Principles Of Corporate Finance, Second 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)Profit maximization fails because it ignores all EXCEPT1)A)cash flows available to stockholders.B)risk.C)earnings per share.D)the timing of returns.Answer:CExplanation:A)B)C)D)2)The officer responsible for the firm's financial activities such as financial planning and fund raising,making capital expenditure decisions, and managing cash, credit, the pension fund, and foreignexchange is2)A)the foreign exchange manager.B)the treasurer.C)the controller.D)none of the above.Answer:BExplanation:A)B)C)D)3)A company determines its overall cost of capital by3)A)calculating the percent of earnings paid out in dividendsB)multiplying the percentage of debt in the capital structure by the percentage of equityC)multiplying the percentage of debt by its cost and adding the result to the percentage ofequity multiplied by its costD)calculating the average cost of interest rates paid on loans and other debt instrumentsAnswer:CExplanation:A)B)C)D)4)Return and risk are the key determinants in share price. Increased risk, other things remaining thesame, results in4)A)a higher share price.B)an undetermined share price.C)a lower share price.D)an unchanged share price.Answer:CExplanation:A)B)C)D)1

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5)The accountant recognizes revenues and expenses on5)A)an expense basis.B)an accrual basis.C)a revenue basis.D)a cash basis.Answer:BExplanation:A)B)C)D)6)Corporate owners receive a realizable return through6)A)profit and earnings per share.B)increase in share price and cash dividends.C)earnings per share and cash dividends.D)increase in share price and earnings per share.Answer:BExplanation:A)B)C)D)7)Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 ofmerchandise purchased during the year at a total cost of $7,000. Although the firm paid in full forthe merchandise during the year, it has yet to collect at year end from the customer. The net profitand cash flow from this sale for the year are7)A)$3,000 and $7,000 respectively.B)$3,000 and-$7,000 respectively.C)$7,000 and-$3,000 respectively.D)$3,000 and $10,000 respectively.Answer:BExplanation:A)B)C)D)8)The key activities of the financial manager include all of the following EXCEPT8)A)managing financial accounting.B)making financing decisions.C)financial analysis and planning.D)making investment decisions.Answer:AExplanation:A)B)C)D)2

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9)For $200,000 you can buy a business that has steady cash flows and low risk. Given these cashflows and level of risk, you estimate the business will earn a return in excess of its opportunity costof money. The business9)A)appears to be a losing proposition but should be bought anyway.B)appears to be a losing proposition and should not be bought.C)appears economically profitable, and strong consideration should be given to buying it.D)looks like a break-even opportunity and should be rejected.Answer:CExplanation:A)B)C)D)10)Sig Hansen runs a ski resort in British Columbia. He is considering replacing the ski lifts at theresort. His calculations suggest that if he does, the economic benefits from the upgraded ski-liftoperations will total $959,000 over the next six years. The ski lifts he already has are projected togenerate $444,000 in economic benefits over the next six years. The new ski lifts would require aninitial cash investment of $385,000 and Sig estimates he can sell his existing ski lift equipment for$170,000. Based on these estimates, what is Sig's marginal benefit from replacing the ski lifts?10)A)$959,000B)$574,000C)$345,000D)$515,000Answer:DExplanation:A)B)C)D)11)The financial manager's investment decisions determine11)A)both the mix and the type of assets found on the firm's balance sheet.B)both the mix and the type of assets and liabilities found on the firm's balance sheet.C)both the mix and the type of short-term and long-term financing.D)both the mix and the type of liabilities found on the firm's balance sheet.Answer:AExplanation:A)B)C)D)12)Agency costs include all of the following EXCEPT12)A)bonding and structuring expenses.B)monitoring expenditures.C)opportunity costs.D)cost of goods sold.Answer:DExplanation:A)B)C)D)3

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13)Career opportunities in financial services include all of the following EXCEPT13)A)investments.B)capital expenditures management.C)real estate and insurance.D)personal financial planning.Answer:BExplanation:A)B)C)D)14)The accountant may be responsible for any of the following EXCEPT14)A)preparing the monthly income statement.B)processing purchase orders and invoices.C)analyzing the mix of current to fixed assets.D)ensuring accounts payable are paid on time.Answer:CExplanation:A)B)C)D)15)Managing the firm's liabilities includes all of the following EXCEPT15)A)accounts payable.B)notes payable.C)accruals.D)cash.Answer:DExplanation:A)B)C)D)16)The true owners of the corporation is/are the16)A)chief executive officer.B)creditors.C)stockholders.D)board of directors.Answer:CExplanation:A)B)C)D)17)Economic theories that the financial manager must be able to utilize for efficient businessoperations, include17)A)profit-maximizing strategies.B)supply-and-demand analysis.C)marginal analysis.D)all of the above.Answer:DExplanation:A)B)C)D)4

