Deck 1: Introduction to Corporate Finance

Question 1

The mixture of debt and equity used by a firm to finance its operations is called:

A)working capital management.
B)financial depreciation.
C)cost analysis.
D)capital budgeting.
E)capital structure.

Answer 1

capital structure.

Question 2

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

A)The life of the firm is limited to the life span of the owner.
B)The owner can generally raise large sums of capital quite easily.
C)The ownership of the firm is easy to transfer to another individual.
D)The company must pay separate taxes from those paid by the owner.
E)The legal costs to form a sole proprietorship are quite substantial.

Answer 2

The life of the firm is limited to the life span of the owner.

Question 3

Which one of the following is a capital budgeting decision?

A)Determining how much debt should be borrowed from a particular lender.
B)Deciding whether or not to open a new store.
C)Deciding when to repay a long-term debt.
D)Determining how much inventory to keep on hand.
E)Determining how much money should be kept in the checking account.

Answer 3

Deciding whether or not to open a new store.

Question 4

Capital structure decisions include consideration of the: I.amount of long-term debt to assume.
II.cost of acquiring funds.
III.current assets and liabilities.
IV.net working capital.

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

Question 5

A business owned by a single individual is called a:

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

Question 6

The process of planning and managing a firm's long-term investments is called:

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

Question 7

Working capital management includes decisions concerning which of the following?
I.trade payables
II.long-term debt
III.trade receivables
IV.inventory

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

Question 8

When one shareholder sells equity directly to another the transaction is said to occur in the:

A)dealer market.
B)primary market.
C)secondary market.
D)OTC market.
E)NASDAQ market.

Question 9

The management of a firm's short-term assets and liabilities is called:

A)working capital management.
B)debt management.
C)equity management.
D)capital budgeting.
E)capital structure.

Question 10

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

A)A sole proprietorship is the least common form of business ownership.
B)The profits of a sole proprietorship are taxed twice.
C)The owners of a sole proprietorship share profits as established by the partnership agreement.
D)The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.
E)A sole proprietorship is often structured as a limited liability company.

Question 11

The corporate document that sets forth the business purpose of a firm is the:

A)indenture contract.
B)state tax agreement.
C)corporate bylaws.
D)corporate charter.
E)articles of incorporation.

Question 12

The division of profits and losses among the members of a partnership is formalized in the:

A)indemnity clause.
B)indenture contract.
C)statement of purpose.
D)partnership agreement.
E)group charter.

Question 13

The rules by which corporations govern themselves are called:

A)indenture provisions.
B)indemnity provisions.
C)charter agreements.
D)memoranda of association.
E)articles of incorporation.

Question 14

The person generally directly responsible for overseeing the tax management,cost accounting,financial accounting,and information system functions is the:

A)treasurer.
B)director.
C)controller.
D)chairman of the board.
E)chief executive officer.

Question 15

A business entity operated and taxed like a partnership,but with limited liability for the owners,is called a:

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

Question 16

The person generally directly responsible for overseeing the cash and credit functions,financial planning,and capital expenditures is the:

A)treasurer.
B)director.
C)controller.
D)chairman of the board.
E)chief operations officer.

Question 17

The decision of which lender to use and which type of long-term loan is best for a project is part of:

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

Question 18

A business created as a distinct legal entity composed of one or more individuals or entities is called a:

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

Question 19

The original sale of securities by governments and corporations to the general public occurs in the:

A)primary market.
B)secondary market.
C)private placement market.
D)proprietary market.
E)liquidation market.

Question 20

A business formed by two or more individuals who each have unlimited liability for business debts is called a:

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

Question 21

A general partner:

A)has less legal liability than a limited partner.
B)has more management responsibility than a limited partner.
C)faces double taxation whereas a limited partner does not.
D)cannot lose more than the amount of his/her equity investment.
E)is the term applied only to corporations which invest in partnerships.

Question 22

In a limited partnership:

A)each limited partner's liability is limited to his net worth.
B)each limited partner's liability is limited to the amount he put into the partnership.
C)each limited partner's liability is limited to his annual salary.
D)there is no limitation on liability; only a limitation on what the partner can earn.
E)None of the above.

Question 23

What advantages does the corporate form of organization have over sole proprietorships or partnerships?

Question 24

Which one of the following statements is correct?

