Test Bank for Fundamentals of Corporate Finance, 4th Edition

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1Fundamentals of Corporate Finance, 4e(Berk/DeMarzo/Harford)Chapter 1Corporate Finance and the Financial Manager1.1Why Study Finance?1) The Valuation Principle shows how to make the costs and benefits of a decision comparable so that wecan evaluate them properly.Answer: TRUEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition2) Financial decisions require that you weigh alternatives in strictly monetary terms.Answer: FALSEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised3) Which of the following best describes why the Valuation Principle is a key concept in making financialdecisions?A) It shows how to assign monetary value to intangibles such as good health and well-being.B) It allows fixed assets and liquid assets to be valued correctly.C) It gives a good indication of the net worth of a person, item, or company and can be used to estimateany changes in that net worth.D) It shows how to make the costs and benefits of a decision comparable so that we can weigh themproperly.Answer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition1.2The Four Types of Firms1) Partnerships are the most common type of business firm in the world.Answer: FALSEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

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22) Corporations have come to dominate the business world through their ability to raise large amounts ofcapital by sale of ownership shares to anonymous outside investors.Answer: TRUEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised3) Which of the following types of firms does NOT have limited liability?A) sole proprietorshipsB) limited partnershipsC) corporationsD) none of the aboveAnswer: ADiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised4) Over four-fifths of all U.S. business revenue is generated by which type of firm?A) sole proprietorshipsB) partnershipsC) limited partnershipsD) corporationsAnswer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised5) What is the most common type of firm in the United States and the world?A) sole proprietorshipsB) partnershipsC) limited partnershipsD) corporationsAnswer: ADiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

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36) Which of the following is typically the major factor in limiting the growth of sole proprietorships?A) The organizational structure of such firms tends to become extremely complicated over time.B) It is extremely difficult to transfer control of such firms to a new owner if the present owner dies orwishes to sell the firm.C) The amount of money that can be raised by such firms is limited by the fact that the single owner mustmake good on all debts.D) Investors have a great deal of control over the day-to-day running of such firms, leading to confusionwhen conflicts in direction arise.Answer: CDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised7) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm.Which of the following statements regarding their respective relationships to the firm is correct?A) Joe has no management authority within the partnership.B) Jane is legally involved in the managerial decision making of the firm.C) Jane's liability for the firm's debts consists solely of her investment in the firm.D) Withdrawal of Jane from the partnership will dissolve the partnership.Answer: CDiff: 1Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Revised8) What is the major way in which the roles and obligations of the owners of a limited liability companydiffer from the roles and obligations of limited partners in a limited partnership?A) The owners of a limited liability company have personal obligation for debts incurred by thecompany.B) There is no separation between the company and its owners in a limited liability company.C) The owners of a limited liability company can withdraw from the company without the companybeing dissolved.D) The owners of a limited liability company can take an active role in running the company.Answer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

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49) In which of the following ways is a limited liability company like a corporation?A) It was created and developed first in the United States.B) It can choose to be considered a partnership for tax purposes.C) Its owners' liability is restricted to their investment.D) It is directly managed by the owners.Answer: CDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised10) Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoyprotection against the seizure of its property?A) The number of owners, and hence the spread of risk among these owners, is not limited.B) Its owners are liable for any obligations it enters into.C) The state in which a corporation is incorporated provides safeguards against any wrongdoing by thecorporation.D) It is a legally defined, artificial entity that is separate from its owners.Answer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised11) Which of the following features of a corporation is LEAST accurate?A) The owners' identities are separate from a corporation.B) The owners of a corporation are not liable for any obligations the corporation enters into.C) Changes in ownership do not result in the dissolution of the corporation.D) Earnings from a corporation are taxed only once.Answer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised12) What is the major advantage corporations have over other business entities?A) It is easier for a corporation to raise capital than other forms of businesses.B) A corporation is treated as a separate legal entity for tax and legal purposes.C) A corporation's shares can be freely traded among its shareholders.D) All of the above are advantages that a corporation has over other business forms.Answer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

