Fundamentals of Corporate Finance 3e Test Bank
IMA: Business Economics
AICPA: Industry/Global Perspective
43.
Which form of business organization generate(s) the majority of business revenues and profits
in the United States?
A)
Sole proprietorship
B)
Partnership
C)
Corporation
D)
Both A and B
Ans:
C
AICPA: Industry/Sector Perspective
44.
Which organizational form best enables a firm to sell its securities to the market?
A)
Sole proprietorship
B)
Partnership
C)
Private corporation
D)
Public corporation
Ans:
D
AICPA: Legal/Regulatory Perspective
45.
Which of the following organizational forms is subject to the Securities and Exchange
Commission (SEC) regulations?
A)
Sole proprietorship
B)
Partnership
C)
Private corporation
D)
Public corporation
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
IMA: Business Economics
AICPA: Industry/Sector Perspective
46.
Which organizational form best enables the owners of a firm to monitor the professional
conduct of each other owners of the firm?
A)
Sole proprietorship
B)
Partnership
C)
Private corporation
D)
Public corporation
Ans:
B
AICPA: Industry/Sector Perspective
47.
Which of the following is considered a hybrid organizational form?
A)
Sole proprietorship
B)
Partnership
C)
Corporation
D)
Limited liability partnership
Ans:
D
AICPA: Resource Management
48.
Which of the following reports directly to the owners of a firm? (Assume that the firm is a
public corporation.)
A)
CFO
B)
CEO
C)
Board of directors
D)
Audit committee
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
IMA: Business Economics
AICPA: Resource Management
49.
Which of the following is primarily responsible for managing all aspects of a firm’s financial
side?
A)
CFO
B)
CEO
C)
Board of directors
D)
Audit committee
Ans:
A
AICPA: Reporting; Resource Management
50.
Which of the following is responsible for performing an independent audit of a firm’s financial
statements?
A)
CFO
B)
CEO
C)
CPA firm
D)
Audit committee
Ans:
C
51.
How is a CPA firm insulated from being pressurized by management?
A)
The audit committee approves hiring, firing, and paying fees to external auditors.
B)
The chairman of the board approves the external auditor’s fees as well as the engagement
letter.
C)
The IRS approves the external auditor’s fees as well as the engagement letter.
D)
The CPA firm is not insulated from management.
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Resource Management
52.
Who among the following is typically responsible for managing a large corporation’s financial
function?
A)
The CEO
B)
The Chairman of the board
C)
The Vice-President – Production
D)
The CFO
Ans:
D
AICPA: Strategic/Critical Thinking
53.
Which of the following is an appropriate goal for a firm?
A)
Profit maximization
B)
Revenue maximization
C)
Stockholder’s wealth maximization
D)
Tax minimization
Ans:
C
AICPA: Industry/Sector Perspective
54.
When analysts and investors determine the value of a firm’s stock, they should consider:
A)
the size of the expected cash flows associated with owning the stock.
B)
the timing of the cash flows.
C)
the riskiness of the cash flows.
D)
all of the above.
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Strategic/Critical Thinking
55.
If a firm establishes maximizing profits as the most important goal of the firm, which of the
following would not be given proper consideration?
A)
Sales revenues
B)
Profits
C)
Risk of bankruptcy
D)
Cost of goods sold
Ans:
C
56.
Which of the following helps in maximizing stockholder’s wealth not usually account for?
A)
Risk.
B)
Government regulation.
C)
The timing of cash flows.
D)
Amount of cash flows.
Ans:
B
AICPA: Strategic/Critical Thinking
57.
Which of the following factors or activities can be controlled by the management of a firm?
A)
Capital budgeting
B)
The level of economic activity
C)
The level of market interest rates
D)
Stock market conditions
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Industry/Sector Perspective
58.
One reason for the existence of agency problems between managers and stockholders is that:
A)
there is a significant degree of separation between management and ownership.
B)
managers know how to manage the firm better than stockholders.
C)
stockholders have unreasonable expectations about managerial performance.
D)
none of the above.
Ans:
A
59.
Who among the following is the principal in the agency relationship of a corporation?
A)
A company engineer
B)
The CEO of the firm
C)
A stockholders
D)
The board of directors
Ans:
C
60.
_____ has (have) a legal responsibility to represent stockholders’ interests.
A)
A chairman
B)
A CEO
C)
A corporation’s board of directors
D)
all of the above
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
IMA: Business Economics
AICPA: Industry/Sector Perspective
61.
An example of an agency cost is,
A)
a manager turning down a value-contributing project because of its risks.
B)
a manager expensing a lavish dinner on the company expense report.
C)
a manager using too little debt within the firm’s capital structure because of the
additional risk associated with debt.
D)
all of the above.
