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Test Bank Fundamentals of Corporate Finance 9th Edition Brealey

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Test Bank Fundamentals of Corporate Finance 9th Edition Brealey

Chapter 01 Test Bank - Static

Test Bank Fundamentals of Corporate Finance 9th Edition Brealey 

Student: ___________________________________________________________________________

1.

The liability of sole proprietors is limited to the amount of their investment in the company. 
 
True    False

 

2.

General partners have limited personal liability for business debts in a limited partnership. 
 
True    False

 

3.

The separation of ownership and management is one distinctive feature of corporations. 
 
True    False

 

4.

A major disadvantage of partnerships is that they have double taxation of profits. 
 
True    False

 

5.

Financial assets have value because they are claims on the firm's real assets and the cash that those assets will produce. 
 
True    False

 

6.

Capital budgeting decisions are used to determine how to raise the cash necessary for investments. 
 
True    False

 

7.

A successful investment is one that increases the value of the firm. 
 
True    False

 

8.

Facebook's decision to spend $700 million to acquire Instagram is an investment decision. 
 
True    False

 

9.

Boards of directors are generally appointed by the firm's senior officers. 
 
True    False

 

10.

Financial analysts are involved in monitoring the risk associated with investment projects and financing decisions. 
 
True    False

 

11.

The primary goal of any company should be to maximize current period profits. 
 
True    False

 

12.

Maximizing profits is the same as maximizing the value of the firm. 
 
True    False

 

13.

The Dodd-Frank financial reform law in 2010 granted shareholders a binding vote on executive compensation. 
 
True    False

 

14.

Sole proprietorships face the same agency problems as those associated with corporations. 
 
True    False

 

15.

Real assets can be intangible assets. 
 
True    False

 

16.

Making good investment and financing decisions is the chief task of the financial manager. 
 
True    False

 

17.

If a project's value is less than its required investment, then the project is financially attractive. 
 
True    False

 

18.

GlaxoSmithKline's spending of $6 billion in 2012 on research and development of new drugs is a capital budgeting decision but not a financing decision. 
 
True    False

 

19.

Volkswagen's issuance of a 2.5 billion euro convertible bond is a financing decision. 
 
True    False

 

20.

An IOU ("I owe you") from your brother-in-law is a financial asset. 
 
True    False

 

21.

The separation of ownership and management is one distinctive feature of both corporations and sole proprietors. 
 
True    False

 

22.

Shareholders welcome higher short-term profits even when they damage long-term profits. 
 
True    False

 

23.

A well-designed compensation package can help a firm achieve its goal of maximizing market value. 
 
True    False

 

24.

While control of large public companies in the United States is exercised through the board of directors and pressure from the stock market, in many other countries the stock market is less important and control shifts to major stockholders, typically banks and other companies. 
 
True    False

 

25.

Established firms can create value by developing long-term relationships and maintaining a good reputation. 
 
True    False

 

26.

Which one of these is a disadvantage of the corporate form of business?  

A. 

Access to capital

 

B. 

Unlimited personal liability for owners

 

C. 

Limited firm life

 

D. 

Legal requirements

 

 

27.

Which one of the following gives a corporation its permanence?  

A. 

Multiple owners

 

B. 

Limited liability

 

C. 

Corporation taxation

 

D. 

Separation of ownership and control

 

 

28.

In a partnership form of organization, income tax liability, if any, is incurred by: 

A. 

the partnership itself.

 

B. 

the partners individually.

 

C. 

both the partnership and the partners.

 

D. 

neither the partnership nor the partners.

 

 

29.

Which one of the following would correctly differentiate general partners from limited partners in a limited partnership?  

A. 

General partners have more job experience.

 

B. 

General partners have an ownership interest.

 

C. 

General partners are subject to double taxation.

 

D. 

General partners have unlimited personal liability.

 

 

30.

Which form of organization provides limited liability for the firm but yet allows the professionals working within that firm to be sued personally? 

A. 

Limited liability partnership

 

B. 

Limited liability company

 

C. 

Sole proprietorship

 

D. 

Professional corporation

 

 

31.

Which of the following is least likely to be discussed in the articles of incorporation? 

A. 

How the firm is to be financed

 

B. 

The purpose of the business

 

C. 

The price range of the shares of stock

 

D. 

How the board of directors is to be structured

 

 

32.

When a corporation fails, the maximum that can be lost by an individual shareholder is: 

A. 

the amount of their initial investment.

 

B. 

the amount of their share of the profits.

 

C. 

their proportionate share required to pay the corporation's debts.

 

D. 

the amount of their personal wealth.

 

 

33.

Which of the following is a disadvantage to incorporating a business? 

A. 

Easier access to financial markets

 

B. 

Limited liability

 

C. 

Becoming a permanent legal entity

 

D. 

Profits taxed at the corporate level and the shareholder level

 

 

34.

Unlimited liability is faced by the owners of:

A. 

corporations.

 

B. 

partnerships and corporations.

 

C. 

sole proprietorships and general partnerships.

 

D. 

all forms of business organization.

 

 

35.

Which one of these statements correctly applies to a limited partnership? 

A. 

All partners share the daily management duties.

 

B. 

All partners enjoy limited personal liability.

 

C. 

General partners have unlimited personal liability.

 

D. 

Taxes are imposed at both the firm and the personal level on profits earned.

 

 

36.

In the case of a limited liability partnership, ________ has/have limited liability. 

 

A. 

only some of partners

 

B. 

only the managing partner

 

C. 

all of the partners

 

D. 

none of the partners

 

 

37.

