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Diff: 1
Topic: 1.1 The Cycle of Money
AACSB : 3 Analytic Skills
2
Copyright © 2013 Pearson Education, Inc.
5) Which of the following is NOT a function of a financial intermediary in the lending/borrowing
process?
A) To help establish terms of the lending/borrowing agreement
B) To match the borrower and the lender
C) To bear the risk that the borrower will not repay
D) All of the above are functions of the financial intermediary.
Answer: D
Diff: 1
6) You place $500 into your checking account at First Bank and earn 1% APR on your deposit. Your
professor borrows money at a rate of 8% from the same bank for a tuition loan for her son. Which of the
following statements is true?
A) The bank is criminally liable to you for paying an interest rate lower than the expected rate of
inflation.
B) You and your professor have an obvious conflict of interest because you have accounts at the same
financial institution.
C) You benefit from earning interest on your deposit, safety for your funds, and having a recognizable
means for paying for your financial obligations without having to hold cash.
D) Your professor is the only party to be made worse off by this example because she is the only party
paying net interest.
Answer: C
Comment: Both you and your professor are using services typically provided by banks. There is no
conflict of interest.
Diff: 2
7) The basic function of financial intermediaries is to move advice from lenders to borrowers and back
to lenders.
Answer: FALSE
Comment: The basic function of financial intermediaries is to move MONEY from lenders to borrowers
and back to lenders.
Diff: 1
8) In the lending/borrowing process, a financial intermediary function is to bear the risk that the
borrower will not repay.
Answer: TRUE
Diff: 1
9) All financial transactions have a buyer and a seller.

Answer: TRUE
Diff: 1
3
10) Give three examples of a financial transaction.
Answer: (1) Your parents use their credit card to pay some of your college expenses.
(2) You use the ATM to withdraw funds so you can buy your best friend a birthday gift.
(3) Your roommate lends you $20 and you repay it back when you get your next pay check.
Diff: 2
1.2 Overview of Finance Areas
1) Which of the following best identifies the four main areas of finance?
A) Exchange rate management, investments, financial institutions and markets, international
B) Corporate, investments, capital structure, international
C) Corporate, investments, financial institutions and markets, international
D) Corporate, capital budgeting, financial institutions and markets, regulation
Answer: C
Comment: Exchange rate management, capital structure, and capital budgeting are activities within the
functional areas of finance.
Diff: 2
Topic: 1.2 Overview of Finance Areas
2) Of the following, which is NOT one of the four main areas of finance?
A) International Finance
B) Corporate Finance
C) Investments
D) All are considered main areas of finance.
Answer: D
Diff: 1
3) The set of financial activities that support the OPERATIONS of a business is best described by which
main area of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
D) International finance
Answer: A
Diff: 1
4
4) ________ is the area of finance concerned with activities like borrowing funds to finance projects
such as plant expansions or new product launches.
A) Working capital management
B) International finance
C) Investments
D) Corporate finance
Answer: D
Diff: 2
5) ________ is the area of finance concerned with activities like repayment of borrowed funds through
dividends or interest payments.
A) Investments
B) Corporate finance
C) Capital budgeting
Answer: B
Diff: 1
6) ________ is the area of finance concerned with the activities of buying and selling financial assets
such as stocks and bonds.
A) Investments
B) Corporate finance
C) International finance
D) Financial markets and institutions
Answer: A
Diff: 1
Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.
7) Which of the following is NOT typically thought of as an investment activity?

A) Accurately pricing financial assets
B) The process of buying and selling financial assets
C) Repaying borrowed funds
D) Negotiating the rules and regulations of financial transactions
Answer: C
Diff: 2
5
8) The organized financial intermediaries and the forums that promote the cycle of money is a good
definition of which of the following main areas of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
Answer: C
Diff: 1
9) Financial institutions and markets

A) are the organized financial intermediaries and the forums that promote the cycle of money.
B) compose the set of financial activities that support the operations of a business.
C) are the activities centered on the purchase and sale of financial assets.
D) are concerned only with the addition of a multinational element to all finance activities.
Answer: A
Diff: 1
10) Of the following, which is NOT an example of a financial intermediary?

A) Commercial bank
B) Insurance company
C) Investment bank
D) All of the above are financial intermediaries.
Answer: D
Diff: 2
11) Of the following, which is NOT an activity engaged in by a financial intermediary?

A) Matching borrowers and lenders
B) Bearing risk
C) Managing retirement portfolios for large classes of employees
D) All of the above are activities of financial intermediaries.
Answer: D
Diff: 2
6
12) "Concern with the multinational elements of financial activities" best describes which of the four
main areas of finance?
A) Investments
B) International finance
C) Corporate finance
D) Financial institutions and markets
Answer: B
Diff: 1
13) Which of the following is a reason why an expertise in international finance is important?
A) Because the process of assessing risk among many countries is more difficult than assessing risk for
a single country
B) Because financial regulatory rules and requirements differ from country to country
C) Because changes in economic conditions impact the relative values of currency among countries
D) All of the above are reasons for gaining expertise in international finance.
Answer: D
Diff: 1
14) Which of the following is NOT an activity of a financial institution or market?

A) Bringing together buyers and sellers of financial assets
B) Providing a market for the transaction of financial assets
C) Providing information to buyers and/or sellers of financial assets
D) All are activities of financial institutions.
Answer: D
Diff: 1
15) Corporate Finance is the set of activities generally concerned with the buying and selling of financial
assets such as stocks and bonds.
Answer: FALSE
Comment: Investsments are the set of activities generally concerned with the buying and selling of
financial assets such as stocks and bonds.
Diff: 1
16) Financial institutions and markets are the organized financial intermediaries and the forums that
promote the cycle of money.
Answer: TRUE
Diff: 1
7
17) The four main areas of finance (corporate, investments, financial markets and institutions, and
international finance) are mutually exclusive topics.
Answer: FALSE
Comment: The four main areas of finance (corporate, investments, financial markets and institutions,
and international finance) are NOT mutually exclusive topics.
Diff: 1
18) Gold and land are considered "real assets" because they are permanent, whereas a commodity such
as corn is not a real asset because it is consumable.
Answer: FALSE
Diff: 1
19) What are the four main areas of finance? Give a brief definition of each.
Answer: The four main areas of finance are corporate, investments, financial institutions and markets,
and international finance. Corporate finance deals with the financial operations of the firm and focuses
on capital budgeting, capital structure, and working capital management. It is the primary focus of this
text. Investments focuses on the activities associated with the buying, selling, pricing, and risk
evaluation of financial assets. It is commonly the part of finance most interesting to students. Financial
institutions and markets is the study of the firms and organizations that facilitate and regulate the trading
of financial assets as well as the markets that make the trading possible. International finance is really a
hybrid of the first three. This area of finance must consider what the first three do and then develop a
framework for understanding in multiple markets with multiple institutions and products in multiple
currencies.
Diff: 3
1.3 Financial Markets
1) ________ are the forums where buyers and sellers of financial assets and commodities meet.
A) Housing markets
B) Federal Reserve banks
C) Financial markets
D) Automotive shows
Answer: C
Diff: 1
Topic: 1.3 Financial Markets
8
2) Financial markets can be classified by which of the following?
A) Type of asset traded
B) Maturity of the financial asset
C) Owner of the financial asset
D) All of the above can be classified as financial markets.
Answer: D
Diff: 2
3) Stocks are bought and sold in ________ markets.

