Corporate Finance, 12e (Ross)
Chapter 1 Introduction to Corporate Finance
1) The treasurer and the controller of a corporation generally report to the:
A) board of directors.
B) chairman of the board.
C) chief executive officer.
D) president.
E) chief financial officer.
2) Which one of the following statements correctly depicts the common chain of command in a
corporation?
A) The information systems manager reports to the treasurer.
B) The credit manager reports to the treasurer.
C) The controller reports to the chief executive officer.
D) The tax manager reports to the treasurer.
E) The capital expenditures manager reports to the controller.
3) Which one of the following is a capital budgeting decision?
A) Determining how much debt should be borrowed from a particular lender
B) Deciding whether or not a new production facility should be built
C) Deciding when to repay a long-term debt
D) Determining how much inventory to keep on hand
E) Deciding how much credit to grant to a particular customer
4) Which one of these is a correct definition?
A) Net working capital equals current assets plus current liabilities.
B) Current liabilities are debts that must be repaid in 18 months or less.
C) Current assets are assets with short lives, such as accounts receivable.
D) Long-term debt is defined as a residual claim on a firm’s assets.
E) Tangible assets are fixed assets such as patents.
5) The corporate controller is generally responsible for which one of these functions?
A) Capital expenditures
B) Cash management
C) Tax reporting
D) Financial planning
E) Credit management
6) The corporate treasurer oversees which one of these areas?
A) Financial planning
B) Cost accounting
C) Tax reporting
D) Information systems
E) Financial accounting
7) A firm’s capital structure refers to the firm’s:
A) mixture of various types of production equipment.
B) investment selections for its excess cash reserves.
C) combination of cash and cash equivalents.
D) combination of accounts appearing on the left side of its balance sheet.
E) proportions of financing from current and long-term debt and equity.
8) Short-term finance deals with:
A) the timing of cash flows.
B) acquiring and selling fixed assets.
C) financing long-term projects.
D) capital budgeting.
E) issuing additional shares of common stock.
9) Which one of these accounts is included in net working capital?
A) Copyright
B) Manufacturing equipment
C) Common stock
D) Long-term debt
E) Inventory
10) The process of planning and managing a firm’s long-term assets is called:
A) working capital management.
B) cash management.
C) cost accounting management.
D) capital budgeting.
E) capital structure management.
11) Any debt that must be repaid within the next year is recorded on the balance sheet as:
A) a current liability.
B) long-term debt.
C) an intangible asset.
D) accounts receivable.
E) a current asset.
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12) The cheapest business entity to form is typically the:
A) limited liability company.
B) joint stock company.
C) general partnership.
D) limited partnership.
E) sole proprietorship.
13) A business owned by a single individual is called a:
A) corporation.
B) sole proprietorship.
C) general partnership.
D) limited partnership.
E) limited liability company.
14) Which one of the following statements concerning a sole proprietorship is correct?
A) A sole proprietorship is difficult to form.
B) The business profits are taxed twice at the federal level.
C) The business profits are taxed separately from the personal income of the owner.
D) The owner may be forced to sell his/her personal assets to pay company debts.
E) A sole proprietorship has an unlimited life.
15) Which one of the following statements concerning a sole proprietorship is correct?
A) The ability to raise capital is limited by the owner’s personal wealth.
B) The proprietorship pays taxes at the corporate tax rate.
C) The ownership of the firm is easy to transfer to another individual.
D) The company must pay income taxes separate from the taxes paid by the owner.
E) The legal costs to form a sole proprietorship are quite substantial.
16) Which one of these characteristics best describes the primary advantage of being a limited
partner rather than a general partner?
A) Entitlement to a larger portion of the partnership’s income
B) Day-to-day management control of the business
C) Profits free of any income taxation
D) Overall control of the partnership
E) Personal financial liability limited to the capital invested
17) A general partner:
A) has less legal liability than a limited partner.
B) can end the partnership by withdrawing.
C) faces double taxation of profits whereas a limited partner does not.
D) cannot lose more than the amount of his/her equity investment.
E) is the term applied only to corporations which invest in partnerships.
18) A partnership:
A) is taxed the same as a corporation.
B) terminates at the death of any limited partner.
C) creates an unlimited liability for all general partners for the partnership’s debts.