A board of directors is elected as a representative of the corporation's: 

A. 

top management.

 

B. 

stakeholders.

 

C. 

shareholders.

 

D. 

customers.

 

 

38.

The legal "life" of a corporation is:

A. 

coincidental with that of its CEO.

 

B. 

equal to the life of its board of directors.

 

C. 

permanent, as long as shareholders don't change.

 

D. 

permanent, regardless of current ownership.

 

 

39.

When the management of a business is conducted by individuals other than the owners, the business is most likely to be a: 

A. 

corporation.

 

B. 

sole proprietorship.

 

C. 

partnership.

 

D. 

general partner.

 

 

40.

"Double taxation" refers to: 

A. 

all partners paying equal taxes on profits.

 

B. 

corporations paying taxes on both dividends and retained earnings.

 

C. 

paying taxes on profits at the corporate level and dividends at the personal level.

 

D. 

the fact that marginal tax rates are doubled for corporations.

 

 

41.

A corporation is considered to be closely held when: 

A. 

only a few shareholders exist.

 

B. 

the market value of the shares is stable.

 

C. 

it operates in a small geographic area.

 

D. 

management also serves as the board of directors.

 

 

42.

Corporations are referred to as public companies when their: 

A. 

shareholders have no tax liability.

 

B. 

shares are held by the federal or state government.

 

C. 

stock is publicly traded.

 

D. 

products or services are available to the public.

 

 

43.

A common problem for closely held corporations is: 

A. 

the lack of access to substantial amounts of capital.

 

B. 

the restriction that shareholders receive only one vote each.

 

C. 

the separation of ownership and management.

 

D. 

an abundance of agency problems.

 

 

44.

Corporate managers are expected to make corporate decisions that are in the best interest of: 

A. 

top corporate management.

 

B. 

the corporation's board of directors.

 

C. 

the corporation's shareholders.

 

D. 

all corporate employees.

 

 

45.

Which one of the following is a financial asset? 

A. 

A corporate bond

 

B. 

A machine

 

C. 

A patent

 

D. 

A factory

 

 

46.

Which of the following statements best distinguishes the difference between real and financial assets? 

A. 

Real assets have less value than financial assets.

 

B. 

Real assets are tangible; financial assets are not.

 

C. 

Financial assets represent claims to income that is generated by real assets.

 

D. 

Financial assets appreciate in value; real assets depreciate in value.

 

 

47.

Which one of the following is a real asset? 

A. 

A patent

 

B. 

A personal IOU

 

C. 

A checking account balance

 

D. 

A share of stock

 

 

48.

Which one of these is not considered to be a security? 

A. 

Shares of GE stock

 

B. 

A bond traded in the financial market

 

C. 

A mortgage loan issued and held by a bank

 

D. 

A convertible bond issued to the public

 

 

49.

Corporations that issue financial securities such as stock or debt obligations to the public do so primarily to: 

A. 

increase sales.

 

B. 

become profitable.

 

C. 

increase their access to funds.

 

D. 

avoid double taxation of their profits.

 

 

50.

Which one of the following would be considered a capital budgeting decision?

A. 

Planning to issue common stock rather than issuing preferred stock

 

B. 

Deciding to expand into a new line of products, at a cost of $5 million

 

C. 

Repurchasing shares of common stock

 

D. 

Issuing debt in the form of long-term bonds

 

 

51.

Which one of these is a capital budgeting decision? 

A. 

Deciding between issuing stock or debt securities

 

B. 

Deciding whether or not the firm should go public

 

C. 

Deciding if the firm should repurchase some of its outstanding shares

 

D. 

Deciding whether to buy a new machine or repair the old machine

 

 

52.

The best criterion for success in a capital budgeting decision would be to: 
 

A. 

minimize the cost of the investment.

 

B. 

maximize the number of capital budgeting projects.

 

C. 

maximize the value added to the firm.

 

D. 

finance all capital budgeting projects with debt.

 

 

53.

The overall goal of capital budgeting projects should be to: 
 

A. 

decrease the firm's reliance on debt.

 

B. 

increase the firm's sales.

 

C. 

increase the firm's outstanding shares of stock.

 

D. 

increase the wealth of the firm's shareholders.

 

 

54.

An example of a firm's financing decision would be: 
 

A. 

acquiring a competitive firm.

 

B. 

determining how much to pay for a specific asset.

 

C. 

issuing 10-year versus 20-year bonds.

 

D. 

deciding whether or not to increase the price of its products.

 

 

55.

Which of the following is a capital budgeting decision? 
 

A. 

Should the firm borrow money from a bank or sell bonds?

 

B. 

Should the firm shut down an unprofitable factory?

 

C. 

Should the firm buy or lease a new machine that it is committed to acquiring?

 

D. 

Should the firm issue preferred stock or common stock?

 

 

56.

Which of these duties are responsibilities of the corporate treasurer? 
 

A. 

Financial statements and taxes

 

B. 

Cash management and tax reporting

 

C. 

Cash management and banking relationships

 

D. 

Raising capital and financial statements

 

 

57.

The term "capital structure" refers to: 
 

A. 

the mix of long-term debt and equity financing.

 

B. 

the length of time needed to repay debt.

 

C. 

whether or not the firm invests in capital budgeting projects.

 

D. 

the types of assets a firm acquires.

 

 

58.

Firms can alter their capital structure by: 
 

A. 

not accepting any new capital budgeting projects.

 

B. 

investing in intangible assets.

 

C. 

issuing stock to repay debt.

 

D. 

becoming a limited liability company.