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513) Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend payment of$25,000,000 paid proportionally to its shareholders, how much of this amount would Helen receive,disregarding tax?A) $3,060,000B) $2,550,000C) $3,570,000D) $2,040,000Answer: BExplanation: B) Helen will receive ownership dividend payment proportional to her ownership of 10.2%:Diff: 2Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition14) Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp.retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments.If the corporate tax rate was 35% and dividend earnings were taxed at 12.5%, what was the value of thedividend earnings received after-tax by a holder of 100,000 shares of Valiant Corp.?A) $105,875B) $127,050C) $148,225D) $84,700Answer: AExplanation: A) Corporate tax paid on $3.4 earnings = $3.4 × 0.35 = 1.190; earnings after-earnings distributed astaxes paid ondividends by aafter-tax dividends perhence a holder of 100,000 shares receivesDiff: 2Var: 22Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Revised15) Which of the following is unique for an S corporation?A) The profits and losses of an S corporation are not taxed at the corporate level, but shareholders mustinclude these profits and losses on their individual tax returns.B) The shareholders of an S corporation must include the firm's profit and losses in their individualincome taxes even if no money is distributed to them.C) There is a maximum limit on the number of shareholders for an S corporation.D) None of the above statements is unique.Answer: DDiff: 3Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised16) You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation

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6announces a profit of $6 per share, of which it retains $1 for reinvestment and distributes the rest asdividend payments. Given that the personal tax rate is 35%, how much tax must you pay per share?A) $0B) $2.10C) $1.75D) $2.52Answer: CExplanation: C) Tax paid by shareholder of SDiff: 2Var: 8Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Revised17) A C corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the personal tax rateon dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amountof taxes paid if the company pays a $6.00 dividend?A) $3.31B) $4.96C) $4.14D) $5.79Answer: CExplanation: C) Corporate tax = $8.30 × 39% = $3.24,Diff: 2Var: 50+Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: New18) An S corporation earns $9.10 per share before taxes. The corporate tax rate is 39%, the personal taxrate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the totalamount of taxes paid if the company pays a $5.00 dividend?A) $3.28B) $3.93C) $2.62D) $4.59Answer: AExplanation: A) $9.10 × 36% = $3.28Diff: 2Var: 50+Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: New

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719) A C corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00 pershare. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rateon non-dividend income is 36%. What is the after-tax amount an individual would receive from thedividend?A) $2.72B) $4.08C) $4.76D) $3.40Answer: DExplanation: D) Personal tax = $4 × 15% = $0.60.Diff: 2Var: 50+Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: Revised20) A C corporation earns $4.30 per share before taxes. The corporate tax rate is 35%, the personal tax rateon dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amountof taxes paid if the company pays a $3.00 dividend?A) $1.68B) $2.53C) $2.11D) $2.95Answer: CExplanation: C) Corporate tax = $4.30 × 35% = $1.51,Diff: 2Var: 50+Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: New21) An S corporation earns $6.00 per share before taxes. The corporate tax rate is 35%, the personal taxrate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the totalamount of taxes paid if the company pays a $2.00 dividend?A) $1.87B) $2.81C) $3.28D) $2.34Answer: DExplanation: D) $6.00 × 39% = $2.34Diff: 2Var: 50+Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: New

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822) Which of the following people may not manage the operations of a firm in which they are part or fullowners?A) stockholders in S corporationsB) stockholders in C corporationsC) limited partners in a limited partnershipD) general partners in a limited partnershipAnswer: CDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition23) What is the process of double taxation for the stockholders in a C corporation?A) Their shares are taxed when they are both bought and sold.B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit isdistributed to them.C) The owners of a corporation are taxed when they receive dividend payments and when they make aprofit from the sale of shares.D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares isalso subject to taxation.Answer: BDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition24) A sole proprietorship is owned by ________.A) one personB) two or more personsC) shareholdersD) bankersAnswer: ADiff: 1Var: 1Skill: DefinitionAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised25) Which of the following types of firms generate the most revenue in the United States?A) S corporationB) limited partnershipC) C corporationD) limited liability companyAnswer: CDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Previous Edition

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926) Which of the following is NOT an advantage of a sole proprietorship?A) single taxationB) ease of setupC) unlimited liabilityD) no separation of ownership and controlAnswer: CDiff: 2Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised27) A limited liability company is essentially ________.A) a limited partnership without limited partnersB) a limited partnership without a general partnerC) just another name for a limited partnershipD) just another name for a corporationAnswer: BDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised28) What are the main differences between a partnership and a sole proprietorship?Answer: A sole proprietorship is a business owned and run by a single person, while a partnership is abusiness owned and run by more than one owner. Each partner is responsible for his or her own decisionas well as any decisions by the other partners.Diff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Revised29) What are the main differences between a limited partnership and a limited liability corporation?Answer: A limited partnership is required to have at least one general partner. A limited liabilitycorporation is similar to a limited partnership but without the general partner. An LLC also allows allowners, unlike limited partners in an LP, to run the business.Diff: 2Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Revised

