Deck 2: Business Corporate Finance

Question 1

What was the reason for the increase in the number of income trusts in Canada during the 2000s?

A)limited liability
B)unlimited liability
C)tax advantage
D)transfer of ownership

Answer 1

tax advantage

Question 2

What are externalities?

A)valuable resources to a company that the firm does not pay or charge for
B)issues in the surrounding business environment of a firm that have no impact on the firm's operations or policies
C)members of the board of directors who are not employed by the firm
D)none of the above

Answer 2

valuable resources to a company that the firm does not pay or charge for

Question 3

Which of the following businesses is most likely to be operated as a corporation?

A)a law firm
B)a mining company
C)an accounting firm
D)All of these are likely to be operated as a corporation.

Answer 3

a mining company

Question 4

Which of the following is NOT an example of a trust?

A)a mutual fund
B)an estate
C)a royalty trust
D)a bank

Question 5

Which of the following is an advantage of forming a general partnership instead of a corporation?

A)It is easier for partnerships to access the debt and equity markets.
B)Partners have limited liability, where corporate shareholders do not.
C)Partnerships are easier to set up than corporations.
D)The partnership lives on, even when any of the partners have died.

Question 6

Which of the following is NOT a form of business organization?

A)corporation
B)sole partnership
C)general partnership
D)sole proprietorship

Question 7

Which of the following should be the primary goal of a Chief Executive Officer (CEO)in a publicly traded corporation?

A)Maximize the profit margin.
B)Avoid bankruptcy.
C)Increase market share.
D)Maximize the company's market share price.

Question 8

After 20 years of being the sole proprietor of Montere Lawn Care, Denis Seville is considering making a change.His business has grown substantially over the years and he now has approximately 100 loyal clients.Denis wants to retire and move to Florida.Unfortunately, Denis has no children to carry on his business and thus he is thinking of selling it to someone else.Which of the following is a main consideration Denis should have about selling his lawn care business?

A)He will face some difficulty in selling because all the client relationships are personal and belong to him; he will have to explain the new situation to each client.
B)Lawn care is seasonal and not many people would want to purchase his business.
C)It is difficult to learn lawn care skills for potential buyers.
D)The new owner may not retain the same business name.

Question 9

Complete the following sentence with the most correct response
______ know their exposure is limited to the amount of capital they invest in the company.

A)Employees
B)Sole proprietors
C)General partners
D)Limited partners and shareholders

Question 10

If you are in a business that is faced with enormous risks of failure, which of the following would have the most risk to you as an individual?

A)corporation
B)sole partnership
C)general partnership
D)sole proprietorship

Question 11

Which of the following is NOT a reason for incorporating a business?

A)There is limited liability.
B)Ownership is relatively easy to transfer.
C)It is easier to form than a proprietorship.
D)Corporate tax laws may allow tax deferral or avoidance.

Question 12

Which of the following is (are)true about a general partnership?
I.Some of the partners have limited liability.
II.Some of the partners may not be involved in the day-to-day operations.
III.Some partners may receive a different percentage of the profits.

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

Question 13

A corporation's board of directors should first and foremost be accountable to which group?

A)politicians (law makers)
B)senior managers
C)shareholders
D)suppliers

Question 14

Which of the situations listed below would be an example of a limited liability partnership?

A)Harun and Ahmed mow lawns together, sharing equipment and expenses.They share the work equally.
B)Xi and Fung operate a delivery business.Xi handles the pickups and deliveries only, while Fung handles only the financial and accounting tasks.
C)Jordan and Chris have a landscaping business, with unequal involvement.Jordan works in the business full-time while Chris is involved half-time.
D)Sara, Morgan, and Sabina started an accounting practice.Sara and Morgan work actively as accountants.Sabina's involvement is as an investor in the firm only.

Question 15

Which of the following is an advantage of a corporation over a sole proprietorship?

A)A corporation is easy to set up.
B)Corporate tax laws are often less attractive than personal tax laws.
C)Shareholders' liability is limited to their investment in the corporation.
D)In a sole proprietorship, it is easier to transfer ownership.

Question 16

In reference to finance, how is wealth different from profits?

A)Wealth is a personal issue, while profits are related to a business.
B)Profits include a deduction for expenses, and expenses are not relevant for wealth calculations.
C)Wealth reflects the value of all profits, both short- and long-term, while profits refer to economic profits only.
D)all of the above

Question 17

Why are externalities a necessary consideration when conducting business, especially for large corporations?