 

 

59.

Which one of these statements is correct? 
 

A. 

Financial managers have a fiduciary duty to stockholders.

 

B. 

Financial managers are concerned only with funds that flow to investors.

 

C. 

The chief financial officer generally reports directly to the corporate treasurer.

 

D. 

The corporate controller is primarily responsible for overseeing a firm's cash functions.

 

 

60.

A firm decides to pay for a small investment project through a $1 million increase in short-term bank loans. This is best described as an example of a(n): 
 

A. 

financing decision.

 

B. 

investment decision.

 

C. 

capital budgeting decision.

 

D. 

capital expenditure decision.

 

 

61.

The short-term decisions of financial managers are comprised of: 
 

A. 

capital structure decisions only.

 

B. 

investment decisions only.

 

C. 

financing decisions only.

 

D. 

both investment and financing decisions.

 

 

62.

A block holder is commonly defined as an investor who: 

A. 

owns 5 percent or more of a firm's outstanding shares.

 

B. 

invests in more than one firm within the same industry.

 

C. 

is another corporation.

 

D. 

is also one of the firm's managers or directors.

 

 

63.

Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm? 
 

A. 

Treasurer

 

B. 

Controller

 

C. 

Chief Operating Officer

 

D. 

Board of directors

 

 

64.

In a large corporation, preparation of the firm’s financial statements would most likely be conducted by the: 
 

A. 

treasurer.

 

B. 

controller.

 

C. 

chief financial officer.

 

D. 

financial manager.

 

 

65.

In a firm having both a treasurer and a controller, which of the following would most likely be handled by the controller? 
 

A. 

Internal auditing

 

B. 

Credit management

 

C. 

Banking relationships

 

D. 

Insurance

 

 

66.

Which one of the following statements more accurately describes the controller than the treasurer? 
 

A. 

Reports directly to the chief executive officer

 

B. 

Monitors capital expenditures to make sure that they are not misappropriated

 

C. 

Responsible for investing the firm's spare cash

 

D. 

Responsible for arranging any issue of common stock

 

 

67.

A chief financial officer would typically: 
 

A. 

report to the treasurer, but supervise the controller.

 

B. 

report to the controller, but supervise the treasurer.

 

C. 

report to both the treasurer and controller.

 

D. 

supervise both the treasurer and controller.

 

 

68.

Which one of these determines the minimum acceptable rate of return on a capital investment? 
 

A. 

The alternative investment opportunities available to investors

 

B. 

The profit margin of the existing firm

 

C. 

The rate of return on the firm's outstanding shares

 

D. 

The rate of return on risk-free debt securities

 

 

69.

A financial analyst in a corporation may be involved with all of the following EXCEPT: 
 

A. 

analyzing a new investment project.

 

B. 

monitoring risk.

 

C. 

managing investment of the company's cash.

 

D. 

purchasing the firm's plant and equipment.

 

 

70.

Investment banks like Morgan Stanley or Goldman Sachs: 
 

A. 

collect deposits and relend the cash to corporations and individuals.

 

B. 

help companies sell their securities to investors.

 

C. 

design and sell insurance policies for businesses.

 

D. 

lend to corporations and investors in commercial real estate.

 

 

71.

The primary goal of corporate management should be to: 
 

A. 

maximize the number of shareholders.

 

B. 

maximize the firm's profits.

 

C. 

minimize the firm's costs.

 

D. 

maximize the shareholders' wealth.

 

 

72.

A corporate board of directors should provide support for the top management team: 
 

A. 

under all circumstances.

 

B. 

in all decisions related to cash dividends.

 

C. 

only when the board approves of management's actions.

 

D. 

if shareholders are pleased with the firm's performance.

 

 

73.

Which of the following appears to be the most appropriate goal for corporate management? 
 

A. 

Maximizing market value of the company's shares

 

B. 

Maximizing the company's market share

 

C. 

Maximizing the current profits of the company

 

D. 

Minimizing the company's liabilities

 

 

74.

A firm with spare cash 
 

A. 

should always reinvest it in new equipment.

 

B. 

should pay it out to shareholders unless the firm can earn a higher rate of return on the cash than the shareholders can earn by investing in the capital market.

 

C. 

should invest it in the safest projects available.

 

D. 

Should always invest it in U.S. equities.

 

 

75.

Financial managers should only accept investment projects that: 
 

A. 

increase the current profits of the firm.

 

B. 

can increase the firm's market share.

 

C. 

earn a higher rate of return than the firm currently earns on its existing projects.

 

D. 

earn a higher rate of return than shareholders can get by investing on their own.

 

 

76.

Agency problems can least be controlled by: 
 

A. 

establishing good internal controls and procedures.

 

B. 

designing compensation packages that align manager's goals with those of the shareholders.

 

C. 

good systems of corporate governance.

 

D. 

electing senior managers to the board of directors.

 

 

77.

Which one of these best defines the objective of a well-functioning financial market? 
 

A. 

Establishing accurate security prices

 

B. 

Creating higher security prices

 

C. 

Eliminating short-selling profits

 

D. 

Increasing shareholder value by any means possible

 

 

78.

Corporate raiders will be looked upon most favorably if they: 
 

A. 

divide up large profitable entities.

 

B. 

take actions that increase current shareholder wealth.

 

C. 

create value for themselves through their actions.

 

D. 

change the capital structure of a firm by increasing its debt.

 

 

79.

Ethical decision making by management has a payoff for shareholders in terms of: 
 

A. 

improved capital structure.

 

B. 

enhanced firm reputation value.