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1030) How is a corporation different from most of the other forms of business organizations?Answer: A corporation has a separate legal identity from those of its owners. This separation gives theowners limited liability for the actions of the corporation. The down side is that each dollar earned by thecorporation is taxed twice, once when it is earned by the corporation and subsequently when it is passedon to the owners.Diff: 2Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Revised1.3The Financial Manager1) The principal goal of a financial manager is to maximize the wealth of the stockholders.Answer: TRUEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised2) It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.Answer: FALSEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition3) Which of the following is a major duty of a financial manager?I.To make investment decisionsII.To make financing decisionsIII. To manage cash flow from operating activitiesA) I onlyB) I and II onlyC) I and III onlyD) all of the aboveAnswer: DDiff: 3Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

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114) Why in general do financial managers make financial decisions in a corporation, rather than theowners making these decisions themselves?A) It is best for the control of the finances of a corporation to be in the hands of a disinterested thirdparty.B) The interests of the various owners may conflict with each other.C) The owners may not be U.S. citizens or residents.D) There are often many owners, and they can often change as they buy and sell stock.Answer: DDiff: 2Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition5) What is the most important duty of a firm's financial officer?A) to ensure that the firm has enough cash on hand to meet its commitments at any given timeB) to decide how to pay for investmentsC) to manage working capitalD) to make investment decisionsAnswer: DDiff: 2Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised6) The financial manager of a well-regarded book publishing firm wishes to buy a small Internetpublishing company to provide an avenue for sale of its materials online. In order to raise the funds tomake this purchase, the financial manager decides to sell more stock in the company. How is the financialmanager raising funds in this case?A) by increasing the debt burden carried by the companyB) by raising the company's equity by encouraging new owners to take a stake in the companyC) by decreasing the ratio of equity to debt held by the companyD) by increasing the value of shares held by the existing owners of the companyAnswer: BDiff: 1Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Previous Edition

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127) Which of the following is NOT a reason why a firm's financial managers must take great care whenmaking investment decisions?A) These investment decisions determine whether the firm will add value for its owners.B) These investments determine the long-term directions in which the company may move.C) These investment decisions determine the corporation's mix of debt and equity.D) These investment decisions typically involve substantial costs which must be carefully weighedagainst their potential benefits.Answer: CDiff: 2Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised8) A company that produces racing motorbikes has several models that sell well within the motorcycleracing community and which are very profitable for the company. Despite having a profitable product,why must this company take care to ensure that it has sufficient cash on hand to meet its obligations?A) Profits from the sales of popular models will be lost when returned to the shareholders in the form ofdividends.B) New models will require a lot of money to develop and bring to market before they generate anyrevenue.C) The company will have built up debts which must be repaid in order to bring the current models tomarket.D) Equity must be raised to finance the development of new models to replace the existing models.Answer: BDiff: 1Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Previous Edition9) A typical company has many types of shareholders, from individuals holding a few shares, to largeinstitutions that hold very large numbers of shares. How does a financial manager ensure that thepriorities and concerns of such disparate stockholders are met?A) The financial manager should seek to make investments that do not harm the interests of thestockholders.B) The decisions taken by the financial manager should be solely influenced by the benefit to thecompany since, by maximizing its fitness, he or she will also maximize the benefits of that company to theshareholders.C) The financial manager should consider the interests and concerns of large shareholders a priority sothe needs of those who hold a controlling interest in the company are met.D) In general, all shareholders will agree that they are better off if the financial manager works tomaximize the value of their investment.Answer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Previous Edition

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1310) Whose interests should a financial manager consider paramount when making a decision?A) the stockholders who have risked their money to become owners of the companyB) the employees and associated stakeholders who are employed by the companyC) the public who consume the company's goods and servicesD) the senior management and associated colleagues at the executive level within the companyAnswer: ADiff: 1Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: DSQuestion Status: Previous Edition11) What is the principal guiding factor for the financial manager of a firm?Answer: Maximizing stockholder wealth is the principal guiding factor for a firm's financial manager.Diff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Previous Edition1.4The Financial Manager's Place in the Corporation1) In most corporations, the owners exercise direct control of a corporation.Answer: FALSEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised2) The fact that corporations' shares are easily traded within the market has a net effect of acting as adisincentive for managers to favor the interests of shareholders over their own interests.Answer: FALSEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition3) How do the shareholders of most corporations exercise their control of that corporation?A) by voting on issues that concern themB) by electing members of a board of directorsC) by vetting the decisions of the board of directorsD) by providing oversight of the day-to-day running of the corporationAnswer: BDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