A) equity
B) debt
C) derivatives
D) foreign exchange
Answer: A
Diff: 1
4) Bonds are bought and sold in ________ markets.

A) equity
B) debt
C) derivatives
D) foreign exchange
Answer: B
Diff: 1
5) Options are bought and sold in ________ markets.

A) equity
B) debt
C) derivatives
D) foreign exchange
Answer: C
Diff: 1
6) Currencies are bought and sold in ________ markets.

A) equity
B) debt
C) derivatives
D) foreign exchange
Answer: D
Diff: 1
9
7) Which of the following is NOT an example of an equity market transaction?
A) Mary sells her shares of Apple stock.
B) Mark contacts his broker and requests a purchase of IBM bonds.
C) Sahid buys shares of a small company stock traded on the NASDAQ.
D) All of the above are equity market transactions.
Answer: B
Comment: Mark contacts his broker and requests a purchase of IBM bonds - this is a debt market
transaction.
Diff: 2
8) Financial assets that will mature within a year are bought and sold in the ________ market.
A) debt
B) capital
C) stock
D) money
Answer: D
Comment: Debt, capital, and the stock markets are longer term in nature.
Diff: 1
9) The sale of "new" securities,where the financial asset is being traded for the very first time, is said to
take place in the ________ market.
A) primary
B) money
C) secondary
D) capital
Answer: A
Diff: 1
10) The sale of "used" securities,where the financial asset is being traded from one individual to another
and the proceeds do not go to the original issuer of the security, is said to take place in the ________
market.
A) primary
B) money
C) secondary
D) capital
Answer: C
Diff: 1
10
11) Sale of new common stock in the primary market is regulated by the ________, and sales of used
common on the secondary market is regulated by the ________.
A) SEC; FDIC
B) SEC; SEC
C) FDIC; Federal Reserve
D) Federal Reserve; SEC
Answer: B
Diff: 1
12) Which of the following is true of a dealer market?

A) The dealer buys and sells assets out of his own inventory.
B) The dealer acts as a broker, lining up the owners of assets with the purchasers of assets.
C) The dealer acts as an auctioneer of securities and takes a percentage of the sale as compensation.
D) None of the above are true of a dealer market.
Answer: A
Comment: Broker markets are characterized by brokers bringing buyers and sellers together with the
brokers earning a commission. Auction markets involve the purchase and sale of securities not currently
held in the dealer's portfolio.
Diff: 1
13) Which of the following is NOT a characteristic of a dealer market?

A) Dealers make a profit on the spread between what they pay for financial assets and what they sell
them for.
B) Securities are auctioned off to the highest bidder.
C) Dealers buy and sell from their own portfolio.
D) All of the above are characteristics of the dealer market.
Answer: B
Comment: Dealers buy and sell to customers; they do not auction to the highest bidder.
Diff: 2
14) Financial markets are the forums where buyers and sellers of financial assets come together.
Answer: TRUE
Diff: 1
15) When a company offers stock for sale for the first time and the proceeds go to the company, then
this is a sale in the primary market.
Answer: TRUE
Diff: 1
11
16) Auction markets consist of dealers buying and selling from their own portfolios.
Answer: FALSE
Comment: DEALER markets consist of dealers buying and selling from their own portfolios.
Diff: 1
17) Equity markets are where bonds are bought and sold.
Answer: FALSE
Comment: Equity markets are where STOCKS are bought and sold.
Diff: 1
18) Give an example of how a corporate manager might use the capital markets in the operation of
his/her corporation. Be sure to define capital market in your answer.
Answer: The capital market is the market for longer-term financial assets such as stocks and bonds. The
financial manager must finance the purchase of long-term assets and will often enter the capital market
to raise sufficient funds by issuing new stock or bonds.
Comment: NOTE: There are several good reasons a student can list for this question.
Diff: 3
19) Define "money market" and "capital market" and give an example of a security that trades in each.
Answer: The money market is the term for the market for short-term, low risk, highly liquid,
homogeneous securities such as Treasury bills, negotiable certificates of deposit or commercial paper.
The capital market consists of longer-term financial assets such as stocks and bonds.
Diff: 3
1.4 The Finance Manager and Financial Management
1) ________ is the typical title of the corporate executive charged with determining the best repayment
structure for borrowed funds to ensure timely repayment and sufficient cash for daily operations.
A) Chief Executive Officer (CEO)
B) Chief Financial Officer (CFO)
C) Chairman
D) Chief Operating Officer (COO)
Answer: B
Diff: 1
Topic: 1.4 The Finance Manager and Financial Management
12
2) ________ is NOT a main category of financial management.
A) Capital budgeting
B) Capital structure
C) Accounts receivable management
D) Working capital management
Answer: C
Diff: 2
3) The process of planning, evaluating, selecting, and managing the long-term operating projects of the
company is termed ________.
A) capital budgeting
B) capital structure
C) accounts receivable management
D) working capital management
Answer: A
Diff: 1
4) ________ addresses the question of what business we should be in over the long run.
C) Working capital management
D) Accounts receivable management
Answer: A
Diff: 1
5) The means by which a company is financed refers to the firm's ________.

Answer: B
Diff: 2
13
6) ________ addresses the question of where we raise money to finance our business activities.
Answer: B
Diff: 1
7) Managing the firm's short-term financing activities is known as ________.

Answer: D
Diff: 1
8) Which of the following is NOT a capital structure question?

A) A delivery company chooses to buy more trucks.
B) A manufacturing firm chooses to take the discount for paying accounts payable early.
C) A retail firm chooses to use a new supplier.
D) None of the above are capital structure questions.
Answer: D
Diff: 2
9) Capital budgeting is best defined by which of the following questions?

A) How will we fund our product and service choices?
B) What business are we in?
C) How will we manage our day-to-day financial needs?
D) What is our firm's best choice for corporate governance?
Answer: B
Diff: 1
10) Capital structure is best defined by which of the following questions?

A) How will we fund our product and service choices?
B) What business are we in?
C) How will we manage our day-to-day financial needs?
D) What is our firm's best choice for corporate governance?
Answer: A
Diff: 1
14
11) Which of the following is NOT an activity of working capital management?
A) Establishing the firm's receivable policies
B) Establishing the firm's payment policies
C) Choosing the appropriate level of inventory
D) All of the above are working capital management activities.
Answer: D
Diff: 1
12) Which of the following is NOT a capital budgeting question?

A) The choice of which long-term assets to purchase to meet the firm's business goals
B) The choice of what type of business a firm wants to operate
C) The proper mix of stocks and bonds to issue for financing assets
D) None of the above are capital budgeting questions.
Answer: C
Comment: The proper mix of stocks and bonds to issue for financing assets is a capital structure
question.
Diff: 2
13) ________ addresses the question of how to handle our day-to-day business needs.
Answer: C
Diff: 1
14) Capital budgeting is the means by which a company is financed.

