Fundamentals Of Corporate Finance, Ninth Canadian Edition Test Bank

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ExamName___________________________________MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.1)Which one of the following actions is the best example of an agency problem?1)A)Paying management bonuses based on the number of store locations opened duringthe year.B)Basing management bonuses on the attainment of specific financial goals.C)Accepting a project that enhances both management salaries and the market valueof the firm's stock.D)Requiring stockholders approval of all management compensation decisions.E)Paying management bonuses based on the current market value of the firm's stock.Answer:AExplanation:A)B)C)D)E)2)Which one of the following best describes the primary advantage of being a limitedpartner rather than a general partner?2)A)Entitlement to a larger portion of the partnership's income.B)Liability for firm debts limited to the capital invested.C)Greater management responsibility.D)Ability to manage the day-to-day affairs of the business.E)No potential financial loss.Answer:BExplanation:A)B)C)D)E)3)Which of the following accounts does not relate to working capital managementdecisions?3)A)Short-term debt.B)Accounts receivable.C)Long-term debt.D)Inventory.E)Accounts payable.Answer:CExplanation:A)B)C)D)E)1

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4)The corporate officer generally responsible for tasks related to tax management, costaccounting, financial accounting, and data processing is the:4)A)Chairman of the Board.B)Corporate Treasurer.C)Director.D)Vice President of Operations.E)Corporate Controller.Answer:EExplanation:A)B)C)D)E)5)The corporate officer generally responsible for tasks related to cash and creditmanagement, financial planning, and capital expenditures is the:5)A)Corporate Controller.B)Chairman of the Board.C)Vice President of Operations.D)Corporate Treasurer.E)Director.Answer:DExplanation:A)B)C)D)E)6)The mixture of debt and equity used by the firm to finance its operations is called:6)A)Agency cost analysis.B)Financial depreciation.C)Capital budgeting.D)Working capital management.E)Capital structure.Answer:EExplanation:A)B)C)D)E)2

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7)The Board of Directors of Beeline, Inc. has decided to base the salary of its financialmanager entirely upon the market share of the firm. Accordingly,7)A)This arrangement may be unnecessary, since the goal of the firm is to maximizeearnings for shareholders, and that is most likely accomplished through largermarket share.B)The manager may not act to maximize the current value of the firm's stock,resulting in agency costs for the firm's stockholders.C)The firm will incur some agency costs if the manager acts to maximize marketshare.D)The financial manager will always act in the best interest of the shareholders sinceall agency costs have been eliminated through salary incentives.E)The firm may incur some agency costs since the manager will be focused on themarket share of the firm rather than acting to maximize earnings.Answer:BExplanation:A)B)C)D)E)8)Which of the following does NOT persuade managers to work in the best interest of thestockholders?8)A)Purely cash compensation package.B)Threat of a company takeover.C)Compensation based on the value of the stock.D)Stock option plans.E)Threat of a proxy fight.Answer:AExplanation:A)B)C)D)E)9)A partnership:9)A)Has less of an ability to raise capital than a proprietorship.B)Is taxed the same as a corporation.C)Terminates at the death of any general partner.D)Agreement defines whether the business income will be taxed like a partnership or acorporation.E)Allows for easy transfer of interest from one general partner to another.Answer:CExplanation:A)B)C)D)E)3

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10)The best definition of "agency problem" is:10)A)Determining the optimal mix of internal and external board of directors.B)The process of planning and managing a firm's long-term investments.C)The purchase or sale of securities whose value derives from the price of another,underlying, asset.D)The possibility of conflicts between shareholders and management in a largecorporation.E)Determining who should be the agent of corporate executives.Answer:DExplanation:A)B)C)D)E)11)In a limited partnership:11)A)A limited partner is liable only for the amount he/she contributed to the partnership.B)A general partner is liable only for the amount he/she contributed to the partnership.C)Only the limited partners are involved in the daily management of the firm.D)The income earned is taxed like a corporation.E)Both general and limited partners are involved in the daily management of the firm.Answer:AExplanation:A)B)C)D)E)12)Which of the following questions is NOT the responsibility of the financial manager?12)A)Should the firm build a new factory?B)How long should customers be given to pay for their credit purchases?C)What product should the firm produce?D)How long will it take to produce a product?E)Should the firm borrow more money?Answer:CExplanation:A)B)C)D)E)4

