Question 1

Both personal financial decisions and business financial decisions can best be made by applying the:

Accepted Answer

The Valuation Principle, also known as the Time Value of Money, is a fundamental principle in finance that states that the value of money today is worth more than the same amount of money in the future, due to the opportunity cost of investing that money today. This principle is relevant to both personal financial decisions, such as investing in a retirement fund, and business financial decisions, such as deciding whether to invest in a new project. By applying the Valuation Principle, individuals and businesses can make informed financial decisions that take into account the time value of money.

Question 2

Partnerships are the most common type of business firm in the world.

Accepted Answer

Sole proprietorships are the most common type of business firm in the world due to their simplicity and the ease with which they can be established.

Question 3

What is one of the major advantages corporations have over other business entities?

Accepted Answer

One of the major advantages corporations have over other business entities is that there is no limitation on who can own its stock. This means that corporations can offer stock ownership to a large number of investors, which can help them raise more capital than other business structures. Additionally, investors in a corporation are not personally liable for its obligations, which is another advantage over other business entities.

Question 4

Why is it possible for a corporation to enter into contracts,acquire assets,incur obligations,and enjoy protection against the seizure of its property?

Accepted Answer

A corporation is a legal entity that is separate from its owners or shareholders. This means it can enter into contracts, acquire assets, incur obligations, and be protected against the seizure of its property. The owners are not personally liable for the obligations of the corporation, and their risk is therefore limited to the amount of their investment in the corporation. This feature of limited liability is one of the main benefits of incorporating a business.

Question 5

Kuljeet owns 20% of the stock of the Flin Flon Corporation.The tax rate on dividend income is 15%.If Flin Flon makes a dividend payment of $2,000,000 paid proportionally to its shareholders,how much of this amount would Kuljeet receive after taxes?

Accepted Answer

Kuljeet owns 20% of the stock, so he would receive 20% of the $2,000,000 dividend payment, which is $400,000 before taxes. After the 15% tax on dividend income, Kuljeet would receive $400,000 * (1-0.15) = $340,000. Therefore, the correct answer is D.

Question 6

To calculate the taxes owing on dividends received from Canadian corporations,investors must undertake the following calculations:

Accepted Answer

To calculate the taxes owing on dividends received from Canadian corporations, investors need to gross up the dividend received and apply the grossed-up amount to their marginal tax rate. This is because dividends received from Canadian corporations are taxed at a lower rate than other types of income. Once the gross up amount is applied to the marginal tax rate, investors can then use the federal and provincial dividend tax credit to reduce their tax liability. Therefore, choice A is the best choice.

Question 7

Saskatoon Smelting is a corporation that earned $4 per share before it paid any taxes.The firm retained $2 of after-tax earnings for reinvestment,and distributed what remained in dividend payments.If the corporate tax rate was 25% and dividend earnings were taxed at 15%,what was the value of the dividend earnings received after tax by a holder of 10,000 shares of Saskatoon Smelting?

Accepted Answer

First, we need to calculate the after-tax earnings that the company retained:
$4 per share earnings x (1 - 0.25) = $3 per share after-tax earnings
So, the company retained $3 per share - $2 per share for reinvestment = $1 per share paid out in dividends.

Now, we need to calculate the dividend earnings received by a holder of 10,000 shares after tax:
Dividend earnings per share = $1 per share x (1 - 0.15) = $0.85 per share after-tax
Total dividend earnings = $0.85 per share x 10,000 shares = $8,500.

Therefore, the correct answer is (C) $8,500.

Question 8

A flow-through entity that holds all the debt and equity securities of a corporation is called:

Accepted Answer

A business income trust is a type of flow-through entity that holds all the debt and equity securities of a corporation, allowing it to pass income directly to investors without being taxed at the corporate level.

Question 9

Katie owns 12.5% of the stock of the Gimli Corporation.The tax rate on dividend income is 24%.If Gimli makes a dividend payment of $25,000,000 paid proportionally to its shareholders,how much of this amount would Katie receive after taxes?

