Deck 1: Introduction to Corporate Finance

Question 1

Capital structure determines how much debt the firm should have in relation to its level of equity.

Answer 1

True

Question 2

Capital structure determines the least expensive sources of funds for the firm to borrow.

Answer 2

True

Question 3

The primary goal of a financial manager should be to maximize the value of shares issued to new
investors in the corporation.

Answer 3

False

Question 4

Common stockholders or limited partners can lose, at most, what they have invested in a firm.

Question 5

A capital expenditure project becomes desirable when the project is worth more to the firm than
the cost to acquire it.

Question 6

Maximization of the current earnings of the firm is the main goal of the financial manager.

Question 7

When evaluating a project in which a firm might invest, the size but not the timing of the cash flows
is important.

Question 8

Capital structure determines the level of current assets that is required to maintain the firm's
operational level.

Question 9

Capital structure determines how much risk is associated with the future cash flows of a project.

Question 10

Partnership income is treated as personal income of the partners.

Question 11

Deciding if a new project should be accepted is a working capital decision.

Question 12

The primary goal of financial management is to minimize the corporate tax liability.

Question 13

The size, timing and risk of cash flows are important when evaluating a capital budgeting decision.

Question 14

Determining the amount of money to borrow in order to finance a 10-year project is a capital
structure decision.

Question 15

Determining when a supplier should be paid is a capital structure decision.

Question 16

A capital expenditure project becomes desirable when the value of the cash flow generated by the
project exceeds the project's cost.

Question 17

A limited partner can lose his or her investment in the partnership.

Question 18

Working capital management addresses the firm's appropriate level of inventory.

Question 19

Establishing the accounts receivable policies is a capital structure decision.

Question 20

In capital budgeting, the financial manager tries to identify investment opportunities that are worth
more to the firm than they cost to acquire.

Question 21

Control of the firm ultimately rests with shareholders. They elect the board of directors, who, in turn,
hire and fire management.

Question 22

A stakeholder is:

A) Given to each stockholder when they first purchase their stock.
B) A proxy vote made at a shareholders' meeting.
C) A founding stockholder of the firm.
D) An original creditor of the firm.
E) A person or entity including a stockholder or creditor, who potentially has a claim on the cash flows of the firm.

Question 23

The triple bottom line is defined as a company's commitment to operate in an economically, socially
and environmentally sustainable manner.

Question 24

The board of directors has the power to act on behalf of the shareholders to hire and fire the
operating management of the firm. In a legal sense, the directors are "principals" and the
shareholders are "agents".

Question 25

Which of the following would be considered a primary market transaction?

A) A buy order to an investment banker for a new public stock offering.
B) A buy order to a broker for shares of a company on the TSX.
C) A buy order to a broker for shares of a company on the Venture Exchange.
D) A buy order to a dealer for shares of a company OTC.
E) A sell order to a broker for a stock listed on the TSX.

Question 26

Stakeholder theory suggests that employees, customers, suppliers, and various levels of
government all have financial interests in the firm.

Question 27

There is a significant relationship between CSR activity and corporate performance.

Question 28

Control of the firm ultimately rests with board of directors. They elect the management, who, in turn,
lead the company.

Question 29

When owners are managers (such as in a sole proprietorship), a firm will have agency costs.

Question 30

The goal of financial managers does not imply that illegal or unethical actions should be taken in
the hope of increasing the value of the the firm.

Question 31

IBEC Inc. of Toronto spends approximately $2 million annually to hire auditors to go over the firm's
financial statements. This is an example of an indirect agency cost.

Question 32

Unethical behaviour does not impact volatility of the stock markets.

Question 33

A proprietorship is:

A) A business formed by two or more individuals.
B) A separate legal body formed by an individual who has limited personal liability.
C) A business owned by an individual who has unlimited personal liability.
D) A business managed by a single general partner.
E) A limited liability form of business ownership.

Question 34

The Sarbanes-Oxley Act was intended to protect investors from corporate abuses.

Question 35

Corporate social responsibility (CSR) is also referred to as corporate sustainability.

