Deck 1: Overview of Corporate Finance

Question 1

For $200,000 you can buy a business that has steady cash flows and low risk. Given these cash flows and level of risk, you estimate the business will earn a return in excess of its opportunity cost of money. The business

A) appears economically profitable, and strong consideration should be given to buying it.
B) looks like a break-even opportunity and should be rejected.
C) appears to be a losing proposition but should be bought anyway.
D) appears to be a losing proposition and should not be bought.

Answer 1

appears economically profitable, and strong consideration should be given to buying it.

Question 2

A recent ethics survey indicated the opinion that maintaining high ethical standards

A) strengthened a firm's competitive position.
B) weakened a firm's competitive position, particularly in foreign markets.
C) was difficult to enforce.
D) had no effect on a firm's competitive position.

Answer 2

strengthened a firm's competitive position.

Question 3

Bayside Equipment is considering buying new equipment. The existing machine produces 10 000 units a day at a cost of $2 per unit. The new machine will produce 15 000 at a cost of $1.50 a unit. BAyside sells each unit for $4. What is the marginal benefit of the new machine

A) $7 500
B) $20 000
C) $22 500
D) $38 500

Answer 3

$38 500

Question 4

A firm has just ended its calendar year making a sale in the amount of $150,000 of merchandisepurchased during the year at a total cost of $112,500. Although the firm paid in full for themerchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are

A) $37,500 and -$112,500 respectively.
B) $150,000 and $112,500 respectively.
C) $0 and $150,000 respectively.
D) $37,500 and -$150,000 respectively.

Question 5

Managing the firm's liabilities includes all of the following EXCEPT

A) notes payable.
B) accounts payable.
C) accruals.
D) cash.

Question 6

Profit maximization fails because it ignores all EXCEPT

A) risk.
B) cash flows available to stockholders.
C) earnings per share.
D) the timing of returns.

Question 7

The key role of the financial manager is

A) the presentation of financial statements.
B) the collection of financial data.
C) decision making.
D) the preparation of data for future evaluation.

Question 8

In planning and managing the requirements of the firm, the financial manager is concerned with

A) the mix and type of assets, the type of financing utilized, and analysis in order to monitor the financial condition.
B) the acquisition of fixed assets, allowing someone else to plan the level of current assets required.
C) the type of financing utilized, but not the mix and type of assets.
D) the mix and type of assets, but not the type of financing utilized.

Question 9

Which of the following would be considered an agency cost?

A) cost of an annual audit required by bondholders
B) cost of wages paid to factory workers
C) cost of interest paid to bondholders
D) cost of dividends paid to shareholders

Question 10

One key output of the financial forecasting process are:

A) the forecasted financial statements
B) the amount of funds the company required to operate over the past fiscal period
C) the current financial statements
D) the past financial statements

Question 11

One way often used to insure that management decisions are in the best interest of the stockholdersis to

A) tie management compensation to the performance of the company's common stock price.
B) remove management's perquisites.
C) tie management compensation to the level of earnings per share.
D) threaten to fire managers who are seen as not performing adequately.

Question 12

The wealth of the owners of a corporation is represented by

A) earnings per share.
B) cash flow.
C) share price.
D) profits.

Question 13

The dominant form of organization with respect to revenues and net income is the

A) sole proprietorship.
B) corporation.
C) limited partnership.
D) partnership.

Question 14

Return and risk

A) have no effect on share price.
B) adversely affect share price.
C) have the same effect on share price.
D) have an inverse effect on share price.

Question 15

The goal of profit maximization would result in priority for

A) cash flows available to stockholders.
B) earnings per share.
C) risk of the investment.
D) timing of the returns.

Question 16

A more recent issue that is causing major problems in the business community is

A) short-term versus long-term financial goals of management.
B) the privatization of ownership.
C) environmental concerns.
D) ethical problems.

Question 17

The conflict between the goals of a firm's owners and the goals of its nonowner managers is

A) the agency problem.
B) of little importance in most large U.S. firms.
C) serious only when profits decline.
D) incompatibility.

Question 18

The true owners of the corporation is/are the

A) board of directors.
B) creditors.
C) chief executive officer.
D) stockholders.

Question 19

All of the following are measures that can be used as a guide for establishing a corporate ethicspolicy, EXCEPT

A) making sure violations are penalized, while at the same time not subjecting the employee to publicity.
B) an effective internal audit system.
C) making reference checks before hiring new employees.
D) an effective internal control system.

