Deck 1: Introduction to Corporate Finance

Question 1

The treasurer is usually responsible for the following functions of a corporation:
i.tax obligations; II)investor relationships; III)cash management; IV)raising new capital

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

Answer 1

II,III,and IV only

Question 2

Shareholders of a corporation may be,among others:
i.individuals; II)pension funds; III)insurance companies

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

Answer 2

I,II,and III

Question 3

The treasurer usually oversees the following functions of a corporation:
i.preparation of financial statements; II)currency trading; III)cash management; IV)raising new capital

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

Answer 3

II,III,and IV only

Question 4

Which of the following is an important function of financial markets?
i.providing financing; II)providing liquidity; III)reducing risk; IV)providing information

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

Question 5

The following groups are some of the claimants to a firm's income stream:
i.shareholders; II)bondholders; III)employees; IV)management; V)government

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

Question 6

Generally,a corporation is owned by its:
i.managers; II)board of directors; III)shareholders

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

Question 7

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

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

Question 8

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 options.

Question 9

The controller usually oversees the following functions of a corporation:
i.preparation of financial statements; II)internal accounting; III)cash management; and IV)taxes

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

Question 10

A firm's investment decision is also called its:

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

Question 11

Limited liability is an important feature of:

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

Question 12

In the principal-agent framework:

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

Question 13

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 14

As a legal entity a corporation can perform the following functions EXCEPT:
i.borrow money; II)lend money; III)sue and be sued; IV)vote

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

Question 15

The controller is usually responsible for the following functions of a corporation EXCEPT:
i.preparation of financial statements; II)internal accounting; III)cash management; IV)taxes

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

Question 16

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 17

The chief financial officer (CFO)of a corporation oversees:

A)treasurer's functions.
B)controller's functions.
C)the chief operating officer's functions.
D)both the treasurer and the controller's functions.

Question 18

Which of the following is not a financial asset?

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

Question 19

Which of the following assets is tangible?

A)Exxon-Mobil's corporate headquarters building
B)Apple Computer's trademark
C)Hewlett-Packard's most recent printer patent
D)Microsoft's technical expertise

Question 20

Which of the following types of assets are intangible?

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

Question 21

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 22

Which of the following is not a common function of the firm's chief financial officer?

A)Hiring the firm's CEO
B)Hiring the firm's controller
C)Capital investment decisions
D)Discussing earnings with investors

Question 23

The ultimate financial goal of a corporation is to:

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

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

Question 26

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

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

Question 27

The following are examples of real assets:
i.machinery; II)office buildings; III)warehouses; IV)common stock

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

Question 28

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 29

Mr.Free has $100 dollars income this year and zero income next year.The market interest rate is 10% 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 30

The following are examples of tangible assets except:
i.machinery; II)office buildings; III)warehouses; IV)training courses for employees

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

Question 31

Ms.Anderson has $60,000 income this year and $40,000 next year.The market interest rate is 10% 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 32

Ms.Venus has $100 income this year and $110 next year.The market interest rate is 10% 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 33

Mr.Dell has $100 income this year and zero income next year.The market interest rate is 10% per 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 34

Mr.Thomas has $100 income this year and zero income next year.The market interest rate is 10% 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 35

Mr.Bird has $100 income this year and zero income next year.The market interest rate is 10% 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 36

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 37

Which of the following groups are referred to as stakeholders?
i.employees; II)customers; III)shareholders; IV)suppliers

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

Question 38

Ms.Newcastle has $60,000 income this year and $40,000 next year.The market interest rate is 10% 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 39

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

Question 40

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 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

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

Question 48

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

Question 49

In large firms,there is usually a chief financial officer (CFO)who oversees both the treasurer's and the controller's work.

Question 50

The treasurer's responsibilities include preparation of financial statements.

Question 51

The controller's responsibilities typically include banking relations and cash management.

Question 52

Briefly discuss the role of financial managers.

Question 53

Briefly explain the term limited liability.

Question 54

Briefly explain the functions of financial markets.

Question 55

Explain the term corporation.

Question 56

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

Question 57

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