Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
81. What is the difference between debt and equity financing?
a. Debt financing is more expensive than equity financing.
b. Equity financing is cheaper than debt financing because no money has to be paid back to the
people who bought the company’s stock.
c. Debt financing is riskier than equity financing because with debt financing debts are incurred which
must be paid back.
d. Debt financing is more short–term oriented than equity financing.
e. Equity financing can be done successfully only when stock markets are rising, whereas debt
financing can be done any time.
Difficulty: 2 Page-Reference: 641
Question ID: 20-1-81 Skill: Comprehension
Objective: 20.4
82. Which of the following would be a likely result of using retained earnings to provide long-term
funds?
a. Larger dividends to shareholders
b. Increased interest expenses
c. Loss of corporate ownership control
d. The stock price may increase
e. Smaller dividends to shareholders and the company’s stock price may drop
Difficulty: 3 Page-Reference: 640-641
Question ID: 20-1-82 Skill: Comprehension
Objective: 20.4
83. If Sunshine Tanning’s founders invested $10 000 by buying the original 500 shares at $20.00 per
share in 1994 and then raised $50 000 by selling 500 more shares at $100 per share, the additional paid-
in capital would bring shareholder’s equity to
a. $40 000
b. $50.00 per shareholder
c. $60 000
d. $51 000
e. $100.00 per shareholder
Difficulty: 2 Page-Reference: 640
Question ID: 20-1-83 Skill: Application
Objective: 20.4
84. Price Steel issued 1000 common shares at a price of $15.00 each. If all the shares sold, Algoma
could expect to raise
a. $14 000.
b. $1500.
c. $15 000.
d. $1000.
e. it is not possible to tell with the information that is given.
Difficulty: 2 Page-Reference: 640
Question ID: 20-1-84 Skill: Application
Objective: 20.4
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
85. Equity financing via common stock can be more expensive than issuing bonds because
a. common stocks must be insured.
b. there is more administration involved.
c. common stocks are backed by retained earnings.
d. common stock must be sold through a broker.
e. interest paid to bondholders is a tax-deductible business expense, but stock dividends are not tax–
deductible.
Difficulty: 3 Page-Reference: 640
Question ID: 20-1-85 Skill: Comprehension
Objective: 20.4
86. Using retained earnings as a source of equity financing has one major disadvantage, which is
a. the shareholders’ dividends may decline.
b. the firm will have to pay interest to common shareholders.
c. the price of the company’s stock will increase because the company is using sound financial
planning.
d. the firm will not have to borrow money.
e. there are actually no disadvantages in using retained earnings as a source of equity.
Difficulty: 2 Page-Reference: 640-641
Question ID: 20-1-86 Skill: Comprehension
Objective: 20.4
87. Adrianna decided to purchase preferred shares because
a. common shareholders get paid first at a lower rate of return and preferred shareholders get paid
next at a much higher rate of return.
b. it has some of the features of corporate bonds and some features of common stock.
c. preferred shares allow shareholders to choose whether they wish to receive cash dividends or
more shares.
d. preferred shares mature very quickly.
e. she likes the variable interest rate paid by preferred shares.
Difficulty: 3 Page-Reference: 641
Question ID: 20-1-87 Skill: Comprehension
Objective: 20.4
88. Falling somewhere between debt and equity financing, ________ are also referred to as
___________.
a. retained earnings; debt financing
b. promissory notes; hybrid financing
c. common shares; preferred shares
d. preferred shares; hybrid financing
e. preferred shares; debt
Difficulty: 3 Page-Reference: 641
Question ID: 20-1-88 Skill: Knowledge
Objective: 20.4
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
89. What is the capital structure of a firm?
a. The organizational structure of the firm’s domestic, but not international, operations
b. The mix of debt and equity in the firm’s financial base
c. The balance of short- and long-term debt
d. The number of shares outstanding multiplied by the value of a given share
e. The total amount of dividends and bond interest payments that must be made in a given year
Difficulty: 2 Page-Reference: 641
Question ID: 20-1-89 Skill: Knowledge
Objective: 20.4
90. What are the two factors that are used to determine where a specific financial instrument will be
placed on the risk-return continuum?
a. The prime interest rate and the quality of the company in question
b. The amount of debt and the amount of equity the company has
c. The size of the financial returns that must be offered to induce investment and the uncertainty
about financial returns on investments
d. The size of the financial returns that must be offered to induce investment and the economic growth
prospects over the next year
e. The mix of short- and long-term sources of funds the firm is using
Difficulty: 3 Page-Reference: 642
Question ID: 20-1-90 Skill: Comprehension
Objective: 20.4
91. Guy is very conservative in his investing and holds mostly government savings bonds and bank
GICs. What type of investment would you recommend to Guy if he says he wants to move up one notch
in risk?
