Deck 1: Corporate Finance and the Financial Manager

Question 1

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

A)Jane is legally involved in the managerial decision making of the firm.
B)Joe has no management authority within the partnership.
C)Jane's liability for the firm's debts consists solely of her investment in the firm.
D)Withdrawal of Jane from the partnership will dissolve that partnership.

Answer 1

Jane's liability for the firm's debts consists solely of her investment in the firm.

Question 2

What is the process of double taxation for the shareholders of a corporation in a 'classical' tax system?

A)Their shares are taxed when they are both bought and sold.
B)The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares.
C)The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation.
D)The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them.

Answer 2

The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them.

Question 3

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

A)There is no separation between the company and its owners in a corporation
B)The owners of a corporation can withdraw from the company without the company being dissolved.
C)The owners of a corporation can take an active role in running the company.
D)The owners of a corporation have personal obligation for debts incurred by the company.

Answer 3

The owners of a corporation can take an active role in running the company.

Question 4

You are a shareholder in a corporation which has announced a profit of $6 per share, of which it retains $2 for reinvestment and distributes the rest as dividend payments. A franking credit of $1.71 per share attaches to the dividend. Given that the personal tax rate is 35%, how much tax must you pay per share?

A)$0.28
B)$3.90
C)$2.00
D)$0

Question 5

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.

Question 6

In Australia, dividend imputation may reduce the tax payable by

A)a non-resident shareholder.
B)a resident shareholder.
C)a corporation.
D)both B and C

Question 7

What is the major advantage corporations have over other business entities?

A)A corporation's shares can be freely traded among its shareholders.
B)It is easier for a corporation to raise capital than other forms of businesses.
C)A corporation is treated as a separate legal entity for tax and legal purposes.
D)All of the above are advantages that a corporation has over other business forms.

Question 8

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

A)It is extremely difficult to transfer control of such a firm to a new owner if the present owner dies or wishes to sell the firm.
B)Investors have a great deal of control over the day-to-day running of the firm, leading to confusion when conflicts in direction arise.
C)The organisation of such firms tends to become extremely complicated over time.
D)The amount of money that can be raised by the firm is limited by the fact that the single owner must make good on all debts.

Question 9

Corporations are the most common type of business form in the world.

Question 10

In revenue terms, which type of firm is the dominant business form all over the world?

A)Partnership
B)Sole trader
C)Corporation
D)Limited partnership

Question 11

Big Business Limited distributes a fully franked dividend to its shareholders. Which of the following statements best describes the outcome for shareholders?

A)The company pays tax on the profits from which the dividend is paid.
B)The profits from which the dividend is paid are not taxed at the corporate level.
C)Shareholders must include their share of the profit from which the dividend is paid in their personal income tax return, but this amount is disregarded for their personal tax purposes.
D)both B and C

Question 12

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

A)The number of owners, and hence the spread of risk among these owners, is not limited.
B)The state in which the corporation is incorporated provides safeguards against any wrongdoing by the corporation.
C)Its owners are liable for any obligations it enters into.
D)It is a legally defined, artificial entity that is separate from its owners.

Question 13

Which of the following types of firms have limited liability?

A)Limited partnerships
B)Sole traders
C)Corporations
D)Limited partnerships and corporations

Question 14

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

Question 15

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

A)It shows how to assign monetary value to intangibles such as good health and wellbeing.
B)It gives a good indication of the net worth of a person, item, or company and can be used to estimate any changes in that net worth.
C)It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.
D)It allows fixed assets and liquid assets to be valued correctly.

Question 16

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

A)Limited partnership
B)Corporation
C)Partnership
D)Sole trader

Question 17

Financial decisions require that you weigh alternatives in strictly monetary terms.

Question 18

What is the maximum number of non-employee shareholders a 'private' corporation may have?

A)50
B)25
C)15
D)There is no limit

Question 19

Helen owns 2.5% of the stock of the Median Corporation. If Median makes a dividend payment of $19 000 000 paid proportionally to its shareholders, how much of this amount would Helen receive, disregarding tax?

A)$479 000
B)$475 000
C)$500 000
D)$450 000

Question 20

ValiantCorp is a corporation that earned $3 per share before it paid any taxes. ValiantCorp retained $1 of after tax earnings for reinvestment, and distributed what remained in dividend payments. If the corporate tax rate was 30% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings received after tax by a holder of 100 000 shares of ValiantCorp?

