Fundamentals of Corporate Finance, 12e (Ross)
Chapter 1 Introduction to Corporate Finance
1) Which one of the following functions should be the responsibility of the controller rather than
the treasurer?
A) Depositing cash receipts
B) Processing cost reports
C) Analyzing equipment purchases
D) Approving credit for a customer
E) Paying a vendor
2) The treasurer of a corporation generally reports directly to the:
A) board of directors.
B) chairman of the board.
C) chief executive officer.
D) president.
E) vice president of finance.
3) Which one of the following correctly defines the upward chain of command in a typical
corporate organizational structure?
A) The vice president of finance reports to the chairman of the board.
B) The chief executive officer reports to the president.
C) The controller reports to the chief financial officer.
D) The treasurer reports to the president.
E) The chief operations officer reports to the vice president of production.
4) An example of a capital budgeting decision is deciding:
A) how many shares of stock to issue.
B) whether or not to purchase a new machine for the production line.
C) how to refinance a debt issue that is maturing.
D) how much inventory to keep on hand.
E) how much money should be kept in the checking account.
5) When evaluating the timing of a project’s projected cash flows, a financial manager is
analyzing:
A) the amount of each expected cash flow.
B) only the start-up costs that are expected to require cash resources.
C) only the date of the final cash flow related to the project.
D) the amount by which cash receipts are expected to exceed cash outflows.
E) when each cash flow is expected to occur.
6) Capital structure decisions include determining:
A) which one of two projects to accept.
B) how to allocate investment funds to multiple projects.
C) the amount of funds needed to finance customer purchases of a new product.
D) how much debt should be assumed to fund a project.
E) how much inventory will be needed to support a project.
7) The decision to issue additional shares of stock is an example of:
A) working capital management.
B) a net working capital decision.
C) capital budgeting.
D) a controller’s duties.
E) a capital structure decision.
8) Which one of the following questions is a working capital management decision?
A) Should the company issue new shares of stock or borrow money?
B) Should the company update or replace its older equipment?
C) How much inventory should be on hand for immediate sale?
D) Should the company close one of its current stores?
E) How much should the company borrow to buy a new building?
9) Which one of the following is a working capital management decision?
A) What type(s) of equipment is (are) needed to complete a current project?
B) Should the firm pay cash for a purchase or use the credit offered by the supplier?
C) What amount of long-term debt is required to complete a project?
D) How many shares of stock should the firm issue to fund an acquisition?
E) Should a project should be accepted?
10) Working capital management decisions include determining:
A) the minimum level of cash to be kept in a checking account.
B) the best method of producing a product.
C) the number of employees needed to work during a particular shift.
D) when to replace obsolete equipment.
E) if a competitor should be acquired.
11) Which one of the following terms is defined as the management of a firm’s long-term
investments?
A) Working capital management
B) Financial allocation
C) Agency cost analysis
D) Capital budgeting
E) Capital structure
12) Which one of the following terms is defined as the mixture of a firm’s debt and equity
financing?
A) Working capital management
B) Cash management
C) Cost analysis
D) Capital budgeting
E) Capital structure
13) A firm’s short-term assets and its short-term liabilities are referred to as the firm’s:
A) working capital.
B) debt.
C) investment capital.
D) net capital.
E) capital structure.
14) Which one of the following questions is least likely to be addressed by financial managers?
A) How should a product be marketed?
B) Should customers be given 30 or 45 days to pay for their credit purchases?
C) Should the firm borrow more money?
D) Should the firm acquire new equipment?
E) How much cash should the firm keep on hand?
15) A business owned by a solitary individual who has unlimited liability for the firm’s debt is
called a:
A) corporation.
B) sole proprietorship.
C) general partnership.
D) limited partnership.
E) limited liability company.
16) A business formed by two or more individuals who each have unlimited liability for all of
the firm’s business debts is called a:
A) corporation.
B) sole proprietorship.
C) general partnership.
D) limited partnership.
E) limited liability company.
17) A business partner whose potential financial loss in the partnership will not exceed his or her
investment in that partnership is called a:
A) general partner.
B) sole proprietor.
C) limited partner.
D) corporate shareholder.