Question 36

The collapse of companies like Enron and Worldcom illustrates the impact unethical behaviour on
public trust and confidence.

Question 37

Research results on CSR activity and corporate performance has been mixed.

Question 38

Corporate social responsibility (CSR) is also referred to as the triple bottom line.

Question 39

In a limited partnership:

A) Only the limited partners are involved in the daily management of the firm.
B) Both general and limited partners are involved in the daily management of the firm.
C) A limited partner is liable only for the amount he/she contributed to the partnership.
D) A general partner is liable only for the amount he/she contributed to the partnership.
E) The income earned is taxed like a corporation.

Question 40

The Sarbanes-Oxley Act was intended to increase corporate social responsibility of publicly listed
organizations.

Question 41

The best definition of capital markets is:

A) The possibility of conflicts between shareholders and management in a large corporation.
B) The process of planning and managing a firm's long-term investments.
C) A venue where long-term debt and equity securities are bought and sold.
D) The purchase or sale of securities whose value derives from the price of another, underlying, asset.
E) A venue where buyers and sellers of capital equipment come together to trade such assets.

Question 42

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 43

Capital structure decisions include which of the following?

A) Determining the number of shares of stock to issue.
B) Determining whether the firm should purchase or lease some equipment.
C) Allocating funds to the various divisions within the firm.
D) Evaluating the size of inventory to be kept on hand.
E) Evaluating the customer credit policy.

Question 44

You are interested in purchasing 100 shares of stock in one of the largest corporations in the Canada. You would most likely purchase the shares in _______________.

A) A secondary market operated as an auction market.
B) A primary market operated as an auction market.
C) A secondary market operated as a dealer market.
D) A primary market operated as a dealer market.
E) A secondary market operated as a money market.

Question 45

An agency problem is said to exist when there is a conflict of interest between _____ and _____.

A) An agent; his or her representative.
B) A broker; a dealer.
C) A principal; his or her agent.
D) One shareholder; another shareholder.
E) A shareholder; a stakeholder.

Question 46

Which of the following accounts does not relate to working capital management decisions?

A) Accounts payable.
B) Long-term debt.
C) Accounts receivable.
D) Inventory.
E) Short-term debt.

Question 47

The document that legally establishes domicile for a corporation is called the:

A) Indenture contract.
B) Partnership agreement.
C) Amended homestead filing.
D) Bylaws.
E) Articles of incorporation.

Question 48

The management of the firm's short-term assets and liabilities is called:
A. Working capital management.
B. Financial depreciation.
C. Agency cost analysis.
D. Capital budgeting.
E. Capital structure.

Question 49

Which of the following statements concerning auction markets is correct?

A) The TSX is an auction market.
B) NASDAQ is an auction market.
C) All trades involve a dealer in an auction market.
D) An auction market is called an over-the-counter market.
E) A market where buyers specify the lowest price they are willing to pay and sellers indicate the highest price they are willing to accept.

Question 50

Which one of the following statements concerning a proprietorship is true?

A) A proprietorship can be a business jointly owned by two family members.
B) Income from a proprietorship is taxed as a separate entity.
C) A proprietor is personally responsible for 100% of the firm's liabilities.
D) A partial transfer of ownership is easier with a proprietorship than with a corporation.
E) Income from a proprietorship is taxed at a lower rate than other personal income.

Question 51

A stakeholder is:

A) Any person or entity that owns shares of stock of a corporation.
B) Any person or entity that has voting rights based on stock ownership of a corporation.
C) A person who initially started a firm and currently has management control over the cash flows of the firm due to his/her current ownership of company stock.
D) A creditor to whom the firm currently owes money and who consequently has a claim on the cash flows of the firm.
E) Any person or entity who potentially has a claim on the cash flows of the firm.

Question 52

What is the difference between third and fourth markets?

