CHAPTER 1.
INTRODUCTION TO CORPORATE FINANCE
A. True/False Questions
1. The controller's responsibilities are financial management, while the treasurer's
responsibilities are primarily related to accounting.
2. Increasing the quarterly dividend is an example of agency costs.
3. Corporation is best suited to raising large amounts of capital.
4. It is usually easier to transfer ownership in a corporation than it is to transfer
ownership in a sole proprietorship
5. The goal of the firm should be to maximize earnings per share.
B. Multiple Choice Questions
1. A business owned by a solitary individual who has unlimited liability for its
debt is called a:
A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.
2. A business formed by two or more individuals who each have unlimited
liability for all of the firm's business debts is called a:
A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited liability company.
3.A business partner whose potential financial loss in the partnership will not
exceed his or her investment in that partnership is called a:
A. generally partner.
B. sole proprietor.
C. limited partner.
D. corporate shareholder.
4.Which one of the following terms is defined as a conflict of interest between the
corporate shareholders and the corporate managers?
A. articles of incorporation
B. corporate breakdown
C. agency problem
D. legal liability
5. Which of the following questions are addressed by financial managers?
I. How should a product be marketed?
II. Should customers be given 30 or 45 days to pay for their credit purchases?
III. Should the firm borrow more money?
IV. Should the firm acquire new equipment?
A. I and IV only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
6. Which one of the following functions should be the responsibility of the
controller rather than the treasurer?
A. daily cash deposit
B. income tax returns
C. equipment purchase analysis
D. customer credit approval
7. Which one of the following statements concerning a sole proprietorship is
correct?
A. A sole proprietorship is designed to protect the personal assets of the owner.
B. The profits of a sole proprietorship are subject to double taxation.
C. The owner of a sole proprietorship is personally responsible for all of the
company's debts.
D. A sole proprietorship is structured the same as a limited liability company.
8.Which of the following individuals have unlimited liability based on their
ownership interest?
I. general partner
II. sole proprietor
III. stockholder
IV. limited partner
A. II only
B. I and II only
C. II and IV only
D. I, II, and III only
9.Which one of the following is a primary market transaction?
A. sale of currently outstanding stock by a dealer to an individual investor
B. sale of a new share of stock to an individual investor
C. stock ownership transfer from one shareholder to another shareholder
D. gift of stock from one shareholder to another shareholder
E. gift of stock by a shareholder to a family member
10. Which one of the following best describes the primary advantage of being a
limited partner instead of a general partner?
A. tax-free income
B. active participation in the firm's activities
C. no potential financial loss
D. maximum loss limited to the capital invested
11.A general partner:
A. is solely responsible for all the partnership debts.
B. has no say over a firm's daily operations.
C. faces double taxation whereas a limited partner does not.
D. has a maximum loss equal to his or her equity investment.
12.A limited partnership:
A. has an unlimited life.
B. can opt to be taxed as a corporation.
C. terminates at the death of any limited partner.
D. has a greater ability to raise capital than a sole proprietorship.
13. Which of the following apply to a partnership that consists solely of general
partners?
I. double taxation of partnership profits
II. limited partnership life
III. active involvement in the firm by all the partners
IV. unlimited personal liability for all partnership debts
A. II only
B. I and II only
C. I, II, and IV only
D. II, III, and IV only
14. Which of the following are advantages of the corporate form of business
ownership?
I. limited liability for firm debt II. double taxation
III. ability to raise capital IV. unlimited firm life
A. I and II only
B. III and IV only
C. I, III, and IV only
D. II, III, and IV only
15 .Shareholder A sold 500 shares of ABC stock on the Stock Exchange. This
transaction:
A. took place in the primary market.
B. occurred in a dealer market.
C. was facilitated in the secondary market.
D. involved a proxy.
16. Which one of the following business types is best suited to raising large
amounts of capital?
A. sole proprietorship
B. limited liability company
C. corporation
D. general partnership
E. limited partnership
17. Which one of the following best states the primary goal of financial
management?
A. maximize current dividends per share
B. maximize the current value per share
C. increase cash flow and avoid financial distress
D. minimize operational costs while maximizing firm efficiency
18. Decisions made by financial managers should primarily focus on increasing
which one of the following?
A. size of the firm
b. gross profit per unit produced
C. market value per share of outstanding stock
D. total sales
19. Which form of business structure is most associated with agency problems?
A. sole proprietorship
B. limited partnership
C. corporation
D. limited liability company
20. Which one of the following is an agency cost?
A. accepting an investment opportunity that will add value to the firm
B. increasing the quarterly dividend
C. investing in a new project that creates firm value
D. hiring outside accountants to audit the company's financial statements
21. Which one of the following parties has ultimate control of a corporation?
A. chairman of the Board B. board of directors
C. shareholders D. chief executive officer
22. Which of the following are cash flows from a corporation into the financial
markets?
I. repayment of long-term debt
II. payment of government taxes
III. payment of loan interest
IV. payment of quarterly dividend
A. I and II only
B. I and III only
C. II and IV only
D. I, III, and IV only
C. Short answer (5)
1. List and briefly describe the three general areas of responsibility for a financial
manager.
2.Why are so many businesses structured as sole proprietorships when the
corporate form of business offers more advantages?