 

C. 

increased managerial benefits.

 

D. 

higher current dividend payments.

 

 

80.

Ethical decision making in business: 
 

A. 

reduces the firm's profits.

 

B. 

requires adherence to implied rules as well as written rules.

 

C. 

is not in the best interests of shareholders.

 

D. 

is less important than good capital budgeting decisions.

 

 

81.

A corporate director: 
 

A. 

is selected by and can be removed by management.

 

B. 

can be voted out of power by the shareholders.

 

C. 

has a lifetime appointment to the board.

 

D. 

is selected by a vote of all corporate stakeholders.

 

 

82.

In which of the following organizations would agency problems be least likely to occur? 

A. 

A sole proprietorship

 

B. 

A partnership

 

C. 

A corporation

 

D. 

A closely held corporation

 

 

83.

Sole proprietorships resolve the issue of agency problems primarily by: 

A. 

avoiding excessive expense accounts.

 

B. 

discharging those who violate the rules.

 

C. 

allowing owners to share the cost of their actions with others.

 

D. 

forcing owners to bear the full cost of their actions.

 

 

84.

Which one of the following can best be characterized as an agency problem? 
 

A. 

differing opinions among directors as to the merits of paying a higher dividend. .

 

B. 

differing incentives between managers and owners.

 

C. 

persistently late delivery times by a major supplier.

 

D. 

Geological problems in the company’s new gold mine.

 

 

85.

Which of the following is least likely to represent an agency problem? 
 

A. 

Lavish spending on expense accounts

 

B. 

Plush remodelling of the executive suite

 

C. 

Excessive avoidance of taxes

 

D. 

Executive incentive compensation plans

 

 

86.

When managers' compensation plans are tied in a meaningful manner to the value of the firm, agency problems: 
 

A. 

can be reduced.

 

B. 

will be created.

 

C. 

are shifted to other stakeholders.

 

D. 

are eliminated entirely from the firm.

 

 

87.

A firm's reputation: 
 

A. 

has no value.

 

B. 

is an important firm asset.

 

C. 

is irrelevant to shareholders.

 

D. 

can be easily restored once damaged.

 

 

88.

Which of the following groups is least likely to be considered a stakeholder of the firm? 
 

A. 

Government

 

B. 

Customers

 

C. 

Competitors

 

D. 

Employees

 

 

89.

A manager's compensation plan that offers financial incentives for increases in quarterly profitability may create agency problems in that: 
 

A. 

the managers are not motivated by personal gain.

 

B. 

the board of directors may claim the credit.

 

C. 

short-term, not long-term profits become the focus.

 

D. 

investors desire stable profits.

 

 

90.

One continuing problem with managerial incentive compensation plans is that: 

A. 

the plans increase agency problems.

 

B. 

managers prefer guaranteed salaries.

 

C. 

their effectiveness is difficult to evaluate.

 

D. 

the plans do not reward shareholders.

 

 

91.

Which one of the following forms of compensation is most apt to align the interests of managers and shareholders? 
 

A. 

A fixed salary

 

B. 

A salary that is linked to current company profits

 

C. 

A salary that is paid partly in the form of the company's shares

 

D. 

A salary that is linked to the company's market share

 

 

92.

Which of the following is a real asset? 
 

A. 

A patent

 

B. 

A share of stock issued by Bank of New York

 

C. 

An IOU ("I owe you") from your brother-in-law

 

D. 

A mortgage loan taken out to help pay for a new home

 

 

93.

Which one of these statements is correct? 
 

A. 

A dollar received next year has the same value as a dollar received today.

 

B. 

Risky cash flows are more valuable than certain cash flows.

 

C. 

Smart investment decisions create more value than smart financing decisions.

 

D. 

Corporate governance is irrelevant.

 

 

94.

Short selling involves selling a security: 
 

A. 

you do not own.

 

B. 

that you have owned for less than one year.

 

C. 

at a price below current market value.

 

D. 

for less than you originally paid to purchase it.

 

 




Chapter 01 Test Bank - Static Key
 

1.

The liability of sole proprietors is limited to the amount of their investment in the company. 
 
FALSE

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

2.

General partners have limited personal liability for business debts in a limited partnership. 
 
FALSE

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

3.

The separation of ownership and management is one distinctive feature of corporations. 
 
TRUE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

4.

A major disadvantage of partnerships is that they have double taxation of profits. 
 
FALSE

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

5.

Financial assets have value because they are claims on the firm's real assets and the cash that those assets will produce. 
 
TRUE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-02 Distinguish between real and financial assets.
Topic: Financial management decisions
 

 

6.

Capital budgeting decisions are used to determine how to raise the cash necessary for investments. 
 
FALSE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Financial management decisions
 

 

7.

A successful investment is one that increases the value of the firm. 
 
TRUE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Goal of financial management
 

 

8.

Facebook's decision to spend $700 million to acquire Instagram is an investment decision. 
 
TRUE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Financial management decisions
 

 

9.

Boards of directors are generally appointed by the firm's senior officers. 
 
FALSE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Management organization and roles
 

 

10.

Financial analysts are involved in monitoring the risk associated with investment projects and financing decisions. 
 
TRUE

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller.
Topic: Management organization and roles
 

 

11.

The primary goal of any company should be to maximize current period profits. 
 
FALSE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation.
Topic: Goal of financial management
 

 

12.

Maximizing profits is the same as maximizing the value of the firm. 
 
FALSE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation.
Topic: Goal of financial management
 

 

13.

