Chapter 1—The Scope of Corporate Finance

MULTIPLE CHOICE 1. One of the tasks for financial managers when identifying projects that increase firm value is to identify those projects where a. marginal benefits are at least equal to the project’s marginal costs. b. taking the project will increase the book value of the firm’s common stock. c. taking the project wll decrease the book value of the firm’s debt outstanding. d. none of the above ANS: A DIF: E REF: Learning Objectives

2. Which finance career classification involves analyzing a firm’s business processes and strategies as well as recommending a change in practice in order to make a firm more competitive? a. corporate finance b. commercial banking c. investment banking d. consulting ANS: D DIF: M REF: 1.1 Career Opportunities in Finance

3. If you would like to work in finance by trading debt and equity securities for customers, then which finance career classification should you target? a. corporate finance b. commercial banking c. investment banking d. money management ANS: C DIF: M REF: 1.1 Investment Banking

4. Which form of invested capital is subject to most of the firm’s business and financial risk? a. debt capital b. equity capital c. borrowed capital d. intellectual capital ANS: B DIF: E REF: 1.2 Debt and Equity: The Two Flavors of Capital Used by All BusinessesCareer Opportunities in Finance 5. Which of the following is not a true capital-raising event for the firm? a. primary market transaction b. secondary market transaction c. initial public offering d. a corporate loan from a bank ANS: B DIF: E REF: 1.2 The Growing Importance of Financial Markets

6. The total value of primary stock and bond offerings sold by corporations and other entitites per year increased by a significant amount during the 1993 -2003 period. That increase most closely corresponds to a. a factor of 2. b. a factor of 5.

corporation ANS: D sole proprietorship . sole proprietorship b. Partnerships 10. Within a limited partnership context. a factor of 20.has limited liability DIF: H REF: 1. The limited partner must remain a low level employee and cannot ever serve in a managerial role in the firm. the corporate charter. c. which legal form of organization would be best for Excellent Adventures to protect both William and Theodore? a. b.3 Legal Forms of Business Organizations. the Institute for Corporate Governance corporte governance procedures.one partner must be the general partner and consequently could not protect both owners corportion . limited partnership d. DIF: H REF: 1.has joint and several liability that will not help the owners limited partnership . There is a limit to the amount of capital that a limited partner can contribute. d. ANS: D DIF: H REF: 1. Corporations . what are the conditions on a limited partner? a. auditing ANS: D DIF: M REF: 1.3 Legal Forms of Business Organizations. There is a limit to the number of limited partners that the firm may take on as investors.S. captial budgeting function c. d. a factor of 10.33 trillion is best described by a factor of 10. the Securities and Exchange Commision rules for corporate governance. d.3 Legal Forms of Business Organizations 9. Consequently. domiciled firm. Which of the following is not one of the five basic corporate finance functions? a. as mandated by law. c.2 The Growing Importance of Financial Markets 7.c. b. A limited partner may not take any active role in the operation of the business. Since their business primarily involves time-travel their clients may be harmed during a small but significant portion of the travels. William and Theodore would like a business form that will shield their personal wealth from any legal claims that the firm might be subject to after one of the travel mishaps. risk management d. partnership c. external financing function b.not possible with 2 owners partnership . If William and Theodore are the only investors in this U. William and Theodore have decided to start a travel business called Excellent Adventures. ANS: C An increase from $504 billion to $5. the minutes of the board of directors meeting.2 The Five Basic Corporate Finance Functions 8. The rules dictating voting procedures and other aspects of corporate governance for a corporation are a. ANS: B DIF: M REF: 1.

