Corporate Finance Exam

Exam Name___________________________________ TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 1) 2) 3) 4) 5) 6) 7) 8) 9) In capital budgeting, the financial manager tries to identify investment opportunities that are worth more to the firm than they cost to acquire. The size, timing and risk of cash flows are important when evaluating a capital budgeting decision. A capital expenditure project becomes desirable when the project is worth more to the firm than the cost to acquire it. A capital expenditure project becomes desirable when the value of the cash flow generated by the project exceeds the project's cost. Capital structure determines the least expensive sources of funds for the firm to borrow. Capital structure determines how much debt the firm should have in relation to its level of equity. Capital structure determines the level of current assets that is required to maintain the firm's operational level. Capital structure determines how much risk is associated with the future cash flows of a project. Determining when a supplier should be paid is a capital structure decision. 10) Establishing the accounts receivable policies is a capital structure decision. the amount of money to borrow in order to finance a 10-year project is a capital structure decision. 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) Determining 11) 12) Deciding 12) if a new project should be accepted is a working capital decision. 13) When evaluating a project in which a firm might invest, the size but not the timing of the cash flows is important. 13) 14) Working capital management addresses the firm's appropriate level of inventory. 14) 15) Common stockholders or limited partners can lose, at most, what they have invested in a 15) firm. 1 16) Partnership 17) A income is treated as personal income of the partners. limited partner can lose his or her investment in the partnership. 18) Maximization manager. of the current earnings of the firm is the main goal of the financial 19) The primary goal of a financial manager should be to maximize the value of shares issued to new investors in the corporation. 20) The primary goal of financial management is to minimize the corporate tax liability. of the firm ultimately rests with board of directors. They elect the management, who, in turn, lead the company. 16) 17) 18) 19) 20) 21) Control 21) 22) The 22) Sarbanes-Oxley Act was intended to protect investors from corporate abuses. 23) The Sarbanes-Oxley Act was intended to increase corporate social responsibility of publicly listed organizations. 23) 24) The 24) 25) The 25) goal of financial managers does not imply that illegal or unethical actions should be taken in the hope of increasing the value of the the firm. collapse of companies like Enron and Worldcom illustrates the impact unethical behaviour on public trust and confidence. 26) Unethical behaviour does not impact volatility of the stock markets. 27) The board of directors has the power to act on behalf of the shareholders to hire and fire the operating management of the firm. In a legal sense, the directors are "principals" and the shareholders are "agents". 28) When costs. owners are managers (such as in a sole proprietorship), a firm will have agency Inc. of Toronto spends approximately $2 million annually to hire auditors to go over the firm's financial statements. This is an example of an indirect agency cost. 26) 27) 28) 29) IBEC 29) 30) Control 30) 31) Stakeholder 31) of the firm ultimately rests with shareholders. They elect the board of directors, who, in turn, hire and fire management. theory suggests that employees, customers, suppliers, and various levels of government all have financial interests in the firm. 2 32) Corporate social responsibility (CSR) is also referred to as corporate sustainability. 32) 33) Corporate social responsibility (CSR) is also referred to as the triple bottom line. 33) 34) The triple bottom line is defined as a company's commitment to operate in an economically, socially and environmentally sustainable manner. 35) There is a significant relationship between CSR activity and corporate performance. 36) Research results on CSR activity and corporate performance has been mixed. 34) 35) 36) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 37) A proprietorship is: separate legal body formed by an individual who has limited personal liability. B) A business owned by an individual who has unlimited personal liability. C) A business managed by a single general partner. D) A limited liability form of business ownership. E) A business formed by two or more individuals. 37) A) A 38) Which of the following would be considered a primary market transaction? buy order to an investment banker for a new public stock offering. B) A sell order to a broker for a stock listed on the TSX. C) A buy order to a broker for shares of a company on the TSX. D) A buy order to a dealer for shares of a company OTC. E) A buy order to a broker for shares of a company on the Venture Exchange. 38) 39) A 39) A) A 40) In stakeholder is: founding stockholder of the firm. B) An original creditor of the firm. C) A person or entity including a stockholder or creditor, who potentially has a claim on the cash flows of the firm. D) A proxy vote made at a shareholders' meeting. E) Given to each stockholder when they first purchase their stock. A) A a limited partnership: general and limited partners are involved in the daily management of the firm. B) The income earned is taxed like a corporation. C) A general partner is liable only for the amount he/she contributed to the partnership. D) Only the limited partners are involved in the daily management of the firm. E) A limited partner is liable only for the amount he/she contributed to the partnership. A) Both 3 40) 41) A stakeholder is: creditor to whom the firm currently owes money and who consequently has a claim on the cash flows of the firm. B) A person who initially started a firm and currently has management control over the cash flows of the firm due to his/her current ownership of company stock. C) Any person or entity that has voting rights based on stock ownership of a corporation. D) Any person or entity that owns shares of stock of a corporation. E) Any person or entity who potentially has a claim on the cash flows of the firm. 41) A) A 42) An agency problem is said to exist when there is a conflict of interest between ________ and ________. A) One shareholder; another shareholder. B) An agent; his or her representative. C) A broker; a dealer. D) A principal; his or her agent. E) A shareholder; a stakeholder. 42) 43) Which 43) 44) You 44) 45) Which 45) one of the following statements concerning a proprietorship is true? proprietor is personally responsible for 100% of the firm's liabilities. B) A proprietorship can be a business jointly owned by two family members. C) Income from a proprietorship is taxed as a separate entity. D) Income from a proprietorship is taxed at a lower rate than other personal income. E) A partial transfer of ownership is easier with a proprietorship than with a corporation. A) A are interested in purchasing 100 shares of stock in one of the largest corporations in the Canada. You would most likely purchase the shares in ________. A) A primary market operated as an auction market. B) A secondary market operated as an auction market. C) A primary market operated as a dealer market. D) A secondary market operated as a dealer market. E) A secondary market operated as a money market. one of the following is a correct statement concerning a sole proprietorship? profits earned by a sole proprietorship are subject to double taxation. B) The losses incurred by a sole proprietor are limited to the amount invested in the firm. C) A sole proprietorship is relatively difficult to form. D) It may be difficult to transfer the ownership of a sole proprietorship. E) A sole proprietorship is more highly regulated than a corporation. A) The 4 46) What is the difference between third and fourth markets? third market involves trading in corporate equities, while a fourth market involves trading in corporate debt. B) A third market involves trading in corporate debt, while a fourth market involves trading in corporate equities. C) A third market involves trading institution-to-institution trading without using the services of brokers or dealers trading, while a fourth market involves trading exchange-listed securities in OTC markets. D) A third market involves trading exchange-listed securities in OTC markets, while a fourth market trading involves institution-to-institution trading without using the services of brokers or dealers. E) A third market involves trading in call options, while a fourth market involves trading in warrants. 46) 47) The 47) 48) The 48) 49) Which 49) A) A best definition of "capital structure" is: a firm is financed through different proportions of debt and equity. B) The possibility of conflicts between shareholders and management in a large corporation. C) A venue where buyers and sellers of capital equipment come together to trade such assets. D) The process of planning and managing a firm's long-term investments. E) A venue where long-term debt and equity securities are bought and sold. A) How best definition of "capital markets" is: process of planning and managing a firm's long-term investments. B) A venue where buyers and sellers of capital equipment come together to trade such assets. C) The purchase or sale of securities whose value derives from the price of another, underlying, asset. D) A venue where long-term debt and equity securities are bought and sold. E) The possibility of conflicts between shareholders and management in a large corporation. A) The one of the following actions is the best example of an agency problem? management bonuses based on the current market value of the firm's stock. B) Accepting a project that enhances both management salaries and the market value of the firm's stock. C) Paying management bonuses based on the number of store locations opened during the year. D) Requiring stockholders approval of all management compensation decisions. E) Basing management bonuses on the attainment of specific financial goals. A) Paying 5 50) Which of the following accounts does not relate to working capital management decisions? A) Inventory. B) Accounts payable. C) Long-term debt. D) Accounts receivable. E) Short-term debt. 50) 51) The 51) 52) The 52) 53) The 53) 54) The 54) 55) In 55) process of planning and managing a firm's Long-term investments is called: structure. B) Financial depreciation. C) Agency cost analysis. D) Capital budgeting. E) Working capital management. A) Capital mixture of debt and equity used by the firm to finance its operations is called: structure. B) Agency cost analysis. C) Capital budgeting. D) Financial depreciation. E) Working capital management. A) Capital