Deck 1: Introduction to Corporate Finance

Question 1

A firm's investment decision is also called its

A)financing decision.
B)liquidity decision.
C)capital budgeting decision.
D)leasing decision.

Answer 1

capital budgeting decision.

Question 2

Which of the following is an important function of financial markets?

A)providing financing
B)providing financing and liquidity
C)providing financing, providing liquidity, reducing risk, and providing information
D)providing information

Answer 2

providing financing, providing liquidity, reducing risk, and providing information

Question 3

Generally, a corporation is owned by its

A)managers.
B)board of directors and shareholders.
C)shareholders.
D)managers, board of directors, and shareholders.

Answer 3

shareholders.

Question 4

The following groups are some of the claimants to a firm's income stream:

A)shareholders and bondholders only.
B)shareholders, bondholders, and employees only.
C)shareholders, bondholders, employees, and management only.
D)shareholders, bondholders, employees, management, and government.

Question 5

The firm's purchase of real assets is also referred to as the:

A)capital structure decision.
B)CFO decision.
C)financing decision.
D)capital investment decision.

Question 6

The financial goal of a corporation is to:

A)maximize profits.
B)maximize sales.
C)maximize the value of the firm for the shareholders.
D)maximize managers' benefits.

Question 7

The sale of financial assets by a corporation is also referred to as the

A)capital budgeting decision.
B)CFO decision.
C)financing decision.
D)investment decision.

Question 8

Which of the following types of assets are intangible?

A)production machinery
B)factories
C)trademarks
D)office equipment

Question 9

This book is mainly about:

A)financial decisions made by corporations.
B)financial decisions made by households.
C)financial decisions made by governments.
D)financial decisions made by employees.

Question 10

A corporation, potentially, has infinite life because it

A)is a legal entity.
B)has the same ownership and management.
C)has limited liability.
D)is closely regulated.

Question 11

In the principal-agent framework:

A)shareholders are the principals.
B)managers are the principals.
C)managers are the agents.
D)shareholders are the principals and managers are the agents.

Question 12

As a legal entity, a corporation can perform the following functions EXCEPT:

A)borrow money and lend money.
B)borrow money, lend money, and sue and be sued.
C)vote.
D)borrow money, lend money, sue and be sued, and vote.

Question 13

Which of the following is not a financial asset?

A)common stock
B)bank loans
C)preferred stock
D)buildings

Question 14

A corporation may incur agency costs because:

A)Managers may not attempt to maximize the value of the firm to shareholders.
B)Shareholders incur monitoring costs.
C)Of the separation of ownership and management.
D)All of the responses are correct.

Question 15

Which of the following assets is tangible?

A)ExxonMobil's corporate headquarters building
B)Apple Inc.'s trademark
C)Hewlett-Packard's most recent printer patent
D)Microsoft's technical expertise

Question 16

The choice of the proper mixture of debt and equity, used to finance a corporation, is also referred to as the

A)capital budgeting decision.
B)capital structure decision.
C)investment decision.
D)liquidity decision.

Question 17

Costs associated with the conflicts of interest between the managers and the shareholders of a corporation are called:

A)legal costs.
B)bankruptcy costs.
C)administrative costs.
D)agency costs.

Question 18

Disadvantages of the corporate form include:

A)agency costs
B)double taxation
C)cost of managing the corporation
D)all of the options

Question 19

Shareholders of a corporation may be, among others,

A)individuals.
B)individuals and pension funds.
C)pension funds.
D)individuals, pension funds, and insurance companies.

Question 20

Limited liability is an important feature of:

A)sole proprietorships.
B)partnerships.
C)corporations.
D)both partnerships and corporations.

Question 21

Which of the following groups are referred to as stakeholders?

A)employees, customers, and suppliers only
B)shareholders only
C)employees and customers only
D)employees, customers, shareholders, and suppliers

Question 22

Mr. Thomas has $100 income this year and zero income next year. The market interest rate is 10 percent per year. Mr. Thomas also has an investment opportunity in which he can invest $50 this year and receive $80 next year. Suppose Mr. Thomas consumes $50 this year and invests in the project. What will be his consumption next year?

