Chapter1

IntroductiontoCorporateFinance

MultipleChoiceQuestions

1. Conflictsbetweenshareholdersandmanagersareusuallyresolved

A) byarbitration.

B) infavorofshareholders.

C) infavorofmanagers.

D) byrulesoffirstpriority.

E) Noneoftheabove.

Answer:BDifficulty:EasyPage:1

2. Firmsissuesecuritiesorfinancialinstruments(orclaims)toraisecapital.Theseclaimsareclassifiedas

A) stocksorbonds.

B) debtorequity.

C) contingentclaimsonthevalueofthefirm.

D) Alloftheabove.

E) Noneoftheabove.

Answer:DDifficulty:MediumPage:2

3. Thebalancesheetismadeupofwhatfivekeycomponents?

A) Fixedassets,currentliabilities,longtermdebt,tangiblecurrentassetsandshareholdersequity

B) Intangiblefixedassets,currentliabilities,long-termdebt,netincomeandcurrentassets

C) Fixedassets,long-termdebt,currentassets,currentliabilitiesandshareholdersequity

D) Currentassets,fixedassets,longtermdebt,shareholdersequityandretainedearnings

E) Noneoftheabove.

Answer:CDifficulty:MediumPage:3

4. Intermsofthebalancesheetmodelofthefirm,thevalueofthefirminfinancialmarketsisequalto

A) tangiblefixedassetsplusintangiblefixedassets.

B) salesminuscosts.

C) cashinflowminuscashoutflow.

D) thevalueofthedebtplusthevalueoftheequity.

E) thevalueofthedebtminusthevalueoftheequity.

Answer:DDifficulty:EasyPage:3

5. Inventoryisa(n)________account.

A) currentasset

B) currentliability

C) equity

D) fixedasset

E) long-termliability

Answer:ADifficulty:EasyPage:3

6. Capitalstructureisdefinedasthemajorfinancingofthefirm.Thecapitalstructureisdivided

A) betweendebtholdersandcreditors.

B) creditorsandshareholders.

C) assetsandliabilities.

D) Alloftheabove.

E) Noneoftheabove.

Answer:BDifficulty:MediumPage:4

7. Usingthebalancesheetmodelofthefirm,financemaybethoughtofasanalysisofthreeprimarysubjectareas.Whichofthefollowinggroupscorrectlyliststhesethreeareas?

A) Capitalbudgeting,capitalstructure,networkingcapital

B) Capitalbudgeting,capitalstructure,securitymarketing

C) Capitalbudgeting,networkingcapital,taxanalysis

D) Capitalbudgeting,taxanalysis,securitymarketing

E) Networkingcapital,taxanalysis,securitymarketing

Answer:ADifficulty:EasyPage:4

8. Whichofthefollowingisnotconsideredoneofthebasicquestionsofcorporatefinance?

A) Whatlong-livedassetsshouldthefirminvest?

B) Howmuchinventoryshouldthefirmhold?

C) Howcanthefirmraisecashforrequiredcapitalexpenditures?

D) Howshouldtheshort-termoperatingcashflowsbemanaged?

E) Alloftheabove.

Answer:BDifficulty:MediumPage:4

9. Theneedtomanagenetworkingcapitalarisesbecause

A) financialmanagementisnaturallybrokenintothoseareas.

B) shareholderswanttoensuretheyreceivedividendpayments.

C) thereisamismatchbetweenthetimingofcashinflowsandcashoutflows.

D) thesumofcurrentassetsandcurrentliabilitiesusuallyiszero.

E) thecapitalstructurepieislimitedinsize.

Answer:CDifficulty:EasyPage:4

10. InthemanagerialstructureofthecorporationthetwoofficersandtheirresponsibilitiesthatreportdirectlytotheChiefFinancialOfficer(CFO)are

A) thecreditmanagerwhohandlesaccountsreceivableandthetaxmanagerwhominimizestaxpayments.

B) thepersonnelmanagerwhomanagessalariesandcompensation,andtheproductionoperationsmanagerwhomanagesfacilityoperations.

C) thetreasurerwhoisresponsiblehandlingcashflowandmakingfinancialdecisionsandthetaxmanagerwhominimizestaxpayments.

