Test Bank for Fundamentals of Corporate Finance, 6th Edition by Robert Parrino

Test Bank to accompany Parrino,
Fundamentals of Corporate Finance, 6e
Chapter 1: The Financial Manager and the Firm

1) What is the primary responsibility of a financial manager?

A) To make decisions that benefit the firm’s suppliers
B) To make decisions in the best interest of the shareholders
C) To ensure that the firm minimizes taxes
D) To prioritize short-term profits over long-term growth

Answer: B

Difficulty: Easy
Learning Objective: LO 1.1 Identify the key financial decisions facing the financial manager of
any business.
Section: 1.1 The Role of the Financial Manager
Bloom code: Remember
AACSB: Analytic
IMA: FSA
AICPA: Process and Resource Management Perspectives

2) Which of the following is considered an intangible productive asset?

A) Manufacturing equipment
B) Cash
C) A Patent
D) An Office building

Answer: C

Difficulty: Easy
Learning Objective: LO 1.1 Identify the key financial decisions facing the financial manager of
any business.
Section: 1.1 The Role of the Financial Manager
Bloom code: Remember
AACSB: Analytic
IMA: Business Economics
AICPA: Global and Industry Perspectives


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,3) Which of the following accurately reflects the relationship between productive assets and cash
flows in a manufacturing firm?

A) Intangible assets typically account for the majority of cash flows generated by a
manufacturing firm.
B) Productive assets, including both tangible and intangible assets, are essential for generating
cash flows for a manufacturing firm.
C) The cash flows of a manufacturing firm are primarily derived from its operational expenses
rather than its assets.
D) Manufacturing firms rely solely on tangible assets to produce cash flows.

Answer: B

Difficulty: Medium
Learning Objective: LO 1.1 Identify the key financial decisions facing the financial manager of
any business.
Section: 1.1 The Role of the Financial Manager
Bloom code: Apply
AACSB: Analytic
IMA: Corporate Finance
AICPA: Process and Resource Management Perspectives

4) To foster long-term growth, businesses should focus on which of the following strategies?

A) Reinvesting their cash flows or earnings back into the business.
B) Paying out all profits as dividends to shareholders.
C) Limiting investments to only high-risk ventures.
D) Minimizing reinvestment in new projects.

Answer: A

Difficulty: Easy
Learning Objective: LO 1.1 Identify the key financial decisions facing the financial manager of
any business.
Section: 1.1 The Role of the Financial Manager
Bloom code: Remember
AACSB: Analytic
IMA: FSA
AICPA: Process and Resource Management Perspectives

5) In the event of bankruptcy, what is the likely process regarding a company's assets?

A) The assets are always liquidated without exception.
B) The company will only be reorganized, not liquidated.
C) The company may be reorganized or liquidated.
D) All assets will be distributed equally among owners and creditors.

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,Answer: C

Difficulty: Medium
Learning Objective: LO 1.1 Identify the key financial decisions facing the financial manager of
any business.
Section: 1.1 The Role of the Financial Manager
Bloom code: Apply
AACSB: Analytic
IMA: Corporate Finance
AICPA: Resource Management

6) What is a key characteristic of capital assets?

A) They are purchased primarily for resale within one year.
B) They are intended for long-term use in generating revenues.
C) They must be liquidated quickly to meet financial obligations.
D) They include only intangible assets.

Answer: B

Difficulty: Easy
Learning Objective: LO 1.1 Identify the key financial decisions facing the financial manager of
any business.
Section: 1.1 The Role of the Financial Manager
Bloom code: Remember
AACSB: Analytic
IMA: Corporate Finance
AICPA: Process and Resource Management Perspectives

7) In capital budgeting, what is the primary goal of investing in a project?

A) To ensure the project has a quick return on investment.
B) To guarantee that costs are minimized.
C) To maximize the value of the firm by ensuring benefits exceed costs.
D) To increase market share regardless of profitability.

Answer: C

Difficulty: Medium
Learning Objective: LO 1.1 Identify the key financial decisions facing the financial manager of
any business.
Section: 1.1 The Role of the Financial Manager
Bloom code: Analyze
AACSB: Analytic
IMA: Budget Preparation
AICPA: Resource Management

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, 8) Why is it important for a firm to carefully consider its mix of debt and equity?

A) It determines the number of employees the firm can hire.
B) It affects the firm’s financing costs and potential bankruptcy risk.
C) It has no significant implications for the firm’s operations.
D) It ensures that the firm remains privately owned.

Answer: B

Difficulty: Easy
Learning Objective: LO 1.1 Identify the key financial decisions facing the financial manager of
any business.
Section: 1.1 The Role of the Financial Manager
Bloom code: Understand
AACSB: Analytic
IMA: Investment Decisions
AICPA: Strategic/Critical Thinking

9) If a firm has total current assets of $500,000 and total current liabilities of $300,000 and total
equity of $260,000, what is the firm's net working capital?

A) $200,000
B) $240,000
C) $800,000
D) $500,000

Answer: A

Explanation: $200,000 (Net working capital = Total Current Assets – Total Current Liabilities =
$500,000 – $300,000)
Difficulty: Easy
Learning Objective: LO 1.1 Identify the key financial decisions facing the financial manager of
any business.
Section: 1.1 The Role of the Financial Manager
Bloom code: Remember
AACSB: Analytic
IMA: Budget Preparation
AICPA: Process and Resource Management Perspectives

10) To start a business, the owners need:

A) wealth.
B) a clear vision of what products or services they want to produce.
C) employees.
D) productive assets such as buildings, technology, or patents.

Answer: B
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