A)Externalities always cost money, and those costs hurt a firm's bottom line.
B)Forgetting to account for externalities is against tax laws in Canada.
C)The actions a large firm makes can have a significant impact on other firms, and those actions may not necessarily be in Canada's best interests.
D)all of the above

Question 18

Lucy Vale and Bob Fama, both accountants, have formed a partnership and opened an accounting firm in Calgary and business has been steadily increasing.Since they each have the same number of clients, Lucy and Bob decided to simply split any income equally between them.However, Lucy has recently made a grievous error in the financial statements of one of her clients, and that client is now considering suing Lucy and the firm.If Lucy and Bob had never created a formal partnership agreement since the inception of their firm, should Bob be at all concerned about the potential lawsuit? Choose the best answer from the following:

A)No.Since there was no formal partnership agreement made, Bob cannot be held responsible for Lucy's error.
B)Yes.A legal agreement is not always required for someone to be considered a partner of a partnership.Thus, Bob may be held partially responsible for Lucy's error in the event the client sues the firm.
C)No.It was Lucy's client and she made the error.Bob was not involved.
D)Yes.Bob has just incurred substantial debt by purchasing a new home which was partially financed by his share of the firm's earnings.

Question 19

The main purpose of creating a trust is to
I.separate ownership from control.
II.avoid legal liability.
III.avoid taxes.
IV.improve a firm's reputation.

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

Question 20

What would be the most appropriate type of organization in Canada for a business with large assets and revenue?

A)trust
B)corporation
C)general partnership
D)sole proprietorship

Question 21

Which of the following is an example of an indirect agency cost?

A)A company buys the latest computer equipment for its employees.
B)Senior management use company money to pay their children's education.
C)Managers can use the company float plane to fly to their cottages on weekends.
D)Managers may take risky projects when the company is not doing well.

Question 22

Of the following who does NOT have a contractual claim on a company?

A)employees
B)shareholders
C)local community
D)customers

Question 23

Which one of the following is NOT an example of the agency problem?

A)management refusing a merger because of the possibility of major changes in management
B)taking a high-risk project to increase the value of the stock options held by management
C)increasing the level of debt of the company to increase the return on equity value
D)distributing a low level of dividends to have enough cash for bonuses

Question 24

Which of the following will help shareholders mitigate agency problems?
I.Shareholders can elect directors.
II.Shareholders can challenge management through proxy fights.
III.Shareholders can tender their shares to outsiders in a hostile takeover.
IV.Shareholders can sell their shares on the stock market.

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

Question 25

A merger between Bank of Montreal and TD Bank would be a potential

A)agency problem.
B)too-big-to-fail problem.
C)moral hazard.
D)none of the above

Question 26

If shareholders are not happy with a company's management, a proxy fight is one method that can be used to attempt to remove managers.Which of the following is true, with regard to a proxy fight?

A)A proxy fight is an inexpensive method for a shareholder with a small holding to have an impact.
B)If a large shareholder is unhappy they are more likely to launch a proxy fight than to sell shares.
C)Most proxy fights are successful.
D)Proxy fights can be very expensive and time consuming.

Question 27

Which of the following describes the risk-return trade-off?

A)A firm will only have returns when it takes on risk.
B)A firm can either have risk, or it can have returns, but not both.
C)The balancing of gain with risk.
D)A risky return is always preferred to a risk-free return.

Question 28

Which one of the following is NOT a criterion that managers prefer to be judged upon?

A)return on assets
B)return on equity
C)market share price
D)market share

Question 29

Which of the following is NOT a reason why the "market for corporate control" is the most effective mechanism to give managers the incentive to act like shareholders?

A)The government imposes significant lawsuits and penalties for managers not acting in the best interests of shareholders.
B)The threat of acquisition keeps managers focused on achieving good performance and a high stock price.
C)A low stock price makes a firm a good target for acquisition.
D)It allows the best managers the chance to manage assets.

Question 30

Which of the following is true?

A)Management buying another business at a premium may be an example of an agency cost.
B)Corporations are not vulnerable to agency costs.
C)Stock options are an example of an agency cost.
D)Agency costs do not include expenses of monitoring and controlling the actions of management.

Question 31

Which one of the following is true?

A)Managers have the mandate to increase the market value of the company.
B)Managers always look after shareholders' interests.
C)The board of directors is legally responsible for all the company's decisions.
D)all of the above

Question 32

You are asked to watch over your brother and sister in exchange for a fee.You invited your friends over and you watched TV all night without paying attention to your siblings.What type of agency problem is this?

A)indirect
B)direct
C)moral hazard
D)none of the above

Question 33

Which of the following illustrates an agency problem?