500 c.000 while the corporation is subject to a 35% income tax rate and an investor is subject to a 35% personal tax rate and a 15% capital gains tax rate. c. $24. d. the costs that arise due to conflicts of interest between shareholders and managers. if a corporation has pre-tax earnings of $110. The ultimate owner(s) of an ongoing corporation are a. then what is the after-tax income that the investor could capture if all of the firm’s earnings are paid out in dividends? a.65 = $46. then what is the after-tax income that the investor could capture if all of the firm’s earnings are paid out in dividends? a. if a corporation or partnership has pre-tax earnings of $110. the federal government. Corporations 12. c.65 *. b.000 while the corporation is subject to a 35% income tax rate and an investor is subject to a 35% personal tax rate and a 15% capital gains tax rate. the costs involved when converting an entity from a proprietorship to a corporation. the equity holders.000 * . Prior to the Tax Relief Act of 2003. $71. Since the Tax Relief Act of 2003. $10. Since the Tax Relief Act of 2003. ANS: C DIF: E REF: 1. $71. the executive staff of the corporation.500 b.475 DIF: M REF: 1.775 d.475 c. $93. $46. Agency costs refer to a.000*.3 Corporations 14.3 Corporations 15. if a corporation has pre-tax earnings of $110.65*.500) b. $44.85 = $60.475 ANS: C $110. ANS: C DIF: E REF: 1. $0 c.3 Legal Forms of Business Organizations.725 d.11. $60.500 b.775 DIF: M REF: 1. ($22. the debt holders.3 Corporations. the costs associated with managing the demands of federal agencies. $46. d.284 ANS: B $110.330 d. b. agency cost definition 13. none of the above.725 . then what is the advantage to being a partnership (compared to a corporation) if all of the proceeds are paid out to investors in either legal form? a. $42.000 while the corporation is subject to a 35% income tax rate and an investor is subject to a 35% personal tax rate.

profit maximization ignores expenses b. they expect will increase the firm’s share price. Managers of firms should only take actions that a. the IRS agent in charge of auditing the firm’s tax return c.4 How Can Agency Costs Be Controlled in Corporate Finance? 21.775 Partnership .500 Corporation: $110.000 * . shareholders d. none of the above would disqualify a firm from qualifying as an S Corporation ANS: B DIF: M REF: 1. value increasing investments for the firm? a.$60.85 = $60.500 .4 What Should a Financial Manager Try to Maximize? 18.4 What Should a Financial Manager Try to Maximize?. Shareholders can attempt to overcome agency problems by all but the following: .000 * . b.Corporation = $71. managers who are only compensated with a salary ANS: C DIF: M REF: 1.ANS: C Partnership: $110. one of the shareholders of the proposed S Corporation is an elected official d.725 DIF: H REF: 1. Which of the following is a valid criticism concerning the goal of firms to maximize profits? a. 100% owner of the firm b. there are no valid criticisms of profit maximizing firms ANS: C DIF: M REF: 1. increase the value of the firm’s future cash flows.3 Corporations 17. Maximize Shareholder Wealth 19. creditors c. Which of the following characteristics would disqualify a firm from being an S Corporation? a. profit maximization is completely unrelated to shareholder wealth c. the controlling majority shareholder is a Fortune 500 corporation c.775 = $10. a firm with 51 different individual shareholders b.4 What Should a Financial Manager Try to Maximize?. profit maximization may ignore the timing of those profits d. Which of the following parties have the proper incentives to make risky. d. have marginal benefits which are at least as great as the marginal cost of those actions. an employee who does not own any proportion of the firm d. c. all of the above ANS: D DIF: M REF: 1. An agent of a firm could be any of the following: a.65 * .3 Legal Forms of Business Organizations 16.65 = $71. suppliers b. a supplier of the firm ANS: C DIF: H REF: 1. Maximize Shareholder Wealth 20.