D) thecontrollerwhomanagestheaccountingfunctionandthetreasurerwhoisresponsiblehandlingcashflowandmakingfinancialdecisions.

E) Noneoftheabove.

Answer:DDifficulty:EasyPage:5-6

11. Valueiscreatedandrecognizedovertimeif

A) cashraisedisinvestedintheinvestmentactivitiesofthefirm.

B) fundsareraisedinthecapitalmarkets.

C) cashpaidtoinvestors,shareholdersandbondholders,isgreaterthancashraisedinthefinancialmarkets.

D) managementpursuesactivitiestoreducetaxestozero.

E) Alloftheabove.

Answer:CDifficulty:MediumPage:7

12. Generallyacceptedaccountingprinciplesmayrecognizeandrecordasale

A) beforeacustomerpaysassumingtheywillpaysoon.

B) onlyafterthecompanyreceivespaymentinfull.

C) whenthecompanyreceivesatleast50%ofthetotalrevenuefromthecustomer.

D) Alloftheabove.

E) Noneoftheabove.

Answer:ADifficulty:MediumPage:7

13. Timepreferencereferstothefactthat

A) corporationsmatchcurrentassetswithcurrentliabilitiestominimizethechanceofbankruptcy.

B) corporationsmatchbothcurrentandlong-termassetswithcurrentandlong-termliabilitiestominimizethechangeofbankruptcy.

C) investorsprefercurrentcashflowstofuturecashflows.

D) investorsseektotimecashflowstominimizetaxliabilities.

E) Noneoftheabove.

Answer:CDifficulty:MediumPage:8

14. Financedeterminesthevaluetothefirmisbasedon

A) thecashflowsofthefirm.

B) thetimingandriskofthecashflows.

C) theprofitsearnedunderGAAP.

D) BothAandC.

E) BothAandB.

Answer:EDifficulty:MediumPage:8-9

15. Acorporatesecuritycanbeviewedasacontingentclaimonthefirm.Thismeansthat

A) debtholderswillreceivetheirpayofffromthefirmbasedontheirfixedclaimorthefirmcashflowsiflessthanthefixedclaim.

B) debtholderswillreceivethemaximumofthefirmcashflowsorthefixedclaim.

C) nopayoffwillbemadeunlessthefirmmakesmorethanthefixedclaimofthedebt.

D) nodebtpayoffwillbemadeunlessthereisanequitypayoff.

E) Noneoftheabove.

Answer:ADifficulty:MediumPage:9

16. Ifafirmhasdebtoutstandingthecontingentclaimofashareholderis

A) equaltothepaymenttothedebtholders.

B) equaltothefirmcashflowsminusthefixeddebtpaymentiftheresidualcashflowsarepositive.

C) equaltothefirmcashflowsminusthefixeddebtpaymentwhetherpositiveornegative.

D) equaltothedebtpaymentplustheresidualcashflowofthefirm.

E) Noneoftheabove.

Answer:BDifficulty:MediumPage:10

17. TheSimpleCorporationhasoutstandingobligationtotheComplexCorporationof$250.Itisyear-endandthetotalcashflowofSimplefromallsourcesis$325.Thecontingentpayofftothedebtholdersandtheshareholdersis

A) $250;$325

B) $75;$250

C) $250;$75

D) $325;$250

E) Noneoftheabove.

Answer:CDifficulty:MediumPage:10

18. Soleproprietorshipsarepredominantlystartedbecause

A) theyareeasilyandcheaplysetup.

B) theproprietorshiplifeislimitedtothebusinessowner'slife.

C) allbusinesstaxesarepaidasindividualtax.

D) Alloftheabove.

E) Noneoftheabove.

Answer:DDifficulty:EasyPage:11

19. Whichofthefollowingisatruestatementconcerningpartnerships?

A) Limitedpartnersareresponsibleforalldebtsofthepartnership.

B) Limitedpartnersgenerallymanagethepartnership.

C) Theincomeofthegeneralpartneristaxedatthecorporateincometaxrate.

D) Partnershipsareneverterminatedandtheyhaveinfinitelife.

E) Noneoftheabove.

Answer:EDifficulty:EasyPage:11

20. Thegeneralpartner(s)inageneralpartnershipagreetosharework,costs,profits,andlosses.Eachpartner

A) hasliabilityonlyuptotheamountoftheirinvestment.