A)$50
B)$55
C)$80
D)$110

Question 23

The line that connects the maximum that one can consume this year (now, on the horizontal axis)and the maximum one can consume next year:

A)has a slope of (1 + r).
B)has a slope of - (1 + r).
C)has a slope of r.
D)has a slope of 1/r.

Question 24

Mr. Smith has an income of $40,000 this year and $60,000 next year. He can invest in a project that costs $30,000 this year, which generates an income of $36,000 next year. The market interest rate is 10 percent. What will be his consumption next year if Mr. Smith invests in the project and consumes $50,000 this year?

A)$40,000
B)$52,000
C)$60,000
D)$62,000

Question 25

The following are examples of tangible assets except:

A)machinery only.
B)machinery and office buildings only.
C)training courses for employees only.
D)machinery, office buildings, and warehouses only.

Question 26

Ms. Venus has $100 income this year and $110 next year. The market interest rate is 10 percent per year. Suppose Ms. Venus consumes $60 this year. What will be her consumption next year?

A)$120
B)$154
C)$170
D)$210

Question 27

Explain the term corporation.

Question 28

Managers, shareholders, and the firm's debtholders have identical information about the value of the firm.

Question 29

Briefly explain the term limited liability.

Question 30

The board of directors is ultimately responsible for all large investment decisions.

Question 31

Mr. Dell has $100 income this year and zero income next year. The expected return from investing in the stock market is 10 percent a year. Mr. Dell also has an investment opportunity-having the same risk as the market in which he can invest $50 this year and receive $80 next year. Suppose Mr. Dell consumes $50 this year and invests in the project. What is the NPV of the investment opportunity?

A)$0
B)$5
C)$22.73
D)none of the options

Question 32

The ultimate financial goal of a corporation is to:

A)minimize stockholder risk.
B)maximize profit.
C)maximize the value of the corporation to the stockholders.
D)increase size of the firm.

Question 33

Ms. Anderson has $60,000 income this year and $40,000 next year. The market interest rate is 10 percent per year. Suppose Ms. Anderson consumes $80,000 this year. What will be her consumption next year?

A)$18,000
B)$30,000
C)$60,000
D)$70,000

Question 34

A firm's total asset value belongs entirely to the shareholders.

Question 35

The following are examples of real assets:

A)machinery, office buildings, and warehouses only.
B)machinery and office buildings only.
C)common stock only.
D)machinery only.

Question 36

A corporation has a legal existence of its own and is based on "articles of incorporation."

Question 37

Mr. Bird has $100 income this year and zero income next year. The market interest rate is 10 percent per year. Mr. Bird also has an investment opportunity in which he can invest $50 today and receive $80 next year. Suppose Mr. Bird consumes $30 this year and invests in the project. What will be his consumption next year?

A)$80
B)$82
C)$100
D)$102

Question 38

Real assets of a corporation are claims on their financial assets.

Question 39

Mr. Free has $100 income this year and zero income next year. The market interest rate is 10 percent per year. If Mr. Free consumes $30 this year and invests the rest in the market, what will be his consumption next year?

A)$50
B)$55
C)$77
D)$100

Question 40

Ms. Newcastle has $60,000 income this year and $40,000 next year. The market interest rate is 10 percent per year. Suppose Ms. Newcastle wishes to consume $62,000 next year. What will be her consumption this year?

A)$19,000
B)$40,000
C)$60,000
D)$70,000

Question 41

Briefly explain the advantages of a corporation as a form of business organization.

Question 42

Briefly explain the functions of financial markets.

Question 43

Briefly explain the term agency costs as related to a corporation.

Question 44

Briefly discuss the role of financial managers.

Question 45

Explain why "maximization of shareholders' wealth" is the appropriate ultimate, long-term goal of the firm.

Question 46

Briefly explain how individuals can adjust their current and future consumption according to their preferences.

Question 47

Briefly explain the sequence of cash flows between financial markets and the firm.

Question 48

Briefly explain some of the institutional arrangements that ensure that managers work toward increasing the value of a firm.

Question 49

Briefly discuss principal-agent problems as related to a corporation.