1. One of the tasks for financial managers when identifying projects that increase firm value is to identify
those projects where
a. benefits are at least equal to the project’s costs.
b. taking the project will increase the book value of the firm’s common stock.
c. taking the project will decrease the book value of the firm’s debt outstanding.
d. none of the above
ANS: A PTS: 1 DIF: E
REF: 1.1 The Role of Corporate Finance in Modern Business NAT: Reflective thinking
LOC: create a finance application in a computer spreadsheet and as an analyst using public
information
2. Which finance career classification involves analyzing a firm’s business processes and strategies as
well as recommending a change in practice in order to make a firm more competitive?
a. corporate finance
b. commercial banking
c. investment banking
d. consulting
ANS: D PTS: 1 DIF: M
REF: 1.1 Career Opportunities in Finance NAT: Reflective thinking
LOC: understand the role of the finance function in the enterprise
3. If you would like to work in finance by trading debt and equity securities for customers, then which
finance career classification should you target?
a. corporate finance
b. commercial banking
c. investment banking
d. money management
ANS: C PTS: 1 DIF: M REF: 1.1 Investment Banking
NAT: Reflective thinking
LOC: understand the role of the finance function in the enterprise
4. Which form of invested capital is subject to most of the firm’s business and financial risk?
a. debt capital
b. equity capital
c. borrowed capital
d. intellectual capital
ANS: B PTS: 1 DIF: E REF: 1.2 Debt and Equity
NAT: Reflective thinking LOC: understand stocks and bonds
5. Which of the following is not a true capital-raising event for the firm?
a. primary market transaction
b. secondary market transaction
c. initial public offering
d. a corporate loan from a bank
ANS: B PTS: 1 DIF: E
, REF: 1.2 The Growing Importance of Financial Markets NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates
6. Which of the following is not one of the five basic corporate finance functions?
a. external financing function
b. capital budgeting function
c. risk management
d. auditing
ANS: D PTS: 1 DIF: M
REF: 1.2 The Five Basic Corporate Finance Functions NAT: Reflective thinking
LOC: understand the role of the finance function in the enterprise
7. William and Theodore have decided to start a travel business called Excellent Adventures. Since their
business primarily involves time-travel their clients may be harmed during a small but significant
portion of the travels. Consequently, William and Theodore would like a business form that will shield
their personal wealth from any legal claims that the firm might be subject to after one of the travel
mishaps. If William and Theodore are the only investors in this U.S. domiciled firm, which legal form
of organization would be best for Excellent Adventures to protect both William and Theodore?
a. sole proprietorship
b. partnership
c. limited partnership
d. corporation
ANS: D
sole proprietorship - not possible with 2 owners
partnership - has joint and several liability that will not help the owners
limited partnership - one partner must be the general partner and consequently could not protect both
owners
corporation - has limited liability
PTS: 1 DIF: H REF: 1.3 Legal Forms of Business Organizations
NAT: Reflective thinking
LOC: understand the role of the finance function in the enterprise
8. Within a limited partnership context, what are the conditions on a limited partner?
a. There is a limit to the amount of capital that a limited partner can contribute, as mandated
by law.
b. There is a limit to the number of limited partners that the firm may take on as investors.
c. The limited partner must remain a low level employee and cannot ever serve in a
managerial role in the firm.
d. A limited partner may not take any active role in the operation of the business.
ANS: D PTS: 1 DIF: H
REF: 1.3 Legal Forms of Business Organizations | 1.3 Partnerships
NAT: Reflective thinking
LOC: understand the role of the finance function in the enterprise
9. The rules dictating voting procedures and other aspects of corporate governance for a corporation are
a. the minutes of the board of directors meeting.
b. the corporate charter.
c. the Institute for Corporate Governance corporate governance procedures.
d. the Securities and Exchange Commission rules for corporate governance.
ANS: B PTS: 1 DIF: M
, REF: 1.3 Legal Forms of Business Organizations | 1.3 Corporations
NAT: Reflective thinking LOC: understand stocks and bonds
10. The ultimate owner(s) of an ongoing corporation are
a. the federal government.
b. the debt holders.
c. the equity holders.
d. the executive staff of the corporation.
ANS: C PTS: 1 DIF: E
REF: 1.3 Legal Forms of Business Organizations | 1.3 Corporations
NAT: Reflective thinking LOC: understand stocks and bonds
11. Agency costs refer to
a. the costs associated with managing the demands of federal agencies.
b. the costs involved when converting an entity from a proprietorship to a corporation.
c. the costs that arise due to conflicts of interest between shareholders and managers.
d. none of the above.
ANS: C PTS: 1 DIF: E
REF: 1.3 Corporations | 1.4 Agency Cost Definition NAT: Reflective thinking
LOC: understand stocks and bonds
12. Since the Tax Relief Act of 2003, if a corporation has pre-tax earnings of $110,000 while the
corporation is subject to a 35% income tax rate and an investor is subject to a 35% personal tax rate
and a 15% capital gains tax rate, then what is the after-tax income that the investor could capture if all
of the firm’s earnings are paid out in dividends?
a. $93,500
b. $71,500
c. $60,775
d. $46,475
ANS: C
$110,000*.65*.85 = $60,775
PTS: 1 DIF: M REF: 1.3 Corporations
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
13. Since the Tax Relief Act of 2003, if a corporation or partnership has pre-tax earnings of $110,000
while the corporation is subject to a 35% income tax rate and an investor is subject to a 35% personal
tax rate and a 15% capital gains tax rate, then what is the advantage to being a partnership (compared
to a corporation) if all of the proceeds are paid out to investors in either legal form?
a. ($22,500)
b. $0
c. $10,725
d. $24,725
ANS: C
Partnership: $110,000 * .65 = $71,500
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