NYSE-listed firm must be worth at least $250 million.
B. The NYSE is the largest dealer market for listed securities in the United States.
C. The listing requirements for the NYSE are more stringent than those of NASDAQ.
D. Any corporation desiring to be listed on the NYSE can do so for a fee.
E. The NYSE is an OTC market functioning as both a primary and a secondary market.

Refer to section 1.5

AACSB: N/A
Difficulty: Intermediate
Learning Objective: 1-3
Section: 1.5
Topic: NYSE
 

63. Which one of the following statements concerning NASDAQ is FALSE?
A. It is easier to be listed on NASDAQ than on the NYSE.
B. NASDAQ is an electronic market.
C. NASDAQ is a dealer market.
D. NASDAQ is an OTC market.
E. NASDAQ is an auction market.

Refer to section 1.5

AACSB: N/A
Difficulty: Basic
Learning Objective: 1-3
Section: 1.5
Topic: NASDAQ
 

Essay Questions
 

64. List and briefly describe the three general areas of responsibility for a financial manager. 

The three basic areas are:
1. capital budgeting: the identification of investment opportunities that have a positive net value
2. capital structure: the mix of long-term debt and equity used to finance a firm's operations
3. working capital management: the daily control of a firm's short-term assets and short-term liabilities

Feedback: Refer to section 1.1

AACSB: Reflective thinking
Difficulty: Intermediate
Learning Objective: 1-1
Section: 1.1
Topic: Financial manager
 

65. Describe the key advantages associated with the corporate form of organization. 

The advantages of the corporate form of organization are the ease of transferring ownership, the owners' limited liability for business debts, the ability to raise large amounts of capital, and the potential for an unlimited life for the organization.

Feedback: Refer to section 1.2

AACSB: Reflective thinking
Difficulty: Intermediate
Learning Objective: 1-3
Section: 1.2
Topic: Corporation
 

66. Why are so many businesses structured as sole proprietorships when the corporate form of business offers more advantages? 

A significant advantage of the sole proprietorship is that it is inexpensive and easy to form. If the sole proprietor has limited capital to start with, it may not be desirable to spend part of that capital forming a corporation. Also, limited liability for business debts may not be a significant advantage if the proprietor has most of his or her personal assets tied up in the business already. Finally, for a typical small firm, having an unlimited life for the business has no real advantage since the heart and soul of the business is the person who founded it, thereby effectively limiting the life of the business to that of its founder.

Feedback: Refer to section 1.2

AACSB: Reflective thinking
Difficulty: Intermediate
Learning Objective: 1-3
Section: 1.2
Topic: Sole proprietorship
 

67. What concerns might a loan officer have when loaning funds to a sole proprietorship that he or she might not have when loaning funds to a corporation? 

The existence and viability of a sole proprietor is dependent upon one individual. Should that individual die, the entity would cease to exist. Likewise, should the owner lose interest in the business or become ill, the business might also cease to exist. With a corporation, the company ownership could be sold in any one of those situations such that the business entity would continue to exist.

Feedback: Refer to section 1.2

AACSB: Reflective thinking
Difficulty: Intermediate
Learning Objective: 1-3
Section: 1.2
Topic: Organizational structure
 

68. From a liability point of view, what is the difference between investing in a sole proprietorship and a general partnership? 

Both a sole proprietor and a general partner have unlimited liability for the firm's debts. However, as a sole proprietor you should be totally aware of all the business dealings of the firm. In a general partnership, you may or may not handle the financial transactions and thus are accepting the responsibility for actions taken not only by yourself, but those of your partners.

Feedback: Refer to section 1.2

AACSB: Reflective thinking
Difficulty: Intermediate
Learning Objective: 1-3
Section: 1.2
Topic: Personal liability
 

69. Give some examples of ways in which manager's goals can differ from those of shareholders. 

The primary goal of a financial manager should be to maximize the current value of the outstanding stock. This goal focuses on enhancing the returns to stockholders who are the owners of the firm. However, managers frequently are more concerned with their personal benefits from employment, the prestige of their position, and the perks to which they feel entitled. There are numerous examples, some of which are excessive compensation packages, large corporate offices, excessive staffing, and first-class travel and conference locations, to name a few.

Feedback: Refer to section 1.4

AACSB: Ethics
Difficulty: Intermediate
Learning Objective: 1-4
Section: 1.4
Topic: Agency conflict
 

70. How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial intent of that Act? 

Some of the key requirements of Sarbanes-Oxley are: the prohibition of personal loans from the company to its officers, an annual report by management of the internal control and financial reporting within the firm along with an independent auditor's assessment of that report, a review and sign off by the corporate officers of the annual financial statements, and the responsibility for the accuracy of the financial reports placed directly on senior management of the firm. While firms that have opted to remain publicly-owned are complying with these requirements, they are paying a cost to do so. This cost has caused other firms to "go dark" or to opt for listing on a foreign exchange rather than a U.S. exchange. While some of the results do match the intent of the Act, the costs, "going dark", and foreign listings were most likely not intended by the supporters of the Act.

Feedback: Refer to section 1.3

AACSB: Ethics
Difficulty: Intermediate
Learning Objective: 1-4
Section: 1.3
Topic: Sarbox
 

71. How might agency problems arise in partnerships? 

Agency conflicts typically arise when there is a separation between the ownership and the management of a business. In a general partnership, especially if the partnership is small, there is less of a chance of an agency conflict if all the partners are involved with the business on a regular basis. However, in a limited partnership, the opportunity exists for an agency problem to arise between the general and the limited partners.

Feedback: Refer to section 1.4

AACSB: Ethics
Difficulty: Intermediate
Learning Objective: 1-4
Section: 1.4
Topic: Agency conflict
 

72. Compare and contrast the NYSE with NSADAQ. 

The NYSE is an auction market where sell orders are matched with buy orders. The NYSE has a physical trading floor located on Wall Street in New York City. NASDAQ is a dealer market which is solely electronic and therefore has no physical trading floor. Dealers buy and sell for their own inventory. The listing requirements of the NYSE are more stringent than those of NASDAQ and thus the NYSE tends to list larger firms with smaller firms being listed on NASDAQ. Note however, that larger firms can, and do, opt to remain on NASDAQ even though they qualify for NYSE listing.

Feedback: Refer to section 1.5

AACSB: Reflective thinking
Difficulty: Intermediate
Learning Objective: 1-3
Section: 1.5
Topic: Exchanges