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18)The implementation of a pro-active ethics program is expected to result in18)A)a positive corporate image and increased respect, a reduction in risk, and enhanced cash flowresulting in an increase in share price.B)a positive corporate image and increased respect, but is not expected to affect cash flows.C)an increased share price resulting from a decrease in risk, but is not expected to affect cashflows.D)a positive corporate image and increased respect, but is not expected to affect share price.Answer:AExplanation:A)B)C)D)19)When entering into a partnership with a business associate, it is strongly recommended that19)A)both partners contribute an equal amount of money.B)both partners contribute an equal amount of money and labor.C)a partnership agreement be drafted outlining roles, responsibilities, and profit sharing.D)both partners contribute an equal amount of labor.Answer:CExplanation:A)B)C)D)20)Which of the following is a career opportunity in managerial finance?20)A)Personal Financial PlanningB)InvestmentC)Capital Expenditures ManagementD)Real Estate and InsuranceAnswer:CExplanation:A)B)C)D)21)Under which of the following legal forms of organization, is ownership readily transferable?21)A)limited partnershipsB)corporationsC)sole proprietorshipsD)partnershipsAnswer:BExplanation:A)B)C)D)5

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22)Hardwood Furniture Limited sold $1,225,000 worth of tables, chairs and other furniture last year.During that time period, the company collected $975,755 for those items and paid $407,844 for thematerials used in producing the furniture they sold. What was Hardwood's net cash flow for lastyear?22)A)$1,225,000B)$567,911C)$975,755D)$817,156Answer:BExplanation:A)B)C)D)23)A financial manager must choose between four alternative investments, 1, 2, 3, and 4. Each assetcosts $35,000 and is expected to provide earnings over a three-year period as described below.AssetYear 1Year 2Year 31$21,000$15,000$ 6,00029,00015,00021,00033,00020,00019,00046,00012,00012,000Based on the profit maximization goal, the financial manager would choose23)A)Asset 1.B)Asset 2.C)Asset 3.D)Asset 4.Answer:BExplanation:A)B)C)D)24)In a corporation, ethical decisions occur at all levels within the hierarchy. If you were an ethicsconsultant, which ethical behavior would concern you the most?24)A)a food-wholesaler's cashier rounds all weights down when calculating the cost of fruits andvegetables for customersB)an investment advisor tells his client that a company near bankruptcy has excellent growthprospects in order to get his sales commissionC)a strawberry grower sprays a legalized chemical on its berries to help them turn red quickerD)a medical research company tests cancer drugs on miceAnswer:BExplanation:A)B)C)D)6

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25)Managerial finance25)A)devotes the majority of its attention to the collection and presentation of financial data.B)involves tasks such as budgeting, financial forecasting, cash management, and fundsprocurement.C)recognizes funds on an accrual basis.D)involves the design and delivery of advice and financial products.Answer:BExplanation:A)B)C)D)26)In ________, owners have limited liability with regard to the businessNthey are not personallyliable for other owners' malpractice.26)A)in a cooperativeB)a partnershipC)a limited partnershipD)s sole proprietorshipAnswer:CExplanation:A)B)C)D)27)The dominant form of organization with respect to revenues and net income is the27)A)sole proprietorship.B)limited partnership.C)partnership.D)corporation.Answer:DExplanation:A)B)C)D)28)The financial manager may be responsible for any of the following EXCEPT28)A)determining whether to accept or reject a capital asset acquisition.B)analyzing quarterly budget and performance reports.C)keeping track of quarterly tax payments.D)analyzing the effects of more debt on the firm's capital structure.Answer:CExplanation:A)B)C)D)29)The controller is commonly responsible for29)A)financial accounting.B)financial planning.C)managing credit activities.D)managing cash.Answer:AExplanation:A)B)C)D)7

