Question 1

Capital structure determines how much debt the ﬁrm should have in relation to its level of equity.

Accepted Answer

Capital structure refers to the proportion of debt and equity used by a company to finance its operations. Therefore, it determines how much debt the firm should have in relation to its level of equity.

Question 2

Capital structure determines the least expensive sources of funds for the ﬁrm to borrow.

Accepted Answer

The capital structure of a firm determines the optimal mix of debt and equity financing that minimizes the cost of capital and determines the least expensive sources of funds for the firm to borrow.

Question 3

The primary goal of a ﬁnancial manager should be to maximize the value of shares issued to new
investors in the corporation.

Accepted Answer

The primary goal of a financial manager is to maximize the wealth of the existing shareholders, not just the value of shares issued to new investors.

Question 4

Common stockholders or limited partners can lose, at most, what they have invested in a ﬁrm.

Accepted Answer

This statement is true. Common stockholders and limited partners have limited liability, meaning their losses are limited to the amount they have invested in a firm. They are not personally responsible for any additional debts or liabilities the firm may have.

Question 5

A capital expenditure project becomes desirable when the project is worth more to the ﬁrm than
the cost to acquire it.

Accepted Answer

This is the basic principle behind capital budgeting decisions- that investments should only be made if their benefits outweigh their costs.

Question 6

Maximization of the current earnings of the ﬁrm is the main goal of the ﬁnancial manager.

Accepted Answer

The main goal of the financial manager is to maximize the value of the firm, not necessarily current earnings. Current earnings may be sacrificed in the short term to achieve long-term growth and sustainability.

Question 7

When evaluating a project in which a ﬁrm might invest, the size but not the timing of the cash ﬂows
is important.

Accepted Answer

Both the size and timing of cash flows are important in evaluating a project. A project with large cash flows is favorable, but if those cash flows are not received in a timely manner or are heavily front-loaded or back-loaded, it can impact the project's profitability and overall value. Therefore, both size and timing are critical considerations in evaluating project investments.

Question 8

Capital structure determines the level of current assets that is required to maintain the ﬁrm's
operational level.

Accepted Answer

Capital structure primarily refers to the mix of debt and equity financing used by a company to fund its operations and investments. It does not directly determine the level of current assets needed for the firm's operations, although the amount of funding obtained through capital structure may affect the firm's investment decisions and subsequent need for current assets.

Question 9

Capital structure determines how much risk is associated with the future cash ﬂows of a project.

Accepted Answer

Capital structure refers to the mix of debt and equity financing a company uses, which affects the cost of capital and financial risk, but it does not directly determine the risk associated with a project's future cash flows.

Question 10

Partnership income is treated as personal income of the partners.

Accepted Answer

Partnership income is distributed among the partners and is reported on their individual tax returns as personal income.

Question 11

Deciding if a new project should be accepted is a working capital decision.

Accepted Answer

Deciding if a new project should be accepted is a capital budgeting decision, not a working capital decision. Working capital decisions involve managing the day-to-day finances and operational liquidity of a company.

Question 12

The primary goal of ﬁnancial management is to minimize the corporate tax liability.

Accepted Answer

The primary goal of financial management is to maximize shareholder wealth or value. While minimizing corporate tax liability may be a part of this goal, it is not the primary focus.

Question 13

The size, timing and risk of cash ﬂows are important when evaluating a capital budgeting decision.

Accepted Answer

The size, timing and risk of cash ﬂows are essential considerations when evaluating the feasibility of a capital budgeting decision. The size of cash flows relates to the magnitude of the cash flows associated with the project, which is crucial in determining whether the investment is financially viable or not. The timing of cash flows is crucial because investors prefer to recover their investment in the shortest possible time. Finally, the risk associated with the cash flows is a vital factor as it determines the probability of achieving the expected returns from the investment.

Question 14

Determining the amount of money to borrow in order to ﬁnance a 10-year project is a capital
structure decision.

Accepted Answer

The decision to determine the amount of money to borrow for a project falls under capital structure decisions, which involve determining how to finance the project with a mix of debt and equity.

Question 15

Determining when a supplier should be paid is a capital structure decision.

Accepted Answer

Determining when a supplier should be paid is a working capital management decision, not a capital structure decision. Capital structure decisions relate to the mix of debt and equity financing used to fund a company's operations and investments.

Question 16

A capital expenditure project becomes desirable when the value of the cash ﬂow generated by the
project exceeds the project's cost.

Accepted Answer

This statement is true as a capital expenditure project is typically undertaken to generate positive cash flows, and if the cash flow generated by the project exceeds its cost, then the project becomes desirable.

Question 17

A limited partner can lose his or her investment in the partnership.

Accepted Answer

A limited partner has limited liability in the partnership, meaning they are not personally responsible for the partnership's debts and obligations. However, their investment in the partnership is still at risk and they may lose all or part of it if the partnership fails or incurs substantial losses.

Question 18

Working capital management addresses the ﬁrm's appropriate level of inventory.

Accepted Answer

Working capital management involves managing the current assets and liabilities of a firm, including inventory. It seeks to ensure that the firm maintains an optimal level of inventory to meet customer demand while minimizing holding costs and avoiding stockouts. Hence, the statement is true.

Question 19

Establishing the accounts receivable policies is a capital structure decision.

Accepted Answer

Establishing the accounts receivable policies is a working capital management decision, not a capital structure decision. Capital structure decisions involve determining the mix of debt and equity financing in a company's capital structure.

Question 20

In capital budgeting, the ﬁnancial manager tries to identify investment opportunities that are worth
more to the ﬁrm than they cost to acquire.

Accepted Answer

This statement is true. The main goal of capital budgeting is to invest in projects that can generate a return that exceeds the cost of acquiring them, creating value for the firm.

Quiz 1: Introduction to Corporate Finance

Capital structure determines how much debt the ﬁrm should have in relation to its level of equity.

Capital structure determines the least expensive sources of funds for the ﬁrm to borrow.

The primary goal of a ﬁnancial manager should be to maximize the value of shares issued to new investors in the corporation.

Common stockholders or limited partners can lose, at most, what they have invested in a ﬁrm.

A capital expenditure project becomes desirable when the project is worth more to the ﬁrm than the cost to acquire it.

Maximization of the current earnings of the ﬁrm is the main goal of the ﬁnancial manager.

When evaluating a project in which a ﬁrm might invest, the size but not the timing of the cash ﬂows is important.

Capital structure determines the level of current assets that is required to maintain the ﬁrm's operational level.