process of planning and managing a firm's long-term investments is called: cost analysis. B) Capital structure. C) Financial depreciation. D) Working capital management. E) Capital budgeting. A) Agency management of the firm's short-term assets and liabilities is called: budgeting. B) Capital structure. C) Working capital management. D) Financial depreciation. E) Agency cost analysis. A) Capital corporate agency theory, managers are ________, and owners are ________. shareholder. B) Principals; agents. C) Agents, principals. D) Agents; contractors. E) Shareholder; bondholders. A) Bondholders; 6 56) Which one of the following actions by a financial manager creates an agency problem? to lower selling prices if doing so will reduce the net profits. B) Agreeing to expand the company at the expense of stockholders' value. C) Increasing current costs in order to increase the market value of the stockholders' equity. D) Agreeing to pay bonuses based on the market value of the company stock. E) Refusing to borrow money when doing so will create losses for the firm. 56) 57) Which 57) 58) Which 58) 59) Capital 59) 60) The 60) A) Refusing one of the following statements is correct concerning the listing of stock on an exchange? A) All exchanges have the same listing requirements. B) Listing requirements are established by the Ontario Securities Commission. C) Any firm can list their stock on any exchange they desire. D) The TSX has the most stringent listing requirements of any Canadian stock exchange. E) The number of shareholders is NOT a listing consideration for a stock. of the following statements concerning auction markets is correct? is an auction market. B) A market where buyers specify the lowest price they are willing to pay and sellers indicate the highest price they are willing to accept. C) The TSX is an auction market. D) All trades involve a dealer in an auction market. E) An auction market is called an over-the-counter market. A) NASDAQ structure decisions include which of the following? whether the firm should purchase or lease some equipment. B) Allocating funds to the various divisions within the firm. C) Evaluating the customer credit policy. D) Evaluating the size of inventory to be kept on hand. E) Determining the number of shares of stock to issue. A) Determining document that legally establishes domicile for a corporation is called the: contract. B) Bylaws. C) Amended homestead filing. D) Partnership agreement. E) Articles of incorporation. A) Indenture 7 61) NASDAQ is: an OTC and an auction market. B) A market with far fewer listings than the NYSE. C) An electronic market which has no physical location. D) An electronic market trading solely in corporate and government bonds. E) The largest financial market in the U.S. in terms of the total value of listed stocks. 61) 62) Of 62) 63) Which 63) 64) Which 64) 65) The 65) A) Both the following, which statement regarding agency costs is false? agency problem exists when there is a conflict of interest between the stockholders and management of a firm. B) An indirect agency cost occurs when firm management avoids risky projects that would favourably affect the stock price because the managers are worried about keeping their jobs. C) If agency costs get too high in the eyes of shareholders, they can begin a proxy fight to replace existing management. D) An agency problem exists when there is a conflict of interest between a principal and an agent. E) A corporate expenditure that benefits stockholders but harms management is an agency cost. A) An one of the following is a primary market transaction? bank selling shares of a medical firm to an individual. B) A dealer selling shares of stock to an individual investor. C) A sole proprietor buying shares of stock from an individual investor. D) A dealer buying newly issued shares of stock from a corporation. E) An individual investor selling shares of stock to another individual. A) A one of the following transactions would occur in the primary market? financial institution buying shares of LM stock from an LM executive. B) KM Co. selling new shares of stock to a financial institution. C) A financial institution selling shares of OPQ stock to another financial institution. D) The gifting of ABC Co. shares by a grandmother to her grandchildren. E) An individual selling shares of JKL stock to an existing JKL shareholder. A) A size, risk, and timing of future cash flows are the key elements evaluated in the: budgeting process. B) Analysis of current assets. C) Capital structure decision. D) Cash management process. E) Analysis of working capital. A) Capital 8 66) Dealer markets: exist outside of Canada. B) List only the securities of the largest firms. C) Include NASDAQ and the New York Stock Exchange. D) Are called over-the-counter markets. E) Are reserved strictly for trading debt securities. 66) 67) Sue 67) 68) A 68) A) Only Folker wants to start a new business decommissioning nuclear warheads and reactors. The work will involve significant hazards, and Sue is concerned about protecting her personal wealth from any losses the business might incur. If she is to be the majority owner of the business how should she structure it? A) As a sole proprietorship. B) As a corporation. C) As a real estate investment trust. D) As a general partnership. E) As a limited partnership. firm's capital structure is defined: the types of fixed assets the firm owns. B) As the amount of fixed assets needed to support every $1 in sales. C) As the combination of debt and equity used to finance the firm's operations. D) By the nature of the product or service provided. E) As the mix of short-term and Long-term assets owned by the firm. A) By 69) The primary goal of financial management is to: current sales. B) Maintain steady earnings growth. C) Avoid financial distress. D) Minimize operational costs. E) Maximize the current value per share of the existing stock. 69) 70) Which 70) A) Maximize of the following is the BEST description of the goal of the financial manager in a corporation where shares are publicly traded? A) Maximize profits. B) Avoid financial distress. C) Maintain steady earnings growth. D) Maximize sales. E) Maximize the current value per share of the existing stock. 9 71) An individual who buys and sells stocks for his/her own account is a: broker. B) Broker. C) Agent. D) Auctioneer. E) Dealer. 71) 72) Ensuring 72) 73) Which 73) 74) A 74) A) OTC that a firm has sufficient cash available on a daily basis is part of: capital management. B) Capital budgeting. C) Business organization. D) Organizational structure. E) Capital structure. A) Working of the following would be considered a secondary market transaction? or sell orders for corporate warrants. B) Buy or sell orders only for call or put options. C) Buy or sell orders only for corporate bonds. D) Buy or sell orders to a broker for shares listed on the TSX. E) Buy or sell orders for shares listed on the TSX or corporate bonds. A) Buy dealer is a person who: and sells for themselves, at their own risk. B) Buys and sells strictly on the trading floor of an exchange. C) Conducts a trade on behalf of another individual. D) Buys and sells on behalf of the original issuer of the commodity being bought or sold. E) Buys and sells but does not own the commodity being bought or sold. A) Buys 75) According to the statement of financial position model of the firm, corporate finance can be thought of as an analysis of three primary subject areas. Which of the following correctly lists these areas? A) Capital budgeting, capital structure, net working capital. B) Capital structure, net working capital, capital rationing. C) Capital budgeting, capital spending, net working capital. D) Capital budgeting, capital structure, capital spending. E) Capital structure, capital budgeting, security analysis. 10 75) 76) The decision of which lender to use and which type of long-term loan is best for a project is part of: A) Working capital management. B) The capital structure decision. C) A controller's duties. D) The net working capital decision. E) Capital budgeting. 76) 77) The 77) 78) The 78) 79) Mr. 79) 80) Deciding 80) 81) The 81) decision to issue debt rather than additional shares of stock is an example of: capital management. B) A net working capital decision. C) A controller's duties. D) Capital structure decision. E) Capital budgeting. A) Working mix of debt and equity by which a corporation is financed refers to the firm's: structure. B) Capital budgeting. C) Working capital management. D) Leverage management. E) Cash management. A) Capital Webster, the CEO of Master Works, Inc., recently stated that the firm will maintain its current policy of borrowing $.40 for every $1 invested by shareholders. Mr. Webster was referring to the ________ policy of the firm. A) Capital budgeting. B) Financial planning. C) Capital investment. D) Working capital. E) Capital structure. whether or not to open a new store is part of the process known as: capital management. B) Credit management. C) Cash management. D) Capital budgeting. E) Capital structure. A) Working Chief Financial Officer of a corporation is the: President of Finance. B) Chairman of the Board. C) Corporate Treasurer. D) President. E) Chief Executive Officer. A) Vice 11 82) The treasurer and the controller of a corporation generally report to the: executive officer. B) Board of directors. C) Vice president of finance. D) Chairman of the board. E) President. 82) 83) The 83) 84) Which 84) 85) Which 85) 86) The 86) A) Chief treasurer of a firm is most apt to report to the: executive officer. B) Controller. C) Vice president of finance. D) President. E) Chief operating officer. A) Chief of the following is considered a primary market transaction? September 25, 1995, 30.8 million shares of stock changed hands on the TSX. B) An investor buys stock in Chrysler Canada from his buddy. C) Labatt's just announced what their upcoming quarterly dividend payment will be. D) A firm sells stock to the public for the first time in an IPO. E) Chrysler Canada's stockholders sell some of their shares to an activist investor. A) On of the following statement is correct regarding control of the firm? of the firm rests with the executives that oversea the strategic planning. B) Control of the firm rests with government agencies and regulatory bodies working in unison with the board of directors. C) Control of the firm ultimately rests with board of directors. They elect the management, who, in turn, lead the company. D) Control of the firm ultimately rests with shareholders. They elect the board of directors, who, in turn, hire and fire management. E) Control of the firm rests with regulatory bodies working in unison with executives. A) Control person generally directly responsible for overseeing the tax management, cost accounting, financial accounting, and data processing functions is the: A) Director. B) Chairman of the board. C) Chief executive officer. D) Treasurer. E) Controller. 