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144) Which of the following is NOT a function of the board of directors?A) determining how top executives should be compensatedB) monitoring the performance of the companyC) answering to shareholders of the companyD) day-to-day running of the companyAnswer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised5) In most corporations, to whom does the chief financial officer report?A) shareholdersB) the board of directorsC) the chief executive officerD) the controllerAnswer: CDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised6) Which of the following would be more typically the responsibility of a controller rather than atreasurer?A) overseeing accounting and tax functionsB) capital budgetingC) managing creditD) making investment decisionsAnswer: ADiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

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157) Which of the following would be best considered to be an agency conflict problem in the behavior ofthe following financial managers?A) Bill chooses to pursue a risky investment for the company's funds because his compensation willsubstantially rise if it succeeds.B) Sue instructs her staff to skip safety inspections in one of the company's factories, knowing that it willlikely fail the inspection and incur significant costs to fix.C) James ignores an opportunity for his company to invest in a new drug to fight Alzheimer's disease,judging the drug's chances of succeeding as low.D) Michael chooses to enhance his firm's reputation at some cost to its shareholders by sponsoring a teamof athletes for the Olympics.Answer: ADiff: 3Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: DSQuestion Status: Revised8) A factory owner wants his workers to produce as many widgets as they can so he pays his workersbased on how many widgets they produce. However, in order to make sure that the workers do not rushand produce a large number of poorly made widgets, he checks the widgets at random during variousstages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factoryresponsible for that defect is docked. How is this factory owner seeking to solve the agency conflictproblem in this case?A) by supplying incentives so the agents act in the way principal desiresB) by ensuring that all workers co-operate to maximize the gains of their sectionC) by making the agents into principals themselvesD) by maximizing the information that the principal obtains about the behavior of the agentsAnswer: ADiff: 1Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: DSQuestion Status: Previous Edition9) In which of the following relationships is an agency conflict problem LEAST likely to arise?A) the relationship between a hire-car company and the persons who hire that company's cars regardingthe treatment of those carsB) the relationship between high-level military officers and the soldiers who serve under them regardingthe willingness of the soldiery to take risksC) the relationship between a restaurateur and the suppliers of produce to that restaurant regarding thefreshness of the produce suppliedD) the relationship between a driver and the passengers in a car regarding the safe driving of that carAnswer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: DSQuestion Status: Revised

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1610) What is the most common way that agency conflict problems are addressed in most corporations?A) by minimizing the number of decisions that a manager makes where there is a conflict between themanagers interests and those of the shareholdersB) by terminating the employment of employees who are found to have put their own interests abovethose of the companyC) by using disinterested outside bodies to adjudicate between managers and shareholders when suchconflicts ariseD) by prosecuting managers who have been found to have illegally used company moneys for their ownbenefitAnswer: ADiff: 1Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: DSQuestion Status: Previous Edition11) A company's board of directors chooses to provide a comprehensive health care plan for the familiesof all employees, despite the large cost. They argue that this will not only increase the number ofemployees who stay with the firm, and thus reduce some costs involved in employee turnover, but alsoincrease the employees' diligence and industry. What general principle is being argued by the board ofdirectors?A) In a conflict between stakeholders in a company, the most important stakeholder is not always thestockholders.B) Some activities that decrease shareholders' wealth may have intangible benefits which increase thestrength of the company overall.C) When a conflict of interest arises between shareholders and other stakeholders, in general, the correctsolution is the one that creates the greatest good for the greatest number of stakeholders.D) Ethical decisions should be assessed on their moral value, not on their value in dollars and cents.Answer: BDiff: 1Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: DSQuestion Status: Previous Edition12) Why is the stock price of a company an indication of the performance of the company's seniormanagers?A) Well-run companies are invariably highly profitable, which leads to a higher share price.B) In general, people want to invest in a well-managed corporation, which will drive up the price ofshares.C) Investors who can see that a company is well-run will hold on to their shares, even if the companyfaces setbacks, since they know that the stock price will likely rise again.D) Larger companies tend to be better run and so have higher stock prices.Answer: BDiff: 1Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Revised