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13)When does the double taxation problem faced by corporations exist?13)A)Whenever a corporation earns a profit, pays taxes on that profit, and then paysdividends to its tax-exempt shareholders.B)Whenever a corporation earns a profit and pays taxes on that profit.C)Whenever a corporation earns a profit, pays taxes on that profit, and then paysinterest to its bondholders.D)Whenever a corporation earns a profit, pays taxes on that profit, and then paysdividends to its stockholders who pay personal taxes.E)Whenever stockholders are paid a dividend and are taxed on that dividend income.Answer:DExplanation:A)B)C)D)E)14)The original sale of securities by governments and corporations to the general publicoccurs in the:14)A)Proprietary market.B)Primary market.C)Secondary market.D)Liquidation market.E)Private placement market.Answer:BExplanation:A)B)C)D)E)15)According to the statement of financial position model of the firm, corporate finance canbe thought of as an analysis of three primary subject areas. Which of the followingcorrectly lists these areas?15)A)Capital budgeting, capital structure, net working capital.B)Capital budgeting, capital structure, capital spending.C)Capital budgeting, capital spending, net working capital.D)Capital structure, capital budgeting, security analysis.E)Capital structure, net working capital, capital rationing.Answer:AExplanation:A)B)C)D)E)5

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16)Financial managers should strive to maximize the current value per share of the existingstock because:16)A)They have been hired for the purpose of representing the interest of the currentshareholders.B)Doing so increases the salaries of all the employees.C)The managers often receive shares of stock as part of their compensation.D)Doing so means the firm is growing in size faster than its competitors.E)Doing so guarantees the company will grow in size at the maximum possible rate.Answer:AExplanation:A)B)C)D)E)17)Which one of the following statements is correct concerning the TSX?17)A)Any corporation desiring to be listed on the TSX can do so.B)The TSX is the largest dealer market for listed securities in Canada.C)The TSX is the second largest stock exchange in the world.D)The TSX is an over-the-counter exchange functioning as both a primary and asecondary market.E)A firm is expected to have a market value for its publicly held shares of at least $4million to be listed on the TSX.Answer:EExplanation:A)B)C)D)E)18)The articles of incorporation:18)A)Set forth the rules by which the corporation regulates its existence.B)Set forth the number of shares of stock that can be issued.C)Can set forth the conditions under which the firm can avoid double taxation.D)Can be used to remove company management.E)Are amended annually by the company stockholders.Answer:BExplanation:A)B)C)D)E)6

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19)Which one of the following statements concerning a sole proprietorship is correct?19)A)The legal costs to form a sole proprietorship are quite substantial.B)The owner can generally raise large sums of capital quite easily.C)The ownership of the firm is easy to transfer to another individual.D)The life of the firm is limited to the life span of the owner.E)The company must pay separate taxes from those paid by the owner.Answer:DExplanation:A)B)C)D)E)20)Suppliers, customers, and employees of a corporation are called:20)A)Shareholders.B)Partners.C)Debtors.D)Creditors.E)Stakeholders.Answer:EExplanation:A)B)C)D)E)21)A stakeholder is:21)A)Any person or entity that has voting rights based on stock ownership of acorporation.B)Any person or entity who potentially has a claim on the cash flows of the firm.C)Any person or entity that owns shares of stock of a corporation.D)A creditor to whom the firm currently owes money and who consequently has aclaim on the cash flows of the firm.E)A person who initially started a firm and currently has management control over thecash flows of the firm due to his/her current ownership of company stock.Answer:BExplanation:A)B)C)D)E)7