12 87) The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the: A) Treasurer. B) Director. C) Chairman of the board. D) Chief operations officer. E) Controller. 87) 88) The 88) 89) The 89) 90) The 90) 91) Agency 91) corporate document that sets forth the business purpose of a firm is the: bylaws. B) Articles of incorporation. C) Provincial tax agreement. D) Corporate charter. E) Indenture contract. A) Corporate corporate officer generally responsible for tasks related to tax management, cost accounting, financial accounting, and data processing is the: A) Director. B) Corporate Treasurer. C) Corporate Controller. D) Chairman of the Board. E) Vice President of Operations. corporate officer generally responsible for tasks related to cash and credit management, financial planning, and capital expenditures is the: A) Director. B) Corporate Treasurer. C) Vice President of Operations. D) Chairman of the Board. E) Corporate Controller. costs are: total dividends paid to shareholders over the lifetime of the firm. B) Corporate income subject to double taxation. C) The costs that result from default and bankruptcy of the firm. D) The total interest paid to creditors over the lifetime of the firm. E) The costs of the conflict of interest between stockholders and management. A) The 13 92) The death of the firm's owner(s) does NOT effectively dissolve which type(s) of organization? A) Sole proprietorship. B) Hybrid partnership. C) Partnership. D) Limited proprietorship. E) Corporation. 92) 93) Which 93) 94) The 94) 95) The 95) one of the following business types is best suited to raising large amounts of capital? A) Corporation. B) General partnership. C) Limited partnership. D) Sole proprietorship. E) Limited liability company. mixture of debt and equity used by a firm to finance its operations is called: structure. B) Working capital management. C) Cost analysis. D) Capital budgeting. E) Financial depreciation. A) Capital best definition of "financial engineering" is: company that owns or finances engineering projects. B) A company that owns or finances income-producing real estate. C) Creation of new securities or financial processes. D) Financial markets where long-term debt and equity securities are bought and sold. E) The purchase or sale of securities whose value derives from the price of another, underlying, asset. A) A 96) Which one of the following groups is the goal of financial management centered around? 96) management. B) Existing shareholders. C) Current creditors. D) The CRA. E) Potential new shareholders. A) Existing 97) The primary goal of financial management is to maximize the: value of the firm. B) Growth rate of a firm. C) Number of shares of common stock outstanding. D) Current value of each share of outstanding stock. E) Compensation of the corporate officers. A) Book 14 97) 98) The Corporate Treasurer is in charge of: processing. B) Credit management. C) Cost accounting. D) Financial accounting. E) Tax management. 98) 99) A 99) A) Data market where dealers buy and sell securities for themselves, at their own risk, is called a(n): A) Auction market. B) Primary market. C) Secondary market. D) Dealer market. E) Liquidation market. 100) 101) 102) 103) A market where trading takes place directly between buyers and sellers is called a(n): A) Auction market. B) OTC market. C) Primary market. D) Dealer market. E) Liquidation market. The original sale of securities by governments and corporations occurs in the: A) Liquidation market. B) Primary market. C) Auction market. D) Secondary market. E) Dealer market. The purchase and sale of securities after the original issuance occurs in the: A) Liquidation market. B) Primary market. C) Dealer market. D) Secondary market. E) Auction market. A market where trading takes place between buyers and sellers directly is called a(n): A) Dealer market. B) Primary market. C) Auction market. D) Liquidation market. E) Secondary market. 15 100) 101) 102) 103) 104) 105) 106) 107) 108) 109) The purchase and sale of shares between investors are done in which market? A) Tertiary market. B) Derivatives market. C) Foreign exchange market. D) Debt market. E) Secondary market. Suppliers, customers, and employees of a corporation are called: A) Creditors. B) Shareholders. C) Stakeholders. D) Debtors. E) Partners. Which one of the following is a capital budgeting decision? A) Determining how much money should be kept in the chequing account. B) Deciding whether or not to open a new store. C) Determining how much debt should be borrowed from a particular lender. D) Determining how much inventory to keep on hand. E) Deciding when to repay a long-term debt. Which of the following is NOT a duty of a financial manager?" A) Deciding the mix of long-term debt and equity. B) Deciding on the optimal product mix to sell. C) Deciding which projects a firm should undertake. D) Deciding how much short-term debt to use. E) Deciding how much interest to pay the holders of the corporation's bonds. The best definition of "agency problem" is: A) The possibility of conflicts between shareholders and management in a large corporation. B) The process of planning and managing a firm's long-term investments. C) Determining who should be the agent of corporate executives. D) Determining the optimal mix of internal and external board of directors. E) The purchase or sale of securities whose value derives from the price of another, underlying, asset. The primary purpose of capital budgeting is to: A) Distinguish projects that have at least a five-year life from those that don't. B) Determine the amount of cash and inventory to keep on hand. C) Identify projects that produce cash flows that exceed the cost of the project. D) Determine the risk level of a project. E) Estimate the initial cost of a project. 16 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) Cash flow from a firm's assets can be: A) Reinvested to other companies. B) Reinvested back in the company. C) Distributed to bondholders. D) Invested in money market funds. E) Paid out as interest. 110) Which of the following are disadvantages of the partnership form of ownership? A) Personal liability and double taxation. B) Ease of formation and ease of ownership transfer. C) Personal liability and limited firm life. D) Double taxation and limited firm life. E) Ease of formation and unlimited firm life. Which of the following is considered a benefit of the corporate form of organization? A) Double taxation. B) Ease of entry into stock exchange. C) Ease of reporting. D) Limited life. E) Ease of the transfer of ownership. In a general partnership: A) Only the general partner is liable for the firm's debt. B) Each partner is responsible only for his/her portion of the firm's debt based on ownership percentage. C) Each partner is personally responsible for all of the firm's debt. D) None of the partners are personally liable for the firm's debt. E) Each partner is liable only for the portion of the total debt he/she agreed in writing to pay. Two of the primary advantages of a sole proprietorship are the: A) Ease of company formation and less regulation. B) Ease of ownership transfer and ease of company formation. C) Ease of ownership transfer and less regulation. D) Ease of company formation and limited liability. E) Ability to raise capital and less regulation. Which one of the following actions best meets the goal of financial management? A) Easing the accounts receivable policies in order to increase current sales. B) Accepting a project that enhances the current market value of the firm's stock. C) Delaying cash payments in order to increase the total cash on hand. D) Issuing additional shares of stock to increase the total cash on hand. E) Deciding a firm should be 100% equity financed. 17 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) Working capital management: A) Balances the amount of company debt to the amount of available equity. B) Ensures that sufficient equipment is available to produce the amount of product desired on a daily basis. C) Ensures that dividends are paid to all stockholders on an annual basis. D) Concerned with having sufficient funds to operate the business on a daily basis. E) Ensures that long-term debt is acquired at the lowest possible cost. The management of a firm's short-term assets and liabilities is called: A) Capital budgeting. B) Equity management. C) Debt management. D) Working capital management. E) Capital structure. Which one of the following is a capital budgeting decision? A) Determining which bank has the best loan terms. B) Establishing the length of time for which store credit will be offered. C) Deciding whether or not the firm should open another retail outlet. D) Ascertaining the optimal level of inventory. E) Evaluating the minimal amount of cash which the firm should keep on hand. A general partner: A) Is the term applied only to corporations which invest in partnerships. B) Has less legal liability than a limited partner. C) Has more management responsibility than a limited partner. D) Cannot lose more than the amount of his/her equity investment. E) Faces double taxation whereas a limited partner does not. The treasurer can be defined as the person who is generally responsible for overseeing the ________ of a firm. A) Cost accounting. B) Data processing functions. C) Financial planning. D) Tax matters. E) Financial accounting. Which of the following does NOT correctly finish this sentence: In Canada, ________. A) Over-the-counter markets are operated as auction markets. B) Auction markets have a physical location. C) Financial markets function as both primary and secondary markets for debt and equity securities. D) New issues of securities occur in primary markets. E) The OTC market does not have a central location. 18 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) The best definition of "money markets" is: A) Financial markets where long-term debt and equity securities are bought and sold. B) Financial markets where foreign currency is bought and sold. C) Financial markets where shares are bought and sold for cash. D) Financial markets where long-term debt securities are bought and sold. E) Financial markets where short-term debt securities are bought and sold. The best definition of "REIT" is: A) Financial markets where long-term debt and equity securities are bought and sold. B) Financial markets where long-term debt securities are bought and sold. C) Financial markets where foreign currency is exchanged for real estate. D) A company that owns or finances income-producing real estate. E) Financial markets where short-term debt securities are bought and sold. The best definition of "capital budgeting" is: A) The possibility of conflicts between shareholders and management in a large corporation. B) The process of planning and managing a firm's long-term investments. C) The annual process of providing a benchmark for financial performance. D) The purchase or sale of securities whose value derives from the price of another, underlying, asset. E) Financial markets where long-term debt and equity securities are bought and sold. The best definition of "derivative securities" is: A) Financial markets where long-term debt and equity securities are bought and sold. B) Creation of new securities or financial processes. C) Investment products whose value derives from the price of another, underlying, asset. D) A compensation package for managers that ties their salary to the firm's share price. E) An insurance policy that ensures underlying assets are secured. A business formed by two or more individuals who each have unlimited liability for business debts is called a: A) Limited liability company. B) Sole proprietorship. C) Corporation. D) General partnership. E) Limited partnership. 