A)The advertising agency that a company uses produces top quality materials and charges a high price for its work.
B)A not-for-profit environmental agency stages a protest.This results in negative attention to a company's manufacturing methods.
C)A company's board, in wanting to protect board member compensation, agrees with everything company management suggests.
D)A hiring agency screens out potential applicants to a company's job posting.

Question 34

Which of the following illustrates a situation that would encourage a manager to work in the interests of a company's shareholders?

A)The manager's salary depends largely on increasing quarterly accounting profits.
B)The manager's salary depends largely on his/her ability to keep costs low.
C)The manager's total compensation depends on maximizing the company's share price.
D)The manager has access to many perks, which improves his/her personal work environment.

Question 35

Agency problems are best defined as

A)difficulties arising in dealings with real estate agencies.
B)problems arising due to potential misalignment between the interests of owners, creditors, and managers.
C)problems arising due to the complete alignment of the interests of owners, creditors, and managers.
D)issues surrounding whether or not to outsource production to an external agency.

Question 36

Which of the following is true?

A)Managers can ignore the objective of shareholder wealth in the short run in favour of other stakeholders' interests, but not in the long run.
B)In 2000, BCE spun off its ownership in Nortel, making this an example of a firm's agency costs diminishing shareholder value.
C)A 1997 Canadian survey of Shareholder Value Measurement showed that a minority of companies with listed shares state maximizing firm value is a key corporate objective.
D)Without adequate financial performance, a firm can survive in a competitive environment.

Question 37

Which of the following is/are considered a stakeholder in the Toronto Stock Exchange (TSX)?

A)shareholders
B)listing companies
C)provincial government
D)all of the above

Question 38

Of the following list, which represents a potential implication for agency issues when shareholders are physically dispersed or widespread?

A)More shareholders have a controlling say in what happens in the firm.
B)The likelihood of management pleasing all shareholders is greatly improved.
C)A firm's chief executive officer (CEO)is better able to choose his or her friends to sit on the board of directors.
D)none of the above

Question 39

Johan, a corporate manager, often takes significant business and financial risks because of the company's compensation structure, which provides him with a comfortable base salary and large bonuses when the business does well.Johan does not suffer in any way when the company performs poorly, even if the performance is a result of his decisions.What is the term that describes this situation?

A)moral hazard
B)agency monitoring problem
C)asymmetric risk structure
D)stakeholder snubbing

Question 40

Which one of the following is NOT considered an externality?

A)union pension costs and regulations
B)high borrowing rate
C)labour regulations
D)cost of carbon emissions

Question 41

Why do shareholders have a greater preference for risk than managers?

A)Shareholders are always richer than managers, and can afford to take more risk.
B)Shareholders can diversify risk by holding many securities, while a manager's career is tied up with the firm.
C)Because they are investing in the stock market, shareholders must naturally prefer taking more risk than managers.
D)Managers do not like risk because it hurts the value of the company.

Question 42

Which one of the following is NOT a way to improve the efficiency in Canadian wealth management?

A)Encourage hostile takeovers.
B)Expand management's defence mechanisms with regards to takeovers.
C)Hold managers personally accountable.
D)Increase measures of corporate governance.

Question 43

Which of the following is NOT a source of corporate financing?

A)equity
B)retained earnings
C)bonds
D)change in inventory

Question 44

Ten years ago a company spent $10 million on a large machine.It is expected that the machine will be useful for two more years.What should the company's financial managers do?

A)They should consider the value of the machine today and in two years, and the potential cost and benefit to extend the machine's life.
B)They should scrap the machine on schedule - the plan was made, so stick to the plan.
C)They should sell the machine now.It always makes more sense to upgrade to new technology than to keep older technology running.
D)They should hand this decision off to the company's accountants.This is an accounting decision, not a finance decision.

Question 45

Capital budgeting refers to

A)the decision to raise capital from the market.
B)the decision to make long-term investments.
C)the decision to budget the administrative expenses of the firm.
D)the decision to budget compensation within the firm.

Question 46

The primary objective of the financial manager is to

A)maximize earnings.
B)maximize dividend payments.
C)maximize shareholder wealth.
D)minimize expenses.

Question 47

If you are working for a company and your job description includes accounting, budgeting, internal audit, systems management/MIS, and tax management, you are most likely a(n)

A)treasurer.
B)tax accountant.
C)auditor.
D)controller.

Question 48

If a controller is responsible for liquidity management, which of the following accounts are they NOT interested in?

A)Long-term Debt
B)Cash
C)Accounts Payable
D)Inventory

Question 49

What does it mean to "go public"?