The Dodd-Frank financial reform law in 2010 granted shareholders a binding vote on executive compensation. 
 
FALSE

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Ethics, governance, and regulation
 

 

14.

Sole proprietorships face the same agency problems as those associated with corporations. 
 
FALSE

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Agency costs and problems
 

 

15.

Real assets can be intangible assets. 
 
TRUE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-02 Distinguish between real and financial assets.
Topic: Financial management decisions
 

 

16.

Making good investment and financing decisions is the chief task of the financial manager. 
 
TRUE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Management organization and roles
 

 

17.

If a project's value is less than its required investment, then the project is financially attractive. 
 
FALSE

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Goal of financial management
 

 

18.

GlaxoSmithKline's spending of $6 billion in 2012 on research and development of new drugs is a capital budgeting decision but not a financing decision. 
 
TRUE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Financial management decisions
 

 

19.

Volkswagen's issuance of a 2.5 billion euro convertible bond is a financing decision. 
 
TRUE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Financial management decisions
 

 

20.

An IOU ("I owe you") from your brother-in-law is a financial asset. 
 
TRUE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-02 Distinguish between real and financial assets.
Topic: Financial management decisions
 

 

21.

The separation of ownership and management is one distinctive feature of both corporations and sole proprietors. 
 
FALSE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

22.

Shareholders welcome higher short-term profits even when they damage long-term profits. 
 
FALSE

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation.
Topic: Goal of financial management
 

 

23.

A well-designed compensation package can help a firm achieve its goal of maximizing market value. 
 
TRUE

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Agency costs and problems
 

 

24.

While control of large public companies in the United States is exercised through the board of directors and pressure from the stock market, in many other countries the stock market is less important and control shifts to major stockholders, typically banks and other companies. 
 
TRUE

 

AACSB: Diversity
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Management organization and roles
 

 

25.

Established firms can create value by developing long-term relationships and maintaining a good reputation. 
 
TRUE

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Goal of financial management
 

 

26.

Which one of these is a disadvantage of the corporate form of business? 
 

A. 

Access to capital

 

B. 

Unlimited personal liability for owners

 

C. 

Limited firm life

 

D. 

Legal requirements

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

27.

Which one of the following gives a corporation its permanence? 
 

A. 

Multiple owners

 

B. 

Limited liability

 

C. 

Corporation taxation

 

D. 

Separation of ownership and control

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

28.

In a partnership form of organization, income tax liability, if any, is incurred by: 

A. 

the partnership itself.

 

B. 

the partners individually.

 

C. 

both the partnership and the partners.

 

D. 

neither the partnership nor the partners.

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

29.

Which one of the following would correctly differentiate general partners from limited partners in a limited partnership? 
 

A. 

General partners have more job experience.

 

B. 

General partners have an ownership interest.

 

C. 

General partners are subject to double taxation.

 

D. 

General partners have unlimited personal liability.

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

30.

Which form of organization provides limited liability for the firm but yet allows the professionals working within that firm to be sued personally? 
 

A. 

Limited liability partnership

 

B. 

Limited liability company

 

C. 

Sole proprietorship

 

D. 

Professional corporation

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

31.

Which of the following is least likely to be discussed in the articles of incorporation? 
 

A. 

How the firm is to be financed

 

B. 

The purpose of the business

 

C. 

The price range of the shares of stock

 

D. 

How the board of directors is to be structured

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

32.

When a corporation fails, the maximum that can be lost by an individual shareholder is: 
 

A. 

the amount of their initial investment.

 

B. 

the amount of their share of the profits.

 

C. 

their proportionate share required to pay the corporation's debts.

 

D. 

the amount of their personal wealth.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

33.

Which of the following is a disadvantage to incorporating a business? 

A. 

Easier access to financial markets

 

B. 

Limited liability

 

C. 

Becoming a permanent legal entity

 

D. 

Profits taxed at the corporate level and the shareholder level

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

34.

Unlimited liability is faced by the owners of: 
 

A. 

corporations.

 

B. 

partnerships and corporations.

 

C. 

sole proprietorships and general partnerships.

 

D. 

all forms of business organization.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

35.

Which one of these statements correctly applies to a limited partnership? 
 

A. 

All partners share the daily management duties.

 

B. 

All partners enjoy limited personal liability.

 

C. 

General partners have unlimited personal liability.

 

D. 

Taxes are imposed at both the firm and the personal level on profits earned.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

36.

In the case of a limited liability partnership, ________ has/have limited liability. 

A. 

only some of partners

 

B. 

only the managing partner

 

C. 

all of the partners

 

D. 

none of the partners

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

37.

A board of directors is elected as a representative of the corporation's: 
 

A. 

top management.

 

B. 

stakeholders.

 

C. 

shareholders.

 

D. 

customers.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Management organization and roles
 

 

38.

The legal "life" of a corporation is: 
 

A. 

coincidental with that of its CEO.

 

B. 

equal to the life of its board of directors.

 

C. 

permanent, as long as shareholders don't change.

 

D. 

permanent, regardless of current ownership.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

39.

When the management of a business is conducted by individuals other than the owners, the business is most likely to be a: 
 

A. 

corporation.

 

B. 

sole proprietorship.

 

C. 

partnership.

 

D. 

general partner.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

40.

"Double taxation" refers to: 
 

A. 

all partners paying equal taxes on profits.

 

B. 

corporations paying taxes on both dividends and retained earnings.

 

C. 

paying taxes on profits at the corporate level and dividends at the personal level.

 

D. 

the fact that marginal tax rates are doubled for corporations.

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

41.