19 122) 123) 124) 125) 126) 127) 128) 129) 130) A business created as a distinct legal entity composed of one or more individuals or entities is called a: A) Sole proprietorship. B) Corporation. C) General partnership. D) Unlimited liability company. E) Limited partnership. Which one of the following is a disadvantage of a partnership? A) Ability to raise capital as compared to a sole proprietorship. B) Double taxation. C) Growth limitations due to the inability to raise investment capital. D) Complexity and cost of partnership formation. E) The debt obligations of a limited partner. Which statement best describes hedge funds? A) Hedge funds are regulated and publicly managed investment funds catering to sophisticated investors, which look to earn high returns using aggressive financial strategies prohibited by mutual funds. B) Hedge funds are largely unregulated and privately managed investment funds catering to sophisticated investors, which look to earn high returns using aggressive financial strategies prohibited by mutual funds. C) Hedge funds are secondary market sources of raising capital for startup companies. D) Hedge funds are highly regulated and publicly managed investment funds catering to novice investors, which look to earn average returns using simple financial strategies similar to mutual funds. E) Hedge funds are largely unregulated and privately managed investment funds catering to sophisticated investors, which look to earn high returns using aggressive financial strategies similar to mutual funds. Which of the following statements is false concerning limited partnerships? A) Limited partners generally do not manage the partnership. B) In a limited partnership, all partners share is limited to the amount contributed to the partnership. C) Limited partnerships have limited liability (to the extent of their investment). D) Limited partners are responsible for all debts of the partnership. E) Limited partnerships can bring in more partners. 20 127) 128) 129) 130) 131) 132) 133) 134) 135) Which one of the following statements concerning a partnership is true? A) Limited partners in a limited partnership should be actively involved in management decisions. B) Income from a limited partnership is taxed as corporate income. C) A primary advantage of a partnership is the ease of transferring ownership. D) Under a general partnership, only the key partner is personally liable for the business debts. E) A partnership terminates at the death of any partner. A sole proprietorship is best defined as a business owned by: A) Individuals who enjoy limited liability. B) An individual for less than ten years. C) One or more individuals who have agreed to accept unlimited liability for the firm. D) A single individual who has unlimited liability for the firm's debts. E) A single individual who has limited liability for the firm's debts. The area of corporate finance concerned purchasing and selling stocks and bonds is called: A) Municipal finance. B) International finance. C) Strategic finance. D) Institutional finance. E) Investments. An individual who places an order to buy 1000 shares of IBM stock: A) Has to be listed as a private dealer. B) Is involved in a private placement of securities. C) Is most likely participating in the secondary market. D) Must have hired a dealer to perform this transaction. E) Is most likely involved in an IPO. Working capital management: A) Deals with the allocation of equipment to various jobs on a daily basis. B) Is the oversight of a firm's long-term assets. C) Deals with the refinancing of the firm's debt if interest rates decline. D) Involves the determination of how much long-term debt should be issued. E) Includes the daily oversight of a firm's cash requirements. 21 131) 132) 133) 134) 135) 136) 137) 138) 139) 140) Which one of the following actions by a financial manager is most aligned with the goal of financial management? A) Increasing the size of a firm by acquiring a non-profitable competitor. B) Improving the efficiency of the company such that the value of the stock increases. C) Increasing the sales of the firm by expanding the company's sales force. D) Increasing the bonuses paid to the top executives as the size of the firm increases. E) Issuing additional shares of stock to repay all of the firm's long-term debt. What was the intent of the Sarbanes-Oxley Act? A) It was intended to harmonize accounting standards in North America. B) It was intended to protect investors from corporate abuses. C) It was intended to increase corporate social responsibility of publicly listed organizations. D) It was intended to provide consumer protection on product quality. E) It was intended to protect employees through better corporate codes of conduct. An entity wherein one or more owners may elect to actively manage the firm while other owners choose limited liability instead of management responsibility is called a: A) Limited liability company. B) Limited liability corporation. C) General partnership. D) Limited partnership. E) Corporation. Limited liability may be a characteristic of each of the following form(s) of organization EXCEPT a ________. A) Limited partnership. B) Corporation. C) Co-operative(Co-op) D) Limited liability company. E) Sole proprietorship. A business that is a distinct legal entity is a: A) Corporation. B) Partnership with only two partners. C) General partnership. D) Proprietorship. E) Limited partnership. 136) 137) 138) 139) 140) 22 141) 142) 143) 144) 145) It is easiest to raise capital for a project under which form of business organization? A) General partnership. B) Limited partnership. C) Sole proprietorship. D) Corporation. E) The form of business organization does NOT affect the ability to raise capital. Robert Fischer is one of the owners of a firm which generated $18,000 in taxable income last year. Robert did not have to pay any personal tax on his share of the firm's income. Robert must be a partial owner of a: A) Limited partnership. B) Non-dividend paying corporation. C) Sole proprietorship. D) Limited liability company. E) General partnership. Which type of business organization has all the respective rights and privileges of a legal person? A) Limited liability company. B) Limited partnership. C) General partnership. D) Corporation. E) Sole proprietorship. Which form of business structure faces the greatest agency problems? A) Sole proprietorship. B) Limited liability company. C) Limited partnership. D) Corporation. E) General partnership. Which of the following are advantages of the corporate form of ownership? A) Limited personal liability and limited firm life. B) Ability to raise capital and limited firm life. C) Limited personal liability and ability to raise capital. D) Simplicity of company formation and the ability to raise capital. E) Ease of ownership transfer and simplicity of company formation. 23 141) 142) 143) 144) 145) 146) 147) 148) 149) 150) Working capital management is concerned with which statement of financial position accounts? A) Current and long-term assets only. B) Long-term assets only. C) Current assets and current liabilities only. D) Current assets only. E) Current assets, long-term assets and current liabilities only. Which of the following is NOT an agency cost? A) Protecting management jobs which could effectively be eliminated. B) Interest paid on long-term corporate borrowing. C) Paying more than the actual market value to purchase a competitor. D) Low-interest loans to corporate executives. E) Flying an executive overseas without a genuine business purpose for doing so. Conflicts that arise between the interests of managers and stockholders are referred to as: A) Proxy fights. B) Agency problems. C) Stockholder conflicts. D) Management conflicts. E) Control problems. Which of the following is a capital structure decision? A) Management of current assets and liabilities. B) Timing and risks of cash flows for an upcoming project. C) Cost of acquiring funds for the company. D) Which projects should be accepted or rejected. E) Management of net working capital. Which one of the following best illustrates the agency problem? A) Management reduces the risk level of the firm while maintaining a steady stock price. B) An employee offers a suggestion which will save the company money and reduce the stress of his job. C) The company creates a management bonus program whereby managers are rewarded when the market price of the firm's stock rises. D) Management rejects a merger which was desired by the shareholders. E) Management expands its operations overseas which is favourably received by the financial markets. 24 146) 147) 148) 149) 150) 151) 152) 153) 154) 155) The agency problem is best defined as a conflict of interest between a firm's: A) Various managers. B) Managers and the firm's employees. C) Various employees. D) Stockholders and the firm's debtors. E) Stockholders and the firm's managers. The decisions made by financial managers should all be ones which increase the: A) Market value of the existing owners' equity. B) Size of the firm. C) Financial distress of the firm. D) Growth rate of the firm. E) Marketability of the managers. Ann is interested in purchasing Ted's factory. Since Ann is a poor negotiator, she hires Mary to negotiate the purchase price. Identify the parties to this transaction. A) Ted is the principal and Ann is the agent. B) Mary is the agent while Ted and Ann together are principals. C) Mary is the principal and Ann is the agent. D) Ann is the principal and Mary is the agent. E) Ann is the principal and Ted is the agent. The triple bottom line measures: A) A company's performance against the top three competitors in the market. B) A company's performance within its three financial statements. C) A company's economic, social and environmental performance. D) A company's performance of its revenues, gross profit and net income against its annual strategic plan. E) A company's performance within the primary, secondary and tertiary markets. The primary market is defined as the market: A) Commonly known as the over-the-counter market. B) Where stocks and bonds are exchanged between dealers. C) Wherein the original sale of securities by the issuer to the general public occurs. D) Mechanism by which a sale of a financial instrument between two shareholders is conducted. E) Operated by brokers for the benefit of shareholders. 