a. Medium-quality preferred stock and high-grade corporate bonds
b. Commercial paper and lower-quality common stocks
c. High-grade corporate bonds and commercial paper
d. Commercial paper and medium-quality preferred stocks
e. Junk bonds and high-grade corporate bonds
Difficulty: 3 Page-Reference: 643
Question ID: 20-1-91 Skill: Application
Objective: 20.4
92. Molly has been very aggressive in her investment strategy and is currently invested in lower–
quality common stocks. What type of investment would you recommend to Molly if she says she wants to
move down one notch in risk?
a. Medium-quality preferred stock and high-grade corporate bonds
b. Commercial paper and lower-quality common stocks
c. Junk bonds and medium-quality preferred stocks
d. Commercial paper and medium-quality preferred stocks
e. Junk bonds and high-quality cyclical common stocks
Difficulty: 3 Page-Reference: 643
Question ID: 20-1-92 Skill: Application
Objective: 20.4
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
93. Maury is currently invested in medium-quality preferred stock. What type of investment would you
recommend to Maury if he says he wants to move up one notch in risk?
a. High-quality, stable common stocks
b. Junk bonds
c. High-quality, cyclical common stocks
d. Lower quality common stocks
e. High-grade corporate bonds
Difficulty: 3 Page-Reference: 643
Question ID: 20-1-93 Skill: Application
Objective: 20.4
94. Bake-Loc is considering issuing corporate bonds in order to raise money. If the following facts are
known, which one would strengthen the case for issuing bonds?
a. The company’s customer base has been slowly declining.
b. The company has debts that need to be paid immediately.
c. The company wants to maintain its long-term solvency.
d. The company is interested in cutting costs.
e. The company’s assets are rapidly depreciating.
Difficulty: 3 Page-Reference: 640
Question ID: 20-1-94 Skill: Analysis
Objective: 20.4
95. Beta Corp. is considering an IPO in order to raise money. If the following facts were known, which
one would strengthen the case for doing an IPO?
a. The company expects its stock price to be low.
b. Internal control over decision making is important to company executives.
c. The company’s customer base has been declining.
d. The company has a healthy list of assets.
e. The company is carrying a significant debt load.
Difficulty: 3 Page-Reference: 641
Question ID: 20-1-95 Skill: Analysis
Objective: 20.4
96. A manufacturing company is planning to go international. If the following facts were known, which
one would strengthen the case that the company should acquire the needed capital through debt
financing?
a. It will likely have slim profit margins in its international sales.
b. It will have to hire many new salespeople to make the international move work.
c. It will have a new, steady stream of revenue from its international sales.
d. It will launch several new product lines very soon.
e. It will have to conduct training sessions for its international employees.
Difficulty: 3 Page-Reference: 640
Question ID: 20-1-96 Skill: Analysis
Objective: 20.4
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
97. A manufacturing company is planning to go international. If the following facts were known, which
one would weaken the case that the company should acquire the needed capital through debt financing?
a. It has several marketing managers who already have international experience.
b. It expects rapid growth in its new international markets.
c. It plans to sell its products only in advanced industrial countries.
d. Its international business will grow slowly for the first several years.
e. It currently possesses engineering talent from all over the world.
Difficulty: 3 Page-Reference: 640
Question ID: 20-1-97 Skill: Analysis
Objective: 20.4
98. A German manufacturing company is planning to go international. If the following facts were
known, which one would strengthen the case that the company should acquire the needed capital through
equity financing?
a. There is not much current investor interest in German companies.
b. The company doesn’t know whether its international sales will be profitable.
c. The company employs some of the best engineers in Germany.
d. The company will achieve savings through economies of scale because it will be producing greater
quantities of its products.
e. Venture capitalists have expressed great interest in the company.
Difficulty: 3 Page-Reference: 641
Question ID: 20-1-98 Skill: Analysis
Objective: 20.4
99. All of the following are reasons for new start-up businesses being under-funded except
a. entrepreneurs underestimate the value of establishing bank credit.
b. entrepreneurs use trade credit ineffectively.
c. entrepreneurs fail to consider venture capital as a source of funding.
d. entrepreneurs are notorious for not planning cash flow properly.
e. entrepreneurs rely too much on equity financing and not enough on debt financing.