E) zero partner.
18) A business created as a distinct legal entity and treated as a legal “person” is called a(n):
A) corporation.
B) sole proprietorship.
C) general partnership.
D) limited partnership.
E) unlimited liability company.
19) Which one of the following statements concerning a sole proprietorship is correct?
A) A sole proprietorship is designed to protect the personal assets of the owner.
B) The profits of a sole proprietorship are subject to double taxation.
C) The owner of a sole proprietorship is personally responsible for all of the company’s debts.
D) There are very few sole proprietorships remaining in the U.S. today.
E) A sole proprietorship is structured the same as a limited liability company.
20) Which one of the following statements concerning a sole proprietorship is correct?
A) The life of a sole proprietorship is limited.
B) A sole proprietor can generally raise large sums of capital quite easily.
C) Transferring ownership of a sole proprietorship is easier than transferring ownership of a
corporation.
D) A sole proprietorship is taxed the same as a C corporation.
E) A sole proprietorship is the most regulated form of organization.
21) Which of the following individuals have unlimited liability for a firm’s debts based on their
ownership interest?
A) Only general partners
B) Only sole proprietors
C) All stockholders
D) Both limited and general partners
E) Both general partners and sole proprietors
22) The primary advantage of being a limited partner is:
A) the receipt of tax-free income.
B) the partner’s active participation in the firm’s activities.
C) the lack of any potential financial loss.
D) the daily control over the business affairs of the partnership.
E) the partner’s maximum loss is limited to their capital investment.
23) A general partner:
A) is personally responsible for all partnership debts.
B) has no say over a firm’s daily operations.
C) faces double taxation whereas a limited partner does not.
D) has a maximum loss equal to his or her equity investment.
E) receives a salary in lieu of a portion of the profits.
24) A limited partnership:
A) has an unlimited life.
B) can opt to be taxed as a corporation.
C) terminates at the death of any one limited partner.
D) has at least one partner who has unlimited liability for all of the partnership’s debts.
E) consists solely of limited partners.
25) A partnership with four general partners:
A) distributes profits based on percentage of ownership.
B) has an unlimited partnership life.
C) limits the active involvement in the firm to a single partner.
D) limits each partner’s personal liability to 25 percent of the partnership’s total debt.
E) must distribute 25 percent of the profits to each partner.
26) One disadvantage of the corporate form of business ownership is the:
A) limited liability of its shareholders for the firm’s debts.
B) double taxation of distributed profits.
C) firm’s greater ability to raise capital than other forms of ownership.
D) firm’s potential for an unlimited life.
E) firm’s ability to issue additional shares of stock.
27) Which one of the following statements is correct?
A) The majority of firms in the U.S. are structured as corporations.
B) Corporate profits are taxable income to the shareholders when earned.
C) Corporations can have an unlimited life.
D) Shareholders are protected from all potential losses.
E) Shareholders directly elect the corporate president.
28) Which one of the following statements is correct?
A) A general partnership is legally the same as a corporation.
B) Income from both sole proprietorships and partnerships that is taxable is treated as individual
income.
C) Partnerships are the most complicated type of business to form.
D) All business organizations have bylaws.
E) Only firms organized as sole proprietorships have limited lives.
29) The articles of incorporation:
A) describe the purpose of the firm and set forth the number of shares of stock that can be issued.
B) are amended periodically especially prior to corporate elections.
C) explain how corporate directors are to be elected and the length of their terms.
D) sets forth the procedures by which a firm regulates itself.
E) include only the corporation’s name and intended life.
30) Corporate bylaws:
A) must be amended should a firm decide to increase the number of shares authorized.
B) cannot be amended once adopted.
C) define the name by which the firm will operate.
D) describe the intended life and purpose of the organization.
E) determine how a corporation regulates itself.
31) A limited liability company:
A) can only have a single owner.
B) is comprised of limited partners only.
C) is taxed similar to a partnership.
D) is taxed similar to a C corporation.
E) generates totally tax-free income.
32) Which business form is best suited to raising large amounts of capital?
A) Sole proprietorship
B) Limited liability company
C) Corporation
D) General partnership
E) Limited partnership