25 151) 152) 153) 154) 155) 156) 157) 158) 159) 160) A general partnership is best defined as a business owned by: A) Two or more individuals, each of whom has limited liability for the firm's debts. B) One or more individuals who are each totally responsible for the debts of the entity. C) A single individual who desires limited liability for the firm's debts. D) Multiple individuals, 80 percent of whom enjoy limited liability. E) Two or more individuals, only one of whom has unlimited liability for the firm's debts. The Treasurer: A) Must file quarterly financial statements in a timely manner. B) Has the responsibility for managing the cash for an organization. C) Is responsible for overseeing the data processing functions within a firm. D) Reports directly to the Chief Executive Officer of a corporation. E) Must keep current on tax laws since he/she is responsible for managing the taxes for a firm. Which of the following is NOT a Canadian financial institution? A) Trust companies. B) Provincial governments. C) Investment dealers. D) Chartered banks. E) Mutual funds. Which of the following statements concerning NASDAQ is incorrect? A) NASDAQ is an electronic market. B) NASDAQ stands for National Association of Securities Dealers Automated Quotations system. C) NASDAQ is an auction market. D) Most smaller firms are listed on NASDAQ rather than on the NYSE. E) NASDAQ is an OTC market. Which one of the following best describes the primary advantage of being a limited partner rather than a general partner? A) Greater management responsibility. B) Ability to manage the day-to-day affairs of the business. C) Entitlement to a larger portion of the partnership's income. D) No potential financial loss. E) Liability for firm debts limited to the capital invested. 26 156) 157) 158) 159) 160) 161) 162) 163) 164) 165) 166) Which one of the following means of management compensation is designed to help eliminate the agency problem? A) Increasing health care benefits. B) Providing annual raises. C) Offering stock options. D) Providing a corporate jet. E) Providing cost of living adjustments. On a typical day in Canada, the largest dollar volume of shares are traded ________. A) On the Venture Exchange. B) On the TSX. C) In primary markets. D) Over the counter. E) On the NYSE. To avoid the agency problem, managers should take actions: A) Which add to the size of the firm's workforce. B) Which adds value to the firm. C) Only if they increase the market share of the firm. D) Only if management jobs will not be jeopardized. E) Only after the president has approved them. When considering a capital budgeting project the financial manager should consider: A) Only the size of the project. B) Only the risk of the project cash flows. C) The size, timing, and risk of the project cash flows. D) Only the size and timing of the project cash flows. E) Only the timing of the project cash flows. Luis has just decided that his firm should obtain $10 million in bank financing from the Atlantic Bank and Trust and should issue $25 million in new equity shares. Luis has just made a(n) ________ decision. A) Operational B) Working capital C) Marketing D) Capital structure E) Capital budgeting Which of the following is incorrect regarding employee stock options? A) It allows management to purchase shares at a fixed price over a period of time. B) Many believe management are already overpaid. C) Many believe management are underpaid and stock options will benefit pay. D) It provides the manager with an ownership stake in the company. E) Options are meant to align the manager's and actions with shareholders' interests. 27 161) 162) 163) 164) 165) 166) 167) 168) 169) 170) 171) 172) Which of the following is a true statement concerning a general partnership? A) Partners are not responsible for the debts of the partnership. B) The income of a partnership is taxed at the partners' income tax rate. C) Partners generally do not manage the partnership. D) Partnerships are taxed at the corporate level. E) Partnerships have unlimited lives similar to corporations. The rules by which corporations govern themselves are called: A) Partnership agreements. B) Articles of incorporation. C) Indemnity provisions. D) Indenture provisions. E) Bylaws. A business owned by a single individual is called a(n): A) Sole proprietorship. B) Closed receivership. C) Open structure. D) Partnership. E) Corporation. A business formed by two or more individuals or entities is called a(n): A) Corporation. B) Sole proprietorship. C) Open structure. D) Partnership. E) Closed receivership. A business created as a distinct legal entity composed of one or more individuals or entities is called a(n): A) Corporation. B) Partnership. C) Closed receivership. D) Sole proprietorship. E) Open structure. Which one of the following statements is correct? A) Both partnerships and corporations incur double taxation. B) Both partnerships and corporations have bylaws. C) Partnerships are the most complicated type of business to form. D) Both sole proprietorships and partnerships are taxed in a similar fashion. E) All types of business formations have limited lives. 28 167) 168) 169) 170) 171) 172) 173) 174) 175) 176) 177) Margie has just been promoted to the position of working capital manager. As part of her duties, Margie will be responsible for: A) Allocating manufacturing overhead. B) Pricing manufactured goods. C) Managing long-term debt. D) Controlling labour costs. E) Overseeing accounts payable. A(n) ________ is a sale of securities which typically does not require registration with the OSC. A) Initial public offering. B) Secondary market transaction. C) Private placement. D) Over-the-counter transaction. E) Primary market transaction. The original sale of securities by governments and corporations to the general public occurs in the: A) Secondary market. B) Proprietary market. C) Liquidation market. D) Primary market. E) Private placement market. "Capital budgeting" is defined as the: A) Mix of debt and equity used by a firm to finance its operations. B) Determination of the total amount of money which a firm should borrow. C) Management of a firm's net working capital. D) Process of determining the optimal types and amounts of inventory to keep on hand. E) Management of a firm's long-term investments. The controller can be defined as the person who is generally responsible for overseeing the ________ of a firm. A) Accounting functions. B) Financial planning. C) Capital expenditures. D) Production functions. E) Cash balances. 29 173) 174) 175) 176) 177) 178) 179) 180) 181) 182) 183) The primary purpose of an auction market is to: A) Provide a market place for dealers. B) Provide electronic trading for dealers. C) Offer new shares of stock to the general public. D) Handle private placements of shares of stock. E) Match buyers with sellers. What are the two types of primary market transactions that corporations engage in? A) Debt and equity placements. B) Staggered and orderly offerings. C) Dutch auctions and orderly offerings. D) Public offerings and private placements. E) Primary and secondary placements. Which of the following is disadvantage of a sole proprietorship? A) Less reliance on partners. B) The owner receiving all the after-tax profit. C) Unlimited liability. D) Can be created through a simple business license. E) Quick decision making. Managers who place the interest of the shareholders first, will tend to: A) Decline all offers to buy the firm. B) Be in greater demand and receive higher compensation. C) Be replaced on a routine basis. D) Reward employees for unethical behaviour if that behaviour increases the firm's net income. E) Realize minimal value from the stock options they are granted. Which of the following is a type of agency cost? A) Salaries paid to the firm's managers. B) The cost of an audit of the firm's financial statements. C) The cost of buying insurance on the firm's assets. D) The costs of financing the firm. E) The cost of a corporate jet needed to keep tabs on foreign operations. Stocks that trade on an exchange are referred to as: A) Primary stocks. B) SEC stocks. C) Privately held stocks. D) Optioned stocks. E) Listed stocks. 30 178) 179) 180) 181) 182) 183) 184) 185) 186) 187) 188) 189) When one shareholder sells stock directly to another, the transaction is said to occur in the: A) Primary market. B) Secondary market. C) TSX market. D) OTC market. E) Dealer market. The articles of incorporation: A) Can be used to remove company management. B) Can set forth the conditions under which the firm can avoid double taxation. C) Set forth the number of shares of stock that can be issued. D) Set forth the rules by which the corporation regulates its existence. E) Are amended annually by the company stockholders. The bylaws: A) Are rules which apply only to limited liability companies. B) Establish the name of the corporation. C) Set forth the procedure by which the stockholders elect the senior managers of the firm. D) Set forth the purpose of the firm. E) Mandate the procedure for electing corporate directors. The secondary market is the market wherein: A) Shareholders buy from and sell to other shareholders. B) The security issuer is the seller and the buyer is a member of the general public. C) The security issuer is the buyer and the seller is a member of the general public. D) The government is either the buyer or the seller of the security. E) One issuer exchanges securities directly with another issuer. Which of the following questions is NOT the responsibility of the financial manager? A) Should the firm build a new factory? B) Should the firm borrow more money? C) How long should customers be given to pay for their credit purchases? D) What product should the firm produce? E) How long will it take to produce a product? The division of profits and losses between the members of a partnership is formalized in the: A) Statement of purpose. B) Group charter. C) Indemnity clause. D) Indenture contract. E) Partnership agreement. 