Difficulty: 2 Page-Reference: 642
Question ID: 20-1-99 Skill: Comprehension
Objective: 20.5
100. Samantha should prepare a cash flow requirements projection for her business because
a. she can see how much anticipated taxes she will have to pay.
b. by anticipating shortfalls, she can seek funds in advance and minimize their cost, and by
anticipating excess cash she can plan to put funds to work in short-term, interest-bearing investments.
c. she will be able to plan her vacation.
d. she will know when to hire extra staff for peak periods.
e. she will need this information when she is planning for an initial public offering of her company’s
stock.
Difficulty: 2 Page-Reference: 644
Question ID: 20-1-100 Skill: Comprehension
Objective: 20.5
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
101. The risk associated with designing and distributing a new product is a(n)________ risk.
a. “act of God”
b. speculative
c. financial
d. market
e. pure
Difficulty: 1 Page-Reference: 645
Question ID: 20-1-101 Skill: Knowledge
Objective: 20.6
102. The risk associated with the chance of a warehouse fire is a(n)________ risk.
a. “act of God”
b. pure
c. speculative
d. financial
e. market
Difficulty: 2 Page-Reference: 645
Question ID: 20-1-102 Skill: Knowledge
Objective: 20.6
103. Conserving the firm’s earning power and assets by reducing the threat of losses due to
uncontrollable events is known as ________ management.
a. contingency
b. insurance
c. financial
d. risk
e. disaster
Difficulty: 1 Page-Reference: 645
Question ID: 20-1-103 Skill: Knowledge
Objective: 20.6
104. What type of risk involves only the possibility of a loss?
a. optimal risk
b. pure risk
c. risk transfer
d. insurable risk
e. speculative risk
Difficulty: 1 Page-Reference: 645
Question ID: 20-1-104 Skill: Knowledge
Objective: 20.6
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
105. John wants to implement a risk management program. What is the first thing he should do?
a. Choose techniques that best handle the loss
b. Identify risks and potential losses
c. Implement the risk management program
d. Measure the frequency of losses
e. Transfer the risk
Difficulty: 1 Page-Reference: 645
Question ID: 20-1-105 Skill: Application
Objective: 20.6
106. ________ risks involve the possibility of gain or loss.
a. “Acts of God”
b. Financial
c. Speculative
d. Pure
e. Market
Difficulty: 2 Page-Reference: 645
Question ID: 20-1-106 Skill: Knowledge
Objective: 20.6
107. John is in the process of implementing a risk-management program for his company. He has
already identified risks and potential losses. His next step is to
a. measure frequency and severity of potential losses.
b. monitor results of the program.
c. evaluate alternatives.
d. implement the program.
e. buy insurance.
Difficulty: 2 Page-Reference: 645
Question ID: 20-1-107 Skill: Application
Objective: 20.6
108. Mary’s company has decided to terminate its delivery system to avoid the risk of physical
damage or injury. It is practising
a. risk elevation.
b. risk control.
c. risk transfer.
d. risk avoidance.
e. risk retention.
Difficulty: 2 Page-Reference: 646
Question ID: 20-1-108 Skill: Comprehension
Objective: 20.6
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
109. A firm that buys an insurance policy to protect itself against automobile accidents is practising
a. risk avoidance.
b. risk transfer.
c. risk acceptance.
d. risk control.
e. risk retention.
Difficulty: 2 Page-Reference: 646
Question ID: 20-1-109 Skill: Knowledge
Objective: 20.6
110. Paying employee medical costs out of company funds rather than buying insurance is an
example of
a. risk avoidance.
b. risk transfer.
c. risk control.
d. risk retention.
e. risk shift.
Difficulty: 2 Page-Reference: 646
Question ID: 20-1-110 Skill: Comprehension
Objective: 20.6
111. Installing a new sprinkler system is an example of
a. risk retention.
b. risk avoidance.
c. risk transfer.
d. risk shift.
e. risk control.
Difficulty: 2 Page-Reference: 646
Question ID: 20-1-111 Skill: Comprehension
Objective: 20.6
112. Risk control is
a. the practice of minimizing the frequency or severity of losses from risky activities.
b. the practice of avoiding risk by declining or ceasing to participate in an activity.
c. the assumption of financial consequences of loss by the firm.
d. the shifting of the risk to an insurance company.
e. the practice of evaluating all costs associated with a decision.
Difficulty: 2 Page-Reference: 646
Question ID: 20-1-112 Skill: Knowledge
Objective: 20.6
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
113. Which of the following is the method most commonly used to transfer risks?
a. surety bonds
b. fidelity bonds
c. premiums
d. contracts
e. insurance
Difficulty: 2 Page-Reference: 646
Question ID: 20-1-113 Skill: Knowledge
Objective: 20.6
114. Which of the following represents the reason that insurance companies are willing to assume
the risk of certain potentially devastating losses for other companies?
a. Insurance companies have more experience with the risk.
b. In return for a sum of money, they are protected against certain losses.
c. Profit
d. The ultimate purpose of insurance is to indemnify policyholders.
e. Insurance companies know the likelihood of a particular loss.