Answer: FALSE
Comment: Capital STRUCTURE is the means by which a company is financed.
Diff: 1
15) Capital structure is the process of planning, evaluating, selecting, and managing the long-term
operating projects of the company.
Answer: FALSE
Comment: Capital BUDGETING is the process of planning, evaluating, selecting, and managing the
long-term operating projects of the company.
Diff: 1
15
16) Working capital management is the day-to-day management of the operating needs of the company
via current assets and current liabilities.
Answer: TRUE
Diff: 1
17) Provide definitions for capital budgeting, capital structure, and working capital management. Give
an example of a capital budgeting type decision and then do the same for capital structure and working
capital management.
Answer: Capital budgeting is the process of choosing which long-term assets a firm should purchase to
best meet the goal of maximizing shareholders' wealth. A firm might need to choose among several
processes to produce a product for sale. The manager needs to choose the process that will be most
valuable for the company.
Capital structure is choosing the optimal mix of long-run debt and equity to minimize the cost of capital.
Here, a manager looking to finance a capital budgeting project might have to choose between a mixture
of internal financing and external debt and equity.
Working capital management is the day-to-day management of short-term assets and liabilities, for
example, what level of inventory to carry or what credit terms to extend to potential customers.
Comment: This question is very open ended in that there are many different examples a student can
provide for each of the three categories.
Diff: 3
1.5 Objective of the Finance Manager
1) When there are conflicts among managerial goals in U.S. markets, the most important priority is to
________.
A) increase the current market value of equity
B) keep all of the company's customers happy
C) foster good relationships with the community
D) maintain a safe and happy work place
Answer: A
Comment: Anglo-American markets emphasize that managers should maximize shareholders' wealth.
Diff: 2
Topic: 1.5 Objective of the Finance Manager
2) Maximizing the market value of firm equity and which of the following are mutually exclusive?
A) Maximizing market value and a safe and happy work place are mutually exclusive.
B) Maximizing market value and good relationships with the local community are mutually exclusive.
C) Maximizing market value and customer satisfaction are mutually exclusive.
D) None of the above are mutually exclusive with maximizing the value of market equity.
Answer: D
Diff: 1
16
3) A firm's stock price most closely reflects which of the following?
A) Current interest rates
B) Expected future cash flows of the firm
C) The amount of debt held by the firm
D) None of the above
Answer: B
Diff: 1
4) Which of the following can lead to increased expected cash flow over time to the firm?
A) Open and collaborative relations with the community
B) Qualified and motivated employees
C) Greater customer satisfaction
D) All of the above
Answer: D
Diff: 2
5) According to the textbook, a good manager treats shareholders, customers, creditors, and employees
equally.
Answer: FALSE
Comment: According to the author a good manager treats shareholders above all others.
Diff: 1
6) The primary objective of the finance manager is to maximize the market value of equity of the
company.
Answer: TRUE
Diff: 1
7) Stock prices reflect the expected future cash flow of the company.
Answer: TRUE
Diff: 1
17
8) What is the primary goal of a financial manager? When you see firms like Enron imploding from the
behavior of executive management, how can you justify your definition?
Answer: The primary goal of a financial manager is to maximize shareholders' wealth. In some ways,
Enron is the exception that proves the rule. When management strays from its primary objective of
maximizing shareholder wealth and resorts to deception in an effort to satisfy greed or ego, that is a
newsworthy event.
Diff: 3
9) The author claims that the goals of keeping customers happy, employees happy, and shareholders
happy are not mutually exclusive, even though the first two goals identified may be costly and come at
the expense of shareholders. How can this be?
Answer: Simply put, the marginal benefits of providing a pleasing and productive work environment for
qualified workers, keeping customer satisfaction, and meeting customer expectations is greater than the
marginal cost. The result of having unhappy workers and displeased customers could well cost the
company in terms of shareholder value.
Diff: 3
10) How does maximizing the long-run expected cash flows to the firm translate into maximizing
shareholder's wealth?
Answer: Shareholders invest in firms to realize a return. The returns from investing in a firm result from
cash flows such as dividends or capital gains on the resale of shares of stock. Increasing the amount of
money a shareholder can expect to receive increases the value of the shares of stock, thus increasing
shareholders' wealth through a larger stream of cash flows and a larger expected capital gain.
Diff: 3
1.6 Internal and External Players
1) Of the following activities which is MOST likely to be an interaction between the financial manager
and the information systems manager?
A) Developing a system to bill customers, pay suppliers, and track inventory
B) Costing of products
C) Setting credit policies
D) Determining the appropriate pricing of products
Answer: A
Comment: Costing of products is done in conjunction with the manufacturing manager. Human
resources helps to ensure enough qualified workers. IT works on billing, paying, and tracking.
Diff: 1
Topic: 1.6 Internal and External Players
18
2) Of the following activities, which is NOT likely to be an interaction between the financial manager
and the marketing manager?
A) Costing of products
B) Setting credit policies
C) Determining that there are a sufficient number of trained workers to develop the product
D) Setting advertising budgets
Answer: C
Diff: 1
3) Of the following activities, which is MOST likely to be an interaction between the financial manager
and the manufacturing manager?
A) Setting of credit policies
B) Developing a system to bill customers, pay suppliers, and track inventory
C) Budgeting the timing and amount of cash needed for the production schedule
D) Determining that there are a sufficient number of trained workers to develop the product
Answer: C
Diff: 1
4) Of the following which group would be considered INTERNAL PLAYERS of the firm?
A) The finance manager
B) The shop foreman
C) The human resources manager
D) All of the above
Answer: D
Diff: 1
5) On a basic organizational chart for a company, the Finance Manager would be on the third line, where
the first line is the CEO and the second line contains titles such as Marketing Manager and Human
Resources Manager.
Answer: FALSE
Comment: The Finance Manager would be on the second line with the other managers.
Diff: 1
19
6) Of the following which group would be considered EXTERNAL PLAYERS of the firm?
A) The loan officer at the firm's commercial bank
B) The shop foreman
C) The human resources manager
D) All of the above
Answer: A
Diff: 1
7) The Finance Manager works with the Human Resources Manager to set credit policies for targeted
customers.
Answer: FALSE
Comment: The Finance Manager works with the MARKETING Manager to set credit policies for
targeted customers.
Diff: 1
8) The Finance Manager works with the Marketing Manager to set annual sales targets.
Answer: TRUE
Diff: 1
9) What does the standard organizational chart show? In your answer, point out the functions needed for
a successful business.
Answer: The standard organizational chart shows a bottom-up reporting relationship, but the reality is
that the functions of marketing, finance, manufacturing, information systems, and human resources are
all interconnected in a successful business.
Diff: 2
1.7 The Legal Forms of Business
1) A ________ is a business that is owned entirely by an individual.

A) sole proprietorship
B) partnership
C) sub-chapter s corporation
D) corporation
Answer: A
Diff: 1
Topic: 1.7 The Legal Forms of Business
20
2) Which of the following is NOT an ADVANTAGE of a sole proprietorship?
A) The owner receiving all the after-tax profit
B) Limited liability
C) Quick decision making
D) All are advantages of a sole proprietorship.
Answer: B
Comment: Sole proprietorships have UNLIMITED liability.
Diff: 1
3) Which of the following is an ADVANTAGE of a sole proprietorship?

