Deck 1: Introduction to Corporate Finance

Question 1

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

Answer 1

capital structure

Question 2

Which of the following accounts are included in working capital management?
I. accounts payable
II. accounts receivable
III. fixed assets
IV. inventory

A)I and II only
B)I and III only
C)II and IV only
D)I, II, and IV only
E)II, III, and IV only

Answer 2

I, II, and IV only

Question 3

The decision to issue additional shares of stock is an example of which one of the following?

A)working capital management
B)net working capital decision
C)capital budgeting
D)controller's duties
E)capital structure decision

Answer 3

capital structure decision

Question 4

Which one of the following is a capital budgeting decision?

A)determining how many shares of stock to issue
B)deciding whether or not to purchase a new machine for the production line
C)deciding how to refinance a debt issue that is maturing
D)determining how much inventory to keep on hand
E)determining how much money should be kept in the checking account

Question 5

Which one of the following is a working capital management decision?

A)determining the amount of equipment needed to complete a job
B)determining whether to pay cash for a purchase or use the credit offered by the supplier
C)determining the amount of long-term debt required to complete a project
D)determining the number of shares of stock to issue to fund an acquisition
E)determining whether or not a project should be accepted

Question 6

Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure?

A)The vice president of finance reports to the chairman of the board.
B)The chief executive officer reports to president.
C)The controller reports to the president.
D)The treasurer reports to the vice president of finance.
E)The chief operations officer reports to the vice president of production.

Question 7

A stakeholder is:

A)a person who owns shares of stock.
B)any person who has voting rights based on stock ownership of a corporation.
C)a person who initially founded a firm and currently has management control over that firm.
D)a creditor to whom a firm currently owes money.
E)any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

Question 8

The controller of a corporation generally reports directly to the:

A)board of directors.
B)chairman of the board.
C)chief executive officer.
D)president.
E)vice president of finance.

Question 9

A business owned by a solitary individual who has unlimited liability for its debt is called a:

A)corporation.
B)sole proprietorship.
C)general partnership.
D)limited partnership.
E)limited liability company.

Question 10

Which one of the following terms is defined as the management of a firm's long-term investments?

A)working capital management
B)financial allocation
C)agency cost analysis
D)capital budgeting
E)capital structure

Question 11

Which one of the following functions should be the responsibility of the controller rather than the treasurer?

A)daily cash deposit
B)income tax returns
C)equipment purchase analysis
D)customer credit approval
E)payment to a vendor

Question 12

Which one of the following statements concerning a sole proprietorship is correct?

A)A sole proprietorship is designed to protect the personal assets of the owner.
B)The profits of a sole proprietorship are subject to double taxation.
C)The owner of a sole proprietorship is personally responsible for all of the company's debts.
D)The sole proprietorship can continue even after the death of the sole proprietor.
E)A sole proprietorship is structured the same as a limited liability company.

Question 13

Which one of the following is a capital structure decision?

A)determining which one of two projects to accept
B)determining how to allocate investment funds to multiple projects
C)determining the amount of funds needed to finance customer purchases of a new product
D)determining how much debt should be assumed to fund a project
E)determining how much inventory will be needed to support a project

Question 14

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:

A)generally partner.
B)sole proprietor.
C)limited partner.
D)corporate shareholder.
E)zero partner.

Question 15

Which of the following questions are addressed by financial managers?
I. How should a product be marketed?
II. Should customers be given 30 or 45 days to pay for their credit purchases?
III. Should the firm borrow more money?
IV. Should the firm acquire new equipment?

A)I and IV only
B)II and III only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV

Question 16

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

A)articles of incorporation
B)corporate breakdown
C)agency problem
D)bylaws
E)legal liability

Question 17

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:

A)corporation.
B)sole proprietorship.
C)general partnership.
D)limited partnership.
E)limited liability company.

Question 18

Which one of the following is defined as a firm's short-term assets and its short-term liabilities?

A)working capital
B)debt
C)investment capital
D)net capital
E)capital structure

Question 19

Which of the following should a financial manager consider when analyzing a capital budgeting project?
I. project start up costs
II. timing of all projected cash flows
III. dependability of future cash flows
IV. dollar amount of each projected cash flow

A)I and IV only
B)I, II, and IV only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV

Question 20

A business created as a distinct legal entity and treated as a legal "person" is called a:

A)corporation.
B)sole proprietorship.
C)general partnership.
D)limited partnership.
E)unlimited liability company.