A corporation is considered to be closely held when: 
 

A. 

only a few shareholders exist.

 

B. 

the market value of the shares is stable.

 

C. 

it operates in a small geographic area.

 

D. 

management also serves as the board of directors.

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

42.

Corporations are referred to as public companies when their: 
 

A. 

shareholders have no tax liability.

 

B. 

shares are held by the federal or state government.

 

C. 

stock is publicly traded.

 

D. 

products or services are available to the public.

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

43.

A common problem for closely held corporations is: 
 

A. 

the lack of access to substantial amounts of capital.

 

B. 

the restriction that shareholders receive only one vote each.

 

C. 

the separation of ownership and management.

 

D. 

an abundance of agency problems.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

44.

Corporate managers are expected to make corporate decisions that are in the best interest of: 
 

A. 

top corporate management.

 

B. 

the corporation's board of directors.

 

C. 

the corporation's shareholders.

 

D. 

all corporate employees.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation.
Topic: Goal of financial management
 

 

45.

Which one of the following is a financial asset? 
 

A. 

A corporate bond

 

B. 

A machine

 

C. 

A patent

 

D. 

A factory

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-02 Distinguish between real and financial assets.
Topic: Financial management decisions
 

 

46.

Which of the following statements best distinguishes the difference between real and financial assets? 
 

A. 

Real assets have less value than financial assets.

 

B. 

Real assets are tangible; financial assets are not.

 

C. 

Financial assets represent claims to income that is generated by real assets.

 

D. 

Financial assets appreciate in value; real assets depreciate in value.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-02 Distinguish between real and financial assets.
Topic: Financial management decisions
 

 

47.

Which one of the following is a real asset? 

A. 

A patent

 

B. 

A personal IOU

 

C. 

A checking account balance

 

D. 

A share of stock

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-02 Distinguish between real and financial assets.
Topic: Financial management decisions
 

 

48.

Which one of these is not considered to be a security? 
 

A. 

Shares of GE stock

 

B. 

A bond traded in the financial market

 

C. 

A mortgage loan issued and held by a bank

 

D. 

A convertible bond issued to the public

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-02 Distinguish between real and financial assets.
Topic: Financial management decisions
 

 

49.

Corporations that issue financial securities such as stock or debt obligations to the public do so primarily to: 

A. 

increase sales.

 

B. 

become profitable.

 

C. 

increase their access to funds.

 

D. 

avoid double taxation of their profits.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Forms of business organization
 

 

50.

Which one of the following would be considered a capital budgeting decision? 
 

A. 

Planning to issue common stock rather than issuing preferred stock

 

B. 

Deciding to expand into a new line of products, at a cost of $5 million

 

C. 

Repurchasing shares of common stock

 

D. 

Issuing debt in the form of long-term bonds

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Financial management decisions
 

 

51.

Which one of these is a capital budgeting decision? 
 

A. 

Deciding between issuing stock or debt securities

 

B. 

Deciding whether or not the firm should go public

 

C. 

Deciding if the firm should repurchase some of its outstanding shares

 

D. 

Deciding whether to buy a new machine or repair the old machine

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Financial management decisions
 

 

52.

The best criterion for success in a capital budgeting decision would be to: 

A. 

minimize the cost of the investment.

 

B. 

maximize the number of capital budgeting projects.

 

C. 

maximize the value added to the firm.

 

D. 

finance all capital budgeting projects with debt.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Goal of financial management
 

 

53.

The overall goal of capital budgeting projects should be to: 
 

A. 

decrease the firm's reliance on debt.

 

B. 

increase the firm's sales.

 

C. 

increase the firm's outstanding shares of stock.

 

D. 

increase the wealth of the firm's shareholders.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Goal of financial management
 

 

54.

An example of a firm's financing decision would be: 
 

A. 

acquiring a competitive firm.

 

B. 

determining how much to pay for a specific asset.

 

C. 

issuing 10-year versus 20-year bonds.

 

D. 

deciding whether or not to increase the price of its products.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Financial management decisions
 

 

55.

Which of the following is a capital budgeting decision? 
 

A. 

Should the firm borrow money from a bank or sell bonds?

 

B. 

Should the firm shut down an unprofitable factory?

 

C. 

Should the firm buy or lease a new machine that it is committed to acquiring?

 

D. 

Should the firm issue preferred stock or common stock?

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Financial management decisions
 

 

56.

Which of these duties are responsibilities of the corporate treasurer? 
 

A. 

Financial statements and taxes

 

B. 

Cash management and tax reporting

 

C. 

Cash management and banking relationships

 

D. 

Raising capital and financial statements

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller.
Topic: Management organization and roles
 

 

57.

The term "capital structure" refers to: 
 

A. 

the mix of long-term debt and equity financing.

 

B. 

the length of time needed to repay debt.

 

C. 

whether or not the firm invests in capital budgeting projects.

 

D. 

the types of assets a firm acquires.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Capital structure
 

 

58.

Firms can alter their capital structure by: 
 

A. 

not accepting any new capital budgeting projects.

 

B. 

investing in intangible assets.

 

C. 

issuing stock to repay debt.

 

D. 

becoming a limited liability company.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Capital structure
 

 

59.

Which one of these statements is correct? 
 

A. 

Financial managers have a fiduciary duty to stockholders.

 

B. 

Financial managers are concerned only with funds that flow to investors.

 

C. 

The chief financial officer generally reports directly to the corporate treasurer.

 

D. 

The corporate controller is primarily responsible for overseeing a firm's cash functions.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller.
Topic: Management organization and roles
 

 

60.