Question 20

The financial manager may be responsible for any of the following EXCEPT

A) determining whether to accept or reject a capital asset acquisition.
B) analyzing the effects of more debt on the firm's capital structure.
C) analyzing budget and performance reports.
D) monitoring of quarterly tax payments.

Question 21

When a firm is under-managed,

A) the market forces will be unable to identify this, and the firm's share price will remain strong.
B) nobody can do nothing since management controls the corporation.
C) market forces expose this weakness and allow for corrective action to be taken.
D) generally there is nothing shareholders can do.

Question 22

Profit maximization as the goal of the firm is NOT ideal because

A) profits today are less desirable than profits earned in future years.
B) profit maximization does not consider risk.
C) cash flows are more representative of financial strength.
D) profits are only accounting measures.

Question 23

Hardwood Furniture Limited sold $1,225,000 worth of tables, chairs and other furniture last year.During that time period, the company collected $975,755 for those items and paid $407,844 for thematerials used in producing the furniture they sold. What was Hardwood's net profit for last year?

A) $1,225,000
B) $975,755
C) $567,911
D) $817,156

Question 24

Wealth maximization as the goal of the firm implies enhancing the wealth of

A) the federal government.
B) the firm's employees.
C) the Board of Directors.
D) the firm's stockholders.

Question 25

The amount earned during the accounting period on each outstanding share of common stock iscalled

A) net profits after taxes.
B) earnings per share.
C) net income.
D) a common stock dividend.

Question 26

A&B Wholesalers sells 1,000 widgets per day at $1 each. A&B has introduced a new product to itsmix called the wiggle. It is estimated that A&B will sell 400 wiggles per day at $2 each; however,the sales of the widgets will decrease by 200 units per day. The firm's marginal change in revenues from adopting the wiggle is

A) $1,800.
B) $600.
C) $1,600.
D) $800.

Question 27

The key variables in the owner wealth maximization process are

A) earnings per share and risk.
B) earnings per share and share price.
C) profits and risk.
D) cash flows and risk.

Question 28

Return and risk are the key determinants in share price. Increased return results in_________ , other things remaining the same.

A) an unchanged share price
B) a lower share price
C) a higher share price
D) an undetermined share price

Question 29

The financial manager's financing decisions determine

A) both the mix and the type of assets and liabilities found on the firm's balance sheet.
B) the proportion of the firm's earnings to be paid as dividend.
C) both the mix and the type of assets found on the firm's balance sheet.
D) the most appropriate mix of short-term and long-term financing.

Question 30

About 75 percent of all business firms are

A) cooperatives.
B) partnerships.
C) sole proprietorships.
D) corporations.

Question 31

The primary goal of the financial manager is

A) maximizing wealth.
B) minimizing return.
C) minimizing risk.
D) maximizing profit.

Question 32

Managerial finance

A) involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.
B) devotes the majority of its attention to the collection and presentation of financial data.
C) recognizes funds on an accrual basis.
D) involves the design and delivery of advice and financial products.

Question 33

The financial manager is interested in the cash inflows and outflows of the firm, rather than the accounting data, in order to ensure

A) the ability to acquire new assets.
B) profitability.
C) the ability to pay dividends.
D) solvency.

Question 34

Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are

A) $3,000 and -$7,000 respectively.
B) $3,000 and $7,000 respectively.
C) $3,000 and $10,000 respectively.
D) $7,000 and -$3,000 respectively.

Question 35

When entering into a partnership with a business associate, it is strongly recommended that

A) a partnership agreement be drafted outlining roles, responsibilities, and profit sharing.
B) both partners contribute an equal amount of money.
C) both partners contribute an equal amount of money and labor.
D) both partners contribute an equal amount of labor.

Question 36

Economic theories that the financial manager must be able to utilize for efficient businessoperations, include

A) marginal analysis.
B) supply-and-demand analysis.
C) profit-maximizing strategies.
D) all of the above.

Question 37

The accountant's primary function is

A) making decisions based on financial data.
B) the collection and presentation of financial data.
C) planning cash flows.
D) evaluating the financial statements.

Question 38

The agency problem may result from a manager's concerns about any of the following EXCEPT

A) personal wealth.
B) corporate goals.
C) job security.
D) company-provided perquisites.

Question 39

PC Express is evaluating the purchase of a new machine that will cost $300 000. The company bought the existing machine for $200 000 five years ago and can sell it today for $50 000. What is the marginal cost of buying the new machine?

A) $250 000
B) $100 000
C) $300 000
D) $50 000

Question 40

If a company's managers are NOT owners of the company, they are

A) outsiders.
B) agents.
C) brokers.
D) dealers.

