Question 1

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

Accepted Answer

The capital budgeting process involves evaluating investment opportunities by assessing the size, risk, and timing of future cash flows to determine their value and appropriateness for the organization.

Question 2

The treasurer and the controller of a corporation generally report to the:

Accepted Answer

The treasurer and the controller typically report to the Vice President of Finance, who oversees the financial operations of a corporation.

Question 3

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?

Accepted Answer

Capital budgeting involves decisions on investment in projects that yield returns over a period longer than one year. Capital structure pertains to the firm's financing decisions—how it decides between raising funds through equity or debt. Net working capital focuses on short-term financial management, dealing with assets and liabilities that are turned over within a year.

Question 4

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

Accepted Answer

A dealer is an individual or firm in the securities business who buys and sells stocks and other securities for their own account, rather than for a client's account. This distinguishes them from brokers, who facilitate transactions on behalf of their clients.

Question 5

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

Accepted Answer

Working capital management involves managing the short-term assets and liabilities of a company, including ensuring that the firm has sufficient cash available on a daily basis to meet its operational needs.

Question 6

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

Accepted Answer

Capital structure refers to the mix of debt and equity that a company uses to finance its operations and growth. This includes long-term debt, preferred stock, and shareholders' equity.

Question 7

Deciding whether to open a new store is part of the process known as:

Accepted Answer

Capital budgeting involves making decisions about long-term investments in projects or ventures, such as opening a new store, which requires analyzing the potential returns and costs associated with the investment.

Question 8

Mr. Webster, the CEO of Master Works, Inc., recently stated that the firm will maintain its current policy of borrowing $0.40 for every $1 invested by shareholders. Mr. Webster was referring to the _____ policy of the firm.

Accepted Answer

Mr. Webster's statement about borrowing $0.40 for every $1 invested by shareholders refers to the firm's capital structure policy. This policy involves decisions about the firm's mix of debt and equity financing.

Question 9

The primary goal of financial management is to:

Accepted Answer

The primary goal of financial management is to maximize the current value per share of the existing stock, as this reflects the company's overall value and financial health to its shareholders.

Question 10

The decision of which lender to use and which type of long-term loan is best for a project is part of:

Accepted Answer

The decision of which lender to use and which type of long-term loan is best for a project is part of the capital structure decision, which involves determining the best mix of debt and equity financing for a company.

Question 11

A dealer is a person who:

Accepted Answer

A dealer buys and sells financial instruments or commodities for their own account, at their own risk. This distinguishes them from brokers, who facilitate trades on behalf of others.

Question 12

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

Accepted Answer

Secondary market transactions involve the buying and selling of existing securities among investors, without the involvement of the issuing companies. This includes transactions for shares listed on stock exchanges like the TSX and for corporate bonds.

Question 13

Which one of the following is a primary market transaction?

Accepted Answer

A primary market transaction involves the issuance of new securities directly from an issuer to investors. Choice B, where a dealer buys newly issued shares of stock from a corporation, is an example of a primary market transaction because it involves the initial sale of new securities.

Question 14

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

Accepted Answer

Issuing debt rather than additional shares of stock is related to a company's capital structure decision. This involves determining the best mix of debt and equity financing to optimize the company's value.

Question 15

A firm's capital structure is defined as follows

Accepted Answer

A firm's capital structure refers to the specific mixture of long-term debt and equity that a company uses to finance its operations and growth. This includes common equity, preferred equity, and any type of debt the firm might have.

Question 16

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

Accepted Answer

In the primary market, securities are sold for the first time from issuers to investors. Option E, where KM Co. is selling new shares of stock to a financial institution, represents a primary market transaction because it involves the issuance of new shares directly from the company to investors.

Question 17

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

Accepted Answer

The primary goal of the financial manager in a publicly traded company is to maximize shareholder wealth, which is achieved by maximizing the current value per share of the existing stock. This objective aligns the interests of the financial manager with those of the shareholders.

Question 18

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?

Accepted Answer

Incorporating the business allows Sue to protect her personal assets from any liabilities or losses the business might incur, as a corporation is a separate legal entity. This structure is most suitable for a business involving significant hazards like decommissioning nuclear warheads and reactors.

Question 19

Dealer markets:

Accepted Answer

Dealer markets are indeed referred to as over-the-counter (OTC) markets, where trading is done directly between two parties without the supervision of an exchange.

Question 20

The Chief Financial Officer of a corporation is the:

Accepted Answer

The Chief Financial Officer (CFO) is typically the Vice President of Finance, responsible for managing the financial actions of a company.

Quiz 1: Introduction to Corporate Finance