A) The owner's unlimited liability
B) The lack of continuity upon death of the owner
C) The ease of start up
D) The ability to raise capital
Answer: C
Comment: A) and B) are disadvantages, and D) is an advantage of a corporation.
Diff: 1
4) A ________ has limited liability, is a legal entity, and has the greatest potential to raise capital.
A) sole proprietorship
B) general partnership
C) limited partnership
D) corporation
Answer: D
Diff: 1
5) A ________ is a business that is jointly owned by two or more individuals.

A) partnership
B) sole proprietorship
C) sub-chapter s corporation
D) corporation
Answer: A
Diff: 1
21
6) Which of the following is NOT a DISADVANTAGE of a partnership?
A) Unlimited liability to at least some of the owners
B) The limited life of the business
C) The potential difficulty in transferring ownership
D) All are disadvantages of a partnership.
Answer: D
Diff: 1
7) Which of the following is NOT an ADVANTAGE of a partnership?

A) A potential increase in available capital over a sole proprietorship
B) The commingling with the general partner's personal assets
C) The potential for more talent and skills in the business
D) All are advantages of a partnership.
Answer: B
Comment: This is considered a disadvantage of a partnership.
Diff: 1
8) Which of the following is NOT true of a sole proprietorship?

A) Sole proprietorships are the least regulated form of business.
B) Sole proprietorships are the easiest form of business to establish.
C) Sole proprietorships are the most popular form of business organization (more sole proprietorships
than other forms of business).
D) All of the above are true.
Answer: D
Diff: 1
9) ________ is a major disadvantage of the corporate form of business.

A) Double taxation
B) Unlimited liability
C) Lack of ability to raise capital
D) Transfer of ownership
Answer: A
Diff: 1
22
10) The form of business organization in the United States that has the greatest amount of capital is
________.
A) the sole proprietorship
B) the partnership
C) the sub-chapter corporation
D) the publicly traded corporation
Answer: D
Diff: 1
11) Double taxation refers to which of the following scenarios?

A) Both bondholders AND shareholders of a corporation must pay taxes on proceeds received.
B) The corporation pays taxes on its earnings, and creditors pay taxes on interest received.
C) The corporation pays taxes on its earnings, and shareholders pay taxes on dividends received.
D) All of the above
Answer: C
Diff: 1
12) In practice,
A) the structure of the corporation separates owners from managers.
B) the corporate board selects the main corporate officers.
C) the corporate board is elected by the shareholders.
D) All of the above are true.
Answer: D
Diff: 1
13) Limited liability is an advantage of the sole proprietorship.

Answer: FALSE
Comment: UNLIMITED liability is a DISADVANTAGE of the sole proprietorship.
Diff: 1
14) The ability to raise capital is an advantage of the corporate form of business organization.
Answer: TRUE
Diff: 1
23
15) The sum of all the market value of publicly traded corporations in the United States exceeds the
combined value of partnerships and sole proprietorships.
Answer: TRUE
Diff: 1
16) Why are sole proprietorships so much more popular in terms of the number of firms than
corporations? (This answer should identify the significant advantages to the sole proprietorship versus
those of other forms of business organization.)
Answer: Sole proprietorships are popular because they are easy to start up, with fewer regulations and
reporting requirements than other forms of business organization. Sole proprietorships are also popular
because they give individuals the opportunity to be their own boss, to make all of the decisions, and to
realize 100% of the after-tax proceeds of the business.
Diff: 3
17) Define the term "limited liability" and state why you think it is an important feature of the corporate
form of organization.
Answer: From a corporate standpoint, limited liability results from the corporation being defined as a
legal entity with its own assets and liabilities. Limited liability thus occurs because the shareholders are
responsible for no more than their investment in the corporation. Should the firm acquire greater debt
than assets and declare bankruptcy, the shareholders do not have personal assets at risk for creditors to
acquire.
Diff: 3
1.8 The Financial Management Setting: The Agency Model
1) ________ is the name given to the processes surrounding recognition of the principal-agent problem
and ways to align agents with the interests of the principals.
A) Principal theory
B) Interested party theory
C) Agency theory
D) Compensation process theory
Answer: C
Diff: 1
Topic: 1.8 The Financial Management Setting: The Agency Model
AACSB : 2 Ethical Understanding and Reasoning Abilities
24
2) In agency theory, the owners of the business are referred to as ________, and the managers are
referred to as ________.
A) bondholders, principals
B) stockholders, bondholders
C) agents, principals
D) principals, agents
Answer: D
Diff: 1
3) Which of the following is NOT an example of an agency cost?

A) Paying an accounting firm to audit your financial statements
B) Paying an insurance company to assure that building codes have been met for new construction
C) Paying a landscaping firm to maintain your firm's grounds
D) All of the above are agency costs.
Answer: C
Diff: 2
4) The problem of motivating one party to act in the best interest of another party is known as the
________.
A) leadership directive
B) management priority
C) principal-agent problem
D) sigma six structure
Answer: C
Diff: 1
5) Which of the following compensation packages is likely to work best for executive managers?
A) Piece-meal
B) Stock options
C) Quarterly bonuses
D) Commission
Answer: B
Diff: 2
25
6) According to the annual Fortune Magazine list of top paid executives in America, what percentage of
annual compensation for the very highest paid managers comes in the form of performance bonuses or
stock options?
A) Less than 10%
B) Between 10% and 40%
C) Between 50% and 60%
D) Nearly 70%
Answer: D
Diff: 2
7) In the agency model, the owners of corporations are the agents and the stockholders are the
principals.
Answer: FALSE
Comment: In the agency model, the owners of corporations are the PRINCIPALS and the AGENTS are
the MANAGERS.
Diff: 1
8) The principal-agent problem is most severe for the sole proprietorship because there are fewer owners
who can monitor the relationship.
Answer: FALSE
Diff: 1
9) The problem of motivating one party to act in the best interest of another party is known as the
principal-agent problem.
Answer: TRUE
Diff: 1
10) Describe the principal-agent relationship. In your answer, give an example of how a principal-agent
problem arises in the corporate world. Can such a problem become costly? Explain.
Answer: The principal-agent relationship is a relationship between one party (principal) who hires
another party (agent) to perform a task. Problems with a principal-agent relationship arise when the
agent has interests that conflict with those of the principal. Any problem becomes costly when the
principal cannot always know for sure if an agent is behaving in a trustworthy manner. If a principal
fears the agent is not properly fulfilling the assigned duties, then the principal has to decide what costs
should be undertaken to monitor the agent. Costs might include hiring another party to watch the agent
or offering the agent pay based on certain performance criteria. A common performance cost for large
companies is the giving of stock options to employees so that their wealth is tied to how well they do
their job.
Diff: 3
26
1.9 Corporate Governance and Business Ethics
1) ________ is the area of business that deals with how a company conducts its business and
implements controls to ensure proper procedures and ethical behavior.
A) Leadership
B) Agency Relationship
C) Corporate Governance
D) None of the above
Answer: C
Diff: 1
Topic: 1.9 Corporate Governance and Business Ethics
2) Of the following, which is the most recent example of legislation passed by the federal government to
deal with a major economic or highly visible corporate event?
A) The Federal Deposit Insurance Corporation Improvement Act
B) The Securities and Exchange Act
C) The Sarbanes-Oxley Act
D) The Securities Act
Answer: C
Diff: 1
3) Which of the following is NOT a feature of the Sarbanes-Oxley Act?