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22)Which one of the following actions best meets the goal of financial management?22)A)Issuing additional shares of stock to increase the total cash on hand.B)Easing the accounts receivable policies in order to increase current sales.C)Accepting a project that enhances the current market value of the firm's stock.D)Deciding a firm should be 100% equity financed.E)Delaying cash payments in order to increase the total cash on hand.Answer:CExplanation:A)B)C)D)E)23)Which one of the following best illustrates the agency problem?23)A)An employee offers a suggestion which will save the company money and reducethe stress of his job.B)Management expands its operations overseas which is favourably received by thefinancial markets.C)The company creates a management bonus program whereby managers arerewarded when the market price of the firm's stock rises.D)Management reduces the risk level of the firm while maintaining a steady stockprice.E)Management rejects a merger which was desired by the shareholders.Answer:EExplanation:A)B)C)D)E)24)A business created as a distinct legal entity composed of one or more individuals orentities is called a:24)A)Limited partnership.B)Sole proprietorship.C)General partnership.D)Corporation.E)Unlimited liability company.Answer:DExplanation:A)B)C)D)E)8

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25)The management of a firm's short-term assets and liabilities is called:25)A)Debt management.B)Capital structure.C)Capital budgeting.D)Working capital management.E)Equity management.Answer:DExplanation:A)B)C)D)E)26)A general partnership is best defined as a business owned by:26)A)A single individual who desires limited liability for the firm's debts.B)Two or more individuals, only one of whom has unlimited liability for the firm'sdebts.C)One or more individuals who are each totally responsible for the debts of the entity.D)Two or more individuals, each of whom has limited liability for the firm's debts.E)Multiple individuals, 80 percent of whom enjoy limited liability.Answer:CExplanation:A)B)C)D)E)27)The best definition of "financial engineering" is:27)A)Financial markets where long-term debt and equity securities are bought and sold.B)The purchase or sale of securities whose value derives from the price of another,underlying, asset.C)A company that owns or finances income-producing real estate.D)Creation of new securities or financial processes.E)A company that owns or finances engineering projects.Answer:DExplanation:A)B)C)D)E)9

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28)Which of the following is a true statement concerning a general partnership?28)A)Partnerships have unlimited lives similar to corporations.B)Partnerships are taxed at the corporate level.C)Partners are not responsible for the debts of the partnership.D)The income of a partnership is taxed at the partners' income tax rate.E)Partners generally do not manage the partnership.Answer:DExplanation:A)B)C)D)E)29)Which one of the following correctly defines the chain of command in a typicalcorporate organizational structure?29)A)The vice president of finance reports to the chairman of the board.B)The treasurer reports to the chief executive officer.C)The chief operations officer reports to the vice president of production.D)The controller reports to the president.E)The chief executive officer reports to the board of directors.Answer:EExplanation:A)B)C)D)E)30)An entity wherein one or more owners may elect to actively manage the firm while otherowners choose limited liability instead of management responsibility is called a:30)A)General partnership.B)Corporation.C)Limited liability company.D)Limited partnership.E)Limited liability corporation.Answer:DExplanation:A)B)C)D)E)10

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31)Working capital management is concerned with which statement of financial positionaccounts?31)A)Long-term assets only.B)Current assets only.C)Current and long-term assets only.D)Current assets and current liabilities only.E)Current assets, long-term assets and current liabilities only.Answer:DExplanation:A)B)C)D)E)32)The primary purpose of an auction market is to:32)A)Provide a market place for dealers.B)Offer new shares of stock to the general public.C)Provide electronic trading for dealers.D)Match buyers with sellers.E)Handle private placements of shares of stock.Answer:DExplanation:A)B)C)D)E)33)The person generally directly responsible for overseeing the tax management, costaccounting, financial accounting, and data processing functions is the:33)A)Director.B)Chief executive officer.C)Treasurer.D)Chairman of the board.E)Controller.Answer:EExplanation:A)B)C)D)E)11