Difficulty: 1 Page-Reference: 646
Question ID: 20-1-114 Skill: Comprehension
Objective: 20.6
115. ________ are fees paid by a policy-holder for insurance coverage.
a. Dividends
b. Revenues
c. Receivables
d. Premiums
e. Dues
Difficulty: 1 Page-Reference: 646
Question ID: 20-1-115 Skill: Knowledge
Objective: 20.6
116. Jerold Corp. recently bought a fire insurance policy. This is an example of which approach to
risk?
a. Risk control
b. Risk transfer
c. Risk retention
d. Risk avoidance
e. Risk severity
Difficulty: 2 Page-Reference: 646
Question ID: 20-1-116 Skill: Comprehension
Objective: 20.6
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
117. Quick-X Corp. recently sent its delivery drivers to a defensive driving course in order to reduce
accidents with company vehicles. This is an example of
a. risk shift.
b. risk control.
c. risk transfer.
d. risk retention.
e. risk avoidance.
Difficulty: 2 Page-Reference: 646
Question ID: 20-1-117 Skill: Comprehension
Objective: 20.6
118. Approximately how much money is lost to insurance fraud each year in Canada?
a. More than $100 million
b. More than $300 million
c. More than $1 billion
d. More than $4 billion
e. More than $11 billion
Difficulty: 2 Page-Reference: 648
Question ID: 20-1-118 Skill: Knowledge
Objective: 20.6
119. Generally speaking, what is the best approach to use when coping with potential losses?
a. Risk transfer
b. Risk avoidance
c. Risk control
d. Risk retention
e. There is no one best option; it depends on the circumstances
Difficulty: 2 Page-Reference: 646
Question ID: 20-1-119 Skill: Comprehension
Objective: 20.6
120. Claremont Corp. wants to buy insurance to protect itself against the possibility of financial loss if
its new product line does not sell well. But Claremont will find that no company will sell it such insurance
because new product development violates the _____criterion for insurable risks.
a. verifiability
b. casualty
c. unconnectedness
d. predictability
e. loss leader
Difficulty: 3 Page-Reference: 648
Question ID: 20-1-120 Skill: Comprehension
Objective: 20.6
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
121. An insurable risk must satisfy all of the following criteria except
a. predictability.
b. verifiability.
c. unconnectedness.
d. casualty.
e. quantifiability.
Difficulty: 2 Page-Reference: 647-648
Question ID: 20-1-121 Skill: Comprehension
Objective: 20.7
122. ________ means that the insurer must be able to use statistical tools to forecast the likelihood
of loss.
a. Casualty
b. Verifiability
c. Unconnectedness
d. Profitability
e. Predictability
Difficulty: 2 Page-Reference: 647
Question ID: 20-1-122 Skill: Knowledge
Objective: 20.7
123. One of the four characteristics of an insurable risk is ________. This means that the loss must
result from an accident, not an intentional act by the policy-holder.
a. unconnectedness
b. verifiability
c. profitability
d. predictability
e. casualty
Difficulty: 2 Page-Reference: 648
Question ID: 20-1-123 Skill: Knowledge
Objective: 20.7
124. One of the four characteristics of an insurable risk is ________. This means that the potential
losses must be random and must occur independently of other losses.
a. casualty
b. predictability
c. verifiability
d. profitability
e. unconnectedness
Difficulty: 2 Page-Reference: 648
Question ID: 20-1-124 Skill: Knowledge
Objective: 20.7
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
125. Which type of insurance would protect a business firm when a fire in its manufacturing facility
spreads and destroys a nearby home?
a. Health insurance
b. Life insurance
c. Property insurance
d. Liability insurance
e. Automobile insurance
Difficulty: 1 Page-Reference: 648
Question ID: 20-1-125 Skill: Knowledge
Objective: 20.7
126. A company is faced with an unexpected shutdown because of a natural disaster. It would be
protected from loss while it is preparing to reopen if it had purchased
a. business interruption insurance.
b. credit insurance.
c. automobile insurance.
d. premises liability insurance.
e. damage insurance.
Difficulty: 2 Page-Reference: 649
Question ID: 20-1-126 Skill: Knowledge
Objective: 20.7
127. Brenda is a top-level manager at Bricks ‘n Bricks. To protect themselves against the loss of her
talents and skills, the company should purchase
a. liability insurance.
b. credit insurance.
c. key person insurance.
d. business interruption insurance.
e. workers‘ compensation coverage.
