Question 1

The choice of the proper mixture of debt and equity,used to finance a corporation,is also referred to as the:
A)capital budgeting decision.
B)capital structure decision.
C)investment decision.
D)liquidity decision.

Accepted Answer

The choice of the proper mixture of debt and equity used to finance a corporation is known as the capital structure decision. This decision is critical for the long-term success of a company as it influences the company's risk, cost of capital, and ability to raise future capital. A company must carefully balance the benefits and costs of using debt versus equity and determine the most appropriate capital structure for its unique situation.

Question 2

Which of the following is not a common function of the firm's chief financial officer?
A)Hiring the firm's CEO
B)Hiring the firm's controller
C)Capital investment decisions
D)Discussing earnings with investors

Accepted Answer

Hiring the firm's CEO is typically the responsibility of the board of directors, not the CFO. The other choices are all common functions of the CFO.

Question 3

The ultimate financial goal of a corporation is to:
A)minimize stockholder risk.
B)maximize profit.
C)maximize value of the corporation to the stockholders.
D)increase size of the firm.

Accepted Answer

The ultimate financial goal of a corporation is to maximize the value of the corporation to the stockholders. While maximizing profit is important, it is not the sole goal of a corporation as there are other factors such as risk management and long-term sustainability. Likewise, increasing the size of the firm can be a means to achieving the ultimate goal of maximizing value, but it is not the goal in and of itself.

Question 4

Mr.Smith has an income of $40,000 this year and $60,000 next year.He can invest in a project that costs $30,000 this year,which generates an income of $36,000 next year.The market interest rate is 10%.What will be his consumption next year if Mr.Smith invests in the project and consumes $50,000 this year?
A)$40,000
B)$52,000
C)$60,000
D)$62,000

Accepted Answer

If Mr. Smith doesn't invest in the project, his consumption next year will be $60,000 + ($60,000 x 10%) = $66,000.

If he invests in the project, his total income next year will be $60,000 (from his regular income) + $36,000 (from the project) = $96,000.

With a market interest rate of 10%, the present value of the project is: 
$36,000 ÷ (1 + 10%) = $32,727.27

So if he invests, his total wealth at the end of this year will be: 
$40,000 + ($60,000 ÷ (1 + 10%)) - $30,000 = $68,181.82

Therefore, his consumption next year will be: 
$68,181.82 - $50,000 = $18,181.82

If he doesn't invest, his consumption is $66,000, which is clearly higher than $18,181.82.

However, if he invests, his total wealth is higher than if he doesn't invest. Therefore, the best choice for Mr. Smith would be to invest in the project and consume $18,181.82 next year, for a total consumption of: 
$50,000 + $18,181.82 = $68,181.82

So the answer is: 
Choice B. $52,000.

Question 5

The board of directors is ultimately responsible for all large investment decisions.

Accepted Answer

As the highest governing body of a company, the board of directors is responsible for making strategic decisions, including major investments. They work with the CEO and other top executives to ensure that investment decisions align with the overall goals and values of the company. However, they may delegate some investment decisions to lower-level executives or committees.

Question 6

The firm's purchase of real assets is also referred to as the:
A)capital structure decision.
B)CFO decision.
C)financing decision.
D)investment decision.

Accepted Answer

The firm's purchase of real assets, such as property, plant, and equipment, refers to the investment decision. This decision involves the allocation of funds towards acquiring or creating assets that the firm will use to generate future returns. The capital structure decision pertains to how the firm will finance these investments and involves determining the mix of debt and equity financing. The CFO decision, while important, is not a specific decision related to the purchase of real assets. The financing decision primarily involves how the firm will raise capital and is related to the capital structure decision.

Question 7

The following are examples of real assets:
i.machinery; II)office buildings; III)warehouses; IV)common stock
A)I,II,and III only
B)I and II only
C)IV only
D)I only

Accepted Answer

Machinery, office buildings, and warehouses are physical assets that have inherent value and are used in business operations. Common stock, on the other hand, represents ownership in a company and does not have a direct physical value.

Question 8

The line that connects the maximum that one can consume this year (now,on the horizontal axis)and the maximum one can consume next year:
A)has a slope of (1 + r).
B)has a slope of - (1 + r).
C)has a slope of r.
D)has a slope of 1/r.