A) A third market involves trading exchange-listed securities in OTC markets, while a fourth market trading involves institution-to-institution trading without using the services of
Brokers or dealers.
B) A third market involves trading institution-to-institution trading without using the services of brokers or dealers trading, while a fourth market involves trading exchange-listed
Securities in OTC markets.
C) A third market involves trading in corporate equities, while a fourth market involves trading in corporate debt.
D) A third market involves trading in corporate debt, while a fourth market involves trading in corporate equities.
E) A third market involves trading in call options, while a fourth market involves trading in warrants.

Question 53

Which one of the following actions is the best example of an agency problem?

A) Paying management bonuses based on the number of store locations opened during the year.
B) Paying management bonuses based on the current market value of the firm's stock.
C) Accepting a project that enhances both management salaries and the market value of the firm's stock.
D) Requiring stockholders approval of all management compensation decisions.
E) Basing management bonuses on the attainment of specific financial goals.

Question 54

The best definition of capital structure is:

A) The possibility of conflicts between shareholders and management in a large corporation.
B) The process of planning and managing a firm's long-term investments.
C) A venue where long-term debt and equity securities are bought and sold.
D) How a firm is financed through different proportions of debt and equity.
E) A venue where buyers and sellers of capital equipment come together to trade such assets.

Question 55

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

A) A sole proprietorship is relatively difficult to form.
B) The profits earned by a sole proprietorship are subject to double taxation.
C) A sole proprietorship is more highly regulated than a corporation.
D) The losses incurred by a sole proprietor are limited to the amount invested in the firm.
E) It may be difficult to transfer the ownership of a sole proprietorship.

Question 56

Which one of the following statements is correct concerning the listing of stock on an exchange?

A) The TSX has the most stringent listing requirements of any Canadian stock exchange.
B) Any firm can list their stock on any exchange they desire.
C) All exchanges have the same listing requirements.
D) Listing requirements are established by the Ontario Securities Commission.
E) The number of shareholders is NOT a listing consideration for a stock.

Question 57

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 58

In corporate agency theory, managers are __________, and owners are __________.

A) Bondholders, shareholder.
B) Shareholder, bondholders.
C) Agents, principals.
D) Principals, agents.
E) Agents, contractors.

Question 59

Which one of the following actions by a financial manager creates an agency problem?

A) Refusing to borrow money when doing so will create losses for the firm.
B) Refusing to lower selling prices if doing so will reduce the net profits.
C) Agreeing to expand the company at the expense of stockholders' value.
D) Agreeing to pay bonuses based on the market value of the company stock.
E) Increasing current costs in order to increase the market value of the stockholders' equity.

Question 60

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

A) Working capital management.
B) Financial depreciation.
C) Agency cost analysis.
D) Capital budgeting.
E) Capital structure.

Question 61

Which one of the following is a primary market transaction?

A) A dealer selling shares of stock to an individual investor.
B) A dealer buying newly issued shares of stock from a corporation.
C) An individual investor selling shares of stock to another individual.
D) A bank selling shares of a medical firm to an individual.
E) A sole proprietor buying shares of stock from an individual investor.

Question 62

Ensuring that a firm has sufficient cash available on a daily basis is part of:

A) Capital budgeting.
B) Working capital management.
C) Business organization.
D) Capital structure.
E) Organizational structure.

Question 63

Which one of the following transactions would occur in the primary market?

A) The gifting of ABC Co. shares by a grandmother to her grandchildren.
B) A financial institution selling shares of OPQ stock to another financial institution.
C) An individual selling shares of JKL stock to an existing JKL shareholder.
D) A financial institution buying shares of LM stock from an LM executive.
E) KM Co. selling new shares of stock to a financial institution.

Question 64

The decision to issue debt rather than additional shares of stock is an example of:

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

Question 65

Of the following, which statement regarding agency costs is false?

A) An agency problem exists when there is a conflict of interest between the stockholders and management of a firm.
B) An agency problem exists when there is a conflict of interest between a principal and an agent.
C) An indirect agency cost occurs when firm management avoids risky projects that would favourably affect the stock price because the managers are worried about keeping their
Jobs.
D) A corporate expenditure that benefits stockholders but harms management is an agency cost.
E) If agency costs get too high in the eyes of shareholders, they can begin a proxy fight to replace existing management.

