3.

There are three primary disadvantages of a regular partnership: (1) unlimited liability,
(2) limited life of the organization, and (3) difficulty of transferring ownership. These
combine to make it difficult for partnerships to attract large amounts of capital and thus
to grow to a very large size.
FALSE
5. By being too involved in the business operation, limited partners can lose their limited
liability status.
TRUE
7. If Firm A's business is to obtain savings from individuals and then invest them in
financial assets issued by other firms or individuals, Firm A is a financial intermediary.
TRUE
8. Today, trustee services can be arranged only with trust companies.
FALSE
4. Cheers Inc. operates as a partnership. Now the partners have decided to convert the
business into a regular corporation. Which statement about its new firm organization is
true?
a. Assuming Cheers is profitable, less of its income will be subject to taxes.

b. Cheers will now be subject to fewer regulations.

c. Cheers' shareholders (the ex-partners) will now be exposed to less liability.

d. Cheers will find it more difficult to raise additional capital.

5. Which of the following statements best describes firm organization?
a. It is usually easier to transfer ownership in a corporation than it is to transfer
ownership in a sole proprietorship.

b. Corporate shareholders are exposed to unlimited liability.

c. Corporations generally face fewer regulations than sole proprietorships.

d. Corporate shareholders are exposed to unlimited liability, and this factor may be
compounded by the tax disadvantages of incorporation.

ANS: A - If ownership in a proprietorship or partnership is transferred, the basic

documents under which the firm operates must be rewritten, whereas for a
corporation the seller simply sells shares to a buyer, and the corporation records
the transfer on its books.
6. Which of the following could explain why a business might choose to operate as a
corporation rather than as a sole proprietorship or a partnership?
a. Less of a corporation's income is generally subjected to taxes than would be true if
the firm were a partnership.
b. Corporate shareholders escape liability for the firm's debts, but this factor may
be offset by the tax disadvantages of the corporate form of organization.

c. Corporate investors are exposed to limited growth potential.

d. Corporations generally face relatively few regulations.

7. What should be done to maximize shareholder wealth and thus the value of the firm?
a. Decrease the size of expected cash flow of the company.

b. Slow down the cash receipt of the organization.

c. Increase the risk level of the firm.

d. Raise the free cash flows of the business.

8. You recently sold 100 shares of your new company, XYZ Corporation, to your brother
at a family reunion. At the reunion your brother gave you a cheque for the shares and
you gave your brother the share certificates. Which statement best describes this
transaction?
a. This is an example of an exchange of physical assets.

b. This is an example of a primary market transaction.

c. This is an example of a direct transfer of capital.

d. This is an example of a money market transaction.

9. Which of the following statements best describes interest rates?
a. The cost of money to fund users is basically determined by the rate of return
required by fund providers.

b. If individuals in general increase the percentage of their income that they save,
interest rates are likely to increase.

c. If companies have fewer good investment opportunities, interest rates are likely to
increase.

d. If expected inflation increases, interest rates are likely to decrease.

10. Which of the following statements best describes hedge funds?
a. Hedge funds are risky, although they may be market-neutral.

b. Hedge funds are open to everyone.

c. Hedge funds have low risk because they hedge their investments.

d. Hedge funds are legal only in Canada, and they are not permitted to operate in
Europe or Asia.
Which of the following
did not contribute to the
financial crisis?

a. The change from

mark-to-market
accounting to
b. Solid credit ratings
from the ratings
agencies C
c. The takeover of
JPMorgan Chase by Bear
Sterns
d. The extension of
credit to high-risk
borrowers
Mark this response if all
of the above contributed
to the financial crisis

Professor Merton Miller

received the Nobel prize
in economics for his work
on?

C
a. working capital
management.
b. dividend policy.
c. capital structure theory.
d. investment theory.

Professors Harry A
Markowitz and William
Sharpe received their
Nobel prize in economics
for their contributions to
the

a. theories of risk-return
and portfolio theory.
b. theories of
international capital
budgeting.
c. theories of working
capital management.
d. options pricing model.

Many companies such as

Tyco, Enron, and
WorldCom that suffered
financial distress in the
late 1990s and early
2000s,
D

a. committed fraud.
b. had failed corporate
governance oversight.
c. went bankrupt.
d. all of these are true.

