Question

State whether the following statements are true or false.

1. Within Corporation, one key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.
2. Money markets are markets for short-term debt securities.
3. Negative net operating cash flow of firm means that the firm has solvency.
4. Agency Problem creates when managers are acting on behalf of owners’ interest.
5. Increase in current liabilities and decrease in current asset represents inflow cash.
6. If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.
7. Activity ratios explain the firm ability to use assets efficiently.
8. Trade-Off between Risk-Return is the main principle to maximize the firm value.
9. Reduce inventory and use the proceeds to pay off a part of current liabilities will lead to increase the quick ratio.
10. Unethical Behavior of the manager includes using the information that not available to the public to make money.

Answer 1

Q1: True: owners risk is limited to the amount he invest and because of this the limited liability company looks attractive to investors

Q2: True: Money markets are market for highly liquid debt securities like t bills, swaps etc

Q3: False: net negative operating cashflow implies the firm is going to have insolvency in future.

Q4: False: agency problem arises when managers acts against owners interest

Q5: True:

Q6: False: This is secondary market transaction.

Q7: True: activity ratio shows efficiency of firm

Q8: True: risk return tradeoff is very important in assessing a project or investment

Q9: True: quick ratio=(current asset-inventory)/current liabilities

Q10: True: Such activities of managers are unethical and create conflict of interests