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30)Financial analysis and planning involve all of the following EXCEPT30)A)evaluating the need for increased or reduced productive capacity.B)determining the additional financing needs.C)transforming data into a form that can be used to monitor the firm's financial position.D)controlling the data processing activities.Answer:DExplanation:A)B)C)D)31)As the risk of a stock investment increases,31)A)return will increase.B)required rate of return will increase.C)return will decrease.D)required rate of return will decrease.Answer:BExplanation:A)B)C)D)32)When a firm is under-managed,32)A)nobody can do nothing since management controls the corporation.B)the market forces will be unable to identify this, and the firm's share price will remain strong.C)market forces expose this weakness and allow for corrective action to be taken.D)generally there is nothing shareholders can do.Answer:CExplanation:A)B)C)D)33)A "legal entity" which can sue and be sued, make and be party to contracts, and acquire property inits own name is33)A)a corporation.B)a professional partnership.C)a partnership.D)a sole proprietorship.Answer:AExplanation:A)B)C)D)34)Which of the following legal forms of organization is most expensive to organize?34)A)partnershipsB)limited partnershipsC)corporationsD)sole proprietorshipsAnswer:CExplanation:A)B)C)D)8

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35)The financial manager's financing decisions determine35)A)both the mix and the type of assets and liabilities found on the firm's balance sheet.B)the proportion of the firm's earnings to be paid as dividend.C)the most appropriate mix of short-term and long-term financing.D)both the mix and the type of assets found on the firm's balance sheet.Answer:CExplanation:A)B)C)D)36)The goal of profit maximization would result in priority for36)A)risk of the investment.B)cash flows available to stockholders.C)earnings per share.D)timing of the returns.Answer:CExplanation:A)B)C)D)37)The financial manager is interested in the cash inflows and outflows of the firm, rather than theaccounting data, in order to ensure37)A)the ability to acquire new assets.B)solvency.C)profitability.D)the ability to pay dividends.Answer:BExplanation:A)B)C)D)38)A financial manager must choose between three alternative investments. Each asset is expected toprovide earnings over a three-year period as described below. Based on the wealth maximizationgoal, the financial manager wouldYearAsset 1Asset 2Asset 31$21,000$ 9,000$ 8,000215,00015,00021,00039,00018,00017,000––––––––––––––––––$46,000$41,000$46,00038)A)choose Asset 1.B)choose Asset 2.C)choose Asset 3.D)be indifferent between Asset 1 and Asset 2.Answer:AExplanation:A)B)C)D)9

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39)Return and risk39)A)have the same effect on share price.B)adversely affect share price.C)have no effect on share price.D)have an inverse effect on share price.Answer:DExplanation:A)B)C)D)40)The agency problem may result from a manager's concerns about any of the following EXCEPT40)A)personal wealth.B)job security.C)corporate goals.D)company-provided perquisites.Answer:CExplanation:A)B)C)D)41)The key variables in the owner wealth maximization process are41)A)cash flows and risk.B)earnings per share and risk.C)earnings per share and share price.D)profits and risk.Answer:AExplanation:A)B)C)D)42)An ethics program is expected to have ________ impact on the firm's share price.42)A)negativeB)positiveC)noD)undeterminedAnswer:BExplanation:A)B)C)D)43)Which of the following would be considered an agency cost?43)A)cost of wages paid to factory workersB)cost of interest paid to bondholdersC)cost of dividends paid to shareholdersD)cost of an annual audit required by bondholdersAnswer:DExplanation:A)B)C)D)10

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44)The difference between the cost of funds used to finance an investment and its after-tax operatingprofits is called44)A)a dividend.B)economic value added.C)retained earnings.D)earnings per share.Answer:BExplanation:A)B)C)D)45)One way often used to insure that management decisions are in the best interest of the stockholdersis to45)A)tie management compensation to the level of earnings per share.B)threaten to fire managers who are seen as not performing adequately.C)tie management compensation to the performance of the company's common stock price.D)remove management's perquisites.Answer:CExplanation:A)B)C)D)46)A recent ethics survey indicated the opinion that maintaining high ethical standards46)A)had no effect on a firm's competitive position.B)was difficult to enforce.C)weakened a firm's competitive position, particularly in foreign markets.D)strengthened a firm's competitive position.Answer:DExplanation:A)B)C)D)47)Wealth maximization as the goal of the firm implies enhancing the wealth of47)A)the federal government.B)the Board of Directors.C)the firm's employees.D)the firm's stockholders.Answer:DExplanation:A)B)C)D)11