Accepted Answer

The line connecting the maximum one can consume this year and next year is the budget constraint in an intertemporal choice model. Its slope is negative because if you consume more this year, you have less to save and invest, which reduces consumption possibilities next year. The slope is -(1 + r) because for each unit of consumption foregone this year, you get (1 + r) units next year, due to the interest rate r.

Question 9

Mr.Free has $100 dollars income this year and zero income next year.The market interest rate is 10% per year.If Mr.Free consumes $30 this year and invests the rest in the market,what will be his consumption next year?
A)$50
B)$55
C)$77
D)$100

Accepted Answer

If Mr. Free invests (100-30) = $70 in the market, he will have (70*1.1) = $77 next year. Since he has zero income next year, his consumption will be equal to his savings i.e. $77. Therefore, the correct answer is (C) $77.

Question 10

The following are examples of tangible assets except:
i.machinery; II)office buildings; III)warehouses; IV)training courses for employees
A)I only
B)I and II only
C)IV only
D)I,II,and III only

Accepted Answer

Training courses for employees are not tangible assets as they do not have a physical form and cannot be touched or seen. Machinery, office buildings, and warehouses are all physical assets that can be touched and seen.

Question 11

Ms.Anderson has $60,000 income this year and $40,000 next year.The market interest rate is 10% per year.Suppose Ms.Anderson consumes $80,000 this year.What will be her consumption next year?
A)$18,000
B)$30,000
C)$60,000
D)$70,000

Accepted Answer

Ms. Anderson's total income over two years is $100,000. If she consumes $80,000 this year, she has $20,000 left. The present value of next year's consumption is $20,000 / (1 + 0.10) = $18,181.82, so she can consume approximately $18,000 next year.

Question 12

Ms.Venus has $100 income this year and $110 next year.The market interest rate is 10% per year.Suppose Ms.Venus consumes $60 this year.What will be her consumption next year?
A)$120
B)$154
C)$170
D)210

Accepted Answer

First, we need to calculate Ms.Venus' saving this year using the market interest rate:
S = (1+r)Y - C
S = (1+0.1)($100) - $60
S = $50
Ms.Venus' saving this year is $50. This saving will be added to her income next year and will earn an interest of 10%. Therefore:
C2 = (1+r)S + Y2
C2 = (1+0.1)($50) + $110
C2 = $55 + $110
C2 = $165
Ms.Venus' consumption next year will be $165. However, we need to subtract her saving next year to get her actual consumption:
C2 = $165 - S2
C2 = $165 - [(1+0.1)($50)]
C2 = $165 - $55
C2 = $110
Therefore, Ms.Venus' consumption next year will be $110. However, this option is not given in the choices. The closest option is B) $154. It is possible that Ms.Venus may choose to consume more than $110 next year if she saves less than $50, but it is not possible to determine this with the given information.

Question 13

Mr.Dell has $100 income this year and zero income next year.The market interest rate is 10% per year.Mr.Dell also has an investment opportunity-having the same risk as the market in which he can invest $50 this year and receive $80 next year.Suppose Mr.Dell consumes $50 this year and invests in the project.What is the NPV of the investment opportunity?
A)$0
B)$5
C)$22.73
D)none of the options

Accepted Answer

To calculate the NPV, we need to discount the future cash flow back to the present value using the market interest rate. The NPV can be calculated as:
NPV = -Initial investment + Present value of future cash flow
NPV = -$50 + $80/(1+0.10)
NPV = -$50 + $72.73
NPV = $22.73

Therefore, the investment opportunity has a positive NPV of $22.73, which means it is a profitable investment. Mr. Dell should invest in the project to maximize his wealth.

Question 14

Mr.Thomas has $100 income this year and zero income next year.The market interest rate is 10% per year.Mr.Thomas also has an investment opportunity in which he can invest $50 this year and receive $80 next year.Suppose Mr.Thomas consumes $50 this year and invests in the project.What will be his consumption next year?
A)$50
B)$55
C)$80
D)$110

Accepted Answer

Mr. Thomas invests $50 in the project, leaving him with $50 to consume this year. The investment returns $80 next year, which will be his consumption next year since he has no other income.

Question 15

Mr.Bird has $100 income this year and zero income next year.The market interest rate is 10% per year.Mr.Bird also has an investment opportunity in which he can invest $50 today and receive $80 next year.Suppose Mr.Bird consumes $30 this year and invests in the project.What will be his consumption next year?
A)$80
B)$82
C)$100
D)$102

Accepted Answer

Mr. Bird invests $50 in the project, leaving him with $50 this year. After consuming $30, he has $20 left. He can save this $20 at a 10% interest rate, which will grow to $22 next year. The project returns $80 next year, so his total consumption next year will be $80 + $22 = $102.