A)$112 500
B)$104 750
C)$96 250
D)$110 000

Question 21

The principal goal of the financial manager is to maximise the wealth of the chief financial officer (CFO).

Question 22

What are the main differences between a 'partnership' and 'sole trader'?

Question 23

How is a corporation different from most of the other forms of business organisations?

Question 24

A 'sole trader' is a type of firm owned by

A)two or more persons.
B)bankers.
C)one person.
D)shareholders.

Question 25

What is the principal guiding factor for the financial manager?

Question 26

Whose interests should a financial manager consider paramount when making a decision?

A)the public who consume the company's goods and services
B)the senior management and associated colleagues at the executive level within the company
C)the employees and associated stakeholders who are employed by the company
D)the shareholders who have risked their money to become owners of the company

Question 27

Which of the following is NOT a reason why financial managers must take great care when making investment decisions?

A)These investment decisions determine whether the firm will add value for its owners.
B)These investment decisions typically involve substantial costs which must be carefully weighed against their potential benefits.
C)These investments determine the long-term directions in which the company may move.
D)These investment decisions determine the corporation's mix of debt and equity.

Question 28

Which of the following is NOT an advantage of a sole trader?

A)Limited liability
B)Single taxation
C)No separation of ownership and control
D)Ease of set-up

Question 29

Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves?

A)There are often many owners, and they can often change as they buy and sell shares.
B)The owners may not be Australian citizens or residents.
C)The interests of the various owners may conflict with each other.
D)It is best for the control of the finances of a corporation to be in the hands of a disinterested third party.

Question 30

In most corporations, the owners exercise indirect control of the corporation.

Question 31

The fact that corporations' shares are easily traded within the market has a net effect of acting as a disincentive for managers to favour the interests of shareholders over their own interests.

Question 32

In a limited partnership, limited partners may

A)make managerial decisions for the firm.
B)have private property seized to pay off the firm's outstanding debts.
C)trigger a dissolution of the firm if they withdraw their participation.
D)none of the above

Question 33

A 'public' company

A)is never a 'reporting entity'.
B)is essentially the same as a 'private' company.
C)must appoint an auditor.
D)must have its shares traded on a stock exchange.

Question 34

A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations?

A)New models will require a lot of money to develop and bring to market before they generate any revenue.
B)The company will have built up debts which must be repaid in order to bring the current models to market.
C)Profits from the sales of popular models will be lost when returned to the shareholders in the form of dividends.
D)Equity must be raised to finance the development of new models to replace the existing models.

Question 35

It is generally the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.

Question 36

A typical 'public' company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate shareholders are met?

A)The decisions taken by the financial manager should be solely influenced by the benefit to the company since, by maximising its fitness, he or she will also maximise the benefits of that company to the shareholders.
B)The financial manager should seek to make investments that do not harm the interests of the shareholders.
C)In general, all shareholders will agree that they are better off if the financial manager works to maximise the value of their investment.
D)The financial manager should consider the interests and concerns of large shareholders a priority, so the needs of those who hold a controlling interest in the company are met.

Question 37

The financial manager of a well-regarded book publishing firm wishes to buy a small internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more shares in the company. How is the financial manager raising funds in this case?

A)By increasing the value of shares held by the existing owners of the company
B)By increasing the debt burden carried by the company
C)By decreasing the ratio of equity to debt held by the company
D)By raising the company's equity by encouraging new owners to take a stake in the company

Question 38

Which of the following are major duties of a financial manager? I. To make investment decisions
II. To make financing decisions
III. To manage cash flow from operating activities

A)I only
B)I and II only
C)I and III only
D)all of the above

Question 39

Which one of the following organisation forms has the most revenue?

A)Corporation
B)Sole trader
C)Partnership
D)Limited partnership

Question 40

What is the most important duty of a financial manager?

A)To decide how to pay for investments
B)To manage working capital
C)To make investment decisions
D)To ensure that the firm has enough cash on hand to meet its commitments at any given time

Question 41

Explain some of the measures taken to reduce the 'agency problem'.

Question 42

In most corporations, to whom does the chief financial officer report?

A)the board of directors
B)the controller
C)the chief executive officer
D)the shareholders

Question 43

Which of the stock markets listed below is the smallest, as judged by trading volume?