31 184) 185) 186) 187) 188) 189) 190) 191) 192) 193) 194) The division of profits and losses among the members of a partnership is formalized in the: A) Indemnity clause. B) Group charter. C) Partnership agreement. D) Statement of purpose. E) Indenture contract. Which of the following is a disadvantage of the corporate form of ownership? A) Taxation. B) The life of the corporation. C) Ease of transfer of ownership. D) Ability to raise capital. E) Limited liability. A partnership: A) Has less of an ability to raise capital than a proprietorship. B) Terminates at the death of any general partner. C) Is taxed the same as a corporation. D) Agreement defines whether the business income will be taxed like a partnership or a corporation. E) Allows for easy transfer of interest from one general partner to another. The best definition of "corporate governance" is: A) The manner in which shareholders agree on corporate capital structure. B) The process of planning and managing a firm's long-term investments. C) The mechanisms and processes by which corporations are directed and controlled. D) The possibility of conflicts between shareholders and management in a large corporation. E) The actions that are deemed as socially responsible. The possibility of conflict of interest between the stockholders and management of the firm is called: A) Corporate activism. B) Legal liability. C) Corporate breakdown. D) The agency problem. E) The shareholders' conundrum. 32 190) 191) 192) 193) 194) 195) 196) 197) 198) 199) Bylaws are: A) The terms by which partnership profits are distributed. B) The rules by which corporations govern themselves. C) The documents which set forth the business purpose of a firm. D) The documents which specify how tax liabilities will be allocated among the owners. E) The agreements specifying which partners are general partners and which are limited partners. Which of the following is NOT a capital budgeting decision? A) The currency and exchange rates of cash inflows and outflows. B) The amount of cash flows which will be required or obtained. C) The timing of all cash inflows and outflows. D) The risk associated with the expected cash inflows. E) The amount of debt versus the amount of equity which should be obtained. Stockholders elect: A) The Chairman of the Board. B) The Chief Executive Officer. C) The Corporate Directors. D) The President. E) All senior managers. 195) 196) 197) The ultimate responsibility for a corporation rests with: A) The stakeholders. B) The Chairman of the Board. C) The Chief Operations Officer. D) The Board of Directors. E) The stockholders. Which one of the following statements is correct concerning the organizational structure of a corporation? A) The treasurer reports to the chief executive officer. B) The chief executive officer reports to the board of directors. C) The controller reports to the president. D) The vice president of finance reports to the chairman of the board. E) The chief operations officer reports to the vice president of production. 33 198) 199) 200) 201) 202) 203) 204) Which one of the following correctly defines the chain of command in a typical corporate organizational structure? A) The vice president of finance reports to the chairman of the board. B) The treasurer reports to the chief executive officer. C) The controller reports to the president. D) The chief operations officer reports to the vice president of production. E) The chief executive officer reports to the board of directors. Tasks related to tax management, cost accounting, financial accounting, and data processing are the responsibility of which corporate officer? A) The Corporate Controller. B) The Vice President of Production. C) The Chairman of the Board. D) The Board of Directors. E) The Corporate Treasurer. Which of the following is an advantage of ownership of a corporation compared to that of a sole proprietorship? A) Dividends received by the corporation's shareholders are tax-exempt. B) It is more difficult to transfer ownership in a corporation. C) It is the simplest to start. D) The owners of the corporation have unlimited liability for the firm's debts. E) The corporation has an unlimited life. Which of the following is a true statement concerning corporations? A) The equity that can be raised by the corporation is limited to the current shareholders' personal wealth. B) When dividends are paid, corporate profits are taxed once. C) The life of the corporation is unlimited. D) The corporation has limited liability for business debts. E) It is difficult to transfer ownership of corporate shares. Double taxation refers to which of the following scenarios? A) Both bondholders and shareholders must pay taxes. B) The corporation pays taxes on its earnings, and shareholders pay taxes on dividends. C) The corporation pays taxes on earnings, and creditors pay taxes on interest received. D) The corporation pays taxes on revenues and expenses. E) The corporation pays taxes on revenues and earnings. 34 200) 201) 202) 203) 204) 205) 206) 207) 208) Which of the following is NOT a capital budgeting question? A) What type of business a firm wants to operate. B) The choice of which long-term assets to purchase. C) Credit policy to provide. D) The percentage return obtained by putting long-term assets to use. E) The dollar obtained by putting long-term assets to use. Which one of the following statements concerning stock exchanges is correct? A) Some large companies are listed on NASDAQ. B) The TSX is primarily a dealer market. C) Most debt securities are traded on the TSX. D) The NASDAQ has more listed stocks than NYSE. E) The exchange with the strictest listing requirements is NASDAQ. Trace the passage of cash from the financial markets to the firm and from the firm back to the financial markets. A) 1. The firm invests the cash in current and fixed assets. 2. Cash flows to the firm from the financial market. 3. These assets generate cash. 4. Corporate taxes are paid. 5. Cash flow is reinvested in the firm. 6. The rest goes back to the financial markets as cash paid to creditors and shareholders. B) 1. Cash flows to the firm from the financial market. 2. The firm invests the cash in current and fixed assets. 3. These assets generate cash. 4. Corporate taxes are paid. 5. Cash flow is reinvested in the firm. 6. The rest goes back to the financial markets as cash paid to creditors and shareholders. C) 1. The firm invests the cash in current and fixed assets. 2. Corporate taxes are paid. 3. These assets generate cash. 4. Cash flows to the firm from the financial market. 5. Cash flow is reinvested in the firm. 6. The rest goes back to the financial markets as cash paid to creditors and shareholders. D) 1. The firm invests the cash in current and fixed assets. 2. These assets generate cash. 3. Cash flows to the firm from the financial market. 4. Corporate taxes are paid. 5. Cash flow is reinvested in the firm. 6. The rest goes back to the financial markets as cash paid to creditors and shareholders. E) 1. The firm invests the cash in current and fixed assets. 2. These assets generate cash. 3. The rest goes back to the financial markets as cash paid to creditors and shareholders. 4. Cash flows to the firm from the financial market. 5. Corporate taxes are paid. 6. Cash flow is reinvested in the firm. Which of the following is NOT a general criterion that must be met in order for a firm to be listed on the TSX? A) The firm must have a minimum amount of assets. B) The firm must have a minimum number of shareholders owning at least 300 shares. C) The firm must have a minimum number of shares outstanding. D) The firm must have a market value of at least $4 million. E) The firm must have a minimum number of directors. 35 205) 206) 207) 208) 209) 210) 211) 212) 213) 214) The total market value of the firm's equity is determined by ________. A) The firm's stockholders. B) Regulatory authorities. C) The firm's financial manager. D) The firm's stakeholders. E) The corporate treasurer. The secondary market is: A) A market which has no central Location. B) The market in which securities are bought and sold after original sale. C) The market in which purchasers are matched with those who wish to sell. D) The market in which dealers buy and sell for themselves, at their own risk. E) The market for the original sale of securities by governments and corporations. The term "capital structure" describes: A) The mixture of debt and equity a firm uses to finance its operations. B) The firm's short-term assets and short-term liabilities. C) The mixture of long-term investments a firm has made. D) The mix of preferred stock and common stock that makes up the equity account of a firm. E) The mixture of short-term liabilities a firm uses to finance its short-term assets. Capital structure refers to: A) The amount of cash on hand. B) The accounts receivable policy. C) The mixture of debt and equity. D) The amount of inventory held. E) The management of Long-term investments. Working capital management refers to: A) The types of stock issued. B) The levels of cash and inventory held. C) The mixture of debt and equity. D) The types of Long-term investments made. E) The amount of Long-term debt. Which of the following statements concerning auction markets is false? A) The OTC is an auction market. B) Auction markets have a physical location. C) The NYSE is an auction market. D) A market where buyers specify the highest price they are willing to pay and sellers indicate the lowest price they are willing to accept. E) The TSX is an auction market. 36 209) 210) 211) 212) 213) 214) 215) 216) 217) 218) 219) 220) Which of the following statements concerning dealers is false? A) Most debt securities trade in dealer markets. B) The OTC market is a dealer market. C) The TSX and NYSE are dealer markets. D) Dealers accept the risks of owning shares of stock. E) Dealers usually buy and sell only for themselves. Which one of the following statements is true concerning stock exchanges? A) NASDAQ listed stocks trade more actively than those listed on the NYSE. B) The Tokyo Stock Exchange is not a very actively traded upon exchange. C) The OTC market is physically located in Toronto. D) The Toronto Stock Exchange is the largest exchange in the world. E) The total value of NASDAQ listed stocks is less than the total value of NYSE listed stocks. Working capital management refers specifically to: A) The management of a firm's Loan accounts from financial institutions. B) The oversight of a firm's current accounts. C) The utilization of a firm's assets on a daily basis. D) Obtaining the necessary funds to finance a firm's long term activities. E) The daily use of a firm's fixed assets to generate revenue. Which one of the following statements concerning a sole proprietorship is correct? A) The profits of a sole proprietorship are taxed twice. B) The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts. C) The owners of a sole proprietorship share profits as established by the partnership agreement. D) A sole proprietorship is the least common form of business ownership. E) A sole proprietorship is often structured as a limited liability company. Which one of the following statements concerning a sole proprietorship is correct? A) The life of the firm is limited to the life span of the owner. B) The owner can generally raise large sums of capital quite easily. C) The ownership of the firm is easy to transfer to another individual. D) The legal costs to form a sole proprietorship are quite substantial. E) The company must pay separate taxes from those paid by the owner. The best definition of "regulatory dialectic" is: A) The pressures government exerts on regulatory bodies. B) The pressures regulatory bodies exert on corporations. C) The pressures regulatory bodies exert on investors. D) The pressures financial institutions and regulatory bodies exert on each other. E) The pressures financial institutions exert on corporations. 