Question 21

Sam, Tom, and Joe want to start a small business. Joe will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Tom will be involved as an active consultant and manager and will also contribute funds. Sam and Tom are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?

A)sole proprietorship
B)joint stock company
C)limited partnership
D)general partnership
E)corporation

Question 22

Siti and Aisha currently are general partners in a business located in Malaysia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Which form of business entity should they consider to replace their general partnership assuming they wish to remain the only two owners of their business? Whichever organization they select, they wish to be treated equally.

A)sole proprietorship
B)joint stock company
C)limited partnership
D)limited liability company
E)corporation

Question 23

Which one of the following statements is correct?

A)A general partnership is legally the same as a corporation.
B)Both sole proprietorship and partnership income is taxed as individual income.
C)Partnerships are the most complicated type of business to form.
D)All business organizations have bylaws.
E)Only firms organized as sole proprietorships have limited lives.

Question 24

Corporate bylaws:

A)must be amended should a firm decide to increase the number of shares authorized.
B)cannot be amended once adopted.
C)define the name by which the firm will operate.
D)describe the intended life and purpose of the organization.
E)determine how a corporation regulates itself.

Question 25

The articles of incorporation:
I. describe the purpose of the firm.
II. are amended periodically.
III. set forth the number of shares of stock that can be issued.
IV. detail the method that will be used to elect corporate directors.

A)I and III only
B)I and IV only
C)II and III only
D)II and IV only
E)I, III, and IV only

Question 26

A limited partnership:

A)has an unlimited life.
B)can opt to be taxed as a corporation.
C)terminates at the death of any limited partner.
D)has a greater ability to raise capital than a sole proprietorship.
E)consists solely of limited partners.

Question 27

A general partner:

A)is solely responsible for all the partnership debts.
B)has no say over a firm's daily operations.
C)faces double taxation whereas a limited partner does not.
D)has a maximum loss equal to his or her equity investment.
E)receives a salary in lieu of a portion of the profits.

Question 28

Which one of the following statements concerning a sole proprietorship is correct?

A)The life of a sole proprietorship is potentially unlimited.
B)A sole proprietor can generally raise large sums of capital quite easily.
C)Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation.
D)A sole proprietorship is taxed the same as a corporation.
E)It is easy to create a sole proprietorship.

Question 29

Which one of the following characteristics applies to a limited liability company?

A)available only to firms having a single owner
B)limited liability for limited partners only
C)taxed similar to a partnership
D)taxed similar to a corporation
E)all income generated is totally tax-free

Question 30

Which type of business organization has all the respective rights and privileges of a legal person?

A)sole proprietorship
B)general partnership
C)limited partnership
D)corporation
E)limited liability company

Question 31

Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life

A)I and II only
B)III and IV only
C)I, III, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Question 32

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?

A)tax-free income
B)active participation in the firm's activities
C)no potential financial loss
D)greater control over the business affairs of the partnership
E)maximum loss limited to the capital invested

Question 33

Decisions made by financial managers should primarily focus on increasing which one of the following?

A)size of the firm
B)growth rate of the firm
C)gross profit per unit produced
D)market value per share of outstanding stock
E)total sales

Question 34

Which one of the following statements is correct?

A)The majority of firms in Asia are structured as corporations.
B)Corporate profits are taxable income to the shareholders when earned.
C)Corporations can raise large amounts of capital generally easier than partnerships can.
D)Stockholders face no potential losses related to their corporate investment.
E)Corporate shareholders elect the corporate president.

Question 35

Which one of the following business types is best suited to raising large amounts of capital?

A)sole proprietorship
B)limited liability company
C)corporation
D)general partnership
E)limited partnership

Question 36

Which of the following individuals have unlimited liability based on their ownership interest?
I. general partner
II. sole proprietor
III. stockholder
IV. limited partner

A)II only
B)I and II only
C)II and IV only
D)I, II, and III only
E)I, II, and IV only

Question 37

Which of the following apply to a partnership that consists solely of general partners?
I. double taxation of partnership profits
II. limited partnership life
III. active involvement in the firm by all the partners
IV. unlimited personal liability for all partnership debts

A)II only
B)I and II only
C)II and III only
D)I, II, and IV only
E)II, III, and IV only

Question 38

Which one of the following best states the primary goal of financial management?