A) The company and auditors must annually assess the effectiveness of financial controls.
B) The company must maintain effective internal financial controls.
C) The CEO and CFO must attest to the fairness of the financial reports.
D) All of the above are features of the Sarbanes-Oxley Act.
Answer: D
Diff: 1
4) Which of the following is NOT a generally accepted way to remove ineffective management of a
publicly traded firm?
A) The Board of Directors can vote to remove management.
B) The shareholders can vote out directors who won't discipline managers.
C) Outside management teams can "take over" the company.
D) All of the above are recognized methods for the removal of ineffective management.
Answer: D
Diff: 2
27
5) The ________ removed the removed the last segments of Federal law that separated investment
banking activities from commercial banking activities.
A) Gramm-Leach-Bliley Act
B) Sarbanes-Oxley Act
C) Federal Deposit Insurance Corporation Improvement Act
D) Glass-Steagall Act
Answer: A
Diff: 2
6) The Sarbanes-Oxley Act (SOX) establishes requirements for documentation and procedures within a
company, especially as they relate to financial reporting.
Answer: TRUE
Diff: 1
7) The Sarbanes-Oxley Act (SOX) established the Securities and Exchange Commission (SEC).
Answer: FALSE
Diff: 1
8) What three major requirements resulted from the Sarbanes-Oxley Act?

Answer: (1) The CEO and CFO attest to the fairness of the financial reports.
(2) The company maintains an effective internal control structure around financial reporting.
(3) The company and auditors assess the effectiveness of the controls over the most recent fiscal year.
Diff: 2
28
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When the gods were all reduced to the rank of demons by the
introduction of Christianity, Loki was confounded with Saturn, who
had also been shorn of all his divine attributes, and both were
considered the prototypes of Satan. The last day of the week, which
was held sacred to Loki, was known in the Norse as Laugardag, or
wash day, but in English it was changed to Saturday, and was said to
owe its name not to Saturn but to Sataere, the thief in ambush, and
the Teutonic god of agriculture, who is supposed to be merely
another form of the god Loki.
CHAPTER XXIII.
THE GIANTS.
As we have already seen, the Northern races imagined that the

giants were the first creatures who came to life among the icebergs
filling the vast abyss of Ginnunga-gap. These giants were from the
very beginning the opponents and rivals of the gods, and as the
latter were the personifications of all that is good and lovely, the
former naturally served to denote all that was ugly and evil.
Slain by the gods, Ymir, the first giant, fell lifeless on the ice,
Jötun-heim. drowning all his progeny in his blood. One couple only,
Bergelmir and his wife, effected their escape to the
confines of the world, Jötun-heim, where they took up their abode
and became the parents of all the giant race. In the North the giants
were called by various names, each having a particular meaning.
Jötun, for instance, meant “the great eater,” for the giants were noted
for their enormous appetites as well as for their uncommon size. As
they were fond of drinking as well as of eating, they were also called
Thurses, a word which some writers claim had the same meaning as
thirst, while others think they owed this name to the high towers
(“turseis”) which they were supposed to have built. As the giants
were antagonistic to the gods, the latter always strove to keep them
at a distance, and drove them away into Jötun-heim, in the cold
regions of the pole, where they condemned them to remain. The
giants were almost invariably worsted in their encounters with the
gods, for they were heavy and slow witted, and had nothing but
stone weapons to oppose the Æsir’s bronze. In spite of this
inequality, however, they were sometimes greatly envied by the
gods, for they were thoroughly conversant with all knowledge
relating to the past. Odin himself was envious of this acquirement,
and no sooner had he secured it by a draught from Mimir’s spring
than he hastened off to Jötun-heim to measure himself against
Vafthrudnir, the most learned of the giant band. But he would never
have succeeded in defeating his antagonist in this strange encounter
had he not ceased inquiring about the past and propounded a
question relating to the future.
Of all the gods Thor was the most feared by the Jötuns, for he
was continually waging war against the frost and mountain giants,
who would fain have hindered agriculture and bound the earth
forever in their rigid bands. In fighting against them, Thor, as we
have already seen, generally had recourse to his crashing hammer
Miölnir, with which he reduced them to powder.
The Germans fancied that the uneven surface of the earth was
Origin of the due to the giants, who, treading upon it while it was
mountains. still soft and newly created, marred its smoothness,
while the giantesses, seeing the valleys made by their
huge footprints, shed copious tears, which formed the streams. As
such was the Teutonic belief, the people imagined that the giants,
who were their personifications of the mountains, were huge uncouth
creatures, who could only move about in the darkness or fog, and
were petrified as soon as the first rays of sunlight pierced through
the gloom or scattered the clouds.
This belief made them call one of their principal mountain chains
the Riesengebirge (giant mountains). The Scandinavians also
shared this belief, and to this day the Icelanders designate their
highest mountain peaks by the name of Jokul, a modification of the
word “Jötun.” In Switzerland, where the everlasting snows rest upon
the lofty mountain tops, the people still relate old stories of the time
when the giants roamed abroad; and when an avalanche comes
crashing down the mountain side, they say the giants have restlessly
shaken off part of the icy burden from their brows and shoulders.
As the giants were also personifications of snow, ice, cold, stone,
and subterranean fire, they were all said to be descended from the
primitive Fornjotnr, whom some authorities identify with Ymir.
According to this version of the myth, Fornjotnr had three sons: Hler,
the sea; Kari, the air; and Loki, fire. These three divinities were the
first gods, formed the oldest trinity, and their respective descendants
were the sea giants Mimir, Gymir, and Grendel, the storm giants
Thiassi, Thrym, and Beli, and the giants of fire and death, such as
the Fenris wolf and Hel.
As all the royal dynasties claimed descent from some mythical
being, the Merovingians asserted that their first progenitor was a sea
giant, who rose up out of the waves in the form of an ox, surprised
the queen while she was walking alone on the seashore, and
induced her to become his wife. She gave birth to a son named
Meroveus, the founder of the first dynasty of Frankish kings.
Many stories have already been told about the most important
giants. They reappear in many of the later myths and fairy-tales, and
manifest, after the introduction of Christianity, a peculiar dislike to the
sound of church bells and the singing of the monks and nuns.
The Scandinavians relate, in this connection, that in the days of
The giant in Olaf the Saint a giant called Senjemand, who dwelt on
love. the Island of Senjen, was greatly incensed because a
nun on the Island of Grypto daily sang her morning
hymn. The sound of this singing troubled his daydreams, for he had
fallen in love with a beautiful maiden called Juternajesta, and was
trying to gain courage to propose to her. When he made his halting
request, however, the fair damsel scornfully rejected him, declaring
that he was far too old and ugly to suit her taste.
“Miserable Senjemand—ugly and gray!