37 215) 216) 217) 218) 219) 220) 221) 222) 223) 224) 225) Which of the following markets is considered a dealer market? A) The Toronto Stock Exchange. B) The Ontario Securities Commission. C) The over-the-counter (OTC) Market. D) New York Stock Exchange. E) The real estate market. The primary market includes: A) The sale of stock by a shareholder in the open market. B) The sale of stock by a shareholder in the OTC market. C) The sale of new securities by a corporation for the first time to the general public. D) The purchase and sale of shares of stock between two shareholders. E) The sale of stock by a shareholder in an auction market. Which one of the following statements is correct concerning corporations? A) The ability of a corporation to raise capital is quite limited. B) The largest firms are usually corporations. C) The majority of firms are corporations. D) The stockholders are usually the managers of a corporation. E) The income of a corporation is taxed as personal income of the stockholders Which of the following does not assist in ensuring managers act in the best interest of owners? A) A compensation package for managers that is all cash with no ties to performance. B) Managers are promoted only if the firm prospers. C) A compensation package for managers that ties their salary to the firm's share price. D) The threat that if the firm does poorly, shareholders will use a proxy fight to replace the existing management. E) There is a high degree of likelihood the firm will become a takeover candidate if the firm performs poorly. Which one of the following statements is correct concerning the TSX? A) A firm is expected to have a market value for its publicly held shares of at least $4 million to be listed on the TSX. B) The TSX is the second largest stock exchange in the world. C) Any corporation desiring to be listed on the TSX can do so. D) The TSX is an over-the-counter exchange functioning as both a primary and a secondary market. E) The TSX is the largest dealer market for listed securities in Canada. 38 221) 222) 223) 224) 225) 226) 227) 228) 229) What strategies do hedge funds employ to earn their returns? A) Their strategies may include indexing the returns of stock and bond markets in North America. B) Their strategies may include arbitrage, high levels of leverage, and active involvement in the derivatives market. C) Their strategies may include indexing the returns of North American mutual funds. D) Their strategies may include indexing the returns of major stock exchanges in North America. E) Their strategies include indexing the returns of risk-free returns such as North American government bonds. Financial managers should strive to maximize the current value per share of the existing stock because: A) Doing so guarantees the company will grow in size at the maximum possible rate. B) Doing so means the firm is growing in size faster than its competitors. C) They have been hired for the purpose of representing the interest of the current shareholders. D) Doing so increases the salaries of all the employees. E) The managers often receive shares of stock as part of their compensation. The Board of Directors of Beeline, Inc. has decided to base the salary of its financial manager entirely upon the market share of the firm. Accordingly, A) The firm may incur some agency costs since the manager will be focused on the market share of the firm rather than acting to maximize earnings. B) The firm will incur some agency costs if the manager acts to maximize market share. C) The manager may not act to maximize the current value of the firm's stock, resulting in agency costs for the firm's stockholders. D) The financial manager will always act in the best interest of the shareholders since all agency costs have been eliminated through salary incentives. E) This arrangement may be unnecessary, since the goal of the firm is to maximize earnings for shareholders, and that is most likely accomplished through larger market share. Which of the following does NOT persuade managers to work in the best interest of the stockholders? A) Stock option plans. B) Threat of a proxy fight. C) Compensation based on the value of the stock. D) Threat of a company takeover. E) Purely cash compensation package. 39 226) 227) 228) 229) 230) 231) 232) 233) 234) When a corporation issues additional shares of common stock to the general public, they do so: A) Through a broker in the secondary market. B) Through a dealer in the secondary market. C) Only through the private markets. D) In the primary market. E) Only through the OTC market. What is NOT a working capital question that must be answered? A) How much cash and inventory should be kept on hand? B) Length of credit terms to provide C) Net present value (NPV) and internal rate of return (IRR) of a long-term project D) Should we sell on credit? E) To whom should credit be extended to? A financial manager of a corporation is considering different operating strategies for the coming year. From a financial management standpoint, which of the following would be her optimal strategy? A) Undertake the plan that would lead to the most stable stock price for the year. B) Undertake the plan that would maximize the current stock price. C) Undertake the plan that would result in the largest profits for the year. D) Undertake the plan that would maximize her personal wealth. E) Undertake the plan that would reduce the overall riskiness of the firm. When does the double taxation problem faced by corporations exist? A) Whenever a corporation earns a profit, pays taxes on that profit, and then pays interest to its bondholders. B) Whenever stockholders are paid a dividend and are taxed on that dividend income. C) Whenever a corporation earns a profit and pays taxes on that profit. D) Whenever a corporation earns a profit, pays taxes on that profit, and then pays dividends to its tax-exempt shareholders. E) Whenever a corporation earns a profit, pays taxes on that profit, and then pays dividends to its stockholders who pay personal taxes. Which of the following is NOT considered one of the basic questions of corporate finance? A) What long-term investments should the firm choose? B) What mixture of debt and equity should the firm use to fund its operations? C) At what rate of interest should a firm borrow? D) Where will the firm get the long-term financing to pay for its investments? E) How should the firm manage its working capital, i.e., its everyday financial activities? 40 230) 231) 232) 233) 234) 235) 236) Which one of the following questions would most likely be the responsibility of the financial manager? A) What price should be charged for a new product? B) How should the firm finance a new distribution center? C) Which employees should work overtime? D) Where should a new store be located? E) Which product markets should be expanded? 235) Which of the following is considered a "primary market" transaction? A) You purchase call options issued by Ford Motor Company. B) You buy shares in Apple from an online brokerage C) You purchase warrants issued by General Motors Corporation. D) Your mother sells you the shares she purchased in your uncle's latest business venture. E) You buy shares in the public offering of a start-up company in the computer industry. 236) SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 237) Define the concept of a corporation, along with several advantages and disadvantages of conducting business as a corporation. 237) 238) What items are included in the articles of incorporation? 238) 239) Provide several advantages of the corporate form of business ownership. 239) 240) Provide several disadvantages of a partnership. 240) 241) 242) 243) Provide several common characteristics between a sole proprietorship and a general partnership. What aspects of cash flows is part of the financial manager's responsibility? Elaborate on the financial management function. In particular, the inter-relationships between the CEO, COO and CFO. Expand on the CFO's responsibility from an accounting and finance perspective. 241) 242) 243) 244) What is a hedge fund and what strategies does it utilize? Who is it intended for? 244) 245) What is the difference between third a fourth markets? 245) 246) How do chartered banks generate income? 246) 41 247) What is the main drawback of the triple bottom line measure? 247) 248) What is the triple bottom line? What does it measure? 248) 249) 250) 251) List and briefly describe the three basic questions addressed by a financial manager. Why is the corporate form of business organization considered to be more important than sole proprietorships or partnerships? If the corporate form of business organization has so many advantages over the corporate form, why is it so common for small businesses to initially be formed as sole proprietorships? 249) 250) 251) 252) What should be the goal of the financial manager of a corporation? Why? 252) 253) Do you think agency problems arise in sole proprietorships and/or partnerships? 253) 254) 255) 256) 257) 258) 259) Assume for a moment that the stockholders in a corporation have unlimited liability for corporate debts. If so, what impact would this have on the functioning of primary and secondary markets for common stock? Suppose you own 100 shares of IBM stock which you intend to sell today. Since you will sell it in the secondary market, IBM will receive no direct cash flows as a consequence of your sale. Why, then, should IBM's management care about the price you get for your shares? One thing lenders sometimes require when lending money to a small corporation is an assignment of the common stock as collateral on the loan. Then, if the business fails to repay its loan, the ownership of the stock certificates can be transferred directly to the lender. Why might a lender want such an assignment? What advantage of the corporate form of organization comes into play here? Why might a corporation wish to list its shares on a national exchange such as the TSX as opposed to a regional exchange? How about being traded OTC? Identify the two capital structure issues that financial managers must address and explain the effects and significance of these issues. Explain the cash flow pattern between a firm and the financial markets. 