A firm decides to pay for a small investment project through a $1 million increase in short-term bank loans. This is best described as an example of a(n): 
 

A. 

financing decision.

 

B. 

investment decision.

 

C. 

capital budgeting decision.

 

D. 

capital expenditure decision.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Financial management decisions
 

 

61.

The short-term decisions of financial managers are comprised of: 
 

A. 

capital structure decisions only.

 

B. 

investment decisions only.

 

C. 

financing decisions only.

 

D. 

both investment and financing decisions.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Financial management decisions
 

 

62.

A block holder is commonly defined as an investor who: 

A. 

owns 5 percent or more of a firm's outstanding shares.

 

B. 

invests in more than one firm within the same industry.

 

C. 

is another corporation.

 

D. 

is also one of the firm's managers or directors.

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-03 Cite some of the advantages and disadvantages of organizing a business as a corporation.
Topic: Forms of business organization
 

 

63.

Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm? 

A. 

Treasurer

 

B. 

Controller

 

C. 

Chief Operating Officer

 

D. 

Board of directors

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller.
Topic: Management organization and roles
 

 

64.

In a large corporation, preparation of the firm’s financial statements would most likely be conducted by the: 
 

A. 

treasurer.

 

B. 

controller.

 

C. 

chief financial officer.

 

D. 

financial manager.

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller.
Topic: Management organization and roles
 

 

65.

In a firm having both a treasurer and a controller, which of the following would most likely be handled by the controller? 
 

A. 

Internal auditing

 

B. 

Credit management

 

C. 

Banking relationships

 

D. 

Insurance

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller.
Topic: Management organization and roles
 

 

66.

Which one of the following statements more accurately describes the controller than the treasurer? 

A. 

Reports directly to the chief executive officer

 

B. 

Monitors capital expenditures to make sure that they are not misappropriated

 

C. 

Responsible for investing the firm's spare cash

 

D. 

Responsible for arranging any issue of common stock

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller.
Topic: Management organization and roles
 

 

67.

A chief financial officer would typically: 

A. 

report to the treasurer, but supervise the controller.

 

B. 

report to the controller, but supervise the treasurer.

 

C. 

report to both the treasurer and controller.

 

D. 

supervise both the treasurer and controller.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller.
Topic: Management organization and roles
 

 

68.

Which one of these determines the minimum acceptable rate of return on a capital investment? 
 

A. 

The alternative investment opportunities available to investors

 

B. 

The profit margin of the existing firm

 

C. 

The rate of return on the firm's outstanding shares

 

D. 

The rate of return on risk-free debt securities

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Introduction to corporate finance
 

 

69.

A financial analyst in a corporation may be involved with all of the following EXCEPT: 
 

A. 

analyzing a new investment project.

 

B. 

monitoring risk.

 

C. 

managing investment of the company's cash.

 

D. 

purchasing the firm's plant and equipment.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller.
Topic: Management organization and roles
 

 

70.

Investment banks like Morgan Stanley or Goldman Sachs: 
 

A. 

collect deposits and relend the cash to corporations and individuals.

 

B. 

help companies sell their securities to investors.

 

C. 

design and sell insurance policies for businesses.

 

D. 

lend to corporations and investors in commercial real estate.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-04 Describe the responsibilities of the CFO, treasurer; and controller.
Topic: Introduction to corporate finance
 

 

71.

The primary goal of corporate management should be to: 

A. 

maximize the number of shareholders.

 

B. 

maximize the firm's profits.

 

C. 

minimize the firm's costs.

 

D. 

maximize the shareholders' wealth.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation.
Topic: Goal of financial management
 

 

72.

A corporate board of directors should provide support for the top management team: 
 

A. 

under all circumstances.

 

B. 

in all decisions related to cash dividends.

 

C. 

only when the board approves of management's actions.

 

D. 

if shareholders are pleased with the firm's performance.

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-07 Explain why unethical behavior does not maximize market value.
Topic: Management organization and roles
 

 

73.

Which of the following appears to be the most appropriate goal for corporate management? 

A. 

Maximizing market value of the company's shares

 

B. 

Maximizing the company's market share

 

C. 

Maximizing the current profits of the company

 

D. 

Minimizing the company's liabilities

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation.
Topic: Goal of financial management
 

 

74.

A firm with spare cash 
 

A. 

should always reinvest it in new equipment.

 

B. 

should pay it out to shareholders unless the firm can earn a higher rate of return on the cash than the shareholders can earn by investing in the capital market.

 

C. 

should invest it in the safest projects available.

 

D. 

Should always invest it in U.S. equities.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation.
Topic: Goal of financial management
 

 

75.

Financial managers should only accept investment projects that: 
 

A. 

increase the current profits of the firm.

 

B. 

can increase the firm's market share.

 

C. 

earn a higher rate of return than the firm currently earns on its existing projects.

 

D. 

earn a higher rate of return than shareholders can get by investing on their own.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 01-05 Explain why maximizing market value is the natural financial goal of the corporation.
Topic: Goal of financial management
 

 

76.

Agency problems can least be controlled by: 
 

A. 

establishing good internal controls and procedures.

 

B. 

designing compensation packages that align manager's goals with those of the shareholders.

 

C. 

good systems of corporate governance.

 

D. 

electing senior managers to the board of directors.

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Agency costs and problems
 

 

77.

Which one of these best defines the objective of a well-functioning financial market? 
 

A. 

Establishing accurate security prices

 

B. 

Creating higher security prices

 

C. 