Accepted Answer

Katie receives 12.5% of $25,000,000, which is $3,125,000. After a 24% tax, she keeps 76% of this amount, which is $2,375,000.

Question 10

Which of the following types of firms do NOT have limited liability?

Accepted Answer

Sole proprietorships are not considered separate legal entities from their owners, so the owner assumes unlimited personal liability for the firm's debts and legal obligations.

Question 11

The collection of all the outstanding shares of a corporation is known as the:

Accepted Answer

The collection of all the outstanding shares of a corporation is known as equity, which represents ownership in the company. This ownership can be in the form of common stock, preferred stock, or other securities. As shareholders, individuals are entitled to a share of the company's profits and a say in how the company is run. Therefore, option D - Equity is the correct answer.

Question 12

Which of the following is typically the major factor in limiting the growth of a sole proprietorship?

Accepted Answer

In a sole proprietorship, the owner is personally liable for all debts and obligations of the business. This means that the amount of money that can be raised by the firm is limited by the owner's ability to personally guarantee and repay the debt. Therefore, the major factor in limiting the growth of a sole proprietorship is the limited access to capital.

Question 13

Over 60% of all Canadian business profit is generated by which type of firm?

Accepted Answer

Corporations generate over 60% of all Canadian business profit.

Question 14

The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly.

Accepted Answer

The Valuation Principle provides a common unit of measurement for expressing costs and benefits so that they can be compared and evaluated in order to make better decisions.

Question 15

What is the major way in which the roles and obligations of the owners of a limited liability partnership differ from the roles and obligations of limited partners in a limited partnership?

Accepted Answer

In a limited liability partnership, the owners have the ability to take an active role in running the company, whereas limited partners in a limited partnership typically cannot have active management roles without losing their limited liability status. Option A is incorrect as one of the main features of a limited liability partnership is that the owners’ personal liability is limited to their investment in the company. Option B is incorrect as limited liability partnerships, like limited partnerships, have a separation between the company and its owners. Option C is incorrect as withdrawing from a limited liability partnership may require the company to be dissolved, depending on the specific partnership agreement. Option E is incorrect as in a limited liability partnership, partners are generally not responsible for the negligence of other partners.

Question 16

Which of the following best describes why the Valuation Principle is a key concept in making financial decisions?

Accepted Answer

The Valuation Principle is important in making financial decisions because it helps to make the costs and benefits of different options comparable, allowing for a proper weighing of options. This helps to ensure that decisions are rational and based on sound financial reasoning. Assigning monetary value to intangibles (A) and valuing various assets (B and E) are important concepts, but they do not fully capture the essence of the Valuation Principle. Additionally, while the Valuation Principle can be used to estimate net worth (C), this is not its primary focus.

Question 17

What is the most common type of firm in Canada and the world?

Accepted Answer

Sole proprietorships are the most common type of firm in Canada and around the world due to their simplicity and ease of setup, allowing individuals to own and operate a business by themselves.

Question 18

Joe is a general partner in a limited partnership firm,while Jane is a limited partner in that same firm.Which of the following statements regarding their respective relationships to the firm is correct?

Accepted Answer

Jane, as a limited partner, has her liability for the firm's debts limited to the amount of her investment in the firm. This means she is not personally liable for the firm's debts beyond what she has invested.

Question 19

Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors.

Accepted Answer

Corporations are able to raise large amounts of capital by issuing shares of stock, which allows them to bring in funding from a wide range of investors, including those who are not personally known to the company's management. This ability to tap into a large pool of outside capital has helped corporations to become major players in the business world.

Question 20

In which of the following ways is a limited liability partnership like a corporation?

Accepted Answer

Like in a corporation, in a limited liability partnership, all of its owners' liability is restricted to their investment in the firm. This means that the personal assets of the owners are not at risk if the partnership faces legal or financial troubles beyond the value of their investment in the company. This is not the case in options A, B, D, and E which have differences with corporations.

Quiz 1: Corporate Finance and the Financial Manager