A)NYSE Euronext (US)
B)London Stock Exchange
C)Australian Stock Exchange
D)Tokyo Stock Exchange

Question 44

A factory owner wants his workers to produce as many widgets as they can, so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly-made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency problem in this case?

A)by maximising the information that the principal obtains about the behaviour of the agents
B)by ensuring that all workers cooperate to maximise the gains of their section
C)by supplying incentives so the agents act in the way the principal desires
D)by making the agents into principals themselves

Question 45

Which of the following would be best considered to be an agency problem in the behaviour of the following financial managers?

A)Michael chooses to enhance his firm's reputation at some cost to its shareholders by sponsoring a team of athletes for the Special Olympics.
B)James ignores an opportunity for his company to invest in a new drug to fight Alzheimer's disease, judging the drug's chances of succeeding as low.
C)Sue instructs her staff to skip safety inspections in one of the company's factories, knowing that it will likely fail the inspection and incur significant costs to fix.
D)Bill chooses to pursue a risky investment for the company's funds, because his compensation will substantially rise if it succeeds.

Question 46

How do the shareholders of most corporations exercise their control of that corporation?

A)by electing members of a board of directors
B)by vetting the decisions of the board of directors
C)by providing oversight of the day-to-day running of the corporation
D)by voting on issues that concern them

Question 47

If a broker will buy a company share from you at $3.85 and sell it to you at $3.87, the bid price would be $3.85.

Question 48

Why is it in general difficult to determine the market price of a private corporation's shares at any point in time?

A)It has a limited number of owners.
B)It is difficult to obtain enough information to accurately value such a company.
C)There is no organised market for its shares.
D)The price of its shares is fixed by the owners.

Question 49

Why is the share price of a company an indication of the performance of that company's senior managers?

A)Larger companies tend to be better run and so have higher share prices.
B)Investors who can see that a company is well-run will hold onto their shares, even if the company faces temporary setbacks, since they know that the share price will likely rise again.
C)Well-run companies are invariably highly profitable, which leads to a higher share price.
D)In general, people want to invest in a well-managed corporation, which will drive up the price of its shares.

Question 50

What is the most common way that agency problems are addressed in most corporations?

A)by using disinterested outside bodies to adjudicate between managers and shareholders when such conflicts arise
B)by minimising the number of decisions that a manager makes where there is a conflict between the manager's interests and those of the shareholders
C)by terminating the employment of employees who are found to have put their own interests above that of the company's
D)by prosecuting managers who have been found to have illegally used company monies for their own benefit

Question 51

In which of the following relationships is an agency problem LEAST likely to arise?

A)the relationship between a driver and the passengers in a car regarding the safe driving of that car
B)the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks
C)the relationship between a restaurateur and the suppliers of produce to that restaurant regarding the freshness of the produce supplied
D)the relationship between a hire-car company and the persons who hire that company's cars regarding the treatment of those cars

Question 52

Stock markets do not provide liquidity for a firm's shares.

Question 53

Which of the following is NOT a function of the board of directors?

A)answering to shareholders of the company
B)determining how top executives should be compensated
C)day-to-day running of the company
D)monitoring the performance of the company

Question 54

The shares of public corporations are traded on a stock market.

Question 55

Briefly discuss the issues in the 'agency problem'.

Question 56

A corporate raider gains a controlling fraction of the shares of a poorly-managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case?

A)by the sale of the assets held by the company that hold most of its value
B)by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company
C)by removing the employees' expectations of the continued poor performance of the company
D)by the rise in the value of the shares held by the raider when the new board of directors is judged to be superior to the ousted board of directors

Question 57

Which of the following must be true for an asset to be considered 'liquid'?

A)It pays regular dividends.
B)It is offered for sale on both primary and secondary markets.
C)It can be bought and sold at an organised stock market or bourse.
D)It can be easily bought and sold, and the selling price is very close to the buying price at a given point in time.

Question 58

A ________ is when a rich individual or organisation purchases a large proportion of the shares of a poorly-performing firm and in doing so gets enough votes to replace the board of directors and the CEO.

A)shareholder proposal
B)shareholder action
C)hostile takeover
D)leveraged buyout

Question 59

Which of the following would be more typically the responsibility of a controller rather than a treasurer?

