Exam
Name___________________________________
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
1.1 WHY STUDY FINANCE
1) The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can
evaluate them properly.
2) Financial decisions require that you weigh alternatives in strictly monetary terms.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
3) Which of the following best describes why the Valuation Principle is a key concept in making financial
decisions?
A) It shows how to assign monetary value to intangibles such as good health and well–being.
B) It allows fixed assets and liquid assets to be valued correctly.
C) It gives a good indication of the net worth of a person, item, or company and can be used to estimate
any changes in that net worth.
D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them
properly.
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
4) Partnerships are the most common type of business firm in the world.
5) Corporations have come to dominate the business world through their ability to raise large amounts of
capital by sale of ownership shares to anonymous outside investors.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
6) Which of the following types of firms do not have limited liability?
A) sole proprietorships
B) limited partnerships
C) corporations
D) none of the above
7)
Which type of organization dominates in most economies?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
8) What is the most common type of firm in the United States and the world?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
9) Which of the following is typically the major factor in limiting the growth of a sole proprietorship?
A) The organization of such firms tends to become extremely complicated over time.
B) It is extremely difficult to transfer control of such a firm to a new owner if the present owner dies or
wishes to sell the firm.
C) The amount of money that can be raised by the firm is limited by the fact that the single owner must
make good on all debts.
D) Investors have a great deal of control over the day–to–day running of the firm, leading to confusion
when conflicts in direction arise.
10) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in that same firm. Which
of the following statements regarding their respective relationships to the firm are correct?
A) Joe has no management authority within the partnership.
B) Jane is legally involved in the managerial decision making of the firm.
C) Jane’s liability for the firm’s debts consists solely of her investment in the firm.
D) Withdrawal of Jane from the partnership will dissolve that partnership.
11) What is the major way in which the roles and obligations of the owners of a limited liability company differ
from the roles and obligations of limited partners in a limited partnership?
A) The owners of a limited liability company have personal obligation for debts incurred by the company.
B) There is no separation between the company and its owners in a limited liability company.
C) The owners of a limited liability company can withdraw from the company without the company being
dissolved.
D) The owners of a limited liability company can take an active role in running the company.
12) In which of the following ways is a limited liability company like a corporation?
A) Both types of firm were created and developed first in the United States.
B) Both can choose to be considered a partnership for tax purposes.
C) All of its owners’ liability is restricted to their investment in the firm.
D) It is directly managed by the owners of the firm.
13) Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy
protection against the seizure of its property?
A) The number of owners, and hence the spread of risk among these owners, is not limited.
B) Its owners are liable for any obligations it enters into.
C) The state in which the corporation is incorporated provides safeguards against any wrongdoing by the
corporation.
D) It is a legally defined, artificial entity that is separate from its owners.
14) Which of the following features of a corporation is LEAST accurate?
A) The owners’ identity is separate from the corporation.
B) The owners of the corporation have unlimited liability for the corporations debts.
C) Changes in ownership do not result in the dissolution of the corporation.
D) Earnings from the corporation are taxed only once.
15) What is the major advantage corporations have over other business entities?
A) It is easier for a corporation to raise capital than other forms of businesses.
B) A corporation is treated as a separate legal entity for tax and legal purposes.
C) A corporation’s shares can be freely traded among its shareholders.
D) All of the above are advantages that a corporation has over other business forms.
16) Helen owns 12.5% of the stock of the Median Corporation. If Median makes a dividend payment of
$25,000,000 paid proportionally to its shareholders, how much of this amount would Helen receive,
disregarding tax?
A) $2,000,000
B) $3,125,000
C) $4,150,000
D) $12,500,000
17) ValiantCorp is a C corporation that earned $3 per share before it paid any taxes. ValiantCorp retained $1 of
after tax earnings for reinvestment, and distributed what remained in dividend payments. If the corporate
tax rate was 30% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings
received after tax by a holder of 100,000 shares of ValiantCorp?
A) $96,250
B) $104,750
C) $110,000
D) $112,500
18) Which of the following are unique for an S corporation?
A) The firm’s profits and losses are not taxed at the corporate level, but shareholders must include these
profits and losses on their individual tax returns.
B) The shareholders of an S corporation must include the firm’s profit and losses in their individual
income taxes even if no money is distributed to them.