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48)One key output of the financial forecasting process are:48)A)the amount of funds the company required to operate over the past fiscal periodB)the past financialstatementsC)the forecasted financial statementsD)the current financial statementsAnswer:CExplanation:A)B)C)D)49)The ________ has/have the ultimate responsibility in guiding corporate affairs and carrying outpolicies.49)A)chief executive officerB)creditorsC)stockholdersD)board of directorsAnswer:DExplanation:A)B)C)D)50)Making investment decisions includes all of the following EXCEPT50)A)machinery.B)notes payable.C)inventory.D)buildings.Answer:BExplanation:A)B)C)D)51)The part of finance concerned with the design and delivery of advice and financial products toindividuals, businesses, and government is called51)A)financial manager.B)managerial finance.C)financial services.D)none of the above.Answer:CExplanation:A)B)C)D)52)When determining a firm's level of net income, accountants use52)A)cash flows.B)static based amounts.C)the actual dollars coming in and going out.D)accrual based amounts.Answer:DExplanation:A)B)C)D)12

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53)Which of the following risk-return statements is true?53)A)rational investors require a lower return for exposing themselves to riskB)an investment in a Government of Canada bond is more risky than an investment in apublicly traded company, such as Nortel NetworksC)in order to increase the return expected from any kind of investment, we must increase ourexposure to riskD)all of the above are trueAnswer:CExplanation:A)B)C)D)54)A more recent issue that is causing major problems in the business community is54)A)ethical problems.B)the privatization of ownership.C)environmental concerns.D)short-term versus long-term financial goals of management.Answer:AExplanation:A)B)C)D)55)Making financing decisions includes all of the following EXCEPT55)A)determining the appropriate mix of short-term and long-term financing.B)deciding which individual long-term sources are best at a given point in time.C)deciding which individual short-term sources are best at a given point in time.D)analyzing quarterly budget and performance reports.Answer:DExplanation:A)B)C)D)56)Profit maximization as the goal of the firm is NOT ideal because56)A)profits today are less desirable than profits earned in future years.B)profit maximization does not consider risk.C)cash flows are more representative of financial strength.D)profits are only accounting measures.Answer:BExplanation:A)B)C)D)13

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57)________ is concerned with the duties of the financial manager in the business firm.57)A)Managerial FinanceB)Financial ServicesC)The Financial ManagerD)None of the aboveAnswer:AExplanation:A)B)C)D)58)Financial managers evaluating decision alternatives or potential actions must consider58)A)only risk.B)both risk and return.C)only return.D)risk, return, and the impact on share price.Answer:DExplanation:A)B)C)D)59)By concentrating on cash flows within the firm the financial manager should be able to59)A)speak authoritatively to stockholders.B)control expenses.C)prepare tax returns.D)avoid insolvency.Answer:DExplanation:A)B)C)D)60)A firm has just ended its calendar year making a sale in the amount of $150,000 of merchandisepurchased during the year at a total cost of $112,500. Although the firm paid in full for themerchandise during the year, it has yet to collect at year end from the customer. The net profit andcash flow from this sale for the year are60)A)$37,500 and-$112,500 respectively.B)$150,000 and $112,500 respectively.C)$37,500 and-$150,000 respectively.D)$0 and $150,000 respectively.Answer:AExplanation:A)B)C)D)61)Generally, the Treasurer of a large corporation reports to the61)A)General Manager.B)Chief Executive Officer.C)Chief Financial Officer.D)Credit Manager.Answer:CExplanation:A)B)C)D)14

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62)Which of the following is an investing decision?62)A)the decision of how many employees to utilize over the slowdown seasonB)the decision on how much cash to keep on hand for precautionary purposesC)the decision on how to price a new issue of preferred stockD)the decision on which technology to adopt for the firm's production needsAnswer:DExplanation:A)B)C)D)63)As a sole proprietor, you are responsible for63)A)the day-to-day management of the business including customer service.B)maintaining financial records and reporting to the government.C)marketing the business to the target market.D)all of the above.Answer:DExplanation:A)B)C)D)64)A firm has just ended its calendar year making a sale in the amount of $200,000 of merchandisepurchased during the year at a total cost of $150,500. Although the firm paid in full for themerchandise during the year, it has yet to collect at year end from the customer. The possibleproblem this firm may face is64)A)high leverage.B)lack of cash flow.C)inability to receive credit.D)low profitability.Answer:BExplanation:A)B)C)D)65)Hardwood Furniture Limited sold $1,225,000 worth of tables, chairs and other furniture last year.During that time period, the company collected $975,755 for those items and paid $407,844 for thematerials used in producing the furniture they sold. What was Hardwood's net profit for last year?65)A)$1,225,000B)$567,911C)$975,755D)$817,156Answer:DExplanation:A)B)C)D)15

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