Which of the following is B

not a true statement
about the goal of
maximizing shareholder
wealth?

a. It takes into account

the timing of cash-flows.
b. It is a short-run point of
view which takes risk into
account.
c. It considers risk as a
factor.
d. None of these.

Capital markets do not

include which of the
following securities?

D
a. Common stock
b. Government bonds
c. Preferred stock
d. Commercial paper

A corporate buy-back, or
the repurchasing of
shares, is

a, an example of balance
sheet restructuring.
A
b. an excellent source of
profits when the firm's
stock is over-priced.
c. a method of reducing
the debt-to-equity ratio.
d. all of these

Increased productivity A
due to technology has

a. helped to keep
corporate costs in check.
b. made it cheaper (in
terms of interest costs)
for firms to borrow
money.
c. created larger asset
values on the firm's
historical balance sheet.
d. increased corporations'
reliance on debt for
capital expansion needs.

The entity that is

responsible for
establishing the allocation
and cost of capital is
D
a. customers
b. the corporation
c. the economy
d. investors

Regarding risk levels, B

financial managers
should

a. pursue higher risk

projects because they
increase value
b. evaluate investor's
desire for risk
c. avoid higher risk
projects because they
destroy value
 d. focus primarily on
market fluctuations

arnings per share is

a. net income minus

preferred dividends
divided by number of
shares outstanding.
b. net income divided by
A
stockholders' equity.
c. net income divided by
number of shares
outstanding.
d. operating profit
divided by number of
shares outstanding.

Which of the following

would not be classified as
a current asset?

C
a. Marketable securities
b. Inventory
c. Investments
d. Prepaid expenses

Asset accounts on the B

balance sheet are listed
in the order of:

a. size.
b. liquidity.
c. profitability.
d. importance.

Which account
represents the
cumulative earnings of
the firm since its
formation, minus
dividends paid?
D

a. Accumulated
depreciation
b. Common stock
c. Paid-in capital
d. Retained earnings

Which of the following is

an inflow of cash?

a. Funds spent in normal

business operations
b. The sale of the firm's B
bonds
c. The purchase of a new
factory
d. The retirement of the
firm's bond

Preferred stock dividends B

__________ earnings
available to common
stockholders.

a. increase
b. decrease
c. do not effect
d. not enough
information to tell

An increase of $100,000
in inventory would result
in an

a. Decrease in
marketable securities
C
b. Increase in bonds
payable
c. Decrease of net cash
flow
d. Increase in net cash
flow

Backdating of options is

a. A fair method to award

top-performing
employees
b. Not to be reported C
unless a gain is provided
to an employee
c. Illegal
d. Considered a gift by
tax law

Which of the following is A

not considered to be a
profitability ratio?
 a. Times interest earned
b. Return on assets
(investment)
c. Return on equity
d. Profit margin

For a given level of

profitability as measured
by profit margin, the
firm's return on equity
will

a. decrease as its current

ratio increases. C
b. decrease as its times-
interest-earned ratio
decreases.
c. increase as its debt-to
assets ratio increases.
d. increase as its debt-to-
assets ratio decreases.

Asset utilization ratios B

a. measure how much

cash is available for
reinvestment into
current assets.
b. relate balance sheet
assets to income
statement sales.
c. measures the firm's
ability to generate a
profit on sales.
d. are most important to
stockholders.

If accounts receivable
stays the same, and credit
sales go up

a. the average collection

period will go up. B
b. the average collection
period will go down.
c. accounts receivable
turnover will decrease.
d. B and C.

Total asset turnover

indicates the firm's

a. profitability.
D
b. liquidity.
c. debt position.
d. ability to use its assets
to generate sales.

A quick ratio that is much D

smaller than the current
ratio reflects

a. a small portion of
current assets is in
inventory.
b. that the firm will have a
high return on assets.
c. that the firm will have a
high inventory turnover.
d. a large portion of
current assets is in
inventory.

Investors and financial

analysts wanting to
evaluate the operating
efficiency of a firm's
managers would probably
look primarily at the firm's A

a. asset utilization ratios.

b. debt utilization ratios.
c. profitability ratios.
d. liquidity ratios.