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1713) A corporate raider gains a controlling fraction of the shares of a poorly managed company andreplaces the board of directors. How does the corporate raider hope to make a profit in this case?A) by the sale of the assets held by the company that hold most of its valueB) by the rise in the value of the stock held by the raider when the new board of directors is judged to besuperior to the ousted board of directorsC) by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the companyD) by removing the employees expectations of the continued poor performance of the companyAnswer: BDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition14) A ________ is when a rich individual or organization purchases a large fraction of the stock of apoorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.A) shareholder proposalB) leveraged buyoutC) shareholder actionD) hostile takeoverAnswer: DDiff: 2Var: 1Skill: DefinitionAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised15) Briefly discuss the issues in the agency conflict problem.Answer: The agency conflict problem arises out of the principal-agent relationship existing between theshareholders and managers of a corporation. Although managers are required to put the shareholders'interests ahead of their own, in practice they tend to put their own interest ahead of the shareholders'interests.Diff: 2Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: SSQuestion Status: Revised16) Explain some of the measures taken to reduce the agency conflict problem.Answer: The agency conflict problem can be reduced by taking measures that align the managersinterests with those of the shareholders. For example, incentive-based compensation, such as employeestock options, helps align the interests of these two constituents.Diff: 2Var: 1Skill: AnalyticalAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: SSQuestion Status: Revised

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181.5The Stock Market1) The shares of private corporations are traded on a stock market.Answer: FALSEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition2) Stock markets provide liquidity for a firm's shares.Answer: TRUEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition3) If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be$3.85.Answer: FALSEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: WCQuestion Status: New4) Which of the following should be true for an asset to be considered liquid?A) It pays regular dividends.B) It can be bought and sold at an organized stock market or bourse.C) It is offered for sale on both primary and secondary markets.D) It can be easily bought and sold and the selling price is very close to the buying price at a given pointin time.Answer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised5) Why is it difficult to determine the market price of a private corporation's shares at any point in time?A) It is difficult to obtain enough information to accurately value such a company.B) The price of its shares is fixed by the owners.C) It has a limited number of owners.D) There is no organized market for its shares.Answer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

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196) Which of the stock markets listed below is the smallest, as judged by trading volume?A) Deutsche BörseB) London Stock ExchangeC) NASDAQD) NYSE Euronext (US)Answer: ADiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised7) Why is a stock exchange like NASDAQ considered a secondary market?A) It trades the second largest volume of shares in the world.B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation.C) The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart.D) NASDAQ is called a secondary market because NYSE is considered a primary market.Answer: BDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition8) On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which weresold in an online auction in a bid to make the shares more widely available. Which of the followingstatements best describes why these are considered a primary market transaction?A) The transaction was between the corporation and investors.B) Shares of Google from this time onward could be traded between investors on a stock exchange.C) The shares were the first to be privately issued by Google.D) Google was at the time a recently founded company seeking capital with which to expand.Answer: ADiff: 1Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Revised

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209) What is the bid-ask spread?A) the difference in price available for an immediate sale of a stock and the immediate purchase of thestockB) all of the costs and fees that a stock exchange charges in order to process a transactionC) the rise or fall in the value of a stock between the time it is acquired by an investor and sold by thatinvestorD) the difference in the selling price of a stock between different exchangesAnswer: ADiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised10) Stella places a market order with her broker to buy 1,000 shares of OneWorld Corp. The broker buys1,000 shares at $16.00 each, and sells them to Stella at $16.15 each. He also charges a commission of $12.00.What is the total dollar amount spent towards the bid-ask spread in this case?A) $162B) $120C) $210.00D) $150Answer: DExplanation: D) (16.15 - 16.00) × 1,000 = $150Diff: 2Var: 33Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised11) Which of the following is a measure of the aggregate price level of collections of pre-selected stocks?A) NASDAQB) S&P 500C) NYSED) EuronextAnswer: BDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

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21Use the figure for the question(s) below.12) Using the above information, how much would you pay for a share of BHP Billiton stock?A) $41.91B) $41.93C) $41.65D) $41.59Answer: BDiff: 1Var: 1Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

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22Use the figure for the question(s) below.13) Using the above information, how much would you receive if you sold a share of Washington Poststock?A) $683.00B) $677.62C) $678.50D) $677.64Answer: BDiff: 1Var: 1Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

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23Use the figure for the question(s) below.14) Based on the information shown above, what would it cost to buy 1,000 shares of the above stock?A) $91,110B) $91,300C) $91,320D) $91,650Answer: DDiff: 1Var: 1Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

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24Use the figure for the question(s) below.15) Based on the information shown above, how much would you receive from selling 2,000 shares of theabove stock?A) €40,840B) €40,740C) €41,000D) €42,560Answer: BDiff: 1Var: 1Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