42 254) 255) 256) 257) 258) 259) 260) 261) 262) Describe the goal of financial management and give an example of a management compensation program which is designed to encourage managers to adhere to that goal. Describe two types of business organizations in which you could obtain an ownership position while enjoying limited liability. Provide an example of a type of firm that you might find utilizing each business type. Explain how ethics can affect the value of a public corporation. 43 260) 261) 262) Answer Key Testname: UNTITLED1 1) TRUE 2) TRUE 3) TRUE 4) TRUE 5) TRUE 6) TRUE 7) FALSE 8) FALSE 9) FALSE 10) FALSE 11) TRUE 12) FALSE 13) FALSE 14) TRUE 15) TRUE 16) TRUE 17) TRUE 18) FALSE 19) FALSE 20) FALSE 21) FALSE 22) TRUE 23) FALSE 24) TRUE 25) TRUE 26) FALSE 27) FALSE 28) FALSE 29) FALSE 30) TRUE 31) TRUE 32) TRUE 33) TRUE 34) TRUE 35) FALSE 36) TRUE 37) B 38) A 39) C 40) E 41) E 42) D 43) A 44) B 45) D 46) D 47) A 48) D 49) C 50) C 44 Answer Key Testname: UNTITLED1 51) D 52) A 53) E 54) C 55) C 56) B 57) D 58) C 59) E 60) E 61) C 62) E 63) D 64) B 65) A 66) D 67) B 68) C 69) E 70) E 71) E 72) A 73) E 74) A 75) A 76) B 77) D 78) A 79) E 80) D 81) A 82) C 83) C 84) D 85) D 86) E 87) A 88) B 89) C 90) B 91) E 92) E 93) A 94) A 95) C 96) B 97) D 98) B 99) D 100) A 45 Answer Key Testname: UNTITLED1 101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139) 140) 141) 142) 143) 144) 145) 146) 147) 148) 149) 150) B D C E C B B A C B C E C A B D D C C C A E D B C D B C B D E D E C E B B D E A D B D D C C B B C D 46 Answer Key Testname: UNTITLED1 151) 152) 153) 154) 155) 156) 157) 158) 159) 160) 161) 162) 163) 164) 165) 166) 167) 168) 169) 170) 171) 172) 173) 174) 175) 176) 177) 178) 179) 180) 181) 182) 183) 184) 185) 186) 187) 188) 189) 190) 191) 192) 193) 194) 195) 196) 197) 198) 199) 200) E A D C C B B B C E C B B C D C B E A D A D E C D E A E D C B B E B C E A D E C A B C D B E C E B E 47 Answer Key Testname: UNTITLED1 201) 202) 203) 204) 205) 206) 207) 208) 209) 210) 211) 212) 213) 214) 215) 216) 217) 218) 219) 220) 221) 222) 223) 224) 225) 226) 227) 228) 229) 230) 231) 232) 233) 234) 235) 236) 237) A E C B C A B E A B A C B A C E B B A D C C B A A B C C E D C B E C B E A corporation is a business created as a distinct legal operating unit that is owned by one or more individuals or entities. Advantages include: ownership can be easily transferred; life of a corporation is not limited to lives of owners or managers; a corporation has limited liability; the ability to raise and access large sums of capital in both debt and equity markets. Disadvantages include: double taxation; lenders view the limited liability as a disadvantage and require the owners of small corporations to make personal guarantees; more complex and expensive form of organization to establish. 238) The articles of incorporation must contain a number of things, including the corporation's name, its intended life (which can be forever), its business purpose, and the number of shares that can be issued. 239) The advantages of the corporation include: limited liability for firm debt; Ability to raise capital; Unlimited firm life. 240) Disadvantages of partnership include: limited life of the firm; personal liability for firm debt; lack of ability to transfer partnership interest. 48 Answer Key Testname: UNTITLED1 Common elements include: method of taxation; limited life of business entity; personal liability. The financial manager is responsible for: the amount of the cash flow; timing of the cash flow; likelihood of the cash flow being received; possibility that only a portion of the expected cash flow will be received. 243) The financial management function is usually associated with a top officer of the firm, such as a vice president of finance or some other chief financial officer (CFO). The CFO reports to the president, who is the chief operating officer (COO) in charge of day-to-day operations. The COO reports to the chairman, who is usually chief executive officer (CEO). The CEO has overall responsibility to the board. The CFO coordinates the activities of the treasurer and the controller. The controller's office handles cost and financial accounting, tax payments, and management information systems. The treasurer's office is responsible for managing the firm's cash, its financial planning, and its capital expenditures. 244) Hedge funds are largely unregulated and privately managed investment funds catering to sophisticated investors, which look to earn high returns using aggressive financial strategies prohibited by mutual funds. These strategies may include arbitrage, high levels of leverage, and active involvement in the derivatives market. 245) A third market involves trading exchange-listed securities in OTC markets, while a fourth market trading involves institution-to-institution trading without using the services of brokers or dealers. 246) Chartered banks generate income from the spread between interest paid on deposits and interest earned on loans, from selling life insurance through their branch networks, and from services provided to corporate clients such as bank guarantees. 247) One problem with the triple bottom line is that the three separate measures cannot easily be added up. It is difficult to measure the planet and people accounts in the same terms as profits. 248) The triple bottom line consists of three Ps: profit, people and planet. It aims to measure the financial, social and environmental performance of the corporation over a period of time. 241) 242) The triple bottom line suggests that firms should be focusing on three interdependent measures of success. One is the traditional measure of corporate profit; the second is a measure of a firm's employees and a firm's responsibility throughout the organization. The third pertains to how environmentally responsible a firm has been. 249) The three areas to be addressed are: 1. Capital budgeting: The financial manager tries to identify investment opportunities that are worth more t the firm than they cost to acquire. 2. Capital structure: This refers to the specific mixture of long-term debt and equity a firm uses to finance i operations. 3. Working capital management: This refers to a firm's short-term assets and short-term liabilities. Managing the firm's working capital is a day-to-day activity that ensures the firm has sufficient resources to continue its operations and avoid costly interruptions. 250) The importance of the corporate form of organization lies in its advantages: ease of transferring ownership, the owners' limited liability for business debts, and unlimited life of the business. 49 Answer Key Testname: UNTITLED1 A significant advantage of the sole proprietorship is that it is cheap and easy to form. If the sole proprietor has limited capital to start with, it may not be desirable to spend part of that capital forming a corporation. Also, limited liability for business debts may not be a significant advantage if the proprietor has limited capital, most of which is tied up in the business anyway. Finally, for a typical small business, the heart and soul of the business is the person who founded it, so the life of the business may effectively be limited to the life of the founder during its early years. 252) The correct goal is to maximize the current value of the outstanding stock. This focuses correctly on enhancing the returns to shareholders, the owners of the firm. Other goals, such as maximizing earnings, focus too narrowly on accounting income and ignore the importance of market values in managerial finance. 253) Agency conflicts typically arise when there is a separation of ownership and management of a business. In a sole proprietorship and a small partnership, such separation is not likely to exist to the degree it does in a corporation. However, there is still potential for agency conflicts. For example, as employees are hired to represent the firm, there is once again a separation of ownership and management. 254) With unlimited liability, you would be very careful which stocks you invest in. In particular, you would not invest in companies you expected to be unable to satisfy their financial obligations. Both the primary and secondary markets for common stock would be severely hampered if this rule existed. It would be very difficult for a young, untested business to get enough capital to grow. 255) The current market price of IBM stock reflects, among other things, market opinion about the quality of firm management. If the shareholder's sale price is low, this indirectly reflects on the reputation of the managers, as well as potentially impacting their standing in the employment market. Alternatively, if the sale price is high, this indicates that the market believes current management is increasing firm value, and therefore doing a good job. 256) In the event of a loan default, a lender may wish to liquidate the business. Often it is time consuming and difficult to take title of all of the business assets individually. By taking control of the stock, the lender is able to sell the business simply by reselling the stock in the business. This illustrates once again the ease of transfer of ownership of a corporation. 257) Being listed on a regional exchange effectively limits the capital access for the business. Plus, there is a prestige factor in being listed on one of the national exchanges. There is still a prestige factor in moving from OTC to the TSX since the TSX has more restrictive membership requirements. 258) Financial managers must first determine which debt-equity mix is best for the firm. Secondly, financial managers must determine the least expensive sources of financing. These decisions will affect both the risk level and the value of the firm. These decisions are significant as they establish the long-term debt obligations of the firm. Should a firm assume too much debt, it could face bankruptcy if the future cash flows cannot support the debt load. 259) A firm issues securities in the financial markets and receives cash in exchange. This cash is used to purchase assets that in turn generate cash flows. These cash flows are used to reinvest in additional firm assets, pay taxes, pay dividends, cover debt payments, and pay interest to the holders of the firm's securities. 260) The goal of financial management is to increase the value of the existing owners' equity. Stock options are designed to reward managers when the value of the stock rises. 251) 50 Answer Key Testname: UNTITLED1 The organizations include a corporation and a limited partnership. Firms which require large sums of external financing will commonly choose the corporate form. Real estate ventures often involve limited partnerships. 262) Student answers will vary but should explain that proper ethical behaviour enhances the market perception of a firm, increases customer satisfaction, lowers agency costs, and in general, increases the market value of the firm, which is the goal of financial management. 261) 51