Thou win the maid of Kvedfiord!
No—a churl thou art and shalt ever remain.”
Ballad (Brace’s tr.).
TORGHATTEN, NORWAY.
In his anger at being thus scornfully refused, the giant swore
vengeance, and soon after he shot a great stone arrow from his bow
at the maiden, who dwelt eighty miles away. Her lover, Torge, also a
giant, seeing her peril and wishing to protect her, flung his hat at the
speeding arrow. This hat was a thousand feet high and
proportionately broad and thick, but a collision with it only spent the
force of the arrow, which, piercing the giant’s headgear, fell short of
its aim. Senjemand, seeing he had failed, and fearing the wrath of
Torge, mounted his steed and prepared to ride away as quickly as
possible; but the sun, rising above the horizon just then, turned him
into stone, as well as the arrow and Torge’s hat, which is now known
as the Torghatten mountain. The people still point out the stone
arrow,—a huge obelisk,—the hole in the mountain, which is 289 feet
high and 88 feet wide, and the horseman on Senjen Island,
apparently riding a colossal steed and drawing the folds of his wide
cavalry cloak closely about him. As for the nun whose singing had so
disturbed Senjemand that he could not propose properly, she was
petrified too, and never troubled any one with her psalmody again.
Another legend relates that one of the mountain giants, annoyed
The giant and by the ringing of church bells more than fifty miles
the church away, once caught up a huge rock, which he hurled at
bells. the sacred building, but which fortunately fell short and
broke in two. Ever since then, on Christmas eve, the peasants report
that the trolls have come to raise the largest piece of stone upon
golden pillars, and to dance and feast beneath it. A lady, wishing to
know whether this tale were true, once sent her groom to the place.
The trolls came forward and hospitably offered him a drink in a horn
mounted in gold and ornamented with runes. Seizing the horn, the
groom flung its contents away and dashed off at a mad gallop,
closely pursued by all the trolls, from whom he escaped only by
passing through a stubble field and over running water. A deputation
of trolls visited the lady on the morrow to claim this horn, and when
she refused to part with it they laid a curse upon her, declaring that
her castle would burn down every time the horn was removed. This
prediction has thrice been fulfilled, and now the family guard their
horn with superstitious care. A similar drinking vessel, obtained in
much the same fashion by the Oldenburg family, is exhibited in the
collection of the King of Denmark.
The giants were not supposed to remain stationary, but were
said to move about in the darkness, sometimes transporting masses
of earth and sand, which they dropped here and there, thus forming
the sandhills in northern Germany and Denmark.
A North Frisian tradition relates that the giants also possessed a
The giants’ colossal ship, called Mannigfual, which constantly
ship. cruised about in the Atlantic Ocean. Such was the size
of this vessel that the captain was said to pace the
deck on horseback. The rigging was so extensive and the masts so
high that the sailors who went up as youths came down as gray-
haired men, having rested and refreshed themselves in rooms
fashioned and provisioned for that purpose in the huge blocks and
pulleys.
By some mischance it happened that the pilot once directed this
immense vessel into the North Sea, and wishing to return to the
Atlantic as soon as possible, yet not daring to turn around in such a
small space, he steered into the English Channel. Imagine the
dismay of all on board when they saw the passage grow narrower
and narrower the farther they advanced. When they came to the
narrowest spot, between Calais and Dover, it seemed barely
possible that the vessel, drifting along with the current, could force its
way through. The captain, with laudable presence of mind, promptly
bade his men soap the sides of the vessel, laying an extra-thick layer
on the starboard, where the rugged Dover cliffs threateningly rose.
These orders were no sooner carried out than the vessel entered the
narrow space, and, thanks to the captain’s precaution, it slipped
safely through. The rocks of Dover scraped off so much soap,
however, that ever since then they have been very white indeed, and
the waves dashing against them still have a particularly foamy
appearance.
This exciting experience was not the only one which the
Mannigfual passed through, for we are told that it once, nobody
knows how, penetrated into the Baltic Sea, where, the water not
being deep enough to keep the vessel afloat, the captain ordered all
the ballast thrown overboard. Such was the amount of material thus
cast on either side the vessel into the sea that it formed the two
islands of Bornholm and Christiansoë.
In Thuringia and in the Black Forest the stories of the giants are
Princess Ilse. very numerous indeed, and the peasants delight in
telling about Ilse, the lovely daughter of the giant of
the Ilsenstein. She was so charming that she was known far and
wide as the beautiful Princess Ilse, and was wooed by many knights,
among whom she preferred the lord of Westerburg. But her father
did not at all approve of her consorting with a mere mortal, and
forbade her seeing her lover. Princess Ilse was willful, and in spite of
his prohibitions she daily visited her lover. The giant, exasperated by
her persistency and disobedience, finally stretched out his huge
hands and, seizing the rocks, tore a great gap between the height
where he dwelt and the castle of Westerburg. Princess Ilse,
perceiving the cleft which parted her from her lover, recklessly flung
herself over the precipice into the raging flood beneath, where she
was changed into a bewitching undine. She dwelt here in the limpid
waters for many a year, appearing from time to time to exercise her
fascinations upon mortals, and even, it is said, captivating the
affections of the Emperor Henry, who paid frequent visits to her
cascade. Her last appearance, according to popular belief, was at
Pentecost, a hundred years ago; and the natives have not yet
ceased to look for the beautiful princess, who is said still to haunt the
stream and wave her white arms to entice travelers into the cool
spray of the waterfall.
“I am the Princess Ilse,

And I dwell at the Ilsenstein;
Come with me to my castle,
And bliss shall be mine and thine.
“With the cool of my glass-clear waters
Thy brow and thy locks I’ll lave;
And thou’lt think of thy sorrows no longer,
For all that thou look’st so grave.
“With my white arms twined around thee,

And lapped on my breast so white,
Thou shalt lie, and dream of elf-land—
Its loves and wild delight.”
Heine (Martin’s tr.).
The giants inhabited all the earth before it was given to mankind;
they very reluctantly made way for the human race,
The giant’s
plaything. and retreated into the waste and barren parts of the
country, where they brought up their families in strict
seclusion. Such was the ignorance of their offspring, that a young
giantess, straying away from home, once came to an inhabited
valley, where for the first time in her life she saw a farmer plowing on
the hillside. Deeming him a pretty plaything, she caught him up with
his team, thrust them into her apron, and gleefully carried them
home to exhibit them to her father. But the giant immediately bade
her carry peasant and horses back to the place where she had found
them, and when she had done so he sadly explained that the
creatures whom she took for mere playthings, would eventually drive
all the giant folk away, and become masters of all the earth.
CHAPTER XXIV.
THE DWARFS.
In the first chapter we saw how the black elves, dwarfs, or Svart-
alfar, were bred like maggots in the flesh of the slain giant Ymir. The
gods, perceiving these tiny, unformed creatures creeping in and out,
gave them form and features, calling them dark elves on account of
their swarthy complexions. These small beings were so homely, with
their dark skin, green eyes, large heads, short legs, and crow’s feet,
that they were told to hide underground and never show themselves
during the daytime under penalty of being turned into stone.
Although less powerful than the gods, they were far more intelligent
than men, and as their knowledge was boundless and extended
even to the future, gods and men were equally anxious to question
them.
They were also known as trolls, kobolds, brownies, goblins,
pucks, or Huldra folk, according to the country where they dwelt.
“You are the gray, gray Troll,