Difficulty: 1 Page-Reference: 650
Question ID: 20-1-127 Skill: Comprehension
Objective: 20.7
1. The overall objective of the financial manager is to invest the firm’s money wisely.
a. True
b. False
Difficulty: 2 Page-Reference: 632
Question ID: 20-2-128 Skill: Knowledge
Objective: 20.1
2. As a result of financial scandals during the last few years, fewer finance managers are being
appointed as CEOs of companies.
a. True
b. False
Difficulty: 2 Page-Reference: 632
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
Question ID: 20-2-129 Skill: Knowledge
Objective: 20.1
3. There are several questions that must be answered when developing a financial plan, but the key
question is this: “Which investment will likely make the highest return for the company?”
a. True
b. False
Difficulty: 2 Page-Reference: 633
Question ID: 20-2-130 Skill: Comprehension
Objective: 20.1
4. The accounting manager is usually responsible for cash flow management.
a. True
b. False
Difficulty: 1 Page-Reference: 632
Question ID: 20-2-131 Skill: Knowledge
Objective: 20.1
5. Budgets are the backbone of financial control.
a. True
b. False
Difficulty: 2 Page-Reference: 633
Question ID: 20-2-132 Skill: Knowledge
Objective: 20.1
6. The responsibilities of financial managers fall into three general categories: cash flow management,
financial control, and financial planning.
a. True
b. False
Difficulty: 1 Page-Reference: 632
Question ID: 20-2-133 Skill: Knowledge
Objective: 20.1
7. To increase a firm’s value, financial managers must ensure that it has enough funds on hand to
purchase the materials and human resources that it needs to produce goods and services.
a. True
b. False
Difficulty: 2 Page-Reference: 632
Question ID: 20-2-134 Skill: Knowledge
Objective: 20.1
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
8. Accurate information about current cash status ensures good cash management.
a. True
b. False
Difficulty: 2 Page-Reference: 632
Question ID: 20-2-135 Skill: Comprehension
Objective: 20.1
9. Accounts payable is the largest single category of short–term debt for most companies.
a. True
b. False
Difficulty: 1 Page-Reference: 634
Question ID: 20-2-136 Skill: Knowledge
Objective: 20.2
10. Financial managers must pay more attention to accounts receivable than accounts payable
because accounts receivable provides the funds the company needs to stay in business.
a. True
b. False
Difficulty: 1 Page-Reference: 634
Question ID: 20-2-137 Skill: Comprehension
Objective: 20.2
11. It is in the firm’s best interest to pay its accounts payables as rapidly as possible.
a. True
b. False
Difficulty: 2 Page-Reference: 634
Question ID: 20-2-138 Skill: Comprehension
Objective: 20.2
12. Credit terms of “2/10, net 30” mean that the selling company offers a 10 percent discount if the
customer pays within 30 days.
a. True
b. False
Difficulty: 2 Page-Reference: 634
Question ID: 20-2-139 Skill: Comprehension
Objective: 20.2
13. Capital expenditures are essentially the same as operating expenditures except they last longer
than one year.
a. True
b. False
Difficulty: 1 Page-Reference: 635
Question ID: 20-2-140 Skill: Knowledge
Objective: 20.2
Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang
Chapter 20—Financial Decisions and Risk Management
14. Accounts payable is an example of short-term expenditures.
a. True
b. False
Difficulty: 2 Page-Reference: 634
Question ID: 20-2-141 Skill: Knowledge
Objective: 20.2
15. Work-in–process inventory includes things like t-shirts that are packaged and ready to be shipped
to customers.
a. True
b. False
Difficulty: 2 Page-Reference: 634
Question ID: 20-2-142 Skill: Knowledge
Objective: 20.2
16. Open-book credit is a secured short-term loan that requires that the borrower put up collateral.
a. True
b. False
Difficulty: 1 Page-Reference: 635
Question ID: 20-2-143 Skill: Knowledge
Objective: 20.3
17. Open-book credit is available only to companies that are financially strong.
a. True
b. False
Difficulty: 1 Page-Reference: 635
Question ID: 20-2-144 Skill: Knowledge
Objective: 20.3
18. A promissory note states when payment will be made and how much money will be paid to the
seller in return for immediate credit.
a. True
b. False
Difficulty: 1 Page-Reference: 635
Question ID: 20-2-145 Skill: Knowledge
Objective: 20.3
19. When accounts receivable are used as collateral, the process is called factoring accounts
receivable.
a. True
b. False
Difficulty: 2 Page-Reference: 636
Question ID: 20-2-146 Skill: Knowledge