B) hasliabilityforthedebtsofthepartnership.

C) hasliabilityonlyifitisformallydocumented.

D) neverhasanyliabilitybutthelimitedpartnersdo.

E) Noneoftheabove.

Answer:BDifficulty:MediumPage:11

21. Inthelargecorporation,theseparationofmanagementandownershipprovidesthefollowingadvantage(s)

A) itmusthavealimitedlife.

B) easeofshareownershiptransfer.

C) unlimitedshareholderliability.

D) BothAandB.

E) BothBandC.

Answer:BDifficulty:MediumPage:11-12

22. Businessesthataregoodcandidatesforincorporationhave

A) lowtaxableincome.

B) lowmarginalcorporatetaxrates.

C) lowmarginalpersonaltaxratesamongpotentialshareholders.

D) Alloftheabove.

E) Noneoftheabove.

Answer:DDifficulty:HardPage:14

23. TheSplitzCorporationhasborrowed$5millionindebtwithapromisetorepay$5.5millioninoneyear.Thecorporationhad10millionsharesoutstandingworth$2eachatthetimeoftheborrowing.Splitz'snetincomewasearns$6millionduringtheyear.Whatisthedebtholder'scontingentclaim;howmuchdothedebtholdersreceive;and,howmuchdotheshareholdersreceive?

A) $5,500,000;$6,000,000;$20,000,000

B) $5,000,000;$5,500,000;$0

C) $5,000,000;$5,500,000;$20,000,000

D) $5,500,000;$5,500,000;$500,000

E) $5,000,000;$5,000,000;$1,000,000

Answer:DDifficulty:MediumPage:9-10

Rationale:

Earnings-DebtClaim=ShareholderResidualorDebtShortfall=$6,000,000-$5,500,000=$500,000;debtholdersreceive$5,500,000;stockholdersreceive$500,000.

24. TheSplitzCorporationhasborrowed$5millionindebtwithapromisetorepay$5.5millioninoneyear.Thecorporationhad10millionsharesoutstandingworth$2eachatthetimeoftheborrowing.Splitzearns$5millionduringtheyear.Whatisthedebtholder'scontingentclaim;howmuchdoesthedebtholderreceive;and,howmuchdotheshareholdersreceive?

A) $5,000,000;$5,500,000;$20,000,000

B) $5,500,000;$5,000,000;$0

C) $5,000,000;-$500,000;$20,000,000

D) -$500,000;$5,000,000;$0.

E) $5,000,000;5,500,000;-$500,000

Answer:BDifficulty:MediumPage:9-10

Rationale:

Earnings-DebtClaim=ShareholderResidualorDebtShortfall=$5,000,000-$5,500,000=

-500,000;debtholdersreceive$5,000,000;stockholdersreceive$0.

25. Corporatesecuritiesarecontingentclaimsbecause

A) theydon'trepresentadirectclaimonthefirm.

B) thefirmmaybeboughtout.

C) thesecuritiesvalueisderivedfromthevalueofthefirm.

D) bookvaluecanbenegative.

E) Noneoftheabove.

Answer:CDifficulty:HardPage:9-10

26. Agencycostssurroundingtheconflictofinterestbetweenmanagersandshareholdersare

A) themonitoringcostsoftheshareholdersandtheresiduallossofwealthduetodivergentmanagementbehavior.

B) thecostsofimplementingcontroldevicesandthemonitoringcostsoftheshareholders.

C) thecostsofimplementingcontroldevicesandtheresiduallossofwealthduetodivergentmanagementbehavior.

D) theset-of-contractsneededtostructurethefirmandresidualwealth.

E) Noneoftheabove.

Answer:BDifficulty:HardPage:15

27. Residuallossessurroundingtheconflictofinterestbetweenshareholdersandmanagementarecalled

A) reductioninshareholderwealthduetocompetitors'behaviors.

B) againtoshareholderwealthifthemanagerdoesnotownstockinthecompany.

C) lostwealthoftheshareholdersduetodivergentbehaviorofmanagers.

D) BothAandC.

E) Noneoftheabove.

Answer:CDifficulty:HardPage:15

28. Fromafinanceperspective,whatistheprimarygoalofthecorporation?

A) Maximizethepayandcompensationofemployeesandmanagersofthefirm.