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25Use the figure for the question(s) below.16) What is the bid-ask spread on the stock shown above?A) 1 centB) 3 centsC) 6 centsD) 12 centsAnswer: BDiff: 1Var: 1Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

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26Use the figure for the question(s) below.17) How much money would a stock exchange make from buying and selling 500 shares of the stockunder the conditions shown above?A) $250B) $3,000C) $5,875D) $210,375Answer: AExplanation: A) (421.25 - 420.75) × 500 = $250Diff: 2Var: 1Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised18) What are the terms for the two types of prices quoted for a stock on an exchange?Answer: The two quotes associated with a stock quoted on the exchange are bid price and ask price.Diff: 2Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Previous Edition19) What is the general relation of the two types of prices quoted for a stock on a exchange?Answer: The two prices are bid price and ask price. The ask price is higher than the bid price to deter abuyer from buying a stock and selling it back immediately, assuming everything else remains unchanged.Diff: 2Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Revised

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2720) What is the term for the applicable price that I will pay, if I have to buy a stock?Answer: The buyer of a stock pays the ask price when he buys the stock.Diff: 2Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Previous Edition21) What is the term for the applicable price that the seller gets when he sells a stock on the exchange?Answer: The seller gets the bid price when he sells a stock on the exchange.Diff: 2Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Previous Edition22) What are the main differences between the NYSE and NASDAQ stock markets?Answer: The NYSE has a physical location, a geographical address where traders gather to trade, butNASDAQ is an electronic market. Moreover, while the NYSE has one specialist in each stock, NASDAQhas multiple market makers serving the functions of both matching buyers and sellers and trading ontheir own account.Diff: 2Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Previous Edition1.6Financial Institutions1) Raising new capital by issuing bonds is an example of a commercial banking activity.Answer: FALSEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: WCQuestion Status: New2) Put the following steps of the financial cycle in the correct order.I.Money flows to companies who use it to fund growth through new products.II.People invest and save their money.III.Money flows back to savers and investors.A) I, II, and IIIB) II, I, and IIIC) III, II, and ID) II, III, and IAnswer: BDiff: 1Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: Revised

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283) Investments by wealthy individuals and endowments is a major source of money for each of thefollowing EXCEPT ________.A) private equity fundsB) hedge fundsC) venture capital fundsD) mutual fundsAnswer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: WCQuestion Status: New4) Which of the following is NOT a role of financial institutions?A) moving funds from savers to borrowersB) spreading out risk-bearingC) printing money for borrowersD) moving funds though timeAnswer: CDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: WCQuestion Status: Revised

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1Fundamentals of Corporate Finance, 4e(Berk/DeMarzo/Harford)Chapter 2Introduction to Financial Statement Analysis2.1Firms' Disclosure of Financial Information1) In the United States, publicly traded companies can choose whether or not they wish to releaseperiodic financial statements.Answer: FALSEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition2) Financial statementsare optional accounting reports issued periodically by a firm which presentinformation on the past performance of the firm, a summary of the firm's assets and the financing of thoseassets, and a prediction of the firm's future performance.Answer: FALSEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised3) International Financial Reporting Standards are taking root throughout the world. However, it isunlikely that the U.S. will report according to IFRS before the second half of the twenty-first century.Answer: FALSEDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JPQuestion Status: New4) What is the main reason that it is necessary for public companies to follow the rules and format set outin the Generally Accepted Accounting Principles (GAAP)when creating financial statements?A) It ensures that the market value of assets and debt are reported accurately.B) It ensures that information on the performance of public companies is reported on cash-basisaccounting.C) It ensures that important budgetary information is not omitted.D) It makes it easier to compare the financial results of different firms.Answer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

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25) Which of the following best describes why a firm produces financial statements?A) to use as a tool when planning future investments within a firmB) to increase the intrinsic value of a firmC) to provide a means for interested outside parties such as creditors to obtain information about a firm,with an overview of the short- and long-term financial condition of a businessD) to show the daily activities a firm has undertaken in the previous financial year, and what activitiesare planned for the near futureAnswer: CDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised6) The exchanges in which of the following countries or regions do NOT accept the InternationalFinancial Reporting Standards set out by the International Accounting Standards Board?A) GermanyB) FranceC) United StatesD) United KingdomAnswer: CDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition7) Which of the following is NOT one of the financial statements that must be produced by a publiccompany?A) the balance sheetB) the income statementC) the statement of cash flowsD) the statement of activitiesAnswer: DDiff: 1Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

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