A)Both partnerships and corporations incur double taxation.
B)Both sole proprietorships and partnerships are taxed in a similar fashion.
C)Partnerships are the most complicated type of business to form.
D)Both partnerships and corporations have bylaws.
E)All types of business formations have limited lives.

Question 25

If the corporate form of business organization has so many advantages over the sole proprietorship,why is it so common for small businesses to initially be formed as sole proprietorships?

Question 26

Which of the following are disadvantages of a partnership?
I.limited life of the firm
II.personal liability for firm debt
III.greater ability to raise capital than a sole proprietorship
IV.lack of ability to transfer partnership interest

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

Question 27

Which of the following statements concerning auction markets is (are)correct?
I.Euronext is an auction market.
II.The Foreign Exchange Market is an auction market.
III.All trades involve a dealer in an auction market.
IV.An auction market is called an over-the-counter market.

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

Question 28

List and briefly describe the three basic questions addressed by a financial manager.

Question 29

The primary market is defined as the:

A)market for insured securities.
B)market for new issues.
C)market for securities of the largest firms.
D)over-the-counter market.
E)None of the above.

Question 30

Dealer markets:

A)are reserved strictly for trading debt securities.
B)only exist outside of Europe.
C)are called over-the-counter markets.
D)include the Euronext and London Stock Exchanges.
E)list only the securities of the largest firms.

Question 31

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 32

The memoranda of association:

A)establish the name of the corporation.
B)are rules which apply only to limited liability companies.
C)set forth the purpose of the firm.
D)mandate the procedure for electing corporate directors.
E)set forth the procedure by which the shareholders elect the senior managers of the firm.

Question 33

Sole proprietorships are predominantly started because:

A)they are easily and cheaply setup.
B)the proprietorship life is limited to the business owner's life.
C)all business taxes are paid as individual tax.
D)All of the above.
E)None of the above.

Question 34

The owners of a limited liability company prefer:

A)being taxed like a corporation.
B)having liability exposure similar to that of a sole proprietor.
C)being taxed personally on all business income.
D)having liability exposure similar to that of a general partner.
E)being taxed like a corporation with liability like a partnership.

Question 35

The articles of incorporation:

A)can be used to remove company management.
B)are amended annually by the company shareholders.
C)set forth the number of shares that can be issued.
D)set forth the rules by which the corporation regulates its existence.
E)can set forth the conditions under which the firm can avoid double taxation.

Question 36

A partnership:

A)is taxed the same as a corporation.
B)agreement defines whether the business income will be taxed like a partnership or a corporation.
C)terminates at the death of any general partner.
D)has less of an ability to raise capital than a proprietorship.
E)allows for easy transfer of interest from one general partner to another.

Question 37

Which one of the following statements is correct concerning corporations?

A)The largest firms are usually corporations.
B)The majority of firms are corporations.
C)The shareholders are usually the managers of a corporation.
D)The ability of a corporation to raise capital is quite limited.
E)The income of a corporation is taxed as personal income of the shareholders.

Question 38

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 39

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

A)Entitlement to a larger portion of the partnership's income.
B)Ability to manage the day-to-day affairs of the business.
C)No potential financial loss.
D)Greater management responsibility.
E)Liability for firm debts limited to the capital invested.

Question 40

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,II,and III only.
D)II,III,and IV only.
E)I,III,and IV only.

Question 41

Suppose you own 100 shares of Vodafone which you intend to sell today.Since you will sell it in the secondary market,Vodafone will receive no direct cash flows as a consequence of your sale.Why,then,should Vodafone's management care about the price you get for your shares?

Question 42

What should be the goal of the financial manager of a corporation?
Why?

Question 43

Assume for a moment that the shareholders in a corporation have unlimited liability for corporate debts.If so,what impact would this have on the functioning of primary and secondary markets for ordinary equity?

Question 44

Why might a corporation wish to list its shares on a national exchange such as the London Stock Exchange as opposed to a small company exchange,such as AIM?

Question 45

One thing lenders sometimes require when loaning money to a small corporation is an assignment of the common stock as collateral on the loan.Then,if the business fails to repay its loan,the ownership of the stock certificates can be transferred directly to the lender.Why might a lender want such an assignment?
What advantage of the corporate form of organization comes into play here?