C) There is a maximum limit on the number of shareholders for an S corporation.
D) all of the above
19) You are a shareholder in a corporation which has elected chapter S treatment. The corporation announces a
profit of $6 per share, of which it retains $2 for reinvestment and distributes the rest as dividend payments.
Given that the personal tax rate is 35%, how much tax must you pay per share?
A) $0
B) $2.10
C) $2.60
D) $3.90
20) A C corporation earns $7.40 per share before taxes. The corporate tax rate is 39%, the personal tax rate on
dividends is 15%, and the personal tax rate on non–dividend income is 36%. What is the total amount of
taxes paid if the company pays a $5.00 dividend?
A) $0.75
B) $2.89
C) $3.64
D) $4.00
21) An S corporation earns $7.40 per share before taxes. The corporate tax rate is 39%, the personal tax rate on
dividends is 15%, and the personal tax rate on non–dividend income is 36%. What is the total amount of
taxes paid if the company pays a $5.00 dividend?
A) $2.66
B) $2.89
C) $3.75
D) $5.54
22) A C corporation earns $7.40 per share before taxes and the company pays a dividend of $5.00 per share. The
corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on
non–dividend income is 36%. What is the after–tax amount an individual would receive from the dividend?
A) $0.75
B) $2.89
C) $3.64
D) $4.25
23) A C corporation earns $4.50 per share before taxes. The corporate tax rate is 35%, the personal tax rate on
dividends is 20%, and the personal tax rate on non–dividend income is 39%. What is the total amount of
taxes paid if the company pays a $2.00 dividend?
A) $0.90
B) $1.58
C) $1.98
D) $2.48
24) An S corporation earns $4.50 per share before taxes. The corporate tax rate is 35%, the personal tax rate on
dividends is 20%, and the personal tax rate on non–dividend income is 39%. What is the total amount of
taxes paid if the company pays a $2.00 dividend?
A) $0.90
B) $1.58
C) $2.48
D) $1.76
25) Which of the following people may not manage the operations of a firm in which they are part or full
owners?
A) stockholders in S corporations
B) stockholders in C corporations
C) limited partners in a limited partnership
D) general partners in a limited partnership
26) What is the process of double taxation for the stockholders in a C corporation?
A) Their shares are taxed when they are both bought and sold.
B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is
distributed to them.
C) The owners of a corporation are taxed when they receive dividend payments and when they make a
profit from the sale of shares.
D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is
also subject to taxation.
27) A sole proprietorship is owned by
A) one person.
B) two or more persons.
C) shareholders.
D) bankers.
28) Which of the following organization forms has the most revenue?
A) S corporation
B) limited partnership
C) C corporation
D) limited liability company
29) Which of the following is NOT an advantage of a sole proprietorship?
A) single taxation
B) ease of setup
C) limited liability
D) no separation of ownership and control
30) A limited liability company is essentially
A) a limited partnership without limited partners.
B) a limited partnership without a general partner.
C) just another name for a limited partnership.
D) just another name for a corporation.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
31) What are the main differences between a partnership and sole proprietorship?
32) What are the main differences between a limited partnership and limited liability corporation?
33) How is a corporation different from most of the other forms of business organizations?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
1.3 The Financial Manager
34) The principal goal of the financial manager is to maximize the wealth of the stockholders.
35) It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day–to–day
transactions.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
36) Which of the following are major duties of a financial manager?
I. To make investment decisions
II. To make financing decisions
III. To manage cash flow from operating activities
A) I only
B) I and II only
C) I and III only
D) all of the above
37) Why in general do financial managers make financial decisions in a corporation, rather than the owners
making these decisions themselves?
A) It is best for the control of the finances of a corporation to be in the hands of a disinterested third party.
B) The interests of the various owners may conflict with each other.
C) The owners may not be U.S. citizens or residents.
D) There are often many owners, and they can often change as they buy and sell stock.
38) What is the most important duty of a financial officer?
A) to ensure that the firm has enough cash on hand to meet its commitments at any given time
B) to decide how to pay for investments
C) to manage working capital
D) to make investment decisions
39) The financial manager of a well–regarded book publishing firm wishes to buy a small Internet publishing
company to provide an avenue for sale of its materials online. In order to raise the funds to make this
purchase, the financial manager decides to sell more stock in the company. How is the financial manager
raising funds in this case?