A)capital budgeting
B)making investment decisions
C)overseeing accounting and tax functions
D)managing credit

Question 60

A company's board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employees' diligence and industry. What general principle is being argued by the board of directors?

A)When a conflict of interest arises between shareholders and other stakeholders, in general, the correct solution is the one that creates the greatest good for the greatest number of stakeholders.
B)In a conflict between stakeholders in a company, the most important stakeholder is not always the shareholders.
C)Ethical decisions should be assessed on their moral value, not on their value in dollars and cents.
D)Some activities that decrease shareholders' wealth may have intangible benefits which increase the strength of the company overall.

Question 61

Investments by wealthy individuals and endowments are a major source of money for each of the following EXCEPT:

A)hedge funds
B)managed funds
C)private equity funds
D)venture capital funds

Question 62

'Dark pools' offer investors the ability to trade a better price with the trade-off that their order might not be filled if an excess of either buy or sell orders is received.

Question 63

Use the figure for the question(s)below.
Using the above information, how much would you have to pay for a share of BHP Billiton stock if you wanted to ensure your trade would be immediately executed?

A)$41.59
B)$41.91
C)$41.65
D)$41.93

Question 64

What is the 'bid-ask spread'?

A)the difference in price available for an immediate sale of a share and the immediate purchase of that share
B)all of the costs and fees that a stock exchange charges in order to process a transaction
C)the difference in the selling price of a share between different exchanges
D)the rise or fall in the value of a share between the time it is acquired by an investor and sold by that investor

Question 65

Put the following steps of the financial cycle in the correct order: I. Money flows to companies who use it to fund growth through new products
II. People invest and save their money
III. Money flows back to savers and investors

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

Question 66

On 19 August 2004, Google IPO offered 19 605 052 shares at a price of US$85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction?

A)The shares were the first to be publicly issued by Google.
B)The transaction was between the corporation and investors.
C)Shares of Google from this time onward could be traded between investors on a stock exchange.
D)Google was at the time a recently-founded company seeking capital with which to expand.

Question 67

What is the term for the applicable price that the seller gets when he/she sells a share on an exchange?

Question 68

What are the terms for the two types of prices quoted for a share on an exchange?

Question 69

Stella places a market order with her broker to buy 1 000 shares of Telstra Corp. The broker buys 1 000 shares at $15.40 each, and sells them to Stella at $15.55 each. He also charges a commission of $12.00. What is the bid-ask spread per share in this case?

A)$0.15
B)$15.40
C)$0.10
D)$1.50

Question 70

Use the figure for the question(s)below.
Using the above information, how much would you receive if you sold a share of Washington Post?

A)$683.00
B)$678.50
C)$677.62
D)$677.64

Question 71

Why is a stock exchange like NASDAQ considered a 'secondary market'?

A)Shares sold on it are exchanged between investors without any involvement of the issuing corporation.
B)NASDAQ is called a secondary market because NYSE is considered a primary market.
C)The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart.
D)It trades the second largest volume of shares in the world.

Question 72

Raising new capital by issuing bonds is an example of a commercial banking activity.

Question 73

What is the term for the applicable price that I will pay, if I have to buy a share?

Question 74

What are the main differences between the NYSE and ASX stock markets?

Question 75

What is the general relation of the two types of prices quoted for a share on an exchange?

Question 76

Use the figure for the question(s)below.
How much money would a stock exchange make from buying and selling 5 000 shares of Strider under the conditions shown above?

A)$5 875
B)$3 000
C)$2 500
D)$210 375

Question 77

Use the figure for the question(s)below.
Based on the information shown above, what payment would you receive from selling 1 000 shares of Gold Seam Corp?

A)$91 810
B)$91 650
C)$91 700
D)$91 350

Question 78

Which of the following is a measure of the aggregate price level of collections of pre-selected shares?

A)NYSE
B)Euronext
C)NASDAQ
D)S&P/ASX 200

Question 79

Use the figure for the question(s)below.
Based on the information shown above, how much would it cost you to buy 2 000 shares of Toyota Industries?

A)€40 740
B)€41 000
C)€40 840
D)€42 560

Question 80

Use the figure for the question(s)below.
What is the bid-ask spread for Pernex Inc?

A)1 cent
B)12 cents
C)3 cents
D)6 cents