Question 41

The officer responsible for the firm's financial activities such as financial planning and fund raising,making capital expenditure decisions, and managing cash, credit, the pension fund, and foreignexchange is

A) the controller.
B) the treasurer.
C) the foreign exchange manager.
D) none of the above.

Question 42

Managerial finance

A) recognizes funds on an accrual basis.
B) involves the design and delivery of advice and financial products.
C) devotes the majority of its attention to the collection and presentation of financial data.
D) involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.

Question 43

The part of finance concerned with the design and delivery of advice and financial products toindividuals, businesses, and government is called

A) financial manager.
B) financial services.
C) managerial finance.
D) none of the above.

Question 44

Financial analysis and planning involve all of the following EXCEPT

A) controlling the data processing activities.
B) transforming data into a form that can be used to monitor the firm's financial position.
C) determining the additional financing needs.
D) evaluating the need for increased or reduced productive capacity.

Question 45

Which of the following is a disadvantage of an income trust?

A) income trusts do not offer the potential for capital appreciation
B) income trusts never provide stable cash flows
C) only immature companies that do not have a regular cash flow can create income trusts
D) unitholders of income trusts have a lower claim on assets than the holders of debt securities

Question 46

A firm has just ended its calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The possible problem this firm may face is

A) inability to receive credit.
B) high leverage.
C) low profitability.
D) lack of cash flow.

Question 47

Generally, the Treasurer of a large corporation reports to the

A) Chief Executive Officer.
B) General Manager.
C) Credit Manager.
D) Chief Financial Officer.

Question 48

The___________ has/have the ultimate responsibility in guiding corporate affairs and carrying out policies.

A) chief executive officer
B) board of directors
C) stockholders
D) creditors

Question 49

Corporate ethics policies typically apply to____________in dealing with _________

A) management actions; all corporate constituents
B) employee actions; customers and creditors
C) employee actions; customers, vendors, and regulators
D) employee actions; all corporate constituents

Question 50

A corporation

A) is a legal entity, separate and distinct from its owners.
B) can sue and be sued, and can enter into contracts.
C) can borrow money and own property.
D) all of the above are true

Question 51

Emerging trends resulting from the agency problem are all of the following EXCEPT

A) large private corporations.
B) restructuring through leveraged buyouts.
C) prohibiting managers from maintaining an ownership interest.
D) management by active investors.

Question 52

A "legal entity" which can sue and be sued, make and be party to contracts, and acquire property in its own name is

A) a professional partnership.
B) a corporation.
C) a partnership.
D) a sole proprietorship.

Question 53

Financial analysts study_________while accountants prepare financial statements using_________accounting techniques.

A) accrual; forecasted
B) cash flows; forecasted
C) accrual; cash flows
D) cash flows; accrual

Question 54

In a corporation, ethical decisions occur at all levels within the hierarchy. If you were an ethicsconsultant, which ethical behavior would concern you the most?

A) a food-wholesaler's cashier rounds all weights down when calculating the cost of fruits and vegetables for customers
B) a strawberry grower sprays a legalized chemical on its berries to help them turn red quicker
C) a medical research company tests cancer drugs on mice
D) an investment advisor tells his client that a company near bankruptcy has excellent growth prospects in order to get his sales commission

Question 55

Which of the following legal forms of organization's income is NOT taxed under individual incometax rate?

A) corporations
B) partnerships
C) limited partnerships
D) sole proprietorships

Question 56

Canada's industry minister recently travelled to Japan on business and took his wife and three children. The minister paid for his wife and childrens' costs out of his own pocket. The minister

A) has created an agency problem by taking his family when travelling on government business.
B) appears to have done nothing wrong in the fulfillment of his duties to the crown.
C) has failed in his fiduciary responsibility to the public and should step down.
D) has created an agency cost by charging the family's costs to his personal account.

Question 57

The financial manager's investment decisions determine

A) both the mix and the type of liabilities found on the firm's balance sheet.
B) both the mix and the type of assets and liabilities found on the firm's balance sheet.
C) both the mix and the type of short-term and long-term financing.
D) both the mix and the type of assets found on the firm's balance sheet.

Question 58

The accountant recognizes revenues and expenses on

A) an expense basis.
B) an accrual basis.
C) a revenue basis.
D) a cash basis.

Question 59

The financial manager may be responsible for any of the following EXCEPT

A) analyzing the effects of more debt on the firm's capital structure.
B) keeping track of quarterly tax payments.
C) analyzing quarterly budget and performance reports.
D) determining whether to accept or reject a capital asset acquisition.