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34)The process of planning and managing a firm's Long-term investments is called:34)A)Agency cost analysis.B)Capital budgeting.C)Capital structure.D)Working capital management.E)Financial depreciation.Answer:BExplanation:A)B)C)D)E)35)Tasks related to tax management, cost accounting, financial accounting, and dataprocessing are the responsibility of which corporate officer?35)A)The Corporate Controller.B)The Vice President of Production.C)The Corporate Treasurer.D)The Chairman of the Board.E)The Board of Directors.Answer:AExplanation:A)B)C)D)E)36)Which type of business organization has all the respective rights and privileges of a legalperson?36)A)General partnership.B)Corporation.C)Sole proprietorship.D)Limited partnership.E)Limited liability company.Answer:BExplanation:A)B)C)D)E)12

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37)Conflicts that arise between the interests of managers and stockholders are referred to as:37)A)Control problems.B)Agency problems.C)Proxy fights.D)Stockholder conflicts.E)Management conflicts.Answer:BExplanation:A)B)C)D)E)38)Stockholders elect:38)A)The President.B)The Chief Executive Officer.C)The Chairman of the Board.D)All senior managers.E)The Corporate Directors.Answer:EExplanation:A)B)C)D)E)39)Which of the following are disadvantages of the partnership form of ownership?39)A)Ease of formation and unlimited firm life.B)Ease of formation and ease of ownership transfer.C)Personal liability and limited firm life.D)Personal liability and double taxation.E)Double taxation and limited firm life.Answer:CExplanation:A)B)C)D)E)13

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40)Which of the following is a true statement concerning corporations?40)A)The life of the corporation is unlimited.B)The equity that can be raised by the corporation is limited to the currentshareholders' personal wealth.C)It is difficult to transfer ownership of corporate shares.D)When dividends are paid, corporate profits are taxed once.E)The corporation has limited liability for business debts.Answer:AExplanation:A)B)C)D)E)41)Which of the following is the BEST description of the goal of the financial manager in acorporation where shares are publicly traded?41)A)Maximize sales.B)Maximize the current value per share of the existing stock.C)Maintain steady earnings growth.D)Avoid financial distress.E)Maximize profits.Answer:BExplanation:A)B)C)D)E)42)Robert Fischer is one of the owners of a firm which generated $18,000 in taxable incomelast year. Robert did not have to pay any personal tax on his share of the firm's income.Robert must be a partial owner of a:42)A)General partnership.B)Sole proprietorship.C)Non-dividend paying corporation.D)Limited liability company.E)Limited partnership.Answer:CExplanation:A)B)C)D)E)14

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43)Which of the following statements concerning NASDAQ is incorrect?43)A)NASDAQ stands for National Association of Securities Dealers AutomatedQuotations system.B)NASDAQ is an auction market.C)NASDAQ is an OTC market.D)NASDAQ is an electronic market.E)Most smaller firms are listed on NASDAQ rather than on the NYSE.Answer:BExplanation:A)B)C)D)E)44)Which one of the following statements is correct concerning the listing of stock on anexchange?44)A)The TSX has the most stringent listing requirements of any Canadian stockexchange.B)Any firm can list their stock on any exchange they desire.C)The number of shareholders is NOT a listing consideration for a stock.D)All exchanges have the same listing requirements.E)Listing requirements are established by the Ontario Securities Commission.Answer:AExplanation:A)B)C)D)E)45)Which of the following is NOT a general criterion that must be met in order for a firm tobe listed on the TSX?45)A)The firm must have a minimum number of shares outstanding.B)The firm must have a minimum number of directors.C)The firm must have a minimum number of shareholders owning at least 300 shares.D)The firm must have a market value of at least $4 million.E)The firm must have a minimum amount of assets.Answer:BExplanation:A)B)C)D)E)15

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