The higher a firm's debt

utilization ratios,
excluding debt-to-total
assets, the

a. less risky the firm's

A
financial position.
b. more risky the firm's
financial position.
c. more easily the firm will
be able to pay dividends.
d. none of these

In general, the larger the C

portion of a firm's sales
that are on credit, the
a. more the firm can buy
raw materials on credit.
b. lower will be the firm's
need to borrow.
c. higher will be the firm's
need to borrow.
d. more rapidly credit
sales will be paid off.

In the construction of the

cash payments schedule,
the major cash payment
is generally

a. payments for new plant

D
and equipment.
b. interest and dividends.
c. the general and
administrative expense.
d. costs associated with
inventory manufactured.

The difference between

total receipts and total
payments is referred to as

C
a. cash balance.
b. cumulative cash flow.
c. net cash flow.
d. beginning cash flow.

Net cash flow is equal to: C

 a. income after taxes
minus depreciation.
b. cash receipts minus
cash payments minus
depreciation.
c. cash receipts minus
cash payments.
d. income after taxes
minus dividends.

In the percent-of-sales
method, an increase in
dividends

a. will increase required

new funds.
A
b. will decrease required
new funds.
c. has no effect on
required new funds.
d. more information is
needed.

When using the percent- D

of-sales method in
forecasting funds needed,
which of the following is
not true?

a. As the ratio of assets to

sales decrease, required
new funds also decrease.
b. Required new funds
decrease as profit
margins increase.
c. As the tax rate
increases, the required
new funds increase.
d. Required new funds
increase as the dividend
payout decreases.

As the compounding rate

becomes lower and
lower, the future value of
inflows approaches

B
a. 0
b. the present value of
the inflows
c. infinity
d. need more information

As the discount rate

becomes higher and
higher, the present value
of inflows approaches
A
a. 0
b. minus infinity
c. plus infinity
d. need more information

An annuity may be C
defined as

a. a series of yearly
payments.
b. a payment at a fixed
interest rate.
c. a series of consecutive
payments of equal
amounts.
d. a series of payments of
unequal amount.

If you were to put $1,000

in the bank at 6% interest
each year for the next ten
years, which table would
you use to find the ending
balance in your account?
D
a. Future value of $1
b. Present value of an
annuity of $1
c. Present value of $1
d. Future value of an
annuity of $1

Babe Ruth Jr. has agreed D

to play for the Cleveland
Indians for $3 million per
year for the next 10 years.
What table would you use
to calculate the value of
this contract in today's
dollars?

a. Future value of an
annuity
b. Present value of a
 single amount
c. None of these
d. Present value of an
annuity

Football player Walter

Johnson signs a contract
calling for payments of
$250,000 per year, to
begin 10 years from now.
To find the present value
of this contract, which
table or tables should you
use?
C

a. the future value of $1

b. the future value of an
annuity of $1 and the
future value of $1
c. the present value of an
annuity of $1 and the
present value of $1
d. none of these

The higher the rate used B

in determining the future
value of a $1 annuity,

a. the smaller the future

value at the end of the
period.
b. the greater the future
value at the end of a
period.
c. the greater the present
value at the beginning of
a period.
d. none of these - the
interest has no effect on
the future value of an
annuity.

Which of the following

financial assets is likely
to have the highest
required rate of return
based on risk?
B

a. Corporate bond.
b. Common stock.
c. Treasury bill.
d. Certificate of Deposit.

An increase in the
riskiness of a particular
security would NOT
affect

a. investors' willingness
to buy the security. B
b. the premium for
expected inflation.
c. the risk premium for
that security.
d. the total required
return for the security.
The longer the time to
maturity:

a. the greater the price

increase from a decrease
in interest rates.
b. the greater the price
increase from an increase A
in interest rates.
c. the less the price
increase from an increase
in interest rates.
d. the less the price
decrease from a decrease
in interest rates.

The dividend valuation

model stresses the

a. importance of earnings
per share.
b. importance of
dividends and legal rules
D
for maximum payment.
c. relationship of
dividends to earnings per
share.
d. relationship of
dividends to market
prices.