B) Maximizethevalueofthestockholdersbecausetheyaretheownersofthecorporation.

C) Maximizethewealthofallstakeholdersifthefirmwantstocontinuetoexist.

D) Maximizethesocietalvaluetominimizegovernmentalinterference.

E) Noneoftheabove.

Answer:BDifficulty:EasyPage:15

29. Shareholdersattempttocontrolmanagerialbehaviorby

A) electingtheboardofdirectorswhoselectmanagement.

B) thethreatofatakeoverbyanotherfirm.

C) settingcompensationcontractsandtyingcompensationtocorporatesuccess.

D) BothAandB.

E) Alloftheabove.

Answer:EDifficulty:MediumPage:16

30. Financialmarketsarecomposedof

A) capitalmarketsandequitymarkets.

B) capitalmarketsanddebtmarkets.

C) capitalmarketsandmoneymarkets.

D) equitymarketsandmoneymarkets.

Answer:CDifficulty:EasyPage:17

31. Theprimarymarketisdefinedasthe

A) marketforinsuredsecurities.

B) marketfornewissues.

C) marketforsecuritiesofthelargestfirms.

D) over-the-countermarket.

E.)Noneoftheabove.

Answer:BDifficulty:EasyPage:17

32. RegistrationofapublicissueofnewsecuritieswiththeSecuritiesandExchangeCommission(SEC)requires

A) theuseofanunderwriter.

B) disclosureofallmaterialinformationinaregistrationstatement.

C) thesaleofthesecuritiesbyprivatenegotiation.

D) Alloftheabove.

E) Noneoftheabove.

Answer:BPage:17

33. TheNYSEandNASDAQareboth

A) primarymarkets.

B) dealermarkets.

C) secondarymarkets.

D) Alloftheabove.

E) Noneoftheabove.

Answer:CDifficulty:MediumPage:18

34. Whichofthefollowingstatementsconcerningregistrationofpubliclyavailablecorporatesecuritiesisfalse?

A) ThesecuritiesmustberegisteredattheSEC.

B) Registrationinvolvesthedisclosureofrelevantinformation.

C) Thecostsofpreparingtheregistrationstatementarenegligible.

D) PrivateplacementofsecuritiesavoidsregisteringwiththeSEC.

E) Noneoftheabove.

Answer:CDifficulty:EasyPage:17

35. TheNYSElistingrequirementsfornon-U.S.companiesare

A) moreflexiblethanthoseforU.S.companies.

B) morestringentthanthoseforU.S.companies.

C) thesameasthoseforU.S.companies.

D) irrelevantsincenonU.S.companiescannotlistontheNYSE.

E) Noneoftheabove.

Answer:BDifficulty:MediumPage:18

36. InordertolistontheNYSE,afirmmusthave

A) nettangibleassetsofatleast$40million.

B) amarketvalueforpubliclyheldsharesofatleast$40million.

C) atleast3,000holdersof100sharesofstockormore.

D) BothAandB.

E) Alloftheabove.

Answer:DDifficulty:HardPage:18

37. Inalimitedpartnership

A) eachpartner'sliabilityislimitedtohisnetworth.

B) eachpartner'sliabilityislimitedtotheamountheputintothepartnership.

C) eachpartner'sliabilityislimitedtohisannualsalary.

D) thereisnolimitationonliability;onlyalimitationonwhatthepartnercanearn.

E) Noneoftheabove.

Answer:BDifficulty:EasyPage:11

EssayQuestions

38. FleaFallInc.,amakerofdogfleacollars,paid$125,000cashforinventoryonJanuary1,2004.OnDecember31,2004,thecompany'ssalestotal$147,000ofwhich$117,000hasbeencollected.IfinventoryrepresentsFleaFallsonlycost,calculatethefirmsaccountingprofitaswellasitscashflowasofDecember31,2004.

Difficulty:MediumPage:7-8

Answer:

AccountingProfit=Sales-Cost[$147,000-$125,000=$22,000]

CashFlow=CashInflow-CashOutflow[$117,000-$125,000=$-8,000]

39. TheHarlowCorporationhaspromisedtopayitsdebtholdersanamountof$2,700overthenextyear.Thefirm'ssh