b. c. b.4 How Can Agency Costs Be Controlled in Corporate Finance? 25. managerial carelessnes. Unlimited life b. let the Securities and Exchange Commission inform the firm of a problem b.4 How Can Agency Costs Be Controlled in Corporate Finance? 26. a contract whereby the manager will forfeit a portion of his deferred compensation in the event of poor performance c. established the Securities and Exchange Commission. b. monitor the executive’s work d. d. Limited access to capital ANS: D DIF: E REF: 1. c. paying the manager a bonus if the firm performs well ANS: B DIF: H REF: 1. Which of the following is one of the most expensive methods for the firm to overcome agency costs? a. A root cause of firm agency costs is a. Which of the following is a weakness of a sole proprietorship? a. d. established that a CFO must be a member of the firm’s audit committee of the board of directors.4 How Can Agency Costs Be Controlled in Corporate Finance? 24. auditing the managers work on a monthly basis b. Easy to form c. Limited liability d. ANS: B DIF: M REF: 1. incurring costs to monitor managers paying managers a good salary relying on market forces to exert managerical discipline paying the manager a proportion of the profits that the firm generates ANS: B DIF: H REF: 1. require executives to own a large proportion of their firm’s outstanding shares ANS: B DIF: H REF: 1. ANS: C DIF: H REF: 1. federal agency filing requirements. The Sarbanes-Oxley Act of 2002 a. granting the manager a large number of options that will become valuable if the firm performs well d. c. defined eithical behavior. proper design of an executive’s compensation contract c.4 How the Sarbanes-Oxley Act Is Changing How Corporate America Conducts Business 23. requires CEO and CFOs of all large companies to personally certify their firms’ financial statements. a managers concern for his personal well-being. Which of the following is the best bonding expenditure to help limit agency costs? a. a manager owning too much of his firm’s stock.a. d.3 Legal Forms of Business Organizations . Types of Agency Costs 22.4 What Should a Financial Manager Try to Maximize?.

Which type of finance position focuses on preparing firm financial plans and the evaluation of the firm’s financial ratios? a. Limited life of the business b. Unlimited life of the business b. Shareholders have limited liability in their investment. Unlimited liability d. Capital budgeting analyst c. J Corporation b. Which of the following is a strength of the corporate form of business? a. Series 6 Corporation ANS: C DIF: M REF: 1. Easy to form c. What does this mean? a. ANS: B DIF: M REF: 1.2 Corporate Finance Essentials 32. c. Unlimited access to capital c. LLP Corporation c.3 Legal Forms of Business Organizations 31. Portfolio manager . Secondary market transactions c.3 Legal Forms of Business Organizations 28. Which of the following is NOT a strength of the corporate form of business? a. Limited access to capital ANS: B DIF: E REF: 1. Shareholders have priority in electing the board of directors for the firm. Financial analyst b. Individual contracting ANS: C DIF: M REF: 1. Limited liability d. d.3 Legal Forms of Business Organizations 29. Shareholders are said to have a residual claim on the firm’s assets. Primary market transactions b. Initial public offering transactions ANS: A DIF: M REF: 1. Shareholders are allowed to recover their investment first if the firm experiences financial distress. Shareholders do not receive any payoff from the firm until all creditors are paid. Commodities market transactions d. S Corporation d.27. b.3 Legal Forms of Business Organizations 30.2 Corporate Finance Essentials 33. What market is where transactions that generate new cash flow for the firm occur? a. Double taxation of income ANS: B DIF: M REF: 1. Which of the following is a strength of a sole proprietorship? a. What type of corporation allows shareholders to be taxes as partners while retaining their limited liability status? a. Unlimited life b. Unlimited access to capital c. Unlimited liability d. Cash manager d.

Someone who evaluates the performance of individual bonds. and the tax rate on corporate dividends is 15%.1 The Role of Corporate Finance in Modern Business 38. Debt holders have voting rights for the firm’s board of directors. ANS: B DIF: E REF: 1. Debt holders can force the firm into bankruptcy if interest payments are not made. It greatly reduced the risk and liability of owning a small business.1 The Role of Corporate Finance in Modern Business 34.ANS: A DIF: M REF: 1. d. Common stock holders bear most of the firm’s business and financial risk.2 Corporate Finance Essentials 36.3 Legal Forms of Business Organizations 37. $17. Debt holders are required to receive interest payments at fixed intervals. Preferred stock holders receive a fixed annual payment on their invested capital. $22. What of the following is FALSE regarding debt capital? a. c. The average personal tax rate for partners in the business is 35%. What is a fiduciary? a. b. Debt holders receive the amount of their loan (called principal) at the debt’s maturity date.2 Corporate Finance Essentials 35. It reduced the effect of double taxation on corporate earnings by lowering the tax rate on corporate dividends.000 d.250 ANS: B DIF: M REF: 1. Which of the following is FALSE regarding equity capital? a. as a corporation versus a partnership. ANS: C DIF: M REF: 1. c.3 Legal Forms of Business Organizations . Someone who performs ratio analysis for a corporation. b. c. What was the key impact to the Jobs and Growth Tax Reconciliation Act of 2003? a. given the following assumptions. c. Someone who invest and manages money on someone else’s behalf. and operating income before taxes will be $200. The effective corporate tax rate is 35%. Someone who manages the release of a initial public offering. $20. Calculate the tax disadvantage to organizing a U. d. a. d. It reduced taxes in an effort to keep Social Security solvent through 2040.500 c. b. It provided tax credits and incentives for corporations to maintain their operations in the United States. b. $19. Common stock holders have ownership in the firm by voting for the firm’s management. ANS: D DIF: M REF: 1. ANS: D DIF: M REF: 1. business today.000. All earnings will be paid out as dividends. d.500 b. Preferred stockholders can force the firm into bankruptcy if dividend payments are not paid.S. after passage of the Jobs and Growth Tax Reconciliation Act of 2003.

and operating income before taxes will be $750. $0 b. Corporate income is taxed. business today if the Jobs and Growth Tax Reconciliation Act of 2003 passed with this provision. as a corporation versus a partnership. b. and the tax rate on corporate dividends is 15%. ANS: B DIF: E REF: 1. Corporations pay both Federal income tax and state income tax on their earnings.3 Legal Forms of Business Organizations 42.S. $63. Maximize net income or earnings c.39. $166.3 Legal Forms of Business Organizations 40.4 The Corporate Financial Manager's Goals 44. What is the proper goal for management of a firm? a.375 ANS: A DIF: M REF: 1. some argued to completely eliminate the tax rate on dividends.S. a.125 ANS: D DIF: M REF: 1. Minimize expenses ANS: A DIF: E REF: 1. $100.850 d. Maximize sales revenue d.250 c. business today. $66. The effective corporate tax rate is 35%. Before passage of the Jobs and Growth Tax Reconciliation Act of 2003. The effective corporate tax rate is 35%. Consider the following firm: All earnings will be paid out as dividends. $152. and then corporate dividends are taxed as well.3 Legal Forms of Business Organizations 41. Calculate the tax disadvantage to organizing a U.000 c. The average personal tax rate for partners in the business is 35%. d.000 d. given the following assumptions.500. as a corporation versus a partnership.250 c. Corporate income as taxed at twice the rate of partnership income.2 Corporate Finance Essentials 43.000. All earnings will be paid out as dividends. Calculate the tax disadvantage to organizing a U. What is meant by the term “double taxation” as applied to the corporate form of business organization? a. a. What is a basic guide for financial decision making? . $125. business today. and operating income before taxes will be $1. The average personal tax rate for partners in the business is 35%. The average personal tax rate for partners in the business is 35%. $73. c. $64.250 b. What is the tax disadvantage? a. and the tax rate on corporate dividends is 0%.000.125 b.000 ANS: A DIF: M REF: 1. Maximize shareholder wealth b. $170. Corporations pay both income tax and sales taxes on their goods. $75. The effective corporate tax rate is 35%. after passage of the Jobs and Growth Tax Reconciliation Act of 2003. after passage of the Jobs and Growth Tax Reconciliation Act of 2003. $146.000 d.000. and operating income before taxes will be $1. given the following assumptions. and the tax rate on corporate dividends is 15%. All earnings will be paid out as dividends.S.500. Calculate the tax disadvantage to organizing a U.

Initial Placed Offering c. Make decisions were the marginal benefits exceed the marginal costs. Sarbanes-Oxley Act of 2002 ANS: D DIF: E REF: 1. Which statement best describes the capital structure decision process for a firm? a. Investment of Public Offers ANS: A DIF: M REF: 1. Limited partnership c.2 Corporate Finance Essentials 48. a firm needs access to capital and to minimize risk for investors. b.1 The Role of Corporate Finance in Modern Business 45. d. Internal Accounting Standards Act of 2002 c. b. Given these guidelines. What is a key provision regarding CEOs in the Sarbanes-Oxley Act of 2002? a. ANS: A DIF: E REF: 1. Make decisions were the marginal benefits exceed the fixed costs. d. What is the term applied to a firm that offers shares to the general public for the first time? a.a. Corporation ANS: D DIF: H REF: 1.4 The Corporate Financial Manager's Goals 47. The firm makes the necessary filings for an initial public offering. General partnership d. ANS: D DIF: M REF: 1. Tax Relief Act of 2003 b. What recent act has attempted to reduce the possibility of more accounting scandals in our economy? a. Sole proprietorship b. The firm finds the least expensive debt to finance its projects.3 Legal Forms of Business Organizations 49. Make decisions were the total benefits exceed the total costs. Initial Public Offering b. When the managers of a firm lack incentive to maximize shareholder wealth. The firm purchases the mix of debt and equity to match the guidelines of the company charter. bearing the cost. . McCain-Feingold Act of 2003 d. ANS: C DIF: M REF: 1. CEOs total compensation cannot exceed a limit set by the SEC. Make decisions were the average benefits exceed the average costs. while the benefits go to all the shareholders in the firm. d. When the shareholders of a firm fail to act in their own best interests. CEOs are prohibited from commenting on company filings to the SEC. Which of the following describes the “collective action problem”? a. When an individual stockholder spends time and resources monitoring managers. which business form should maximize value for a firm? a. c. b. c. The firm finds the mix of debt and equity to maximize firm value. To maximize the value of a business. b. CEOs are personally liable for any mistakes on company financial filings. Investment Plan Offer d. c. When a CEO fails to represent the interest of shareholders in daily decisions of the firm. CEOs cannot hold options in the firms they direct. d. c.4 The Corporate Financial Manager's Goals 46.2 Corporate Finance Essentials 50.

partnership. Financial analyst b. S Corporation d. ANS: A DIF: E REF: 1. In order to be eligible for S status. Budgeting b. Corporate finance b. sole proprietorship. A corporation is a separate legal entity. They can own property. ANS: B DIF: E REF: 1. b.2 Corporate Finance Essentials 51.3 Legal Forms of Business Organizations 56. corporation. d.ANS: B DIF: M REF: 1. Which is not a duty of a financial manager? a. Corporation b. All of the above ANS: D DIF: E REF: 1.3 Legal Forms of Business Organizations 54. What consequences does that have for the corporation? a. Sole Proprietorship ANS: C DIF: E REF: 1. a firm must a. not have more than one line of business. Product research d. a only d.2 Corporate Finance Essentials 52. A business with a single owner is called a a. Investment banking c. Financial forecasting c. Which of the following is not a career opportunity in corporate finance? a. Partnership c.3 Legal Forms of Business Organizations 53. a and b ANS: D DIF: E REF: 1. It can sue and be sued. Investment analysis ANS: C DIF: E REF: 1. limited liability company. c. d. Which form of business organization allows shareholders to be taxed as partners while still retaining their limited liability status? a. Which of the following represents career opportunities in finance? a. Consulting d. b. Mortgage banker .3 Legal Forms of Business Organizations 55. c.1 The Role of Corporate Finance in Modern Business 57. c. b. have 75 or fewer shareholders. have been incorporated for more than 5 years. be a financial intermediary.

d. ANS: A DIF: E REF: 1. Portfolio manager b. Assets d. Developing new products. What is considered a primary market transaction? a.2 Corporate Finance Essentials 62.2 Corporate Finance Essentials 61. Limited access to capital . b. Unlimited personal liability c. d. Identifying potential investments. Corporations sell securities to investors in exchange for cash. A company makes a bank deposit. Financial planner d.2 Corporate Finance Essentials 60. Investor A buys stock from investor B. Financial management d. c. b. Limited life b. Risk management ANS: B DIF: E REF: 1. Debt c. A company declares a dividend. Which of the following is not a part of the capital budgeting process? a. Implementing and monitoring the selected investments. Corporate governance c. Capital budgeting is the single most important activity of the firm’s financial manager. Identifying investments that create shareholder value. Controller ANS: B DIF: E REF: 1.2 Corporate Finance Essentials 63. Cash manager d. Financing b.1 The Role of Corporate Finance in Modern Business 59. Capital budgeting analyst ANS: D DIF: E REF: 1. What are the broad types of capital? a. a and b ANS: D DIF: E REF: 1. Of the five basic corporate finance functions which deals with developing company wide structures that force managers to act ethically and to make decisions that further the interests of the firm’s stockholders? a.1 The Role of Corporate Finance in Modern Business 58.c. Equity b. Which of the following is not considered a weakness of the sole proprietorship? a. Simplicity d. Which of the following does not represent a career opportunity in money management? a. ANS: C DIF: E REF: 1. c. Securities analyst c.

ANS: C DIF: E REF: 1. b.3 Legal Forms of Business Organizations 66.3 Legal Forms of Business Organizations 67. A single owner d. c. c. Common stockholders vote to elect the members of the board of directors. In situations of conflict pick stakeholders’ interests over shareholders’ interests. Corporation c. Maximize the stakeholders’ interests. b. Limited access to capital c. ANS: A DIF: E REF: 1. Limited life b. You were just hired as the CEO of a company. Preserve stakeholders’ interests. b. ANS: D DIF: E REF: 1. to maximize the company’s price of common stock. d. What should be the objective of a focus on stakeholders? a. ANS: C DIF: M REF: 1. In which form of business organization is a agency problem most likely to occur? a. b. Maximize earnings. c. d. Maximize corporate profits. Hire and fire managers. Hire and fire entry level employees.4 The Corporate Financial Manager's Goals 68. to eliminate the company’s competitors. to maximize profits. b. Unlimited personal liability ANS: C DIF: E REF: 1. c. Disregard shareholders’ interests all together.4 The Corporate Financial Manager's Goals 70. Minimize costs. Preferred stockholders receive a fixed dividend each year. d. What is the goal of financial management? a. Partnership d. ANS: C DIF: M REF: 1. Limited liability company . Which of the following does not apply to a partnership? a. What are the responsibilities of the board of directors in a corporation? a.3 Legal Forms of Business Organizations 64. Which of the following is not true about common stockholders and preferred stockholders? a. c.4 The Corporate Financial Manager's Goals 69. d. Your primary objective should be a. ANS: B DIF: E REF: 1. Preferred stockholders have a more senior claim on the firm’s assets in the event of bankruptcy. Sole proprietorship b. to maximize the company’s earnings. d. Preferred stockholders are considered the firm’s ultimate owners. Maximize shareholder wealth.3 Legal Forms of Business Organizations 65. Amend the firm’s corporate charter when necessary. Manage day-to-day operations.

All of the above. d. The Patriot Act d. Threat of hostile takeovers. Shareholders’ dilemma ANS: A DIF: E REF: 1. Agency problem.ANS: B DIF: M REF: 1. Double taxation d. The Sarbanes-Oxley Act ANS: D DIF: E REF: 1. c. Stakeholder problem c. Audits. The Jobs and Growth Relief Reconciliation Act b.4 The Corporate Financial Manager's Goals . They receive a salary from the company. b. b. They only have a residual claim on the firm’s cash flows. ANS: A DIF: E REF: 1. c. Which of the following encourages managers to act in the shareholders’ interests? a. What do we call the possible conflict of interests between shareholders and management? a. Management decides to close a plant to lower operating costs. The Financial Services Modernization Act c.4 The Corporate Financial Manager's Goals 72. Which of the folowing scenarios could be considered an example of an agency problem. Management decides to go ahead with an expansion that is expected to benefit the company’s value. Why do shareholders bear most of the risk of running a firm? a. d.4 The Corporate Financial Manager's Goals 75. The board of directors rewards management for the company’s last year performance. ANS: D DIF: M REF: 1. a. Shares can be taken away at any time without notice.4 The Corporate Financial Manager's Goals 74. Which law did congress pass in 2002 to enforce ethical behavior in corporate finance? a. b. b. d. Management decides to purchase a Boeing 747 as a corporate plane. ANS: D DIF: E REF: 1. They are guaranteed a fixed payout each quarter. c. Performance based compensation.4 The Corporate Financial Manager's Goals 71.4 The Corporate Financial Manager's Goals 73.