Stock valuation models A

are dependent upon
a. expected dividends,
future dividend growth
and an appropriate
discount rate.
b. past dividends, flotation
costs and bond yields.
c. historical dividends,
historical growth and an
appropriate discount rate.
d. all of these.

If a company's stock price

(Po) goes up, and nothing
else changes, Ke (the
required rate of return)
should
B

a. go up.
b. go down.
c. remain unchanged.
d. need more information.

The required return by C

investors is important to
financial managers for all
of the following reasons
except:

a. It influences their stock

price
b. It influences the firm's
cost of financing
c. It is the primary driver
of their financial ratios
d. It helps when pricing
new issues of securities

The market allocates

capital to firms based on
all of the following except:

a. Higher risk requires

lower returns due to A
higher expectations
b. Degree of past
performance
c. Level of efficiency
d. Expected returns

Credit swaps are:

A. an insurance product
designed to protect
financial institutions from
customers who default on
their loans.
B. securities with a
maturity of less than 1 A
year.
C. the result of a leveling
off or slowing down of
price increases.
D. market trades in
previously issued
securities.
E. none of the above.

What is the primary goal C

 of financial management?

A. Increased earnings
B. Maximizing cash flow
C. Maximizing
shareholder wealth
D. Minimizing risk of the
firm

In the past, the study of

finance has included

A. mergers and
D
acquisitions.
B. raising capital.
C. bankruptcy.
D. all of these.

The firm's price-

earnings (P/E) ratio is
influenced by its

A. capital structure. D
B. earnings volatility.
C. sales, profit margins,
and earnings.
D. all of these.

A short-term creditor C
would be most interested
in

A. profitability ratios.
B. asset utilization ratios.
C. liquidity ratios.
D. debt utilization ratios.

Which two ratios are used

in the DuPont system to
create return on assets?

A. Return on assets and

asset turnover
B
B. Profit margin and asset
turnover
C. Return on total capital
and the profit margin
D. Inventory turnover and
return on fixed assets

Total asset turnover

indicates the firm's

A. liquidity.
C
B. debt position.
C. ability to use its assets
to generate sales.
D. profitability.

In developing the pro D

forma income statement
we follow four important
steps:

1) compute other
expenses,
2) determine a production
schedule,
3) establish a sales
projection,
4) determine profit by
completing the actual pro
forma statement.

What is the correct order

for these four steps?
A. 1,2,3,4
B. 3,2,4,1
C. 2,1,3,4
D. 3,2,1,4

Pro forma financial

statements are

A. the most
comprehensive means of
financial forecasting.
D
B. often required by
prospective creditors.
C. projections of financial
statements for a future
period.
D. all of these.

Required production D
during a planning period
will depend on the

A. beginning inventory of
products.
B. sales during the period.
C. desired level of ending
inventory.
D. all of these.

Agency problems are least

likely to arise in which
organizational form?

a. Sole proprietorship A
b. Limited partnership
c. Corporation
d. Subchapter S
corporation

The major difficulty in

most insider-trading cases
has been

a. That lenient judges have

simply released the guilty
individuals.
b. That insider trading,
even though illegal,
actually serves a beneficial C
economic and financial
purpose.
c. That inside trades have
not been legally well
defined
d. Insides trades actually
have a beneficial effect on
the wealth of all
stockholders.
 A Corporate restructuring
can result in

a. Changes in the capital

structure
D
b. Selling of low profit
margin divisions
c. Reductions in the work
force
d. All of these

Which of the following is

not an example of
restructuring as discussed
in the text

a. Repurchase of
common stock
B
b. Creating a new
organizational chart
c. Merging with
companies in related
industries
d. Divesting of an
unprofitable division

Which of the following D

factors do not influence
the firm's P/E ratio

a. Past earnings
b. Shares outstanding
c. Volatility in
performance
d. None of these

The key initial element in

developing pro forma
statements is

C
a. a cash budget
b. an income statement
c. a sales forecast
d. a collections schedule

In the development of
the pro forma financial
statements, the last step
in the process is the
development of the

B
a. cash budget
b. pro forma balance
sheet
c. pro forma income
statement
d. capital budget