With the great green eyes,
But I love you, gray, gray Troll—
You are so wise!
“Tell me this sweet morn,

Tell me all you know—
Tell me, was I born?
Tell me, did I grow?”
The Legend of the Little Fay (Buchanan).
These dwarfs could transport themselves with
The
Tarnkappe. marvelous celerity from one place to another, loved to
conceal themselves behind rocks, and mischievously
repeated the last words of every conversation they overheard. Owing
to this well-known trick, the echoes were called dwarfs’ talk, and
people fancied that the reason why they were never seen was
because each dwarf was the proud possessor of a tiny red cap
which made the wearer invisible. This cap was called Tarnkappe,
and it was owing to it only that the dwarfs dared appear above the
surface of the earth after sunrise without fear of being petrified.
“Away! let not the sun view me—

I dare no longer stay;
An Elfin-child, thou wouldst me see,
To stone turn at his ray.”
La Motte-Fouqué.
The dwarfs as well as the elves were ruled by a king, who, in

various countries of northern Europe, was known as
The magic of
the dwarfs. Andvari, Alberich, Elbegast, Gondemar, Laurin, or
Oberon. He dwelt in a magnificent subterranean
palace, all studded with the gems which his subjects had drawn from
the bosom of the earth, and, besides untold riches and the
Tarnkappe, he owned a magic ring, an invincible sword, and a belt of
strength. At his command his subjects, who were very clever smiths,
fashioned marvelous jewels or weapons, which he bestowed upon
favorite mortals.
We have already seen how the dwarfs fashioned Sif’s golden
hair, the ship Skidbladnir, the point of Odin’s spear Gungnir, the ring
Draupnir, the golden-bristled boar Gullin-bursti, the hammer Miölnir,
and Freya’s golden necklace Brisinga-men. They are also said to
have made the magic girdle which Spenser describes in his poem of
the “Faerie Queene,”—a girdle which was said to have the power of
revealing whether the wearer were virtuous or a hypocrite.
“That girdle gave the virtue of chaste love
And wifehood true to all that did it bear;
But whosoever contrary doth prove
Might not the same about her middle wear
But it would loose, or else asunder tear.”
Faerie Queene (Spenser).
The dwarfs also manufactured the mythical sword Tyrfing, which

could cut through iron and stone, and which they gave to Angantyr.
This sword, like Frey’s, fought of its own accord, and could not be
sheathed, after it was once drawn, until it had tasted blood. Angantyr
was so proud of this weapon that he had it buried with him; but his
daughter Hervor visited his tomb at midnight, recited magic spells,
and forced him to rise from his grave to give her the precious blade.
She wielded it bravely, and it eventually became the property of
another of the Northern heroes.
The dwarfs were generally kindly and helpful; sometimes they
kneaded bread, ground flour, brewed beer, performed countless
household tasks, and harvested and threshed the grain for the
farmers. If ill treated, however, or turned into ridicule, these little
creatures forsook the house and never came back again. When the
old gods ceased to be worshiped in the Northlands, the dwarfs
entirely withdrew from the country, and a ferryman once said that he
had been hired to ply his boat back and forth across the river one
night, and that at every trip his vessel was so laden down with
invisible passengers that it nearly sank. When his night’s work was
over, he received a rich reward, and his employer informed him that
he had helped all the dwarfs across the river, for they were leaving
the country forever to punish the people for their unbelief.
According to popular superstition, the dwarfs envied man’s taller
Changelings. stature and often tried to improve their race by winning
human wives or by stealing unbaptized children, and
substituting their own offspring for the human mother to nurse.
These dwarf babies were known as changelings, and were
recognizable by their puny and wizened forms. To recover
possession of her own babe, and to rid herself of the changeling, a
woman was obliged either to brew beer in egg-shells or to grease
the soles of the child’s feet and hold them so near the flames that,
attracted by their offspring’s distressed cries, the dwarf parents
would hasten to claim their own and return the stolen child.
The female trolls were also said to have the power of changing
themselves into Maras or nightmares, and of tormenting any one
they pleased; but if the victim succeeded in stopping up the hole
through which a Mara made her ingress into his room, she was
entirely at his mercy, and he could even force her to marry him if he
chose to do so. A wife thus obtained was sure to remain as long as
the opening through which she had entered the house was closed,
but if the plug were removed, either by accident or design, she
immediately effected her escape and never returned.
Some writers have ventured a conjecture that the dwarfs so
A conjecture. often mentioned in the ancient sagas and fairy-tales
were real beings, probably the Phœnician miners,
who, working the coal, iron, copper, gold, and tin mines of England,
Norway, Sweden, etc., took advantage of the simplicity and credulity
of the early inhabitants to make them believe that they belonged to a
supernatural race and always dwelt underground, in a region which
was called Svart-alfa-heim, or the home of the black elves.
CHAPTER XXV.
THE ELVES.
Besides the dwarfs there was another numerous class of tiny

creatures called Lios-alfar, light or white elves, who inhabited the
realms of air between heaven and earth, had their palace in Alf-heim,
and were gently governed by the genial god Frey. They were lovely,
beneficent beings, so pure and innocent that, according to some
authorities, their name was derived from the same root as the Latin
word “white” (albus), which, in a modified form, was given to the
Alps, those snow-covered mountains, and to Albion (England),
because of her white chalk cliffs which could be seen from afar.
DANCE OF THE WILL-O’-THE-WISPS.—W. Kray.

The elves were so small that they could flit about unseen to care
for the flowers, birds, and butterflies; and as they were passionately
fond of dancing, they often slipped down to earth on a moonbeam, to
dance on the green. Holding one another by the hand, they danced
round in circles, thereby making the “fairy rings,” which could easily
be discovered, as the grass grew greener and more luxuriant in the
places their little feet had trod.
“Merry elves, their morrice pacing

To aërial minstrelsy,
Emerald rings on brown heath tracing,
Trip it deft and merrily.”
Walter Scott.
If any mortal stood in the middle of one of these fairy rings he

could, according to the popular belief in England, see the fairies and
enjoy their favor; but the Germans and Scandinavians vowed that
the unhappy man must die. In connection with this superstition, they
tell how Sir Olaf, riding off to his wedding, was enticed by the fairies
into their ring. On the morrow, instead of a merry marriage, his
friends witnessed a triple funeral, for his mother and bride both died
of grief when they beheld his lifeless corpse.
“Master Olof rode forth ere dawn of the day

And came where the Elf folk were dancing away.
The dance is so merry,
So merry in the greenwood.
“And on the next morn, ere the daylight was red,