A) by increasing the debt burden carried by the company
B) by raising the company’s equity by encouraging new owners to take a stake in the company
C) by decreasing the ratio of equity to debt held by the company
D) by increasing the value of shares held by the existing owners of the company
40) Which of the following is NOT a reason why financial managers must take great care when making
investment decisions?
A) These investment decisions determine whether the firm will add value for its owners.
B) These investments determine the long–term directions in which the company may move.
C) These investment decisions determine the corporations mix of debt and equity.
D) These investment decisions typically involve substantial costs which must be carefully weighed against
their potential benefits.
41) A company that produces racing motorbikes has several models that sell well within the motorcycle racing
community and which are very profitable for the company. Despite having a profitable product, why must
this company take care to ensure that it has sufficient cash on hand to meet its obligations?
A) Profits from the sales of popular models will be lost when returned to the shareholders in the form of
dividends.
B) New models will require a lot of money to develop and bring to market before they generate any
revenue.
C) The company will have built up debts which must be repaid in order to bring the current models to
market.
D) Equity must be raised to finance the development of new models to replace the existing models.
42) A typical company has many types of shareholders, from individuals holding a few shares, to large
institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities
and concerns of such disparate stockholders are met?
A) The financial manager should seek to make investments that do not harm the interests of the
stockholders.
B) The decisions taken by the financial manager should be solely influenced by the benefit to the company
since, by maximizing its fitness, he or she will also maximize the benefits of that company to the
shareholders.
C) The financial manager should consider the interests and concerns of large shareholders a priority, so
the needs of those who hold a controlling interest in the company are met.
D) In general, all shareholders will agree that they are better off if the financial manager works to
maximize the value of their investment.
43) Whose interests should a financial manager consider paramount when making a decision?
A) the stockholders who have risked their money to become owners of the company
B) the employees and associated stakeholders who are employed by the company
C) the public who consume the company’s goods and services
D) the senior management and associated colleagues at the executive level within the company
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
44) What is the principal guiding factor for the financial manager?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
1.4 The Financial Manager‘s Place in the Corporation
45) In most corporations the owners exercise direct control of the corporation.
46) The fact that corporations‘ shares are easily traded within the market has a net effect of acting as a
disincentive for managers to favor the interests of shareholders over their own interests.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
47) How do the shareholders of most corporations exercise their control of that corporation?
A) by voting on issues that concern them
B) by electing members of a board of directors
C) by vetting the decisions of the board of directors
D) by providing oversight of the day to day running of the corporation
48) Which of the following is NOT a function of the board of directors?
A) determining how top executives should be compensated
B) monitoring the performance of the company
C) answering to shareholders of the company
D) day–to–day running of the company
49) In most corporations, to whom does the chief financial officer report?
A) the shareholders
B) the board of directors
C) the chief executive officer
D) the controller
50) Which of the following would be more typically the responsibility of a controller rather than a treasurer?
A) overseeing accounting and tax functions
B) capital budgeting
C) managing credit
D) making investment decisions
51) Which of the following would be best considered to be an agency conflict problem in the behavior of the
following financial managers?
A) Bill chooses to pursue a risky investment for the company’s funds, because his compensation will
substantially rise if it succeeds.
B) Sue instructs her staff to skip safety inspections in one of the company’s factories, knowing that it will
likely fail the inspection and incur significant costs to fix.
C) James ignores an opportunity for his company to invest in a new drug to fight Alzheimer’s disease,
judging the drug’s chances of succeeding as low.
D) Michael chooses to enhance his firm’s reputation at some cost to its shareholders by sponsoring a team
of athletes for the Special Olympics.
52) A factory owner wants his workers to produce as many widgets as they can, so he pays his workers based on
how many widgets they produce. However, in order to make sure that the workers do not rush and produce
a large number of poorly made widgets, he checks the widgets at random at various stages of their
manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that
defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case?
A)
by supplying incentives so the agents act in the way principal desires
B) by ensuring that all workers co–operate to maximize the gains of their section
C) by making the agents into principals themselves
D) by maximizing the information that the principal obtains about the behavior of the agents