Question 60

Sig Hansen runs a ski resort in British Columbia. He is considering replacing the ski lifts at the resort. His calculations suggest that if he does, the economic benefits from the upgraded ski-lift operations will total $959,000 over the next six years. The ski lifts he already has are projected to generate $444,000 in economic benefits over the next six years. The new ski lifts would require an initial cash investment of $385,000 and Sig estimates he can sell his existing ski lift equipment for$170,000. Based on these estimates, what is Sig's marginal cost from replacing the ski lifts?

A) $385,000
B) $515,000
C) $574,000
D) $215,000

Question 61

All of the following are key strengths of a corporation EXCEPT

A) limited liability.
B) access to capital markets.
C) readily transferable ownership.
D) low organization costs.

Question 62

The implementation of a pro-active ethics program is expected to result in

A) a positive corporate image and increased respect, a reduction in risk, and enhanced cash flow resulting in an increase in share price.
B) an increased share price resulting from a decrease in risk, but is not expected to affect cash flows.
C) a positive corporate image and increased respect, but is not expected to affect share price.
D) a positive corporate image and increased respect, but is not expected to affect cash flows.

Question 63

Agency costs include all of the following EXCEPT

A) opportunity costs.
B) monitoring expenditures.
C) bonding and structuring expenses.
D) cost of goods sold.

Question 64

The key activities of the financial manager include all of the following EXCEPT

A) financial analysis and planning.
B) making financing decisions.
C) managing financial accounting.
D) making investment decisions.

Question 65

As a sole proprietor, you are responsible for

A) marketing the business to the target market.
B) maintaining financial records and reporting to the government.
C) the day-to-day management of the business including customer service.
D) all of the above.

Question 66

By concentrating on cash flows within the firm the financial manager should be able to

A) control expenses.
B) avoid insolvency.
C) prepare tax returns.
D) speak authoritatively to stockholders.

Question 67

In a corporation, the members of the board of directors are elected by the

A) employees.
B) creditors.
C) stockholders.
D) chief executive officer.

Question 68

The primary economic principle used in managerial finance is

A) supply and demand.
B) the crowding out effect.
C) marginal analysis.
D) the liquidity trap.

Question 69

A company determines its overall cost of capital by

A) multiplying the percentage of debt by its cost and adding the result to the percentage of equity multiplied by its cost
B) calculating the average cost of interest rates paid on loans and other debt instruments
C) calculating the percent of earnings paid out in dividends
D) multiplying the percentage of debt in the capital structure by the percentage of equity

Question 70

Financial managers evaluating decision alternatives or potential actions must consider

A) only risk.
B) both risk and return.
C) only return.
D) risk, return, and the impact on share price.

Question 71

Benefits to incorporating a small business with one owner include all of the following EXCEPT

A) the ability to raise capital through public offerings.
B) the small business tax credit on income below $200,000.
C) the ability to limit liability to the amount invested in the company.
D) the $500,000 capital gains exemption for qualified small business shares.

Question 72

Profit maximization does NOT take into consideration

A) risk and eps.
B) risk and cash flow.
C) cash flow and stock price.
D) eps and stock price.

Question 73

A major weakness of a partnership is

A) access to capital markets.
B) low organizational costs.
C) limited liability.
D) difficulty liquidating or transferring ownership.

Question 74

Which of the following risk-return statements is true?

A) an investment in a Government of Canada bond is more risky than an investment in a publicly traded company, such as Nortel Networks
B) rational investors require a lower return for exposing themselves to risk
C) in order to increase the return expected from any kind of investment, we must increase our exposure to risk
D) all of the above are true

Question 75

Under which of the following legal forms of organization, is ownership readily transferable?

A) limited partnerships
B) corporations
C) partnerships
D) sole proprietorships

Question 76

Career opportunities in financial services include all of the following EXCEPT

A) real estate and insurance.
B) investments.
C) capital expenditures management.
D) personal financial planning.

Question 77

Agency costs include all of the following EXCEPT

A) management reports to stockholders.
B) the cost of monitoring management behavior.
C) purchasing insurance against management misconduct.
D) performance incentives paid to managers.

Question 78

The financial manager recognizes revenues and expenses utilizing

A) the actual inflows and outflows of cash.
B) standardized, generally accepted, accounting principles.
C) the revenue method.
D) the accrual method.

Question 79

The accountant may be responsible for any of the following EXCEPT

A) processing purchase orders and invoices.
B) analyzing the mix of current to fixed assets.
C) preparing the monthly income statement.
D) ensuring accounts payable are paid on time.

Question 80

An ethics program is expected to have___________impact on the firm's share price

A) positive
B) undetermined
C) no
D) negative