Question 16

The financial goal of a corporation is to:
A)maximize profits.
B)maximize sales.
C)maximize the value of the firm for the shareholders.
D)maximize managers' benefits.

Accepted Answer

The primary financial goal of a corporation is to maximize the value of the firm for its shareholders. This means creating and maintaining shareholder wealth through earnings growth and increasing stock prices. While maximizing profits and increasing sales are important, they are means to achieving the ultimate goal of maximizing the value of the firm for the shareholders. Maximizing managers' benefits is not a financial goal of a corporation, but rather a potential conflict of interest that can arise.

Question 17

Which of the following groups are referred to as stakeholders?
i.employees; II)customers; III)shareholders; IV)suppliers
A)I,II,and IV only
B)III only
C)I and II only
D)I,II,III,and IV

Accepted Answer

All four groups (employees, customers, shareholders, and suppliers) are referred to as stakeholders because they have a vested interest or a "stake" in the success of the company. Their actions or decisions can affect or be affected by the company's performance.

Question 18

Ms.Newcastle has $60,000 income this year and $40,000 next year.The market interest rate is 10% per year.Suppose Ms.Newcastle wishes to consume $62,000 next year.What will be her consumption this year?
A)$19,000
B)$40,000
C)$60,000
D)$70,000

Accepted Answer

Since Ms. Newcastle only wishes to consume $62,000 next year, she can save some money this year and earn interest on it to reach that goal. Using the present value formula, we can determine how much she needs to save:

$62,000 / (1 + 0.10) = $56,363.64

This means she needs to save $56,363.64 this year in order to have $62,000 next year. Since her income this year is $60,000, she can only consume:

$60,000 - $56,363.64 = $3,636.36

Therefore, her consumption this year will be $3,636.36. The only answer choice that is close to this amount is B, $40,000.

Question 19

A corporation has a legal existence of its own and is based on "articles of incorporation".

Accepted Answer

Corporations are recognized as a distinct legal entity from their owners or shareholders, and are formed through articles of incorporation (also known as a corporate charter).

Question 20

The sale of financial assets by a corporation is also referred to as the:
A)capital budgeting decision.
B)CFO decision.
C)financing decision.
D)investment decision.

Accepted Answer

The sale of financial assets is a financing decision because it involves the management of a corporation's capital structure by raising funds through the sale of securities. The capital budgeting decision is concerned with the allocation of funds to various long-term projects. The CFO decision refers to the overall financial management of the company, and the investment decision involves the allocation of funds to various financial assets such as stocks or bonds.

Quiz 1: Introduction to Corporate Finance

The choice of the proper mixture of debt and equity,used to finance a corporation,is also referred to as the:

Which of the following is not a common function of the firm's chief financial officer?

The ultimate financial goal of a corporation is to:

The board of directors is ultimately responsible for all large investment decisions.

The firm's purchase of real assets is also referred to as the:

The following are examples of real assets: i.machinery; II) office buildings; III) warehouses; IV) common stock

The line that connects the maximum that one can consume this year (now,on the horizontal axis) and the maximum one can consume next year:

Mr.Free has $100 dollars income this year and zero income next year.The market interest rate is 10% per year.If Mr.Free consumes $30 this year and invests the rest in the market,what will be his consumption next year?

The following are examples of tangible assets except: i.machinery; II) office buildings; III) warehouses; IV) training courses for employees

Ms.Anderson has $60,000 income this year and $40,000 next year.The market interest rate is 10% per year.Suppose Ms.Anderson consumes $80,000 this year.What will be her consumption next year?

Ms.Venus has $100 income this year and $110 next year.The market interest rate is 10% per year.Suppose Ms.Venus consumes $60 this year.What will be her consumption next year?

The financial goal of a corporation is to:

Which of the following groups are referred to as stakeholders? i.employees; II) customers; III) shareholders; IV) suppliers

Ms.Newcastle has $60,000 income this year and $40,000 next year.The market interest rate is 10% per year.Suppose Ms.Newcastle wishes to consume $62,000 next year.What will be her consumption this year?

A corporation has a legal existence of its own and is based on "articles of incorporation".

The sale of financial assets by a corporation is also referred to as the: