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FM Part 1 PDF
FM Part 1 PDF
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[A] True
[B] False
[A] :Capital structure is still relevant. This firm has chosen to have no long-term debt. Review section 1.1.
[B] :You are correct!
2) Which one of the following is the best description of the goal of a financial manager in a corporation
where shares are publicly traded?
[A] :The primary goal is to maximize the current value per share of the existing stock. Review section 1.3.
[B] :The primary goal is to maximize the current value per share of the existing stock. Review section 1.3.
[C] :The primary goal is to maximize the current value per share of the existing stock. Review section 1.3.
[D] :The primary goal is to maximize the current value per share of the existing stock. Review section 1.3.
[E] :You are correct!
5) The partnership form of organization is considered more important than the corporate form in respect
to firm size.
[A] True
[B] False
[A] :The largest firms are generally corporations. Review section 1.2.
[B] :You are correct!
6) When evaluating a project in which a firm might invest, both the size and the timing of the cash flows
are important.
[A] True
[B] False
7) A type of small corporation that is taxed like a partnership and thus avoids double taxation in the U.S.
is called a:
[A] mixture of debt and equity a firm uses to finance its operations.
[B] types of long-term investments a firm has made.
[C] long term assets acquired by a firm.
[D] firm's short-term assets and liabilities.
[E] mixture of short-term liabilities a firm uses to finance its short-term assets.
10) Which of the following criteria are required if a firm is to accept a project?
I. The size of the cash flows must be acceptable to the firm.
II. The value of the cash flows generated by the project must exceed the cost of the project.
III. The risk level of the project must be acceptable to the firm.
IV. The timing of the cash flows must be acceptable to the firm.
[A] :True, but at least one other criteria is also required. Review section 1.1.
[B] :True, but at least one other criteria is also required. Review section 1.1.
[C] :True, but at least one other criteria is also required. Review section 1.1.
[D] :True, but at least one other criteria is also required. Review section 1.1.
[E] :You are correct!
11) In the evaluation of cash flow in a capital budgeting decision, which of the following must be
considered?
I. size of the cash flow
II. timing of the cash flow
III. risk of the cash flow
[A] I only
[B] II only
[C] III only
[D] II and III only
[E] I, I, and III
[A] :True, but this is not the only consideration. Review section 1.1.
[B] :True, but this is not the only consideration. Review section 1.1.
[C] :True, but this is not the only consideration. Review section 1.1.
[D] :True, but is the size of the cash flows not a consideration also? Review section 1.1.
[E] :You are correct!
12) Which one of the following is an advantage enjoyed by the owner of a corporation but not by the
owner of a sole proprietorship?
[A] president.
[B] chief executive officer.
[C] board of directors.
[D] vice president of finance.
[E] chief operations officer.
[A] :The treasurer and controller report to the vice president of finance. Review section 1.1.
[B] :The treasurer and controller report to the vice president of finance. Review section 1.1.
[C] :The treasurer and controller report to the vice president of finance. Review section 1.1.
[D] :You are correct!
[E] :The treasurer and controller report to the vice president of finance. Review section 1.1.
[A] True
[B] False
15)
71. The shareholders at the Kenper Group have received two offers to purchase their firm. In the first
offer, Kenper shareholders would receive $60 per share in cash for their stock (the current market price is
$45), and existing managers would lose their jobs. In the second, Kenper shareholders would receive $55
in cash for their stock, but the firm's managers would retain their positions after the firm is purchased.
Kenper's management is acting to block the first offer and backs the second offer. This is an example of
a(n):
[A] :This is not a working capital problem. Review sections 1.1 and 1.4.
[B] :You are correct!
[C] :This is not a capital budgeting problem. Review sections 1.1 and 1.4.
[D] :This is not a capital structure problem. Review sections 1.1 and 1.4.
[E] :This is not a cash management problem. Review sections 1.1 and 1.4.
16) Which of the following help ensure managers act in the best interest of owners?
I. a compensation package for managers that ties their salary to the firm's share price
II. the incentives managers have for being promoted or having better job prospects are related to the
prosperity of the firm
III. the threat that if the firm does poorly, shareholders will use a proxy fight to replace existing
management
IV. a high probability the firm will become a takeover candidate if the firm performs poorly
[A] :These are not the only ones that are correct. Review section 1.4.
[B] :These are not the only ones that are correct. Review section 1.4.
[C] :These are not the only ones that are correct. Review section 1.4.
[D] :These are not the only ones that are correct. Review section 1.4.
[E] :You are correct!
[A] a firm selling stock to the public for the first time in an IPO
[B] an investor buying stock in Chrysler from his buddy
[C] IBM stockholders selling some of their shares to another investor
[D] Cathy Smith giving shares of GE stock to her sister
[E] ABC company buying shares of AT&&T stock from John Smith
18) Limited liability may be available for an owner in which of the following types of organizations?
I. sole proprietorship
II. limited partnership
III. corporation
IV. limited liability company
[A] IV only
[B] II and IV only
[C] I and III only
[D] II, III, and IV only
[E] I, II, III, and IV
[A] :True, but this is only one of the correct options. Review section 1.2.
[B] :True, but there is one more correct option. Review section 1.2.
[C] :One of these is incorrect. Review section 1.2.
[D] :You are correct!
[E] :One of these is incorrect. Review section 1.2.
20) The process by which unhappy stockholders can attempt to replace existing management is called
a(n):
21) Which of the following types of firm owners can lose no more than their initial investment in the firm?
I. common stockholder
II. limited partner
III. general partner
IV. sole proprietor
[A] I only
[B] I and II only
[C] I, II, and IV only
[D] II, III, and IV only
[E] II and III only
[A] :True, but this also applies to one other type of owner. Review section 1.2.
[B] :You are correct!
[C] :At least one of these is incorrect. Review section 1.2.
[D] :At least one of these is incorrect. Review section 1.2.
[E] :At least one of these is incorrect. Review section 1.2.
22) A secondary market transaction can occur in either a dealer market or an auction market.
[A] True
[B] False
23) A ____________ transaction occurs when a firm first sells its shares to the investing public.
[A] :The money market is not for shares of stock. Review section 1.5.
[B] :You are correct!
[C] :Note the word "first" in the sentence. Review section 1.5.
[D] :Shares mean stock, not bonds. Review section 1.5.
[E] :Cash markets are not related to the sale of stock. Review section 1.5.
[A] I only
[B] II only
[C] III only
[D] I and III only
[E] I and II only
[A] :True, but this also applies to another option. Review section 1.2.
[B] :True, but this also applies to another option. Review section 1.2.
[C] :A corporation is not affected by the death of an owner. Review section 1.2.
[D] :Only one of these is correct. Review section 1.2.
[E] :You are correct!
27) Which one of the following statements concerning the cash flows between a firm and the financial
markets is correct?
[A] When a firm sells shares of stock, cash flows out of the firm into the financial markets.
[B] When a firm issues debt, cash flows into the firm.
[C] When a firm pays taxes, cash flows into the firm.
[D] When a firm pays dividends, cash flows into the firm.
[E] When a firm makes a payment on its debt, cash flows into the firm.
[A] :Who receives the cash when a firm sells stock? Review section 1.5.
[B] :You are correct!
[C] :This is a cash outflow from the firm. Review section 1.5.
[D] :This is a cash outflow from the firm. Review section 1.5.
[E] :This is a cash outflow from the firm. Review section 1.5.
28) The majority of the trades on the NYSE can best be described as:
[A] secondary market transactions in an auction market.
[B] primary market transactions in an auction market.
[C] secondary market transactions in a dealer market.
[D] primary market transactions in a dealer market.
[E] secondary market transactions in a money market.
[A] True
[B] False
[A] :Working capital refers only to short-term assets and short-term liabilities. Review section 1.1.
[B] :You are correct!
30) Sole proprietorships incur agency costs when the owner is also the manager.
[A] True
[B] False
[A] :Agency costs arise only when the owner and the manager are separate parties. Review section 1.4.
[B] :You are correct!
31) The board of directors has the power to act on behalf of the shareholders to hire and fire the
operating management of a firm. In a legal sense, the directors are "principals" and the shareholders are
"agents".
[A] True
[B] False
[A] :The shareholders are the "principals," the directors are the "agents." Review section 1.4.
[B] :You are correct!
32) In capital budgeting, the financial manager tries to identify investment opportunities that are worth
more to the firm than they cost to acquire.
[A] True
[B] False
34) An appropriate financial decision will ______________ of the cash flows to the firm, all else equal.
I. slow down the receipt
II. increase the size
III. increase the risk
[A] I only
[B] II only
[C] I and II only
[D] II and III only
[A] :It would generally be better to speed up receipts. Review section 1.1.
[B] :You are correct!
[C] :At least one of these is incorrect. Review section 1.1.
[D] :At least one of these is incorrect. Review section 1.1.
[E] :At least one of these is incorrect. Review section 1.1.
36) The primary goal of a financial manager is to maximize the current earnings of the firm.
[A] True
[B] False
[A] :The primary goal is to maximize the current value per share of the existing stock. Review section 1.3.
[B] :You are correct!
[A] buy order given to an investment banker for a new public stock offering
[B] sell order given to a broker for shares of a company trading on the NYSE
[C] buy order given to a broker for shares of a company trading on AMEX
[D] sell order given to a dealer for shares of a company trading over-the counter
[E] buy order given to a broker for a stock listed on a regional exchange
38) The __________ contain(s) the corporation's name, its intended life, its business purpose, and the
number of shares that can be issued.
[A] :This does not contain this information. Review section 1.2.
[B] :You are correct!
[C] :These do not contain this information. Review section 1.2.
[D] :This is not related to a corporation. Review section 1.2.
[E] :This is not related to a corporation. Review section 1.2.
[A] True
[B] False
[A] :The New York Stock Exchange operates as an auction market. Review section 1.5.
[B] :You are correct!
41) A financial manager must be concerned with three basic areas: Capital budgeting, capital structure,
and working capital.
[A] True
[B] False
42) One advantage of the corporate form of organization is that you can buy shares in a major
corporation without worrying about being held personally liable for the debt of that corporation.
[A] True
[B] False
43) A(n) ________________ is a sale of securities which typically does not require registration with the
SEC and is usually sold to a large financial institution.
[A] :This is a public offering, not a private one. Review section 1.5.
[B] :This is a transaction in a public market, not a private one. Review section 1.5.
[C] :This is a transaction in a public market, not a private one. Review section 1.5.
[D] :This is a transaction in a public market, not a private one. Review section 1.5.
[E] :You are correct!
44) In which one of the following situations does an agency problem exist?
[A] when there is a conflict of interest between the stockholders and the management of a firm
[B] the manager of a sole proprietorship is also the firm owner
[C] when the management of a firm rejects a project because they feel the project will reduce the current
value of the firm’s stock
[D] when the managers decide to lay off employees because they feel by doing so the firm has more
value
[E] when the managers of ABC acquire firm XYZ because they feel that the acquisition will increase the
value of ABC stock
46) Which of the following are considered basic questions of corporate finance?
I. What long-term investments should the firm undertake?
II. Where will the firm get the long-term financing to pay for its investments?
III. Which mixture of debt and equity should the firm use to fund its operations?
IV. How should the firm manage its working capital?
[A] :True, but there are additional correct options. Review section 1.1.
[B] :True, but there are additional correct options. Review section 1.1.
[C] :True, but there is an additional correct option. Review section 1.1.
[D] :True, but there is an additional correct option. Review section 1.1.
[E] :You are correct!
48) Which of the following are true statements concerning limited partnerships?
I. Limited partners are personally responsible for all debts of the partnership.
II. Limited partners are NOT active managers of the partnership.
III. In a limited partnership, all partners share equally in the gains or losses.
IV. A limited partnership has a limited life.
[A] :This is the definition of a primary market, not a secondary market. Review section 1.5.
[B] :This is the definition of a dealer market, not a secondary market. Review section 1.5.
[C] :This is the definition of an auction market, not a secondary market. Review section 1.5.
[D] :This is the definition of a dealer market, not a secondary market. Review section 1.5.
[E] :You are correct!
50) Which one of the following is considered a benefit of the corporate form of organization?
[A] in corporations.
[B] in limited partnerships.
[C] when managers act in the best interest of the firm owners.
[D] when managers receive bonuses based on the total sales of a firm.
[E] while managers are hiring new employees.
52) Which of the following induce managers to work in the best interests of the shareholders?
I. incentives tied to current firm earnings
II. threat of takeover
III. prospects for promotion
[A] II only
[B] I and II only
[C] I and III only
[D] II and III only
[E] I, II, and III
[A] :True, but one other is correct as well. Review section 1.4.
[B] :Only one of these is correct. Review section 1.4.
[C] :Only one of these is correct. Review section 1.4.
[D] :You are correct!
[E] :One of these is not correct. Review section 1.4.
[A] :One of these is not a duty of the financial manager. Review section 1.1.
[B] :One of these is not a duty of the financial manager. Review section 1.1.
[C] :True, but there is one additional duty. Review section 1.1.
[D] :You are correct!
[E] :One of these is not a duty of the financial manager. Review section 1.1.
54) Which one of the following should produce the least amount of agency cost?
[A] bonuses based on the per share value of the company stock
[B] promotions based upon increases in market share
[C] annual raises based upon the growth rate of the company
[D] bonuses based on number of retail outlets owned
[E] annual raises based on the number of smaller firms acquired
[A] The equity that can be raised by a corporation is limited to the current shareholders' personal wealth.
[B] The life of a corporation is unlimited.
[C] A corporation has limited liability for its business debts.
[D] The interest paid by a corporation on its debt is subject to double taxation.
[E] It is difficult to transfer ownership of corporate shares.
56) Which one of the following statements represents an advantage of the corporate form of organization
over that of a sole proprietorship?
[A] A sole proprietorship has an unlimited life while a corporation does not.
[B] Owners in a sole proprietorship have limited liability for the firm's debts.
[C] It is easier to raise new capital in a sole proprietorship than in a corporation.
[D] Sole proprietorships pay dividends but corporations do not.
[E] It is easier to transfer ownership in a corporation than in a sole proprietorship.
[A] :This is not true, but the reverse of this statement is. Review section 1.2.
[B] :This is not true, they have unlimited liability. Review section 1.2.
[C] :This is not true, but the reverse of this statement is. Review section 1.2.
[D] :This is not true, but the reverse of this statement is. Review section 1.2.
[E] :You are correct!
57) According to the balance sheet model of the firm, corporate finance may be thought of as the analysis
of three primary subject areas. Which of the following groups correctly lists these three areas?
[A] :Security analysis deals with buying investments, which is not a primary subject area in corporate
finance. Review section 1.1.
[B] :Capital spending is very much the same as capital budgeting. Review section 1.1.
[C] :You are correct!
[D] :As you will learn later, capital rationing is a concern of capital budgeting analysis. Review section
1.1.
[E] :Capital spending is very much the same as capital budgeting. Review section 1.1.
58) Which of the following statements is/are correct regarding agency costs?
I. Indirect costs occur when managers, acting to minimize the risk of the firm, forego investments
shareholders would prefer they take.
II. Direct costs occur when shareholders must incur costs to monitor their managers’ actions.
III. Direct costs occur when managers buy assets considered unnecessary by the firm's owners.
[A] I only
[B] I and II only
[C] II only
[D] II and III only
[E] I, II, and III
[A] :This is not the only one that is correct. Review section 1.4.
[B] :These two are not the only ones that are correct. Review section 1.4.
[C] :This is not the only one that is correct. Review section 1.4.
[D] :These two are not the only ones that are correct. Review section 1.4.
[E] :You are correct!
59) On a typical day in the U.S., the largest volume of trading in auction markets occurs:
[A] True
[B] False
61) A financial manager of a corporation is considering different operating strategies for the coming year.
From a financial management standpoint, which one of the following would be her optimal strategy?
[A] :Reducing the risk level also typically reduces returns. Would stockholders like this? Review section
1.3.
[B] :You are correct!
[C] :Is it okay to maximize profits for this year only? Review section 1.3.
[D] :The stockholders probably wouldn't appreciate her increasing her personal wealth at their expense.
Review section 1.3.
[E] :Do you think stockholders prefer stocks whose price remains stable, that is, never goes up? Review
section 1.3.
62) The primary goal of financial management is to minimize the corporate tax liability.
[A] True
[B] False
[A] :Minimizing taxes is a good thing but is this the primary goal? Review section 1.3.
[B] :You are correct!
63) Two advantages of the corporate form of organization are the ease of transferring ownership and an
unlimited firm life.
[A] True
[B] False
64) Financial markets bring the buyers and sellers of debt and equity together.
[A] True
[B] False
66) Julie Etling wants to start a new business decommissioning nuclear warheads and reactors. The work
will involve significant hazards. Julie is concerned about protecting her personal wealth from any losses
the business might incur. Which form of business structure should she select if she will be the majority
owner and the sole manager of the firm?
[A] corporation
[B] general partnership
[C] limited partnership
[D] general partnership with limited partners
[E] sole proprietorship
67) A financial manager is responsible for determining the firm's appropriate level of inventory. Which of
the financial management areas addresses this decision?
I. capital budgeting
II. capital structure management
III. working capital management
[A] I only
[B] II only
[C] III only
[D] I and II only
[E] I, II, and III
[A] :Managing inventory levels is not a capital budgeting decision. Review section 1.1.
[B] :Managing inventory levels is not a capital structure decision. Review section 1.1.
[C] :You are correct!
[D] :One or more of these is incorrect. Review section 1.1.
[E] :Only one of these is correct. Review section 1.1.
68) A financial manager is responsible for deciding whether or not new manufacturing equipment should
be purchased to replace existing equipment. The firm has sufficient cash available to make the purchase.
The new equipment would reduce labor expenses and would allow the firm to reduce its investment in
inventory. Which of the financial management areas would be involved in this decision?
I. capital budgeting
II. capital structure
III. working capital
[A] I only
[B] I and II only
[C] II and III only
[D] I and III only
[E] I, II, and III
[A] :This is not the only area affected. Review section 1.1.
[B] :How is capital structure affected? Review section 1.1.
[C] :How is capital structure affected? Review section 1.1.
[D] :You are correct!
[E] :How is capital structure affected? Review section 1.1.
69) Which one of the following is a true statement concerning a partnership comprised solely of general
partners?
[A] All partners are personally responsible for the debts of the partnership.
[B] Only one partner can participate in the management of the partnership.
[C] The income of the partnership is taxed as a corporation.
[D] Each partner enjoys limited liability for the debts of the partnership.
[E] The partnership has an unlimited life.
70) Ann is interested in purchasing Ted's factory. Since Ann is a poor negotiator, she hires Mary to
negotiate a purchase price. Identify the parties to this transaction.
71) The vice-president of finance generally reports directly to the chairman of the board.
[A] True
[B] False
[A] :The vice-president of finance generally reports directly to the president. Review section 1.1.
[B] :You are correct!
[A] True
[B] False
[A] :What groups of people are considered stakeholders? Review section 1.4.
[B] :You are correct!
[A] listed.
[B] privately held.
[C] an OTC security.
[D] an IPO.
[E] a private placement.
74) 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 who are taxed
[B] whenever a corporation earns a profit, pays taxes on that profit, and then pays dividends to its
stockholders who are taxed
[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 interest to its
shareholders
[E] whenever stockholders are also employees
[A] :Isn't interest a tax-deductible expense, thereby avoiding the double taxation problem? Review
section 1.2.
[B] :You are correct!
[C] :There is nothing taxed twice here. Review section 1.2.
[D] :Shareholders don't earn interest, they earn dividends. Review section 1.2.
[E] :Employee compensation is an expense thus there is no double taxation here. Review section 1.2.
75) Tasks related to tax management, cost accounting, financial accounting, and data processing are the
primary responsibilities of which corporate officer?
[A] treasurer
[B] corporate director
[C] controller
[D] chairman of the board
[E] vice president of production
[A] :These are not the responsibilities of the treasurer. Review section 1.1.
[B] :The directors do not directly oversee company operations. Review section 1.1.
[C] :You are correct!
[D] :These are not the primary responsibilities of the chairman of the board. Review section 1.1.
[E] :These are not the responsibilities of this officer. Review section 1.1.
76) Stocks that trade on an organized exchange such as the New York Stock Exchange are said to be:
77) Milo, Inc. spends approximately $3 million annually to hire auditors to review the firm's financial
statements. This is an example of an indirect agency cost.
[A] True
[B] False
[A] :Whenever cash is spent it's a direct cost. Review section 1.4.
[B] :You are correct!