A)maximize current dividends per share
B)maximize the current value per share
C)increase cash flow and avoid financial distress
D)minimize operational costs while maximizing firm efficiency
E)maintain steady growth while increasing current profits

Question 39

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?

A)increase in the amount of the quarterly dividend
B)decrease in the per unit production costs
C)increase in the number of shares outstanding
D)decrease in the net working capital
E)increase in the market value per share

Question 40

Why should financial managers strive to maximize the current value per share of the existing stock?

A)doing so guarantees the company will grow in size at the maximum possible rate
B)doing so increases employee salaries
C)because they have been hired to represent the interests of the current shareholders
D)because this will increase the current dividends per share
E)because managers often receive shares of stock as part of their compensation

Question 41

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

Question 42

Which one of the following parties has ultimate control of a corporation?

A)chairman of the Board
B)board of directors
C)chief executive officer
D)chief operating office
E)shareholders

Question 43

Which of the following are cash flows from a corporation into the financial markets?
I. repayment of long-term debt
II. payment of government taxes
III. payment of loan interest
IV. payment of quarterly dividend

A)I and II only
B)I and III only
C)II and IV only
D)I, III, and IV only
E)I, II, and III only

Question 44

Which of the following parties are considered stakeholders of a firm?
I. employee
II. long-term creditor
III. government
IV. common stockholder

A)I only
B)IV only
C)I and III only
D)II and IV only
E)II, III, and IV only

Question 45

The Sarbanes-Oxley Act of 2002 is a U.S. governmental response to:

A)decreasing corporate profits.
B)the terrorists attacks on 9/11/2001.
C)a weakening economy.
D)deregulation of the stock exchanges.
E)management greed and abuses.

Question 46

Which one of the following is not an intended result of the Sarbanes-Oxley Act?

A)more detailed and accurate financial reporting
B)increased management awareness of internal controls
C)corporations delisting from major exchanges
D)increased responsibility for corporate officers
E)identification of internal control weaknesses

Question 47

Which one of the following is an agency cost?

A)accepting an investment opportunity that will add value to the firm
B)increasing the quarterly dividend
C)investing in a new project that creates firm value
D)hiring outside accountants to audit the company's financial statements
E)closing a division of the firm that is operating at a loss

Question 48

Which form of business structure is most associated with agency problems?

A)sole proprietorship
B)general partnership
C)limited partnership
D)corporation
E)limited liability company

Question 49

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?

Question 50

Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes.
I. compensation based on the value of the stock
II. stock option plans
III. threat of a company takeover
IV. threat of a proxy fight

A)I and II only
B)III and IV only
C)I, II, and III only
D)I, III, and IV only
E)I, II, III, and IV

Question 51

Which one of the following is a primary market transaction?

A)sale of currently outstanding stock by a dealer to an individual investor
B)sale of a new share of stock to an individual investor
C)stock ownership transfer from one shareholder to another shareholder
D)gift of stock from one shareholder to another shareholder
E)gift of stock by a shareholder to a family member

Question 52

Shareholder A sold 500 shares of ABC stock on the Hong Kong Stock Exchange. This transaction:

A)took place in the primary market.
B)occurred in a dealer market.
C)was facilitated in the secondary market.
D)involved a proxy.
E)was a private placement.

Question 53

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

Question 54

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

Question 55

Which one of the following is least likely to be an agency problem?

A)increasing the size of a firm
B)concentrating on maximizing current profits
C)closing a division with net losses
D)increasing the market value of the firm's shares
E)obtaining a patent for a new product

Question 56

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

Question 57

Which one of the following grants an individual the right to vote on behalf of a shareholder?

A)proxy
B)by-laws
C)indenture agreement
D)stock option
E)stock audit

Question 58

Which of the following represent cash outflows from a corporation?
I. issuance of securities
II. payment of dividends
III. new loan proceeds
IV. payment of government taxes

A)I and III only
B)II and IV only
C)I and IV only
D)I, II, and IV only
E)II, III, and IV only

Question 59

Which one of the following is a means by which shareholders can replace company management?

A)stock options
B)promotion
C)Sarbanes-Oxley Act
D)agency play
E)proxy fight

Question 60

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

Question 61

How might agency problems arise in partnerships?