Eliminating short-selling profits

 

D. 

Increasing shareholder value by any means possible

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Introduction to corporate finance
 

 

78.

Corporate raiders will be looked upon most favorably if they: 
 

A. 

divide up large profitable entities.

 

B. 

take actions that increase current shareholder wealth.

 

C. 

create value for themselves through their actions.

 

D. 

change the capital structure of a firm by increasing its debt.

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 01-07 Explain why unethical behavior does not maximize market value.
Topic: Goal of financial management
 

 

79.

Ethical decision making by management has a payoff for shareholders in terms of: 
 

A. 

improved capital structure.

 

B. 

enhanced firm reputation value.

 

C. 

increased managerial benefits.

 

D. 

higher current dividend payments.

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-07 Explain why unethical behavior does not maximize market value.
Topic: Goal of financial management
 

 

80.

Ethical decision making in business: 
 

A. 

reduces the firm's profits.

 

B. 

requires adherence to implied rules as well as written rules.

 

C. 

is not in the best interests of shareholders.

 

D. 

is less important than good capital budgeting decisions.

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 01-07 Explain why unethical behavior does not maximize market value.
Topic: Ethics, governance, and regulation
 

 

81.

A corporate director: 
 

A. 

is selected by and can be removed by management.

 

B. 

can be voted out of power by the shareholders.

 

C. 

has a lifetime appointment to the board.

 

D. 

is selected by a vote of all corporate stakeholders.

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Management organization and roles
 

 

82.

In which of the following organizations would agency problems be least likely to occur? 
 

A. 

A sole proprietorship

 

B. 

A partnership

 

C. 

A corporation

 

D. 

A closely held corporation

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Agency costs and problems
 

 

83.

Sole proprietorships resolve the issue of agency problems primarily by: 

A. 

avoiding excessive expense accounts.

 

B. 

discharging those who violate the rules.

 

C. 

allowing owners to share the cost of their actions with others.

 

D. 

forcing owners to bear the full cost of their actions.

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Agency costs and problems
 

 

84.

Which one of the following can best be characterized as an agency problem? 
 

A. 

differing opinions among directors as to the merits of paying a higher dividend. .

 

B. 

differing incentives between managers and owners.

 

C. 

persistently late delivery times by a major supplier.

 

D. 

Geological problems in the company’s new gold mine.

 

 

AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Agency costs and problems
 

 

85.

Which of the following is least likely to represent an agency problem? 

A. 

Lavish spending on expense accounts

 

B. 

Plush remodelling of the executive suite

 

C. 

Excessive avoidance of taxes

 

D. 

Executive incentive compensation plans

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Agency costs and problems
 

 

86.

When managers' compensation plans are tied in a meaningful manner to the value of the firm, agency problems: 
 

A. 

can be reduced.

 

B. 

will be created.

 

C. 

are shifted to other stakeholders.

 

D. 

are eliminated entirely from the firm.

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Agency costs and problems
 

 

87.

A firm's reputation: 
 

A. 

has no value.

 

B. 

is an important firm asset.

 

C. 

is irrelevant to shareholders.

 

D. 

can be easily restored once damaged.

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-07 Explain why unethical behavior does not maximize market value.
Topic: Goal of financial management
 

 

88.

Which of the following groups is least likely to be considered a stakeholder of the firm? 
 

A. 

Government

 

B. 

Customers

 

C. 

Competitors

 

D. 

Employees

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Forms of business organization
 

 

89.

A manager's compensation plan that offers financial incentives for increases in quarterly profitability may create agency problems in that: 
 

A. 

the managers are not motivated by personal gain.

 

B. 

the board of directors may claim the credit.

 

C. 

short-term, not long-term profits become the focus.

 

D. 

investors desire stable profits.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Agency costs and problems
 

 

90.

One continuing problem with managerial incentive compensation plans is that: 

A. 

the plans increase agency problems.

 

B. 

managers prefer guaranteed salaries.

 

C. 

their effectiveness is difficult to evaluate.

 

D. 

the plans do not reward shareholders.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Agency costs and problems
 

 

91.

Which one of the following forms of compensation is most apt to align the interests of managers and shareholders? 
 

A. 

A fixed salary

 

B. 

A salary that is linked to current company profits

 

C. 

A salary that is paid partly in the form of the company's shares

 

D. 

A salary that is linked to the company's market share

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-06 Understand what is meant by "agency problems" and cite some of the ways that corporate governance helps mitigate agency problems.
Topic: Agency costs and problems
 

 

92.

Which of the following is a real asset? 
 

A. 

A patent

 

B. 

A share of stock issued by Bank of New York

 

C. 

An IOU ("I owe you") from your brother-in-law

 

D. 

A mortgage loan taken out to help pay for a new home

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-02 Distinguish between real and financial assets.
Topic: Financial management decisions
 

 

93.

Which one of these statements is correct? 
 

A. 

A dollar received next year has the same value as a dollar received today.

 

B. 

Risky cash flows are more valuable than certain cash flows.

 

C. 

Smart investment decisions create more value than smart financing decisions.

 

D. 

Corporate governance is irrelevant.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 01-01 Give examples of the investment and financing decisions that financial managers make.
Topic: Introduction to corporate finance
 

 

94.

Short selling involves selling a security: 
 

A. 

you do not own.

 

B. 

that you have owned for less than one year.

 

C. 

at a price below current market value.

 

D. 

for less than you originally paid to purchase it.

 

 

AACSB: Ethics
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 01-07 Explain why unethical behavior does not maximize market value.
Topic: Introduction to corporate finance