D) has the same ability as a corporation to raise capital.
E) allows for easy transfer of interest from one general partner to another.
19) One advantage of a partnership is the:
A) personal liability for all of the firm’s debts.
B) limited life of the entity.
C) limited liability protection for all of the partners.
D) relatively low formation cost.
E) ease of transferring full ownership.
20) One disadvantage of the corporate form of business ownership is the:
A) limited liability protection provided for all owners.
B) firm’s ability to raise cash.
C) unlimited life of the firm.
D) difficulties encountered when changing ownership.
E) double taxation of profits.
21) Which one of the following statements is correct?
A) Both partnerships and corporations incur double taxation.
B) Sole proprietorships and partnerships are taxed in a similar fashion.
C) Partnerships are the most complicated type of business to form.
D) Both partnerships and corporations have limited liability for general partners and
shareholders.
E) All types of business formations have limited lives.
22) The articles of incorporation:
A) can be used to remove the firm’s management.
B) are amended annually by the firm’s stockholders.
C) set forth the rights granted to shareholders.
D) set forth the rules by which the corporation regulates its existence.
E) can set forth the conditions under which the firm can avoid double taxation.
23) Corporate bylaws:
A) establish the name of the corporation.
B) establish the rights granted to its shareholders.
C) set forth the purpose of the firm.
D) establish the rules by which the corporation regulates its existence.
E) set forth the number of members of the initial board of directors.
24) Which statement concerning corporations is correct?
A) There are time limits placed on the transfer of ownership.
B) The ability to raise capital is limited to that of a general partnership.
C) Primary shareholders have unlimited liability for corporate debts.
D) The entity can outlive all of its initial owners.
E) When the last original owner dies or withdraws, the entity is terminated.
25) Given the corporate form of business organization, ownership:
A) must be granted with equal rights assigned to each and every shareholder.
B) transfers are unlimited.
C) can only be transferred with the approval of the board of directors.
D) is controlled by the corporate officers.
E) must be held by non-management owners.
26) The owners of a limited liability company generally prefer:
A) being taxed like a corporation.
B) having liability exposure similar to that of a sole proprietor.
C) being taxed personally on all business income.
D) having liability exposure similar to that of a general partner.
E) being taxed like a corporation with liability like a partnership.
27) In a general partnership, the general partners have ________ liability for the firm’s debts and
have ________ control over day-to-day operations.
A) limited; no
B) unlimited; total
C) limited; total
D) unlimited; no
E) unlimited; limited
28) Which one of the following business types is best suited to raising large amounts of capital?
A) Sole proprietorship
B) Limited liability company
C) Corporation
D) General partnership
E) Limited partnership
29) Which type of business organization has the respective rights and privileges of a legal
person?
A) Sole proprietorship
B) General partnership
C) Limited partnership
D) Corporation
E) Limited liability company
30) A business formed by two or more individuals who each have unlimited personal liability for
all of the firm’s debts is called a:
A) corporation.
B) sole proprietorship.
C) general partnership.
D) limited partnership.
E) limited liability company.
31) The understanding of the work and cash to be contributed to a partnership by each member
of that partnership is formalized in the:
A) indemnity clause.
B) indenture contract.
C) statement of purpose.
D) partnership agreement.
E) group charter.
32) A business created as a distinct legal entity is called a:
A) corporation.
B) sole proprietorship.
C) general partnership.
D) limited partnership.
E) unlimited liability company.
33) In a limited partnership, each limited partner’s liability for the partnership’s debts is:
A) limited to his or her personal net worth.
B) limited to the amount he or she invested into the partnership.
C) limited to his or her total earnings received from the partnership.
D) unlimited.
E) limited to the total amount invested by all partners.
34) A business entity that provides each owner with limited liability while the firm is operated
and taxed like a partnership is called a:
A) limited liability company.
B) general partnership.
C) limited proprietorship.
D) limited partnership.
E) corporation.
35) Partnership profits:
A) are fully distributed as taxable income to the partners.
B) are distributed to general partners with interest paid to limited partners.
C) are distributed to the partners on an aftertax basis.
D) are generally reinvested in the firm rather than being distributed.
E) are generally held by the partnership and later distributed as dividend payments.