A)to sell goods and services to the public
B)to raise money by selling equity shares via the stock market
C)to borrow money by selling debt instruments via the debt market
D)to do business with governmental firms

Question 50

All of the following are the responsibility of the treasurer EXCEPT

A)financial planning.
B)liquidity management.
C)mergers and acquisitions.
D)dividend policy.

Question 51

The framework for analyzing investment or asset decisions is known as

A)income management analysis.
B)capital budgeting analysis.
C)capital aligning analysis.
D)asset allocation analysis.

Question 52

If your job requires you to monitor the valuations of various companies and then to make recommendations to buy or sell a company's shares, you are most likely a(n)

A)banker to retail clients.
B)investment dealer security analyst.
C)valuation insurance agent.
D)mutual fund private client sales representative.

Question 53

Which one of the following is NOT part of financial management?

A)deciding on sources of capital financing
B)deciding on debt versus equity
C)deciding on buying property
D)deciding on changing the company image

Question 54

Which of the following is a reason why share incentive plans may NOT produce the desired results?

A)the retooling of option grants and share incentive schemes
B)compensation schemes are generally designed to reward management, not to provide incentives.
C)fraud
D)all of the above

Question 55

Which of the following is the least important of the financial manager's responsibilities?

A)Keep an up-to-date record on past operations.
B)Manage the risk exposure of the firm.
C)Raise funds to support the ongoing operations and planned investments.
D)Control the disbursement of funds to ensure efficiency and adequate returns.

Question 56

What is the primary responsibility of a portfolio manager?

A)to oversee the financial investments within a portfolio
B)to take care of the financial needs of a portfolio of clients, as a personal representative
C)to make forecasts for a portfolio of economic and financial variables
D)to buy and sell bonds

Question 57

What is the main purpose behind share incentive plans?

A)The plans encourage managers to invest in the stock market.
B)The plans are meant to align the interests of management and shareholders.
C)The plans encourage managers to give shares as incentives for employees.
D)all of the above

Question 58

When a company faces uncertainty it is common for managers to attempt to build up cash reserves.Which of the following is an important advantage of having large cash balances on hand?

A)Cash balances pay significant interest, enabling a company to receive additional revenue.
B)Having large cash balances enables a company to pay its bills even when sales are dropping.
C)A cash account will increase in value when equity markets go up in value.
D)Corporate shareholders generally approve of large corporate cash balances, believing that corporate managers are acting prudently.

Question 59

Typical duties of the financial manager include
I.raising funds.
II.product line evaluation.
III.controlling the disbursement of funds.
IV.dividend policy.
V.auditing financial statements.
VI.shareholder relations.
VII.setting personnel policy.
VIII.pricing of the company's products.

A)I, III, IV, V, and VI
B)I, III, IV, and VI
C)III, IV, VI, and VII
D)II, III, VI, and VIII

Question 60

Which of the following is an example of a capital structure decision?

A)issuing new shares
B)buying a new factory
C)reducing inventory levels
D)increasing purchases on credit

Question 61

Do agency costs only occur in a corporation, or can you have agency costs in a sole proprietorship?

Question 62

Explain the concept of "too-big-to-fail" and how it relates to the latest financial crisis.

Question 63

In major financial institutions, people generally start their careers as

A)consultants.
B)analysts.
C)account managers.
D)banking associates.

Question 64

Which is a better economic objective for financial managers: maximizing profit or maximizing share price? Why? Give three reasons.

Question 65

Give three potential advantages that explain why corporations represent a small percentage of the total number of businesses in Canada, but dominate in terms of assets and dollar volumes of sales.

Question 66

Describe what is meant by agency relationships, and outline the potential conflicts of interest that may arise.

Question 67

The management of Prairie Resources Limited (PRL)has just recommended to the board that the company should purchase an expensive corporate jet in order to improve management's ability to oversee the company's operations.PRL's operations are geographically remote.Are company jets always a waste of shareholder wealth? How should the board decide if the purchase is appropriate?

Question 68

Frank Wood, the owner of Cozy Corner Cabinets (CCC), has just hired Joe Boss to manage his company.Instead of using a flat salary, the two men have agreed that Joe will be paid 15.0% of the profits at the end of each year.CCC currently has three project opportunities to choose from and can only choose one of them.
$\bullet$ Project A will generate profits of $75,000 per year and will increase the value of CCC by $145,000.
$\bullet$ Project B will generate profits of $63,000 per year and will increase the value of CCC by $153,000.
$\bullet$ Project C will generate profits of $68,000 per year and will increase the value of CCC by $138,000.
Which project is Joe Boss likely to choose and why? As the owner of CCC, which project would Frank prefer?