Ans:
B
AICPA: Leadership
62.
Which of the following mechanisms can help to align the behavior of managers with the goals
of stockholders?
A)
Well-designed management compensation
B)
Managerial labor market
C)
An independent board of directors
D)
All of the above
Ans:
D
63.
If a firm has had an agency conflict which is reflected in a poor performing stock for a long
period of time, then the firm may become a target of _____
A)
an SEC investigation.
B)
a corporate raider.
C)
an IRS investigation.
D)
a bankruptcy lawyer.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
IMA: Business Economics
AICPA: Industry/Sector Perspective
64.
Executives that repeatedly put their own interests before that of the firm may find that they
have difficulty in finding another job after their current one. This is an example of
A)
the managerial labor market disciplining managers.
B)
the market for corporate control.
C)
the board of directors affecting the prospects of a manager.
D)
none of the above.
Ans:
A
AICPA: Resource Management
65.
Who among the following is responsible for setting an agenda at meetings of the board of
directors?
A)
Chairperson of the board of directors
B)
President
C)
Nominating committee
D)
Manager
Ans:
A
66.
A director who is not an employee of the firm is called
A)
an executive director.
B)
an inside director.
C)
an independent director.
D)
an official director.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
IMA: FSA
AICPA: Legal/Regulatory Perspective
67.
Which of the following is NOT one of the strategies incorporated in the Sarbanes-Oxley Act of
2002?
A)
Attain greater board independence
B)
Establish compliance programs
C)
Establish ethics programs
D)
Dictate maximum compensation levels
Ans:
D
AICPA: Reporting
68.
Which of the following unconditional powers does the audit committee have the authority to
do?
A)
Audit the personal bank account of the CEO
B)
Question any person employed by the firm
C)
Audit the compensation files of firms in the same industry
D)
None of the above
Ans:
B
69.
What is the major complaint concerning the Sarbanes-Oxley Act of 2002 by firms?
A)
The legislative maximum allowable compensation for a CEO.
B)
The legal requirement to disclose project information.
C)
The cost of compliance.
D)
The cost of maintaining an SEC employed officer at the firm’s premises.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Legal/Regulatory Perspective
70.
A society’s ideas about what actions are right and wrong are termed as:
A)
rules and policies.
B)
ethics.
C)
laws.
D)
unwritten laws.
Ans:
B
71.
The golden rule is an example of
A)
a current law.
B)
a civil law.
C)
an unworkable rule in financial markets.
D)
an ethical norm.
Ans:
D
72.
An example of an economy that had trouble in establishing a stock market and attracting
foreign investment is
A)
Russia.
B)
China.
C)
The Czech Republic.
D)
Japan.
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Legal/Regulatory Perspective
73.
Corruption in business
A)
creates inefficiencies in an economy.
B)
inhibits growth in an economy.
C)
slows the rate of economic growth in a country.
D)
all of the above
Ans:
D
74.
Which corporate officer, when he or she is guilty of serious misconduct, can subject the firm to
the heavy losses in financial wealth?
A)
Marketing Manager
B)
CFO
C)
Chief Technology Officer
D)
Chief Risk Officer
Ans:
B
75.
An officer of a firm who is a majority owner in a competing firm will probably be subject to
A)
an IRS audit.
B)
a conflict of interest with his stockholders.
C)
arbitrage profit returns to the SEC.
D)
an FBI investigation.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
IMA: Business Economics
AICPA: Industry/Sector Perspective
76.
_____ occur(s) when one party in a business transaction has information that is unavailable to
the other parties in the transaction.
A)
Profits
B)
Information asymmetry
C)
Information efficiency
D)
None of the above
Ans:
B
IMA: Decision Analysis
AICPA: strategic/critical Thinking
77.
With regard to information, a central idea of fairness suggests that:
A)
decisions should be made on an even playing field.
B)
insiders should be able to trade whenever they want.
C)
insiders should never be able to trade.
D)
outsiders should not be allowed to trade since, by definition, they are at a disadvantage.
Ans:
A
78.
The legal system and market forces impose substantial costs on individuals and institutions that
engage in unethical behavior. Which of the following would not be an example of the above?
A)
Financial losses
B)
Legal fines
C)
Agency conflicts
D)
Jail time
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
79.
Explain what should be the goal of a firm.
80.
Explain how agency costs might be found within a firm whose CEO owns no shares in the firm
and whose compensation package is unaffected by the profits (cash or accounting profits) of the
firm.
like the above, we might expect the firm to expend a material amount of resources on
81.
You have a friend who tells you that ethics are completely unimportant in business since a
number of laws have been set up for us to know the rules of the game. Comment.
many of the scandals began as ethical lapses. This suggests that laws are not enough to