Question 66

A firm's capital structure is defined:

A) As the combination of debt and equity used to finance the firm's operations.
B) By the types of fixed assets the firm owns.
C) As the mix of short-term and Long-term assets owned by the firm.
D) As the amount of fixed assets needed to support every $1 in sales.
E) By the nature of the product or service provided.

Question 67

According to the statement of financial position model of the firm, corporate finance can be thought of as an analysis of three primary subject areas. Which of the following correctly lists these areas?

A) Capital structure, capital budgeting, security analysis.
B) Capital budgeting, capital structure, capital spending.
C) Capital budgeting, capital structure, net working capital.
D) Capital structure, net working capital, capital rationing.
E) Capital budgeting, capital spending, net working capital.

Question 68

The mix of debt and equity by which a corporation is financed refers to the firm's:

A) Cash management.
B) Capital structure.
C) Capital budgeting.
D) Working capital management.
E) Leverage management.

Question 69

NASDAQ is:

A) The largest financial market in the U.S. in terms of the total value of listed stocks.
B) Both an OTC and an auction market.
C) An electronic market trading solely in corporate and government bonds.
D) An electronic market which has no physical location.
E) A market with far fewer listings than the NYSE.

Question 70

Sue Folker wants to start a new business decommissioning nuclear warheads and reactors. The work will involve significant hazards, and Sue is concerned about protecting her personal wealth
From any losses the business might incur. If she is to be the majority owner of the business how
Should she structure it?

A) As a corporation.
B) As a general partnership.
C) As a limited partnership.
D) As a sole proprietorship.
E) As a real estate investment trust.

Question 71

The size, risk, and timing of future cash flows are the key elements evaluated in the:

A) Capital budgeting process.
B) Cash management process.
C) Analysis of working capital.
D) Capital structure decision.
E) Analysis of current assets.

Question 72

Mr. Webster, the CEO of Master Works, Inc., recently stated that the firm will maintain its current policy of borrowing $.40 for every $1 invested by shareholders. Mr. Webster was referring to the
_____ policy of the firm.

A) Capital budgeting.
B) Working capital.
C) Capital structure.
D) Capital investment.
E) Financial planning.

Question 73

An individual who buys and sells stocks for his/her own account is a:

A) Dealer.
B) Agent.
C) Broker.
D) Auctioneer.
E) OTC broker.

Question 74

Deciding whether or not to open a new store is part of the process known as:

A) Capital budgeting.
B) Credit management.
C) Capital structure.
D) Cash management.
E) Working capital management.

Question 75

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 76

Which of the following would be considered a secondary market transaction?

A) Buy or sell orders to a broker for shares listed on the TSX.
B) Buy or sell orders only for corporate bonds.
C) Buy or sell orders for corporate warrants.
D) Buy or sell orders for shares listed on the TSX or corporate bonds.
E) Buy or sell orders only for call or put options.

Question 77

A dealer is a person who:

A) Conducts a trade on behalf of another individual.
B) Buys and sells but does not own the commodity being bought or sold.
C) Buys and sells on behalf of the original issuer of the commodity being bought or sold.
D) Buys and sells for themselves, at their own risk.
E) Buys and sells strictly on the trading floor of an exchange.

Question 78

Which of the following is the BEST description of the goal of the financial manager in a corporation where shares are publicly traded?

A) Maximize sales.
B) Maximize profits.
C) Avoid financial distress.
D) Maintain steady earnings growth.
E) Maximize the current value per share of the existing stock.

Question 79

Dealer markets:

A) Are reserved strictly for trading debt securities.
B) Only exist outside of Canada.
C) Are called over-the-counter markets.
D) Include NASDAQ and the New York Stock Exchange.
E) List only the securities of the largest firms.

Question 80

The primary goal of financial management is to:

A) Maximize current sales.
B) Maximize the current value per share of the existing stock.
C) Avoid financial distress.
D) Minimize operational costs.
E) Maintain steady earnings growth.