In Master Olof’s house lay three corpses dead.
So merry in the greenwood.
“First Master Olof, and next his young bride,
And third his old mother—for sorrow she died.
So merry in the greenwood.”
Master Olof at the Elfin Dance (Howitt’s tr.).
These elves, who in England were called fairies or fays, were

also enthusiastic musicians, and delighted especially
Fairies or
fays. in a certain tune which was known as the elf dance,
and which was so irresistible that no one could hear it
without dancing. If a mortal, overhearing the air, ventured to play it,
he suddenly found himself incapable of stopping and was forced to
play on and on until he died of exhaustion, unless he were deft
enough to play the tune backwards, or some one charitably slipped
behind him and cut the strings of his violin. His hearers, who were
forced to dance as long as the tones continued, could only pause
when they ceased.
In the North, in the mediæval ages, the will-o’-the-wisps were
The Will-o’- known as lights, for these tiny sprites were supposed
the-wisps. to mislead travelers; and popular superstition claimed
that the Jack-o’-lanterns were the restless spirits of
murderers forced against their will to return to the scene of their
crimes. As they nightly walked thither, it is said that they doggedly
repeated with every step, “It is right;” but as they returned they sadly
reiterated, “It is wrong.”
In later times the fairies or elves were said to be ruled by the
Oberon and king of the dwarfs, who, being an underground spirit,
Titania. was considered a demon, and allowed to retain the
magic power which the missionaries had wrested from
the god Frey. In England and France the king of the fairies was
known by the name of Oberon; he governed fairyland with his queen
Titania, and held his highest revels on earth on Midsummer night. It
was then that the fairies all congregated around him and danced
most merrily.
“Every elf and fairy sprite
Hop as light as bird from brier;
And this ditty after me
Sing, and dance it trippingly.”
Midsummer-Night’s Dream (Shakespeare).
These elves, like the brownies, Huldra folk, kobolds, etc., were
also supposed to visit human dwellings, and it was said that they
took mischievous pleasure in tangling and knotting horses’ manes
and tails. These tangles were known as elf locks, and whenever a
farmer descried them he declared that his steeds had been elf-
ridden during the night.
In Germany and Scandinavia sacrifices were offered to the elves
Alf-blot. to make them propitious. These sacrifices, which
consisted either of some small animal, or of a bowl of
honey and milk, were known as Alf-blot, and were quite common
until the missionaries taught the people that the elves were mere
demons. The sacrifice once offered to them was then transferred to
the angels, who were long entreated to befriend mortals, and
propitiated by the same gifts.
Many of the elves were supposed to live and die with the trees or
plants which they tended, but these moss, wood, or tree maidens,
while remarkably beautiful when seen in front, were hollow like a
trough when viewed from behind. They appear in many of the
popular tales, but almost always as benevolent and helpful spirits, for
they were anxious to do good to mortals and to remain on a friendly
footing with them.
In Scandinavia the elves, both light and dark, were worshiped as
Images on household divinities, and their images were carved on
doorposts. the doorposts. The Norsemen, who were driven away
from home by the tyranny of Harald Harfager in 874,
entered their ships, taking these carved doorposts with them. Similar
carvings, including images of the gods and heroes, decorated the
pillars of their high seats which they also carried away. The exiles
showed their trust in their gods by throwing these wooden images
overboard when they neared the Icelandic shores, and settling
where the waves carried the posts, although the spot scarcely
seemed the most desirable. “Thus they carried with them the
religion, the poetry, and the laws of their race, and on this desolate
volcanic island they kept these records unchanged for hundreds of
years, while other Teutonic nations gradually became affected by
their intercourse with Roman and Byzantine Christianity.” These
records, carefully collected by Sæmund the learned, form the Elder
Edda, the most precious relic of ancient Northern literature, without
which we would know comparatively little of the religion of our
forefathers.
The sagas relate that the first Norse settlements in Greenland
and Vinland were made in the same way,—the Norsemen piously
landing wherever their household gods drifted ashore,—many years
before the voyage of Columbus and the accredited discovery of
America.
OLD HOUSES WITH CARVED DOORPOSTS, NORWAY.
CHAPTER XXVI.
THE SIGURD SAGA.
While the first part of the Elder Edda consists of a collection of

alliterative poems describing the creation of the world, the
adventures of the gods, their eventual downfall, and gives a
complete exposition of the Northern code of ethics, the second part
comprises a series of heroic lays describing the life and adventures
of the Volsung family, and especially of their chief representative,
Sigurd, the great Northern warrior.
These lays form the basis of the great Scandinavian epic, the
The Volsunga Volsunga Saga, and have supplied not only the
Saga. materials for the Nibelungenlied, the German epic,
and for countless folk tales, but also for Wagner’s
celebrated operas, “The Rhinegold,” “Valkyr,” “Siegfried,” and “The
Dusk of the Gods.” They have also been rewritten by William Morris,
the English poet, who has given them the form which they will
probably retain in our literature, and it is from his work that almost all
the quotations in this chapter are taken in preference to extracts from
the Edda.
Sigi, Odin’s son, was a powerful man, and generally respected
Sigi. until he killed a man out of jealousy because the latter
had slain the most game when they were out hunting
together. In consequence of this crime, Sigi was driven from his own
land and declared an outlaw. But, although he was a criminal, he had
not entirely forfeited Odin’s favor, for the god now gave him a well-
equipped vessel, provided him with a number of brave followers, and
promised that victory should ever attend him.

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9) All financial transactions have a buyer and a seller.

1.2 Overview of Finance Areas

7) Which of the following is NOT typically thought of as an investment activity?

9) Financial institutions and markets

10) Of the following, which is NOT an example of a financial intermediary?

11) Of the following, which is NOT an activity engaged in by a financial intermediary?

14) Which of the following is NOT an activity of a financial institution or market?

1.3 Financial Markets

3) Stocks are bought and sold in ________ markets.

4) Bonds are bought and sold in ________ markets.

5) Options are bought and sold in ________ markets.

6) Currencies are bought and sold in ________ markets.

12) Which of the following is true of a dealer market?

13) Which of the following is NOT a characteristic of a dealer market?

1.4 The Finance Manager and Financial Management

5) The means by which a company is financed refers to the firm's ________.

7) Managing the firm's short-term financing activities is known as ________.

8) Which of the following is NOT a capital structure question?

9) Capital budgeting is best defined by which of the following questions?

10) Capital structure is best defined by which of the following questions?

12) Which of the following is NOT a capital budgeting question?

14) Capital budgeting is the means by which a company is financed.

1.5 Objective of the Finance Manager

1.6 Internal and External Players

1.7 The Legal Forms of Business

1) A ________ is a business that is owned entirely by an individual.

3) Which of the following is an ADVANTAGE of a sole proprietorship?

5) A ________ is a business that is jointly owned by two or more individuals.

7) Which of the following is NOT an ADVANTAGE of a partnership?

8) Which of the following is NOT true of a sole proprietorship?

9) ________ is a major disadvantage of the corporate form of business.

11) Double taxation refers to which of the following scenarios?

13) Limited liability is an advantage of the sole proprietorship.

1.8 The Financial Management Setting: The Agency Model

3) Which of the following is NOT an example of an agency cost?

3) Which of the following is NOT a feature of the Sarbanes-Oxley Act?

8) What three major requirements resulted from the Sarbanes-Oxley Act?

As we have already seen, the Northern races imagined that the

“Miserable Senjemand—ugly and gray!

“I am the Princess Ilse,

“With my white arms twined around thee,

“You are the gray, gray Troll,

“Tell me this sweet morn,

“Away! let not the sun view me—

The dwarfs as well as the elves were ruled by a king, who, in

The dwarfs also manufactured the mythical sword Tyrfing, which

Besides the dwarfs there was another numerous class of tiny

DANCE OF THE WILL-O’-THE-WISPS.—W. Kray.