Student name:__________ 1) The balance sheet

is made up of what five

key components:

D) current assets,
A) fixed assets, current liabilities, long term debt, fixed assets, long term
tangible current assets and shareholders' equity. debt, shareholders equity
B) intangible fixed assets, current liabilities, long term and retained earnings.
debt, net income and current assets.
C) fixed assets, long term debt, current assets, current
liabilities and shareholders' equity.

Bloom's : Remember
Question Details Difficulty : Medium
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Topic : 01-01 What is Corporate Finance?

2) In terms of the balance sheet model of the firm, the

value of the firm in financial markets is equal to:

E) the value of the

A) tangible fixed assets plus intangible fixed assets. debt minus the value of the
B) sales minus costs. equity.
C) cash inflow minus cash outflow.
D) the value of the debt plus the value of the equity.

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Topic : 01-01 What is Corporate Finance?

3) Inventory is a component of:

C) equity.
A) current assets. D) fixed assets.
B) current liabilities.

Topic : 01-01 What is Corporate

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Bloom's : Remember
Difficulty : Easy

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4) Using the balance sheet model of the firm, finance
may be thought of as analysis of three primary subject areas.
Which of the following groups correctly lists these three
areas?

D) Capital
A) Capital budgeting, capital structure, net working budgeting, tax analysis,
capital. security marketing.
B) Capital budgeting, capital structure, security E) Net working
marketing. capital, tax analysis,
C) Capital budgeting, net working capital, tax security marketing.
analysis.

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Topic : 01-01 What is Corporate Finance?

5) Which of the following is not considered one of the

basic questions of corporate finance?

E) What amount of
A) What long-lived assets should the firm invest? long term debt and equity
B) How much inventory should the firm hold? should the company issue
C) How can the firm raise cash for required capital to the market in the
expenditures? following years?
D) How should the short-term operating cash flows be
managed?

Bloom's : Understand
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Topic : 01-01 What is Corporate Finance?

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 D) the sum of
A) financial management is naturally broken into current assets and current
those areas. liabilities usually is zero.
B) shareholders want to ensure they receive dividend E) the capital
payments. structure pie is limited in
C) there is a mismatch between the timing of cash size.
inflows and cash outflows.

Bloom's : Understand
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Topic : 01-01 What is Corporate Finance?

7) Which one of these is a cash outflow from a

corporation?

D) issuance of debt
A) sale of an asset E) profit retained
B) dividend payment by the firm
C) sale of common stock

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Topic : 01-01 What is Corporate Finance?

8) Which one of these is a cash inflow to a corporation?

D) Reduction of
A) Purchase of a long-term asset accounts payables
B) Repurchase of shares
C) Collection of account receivables

Bloom's : Understand
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Topic : 01-01 What is Corporate Finance?

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9) In the managerial structure of the corporation the two Chief Financial Officer
officers and their responsibilities that report directly to the are:

minimizes tax payments.

A) the credit manager who handles accounts D) the controller
receivable and the tax manager who minimizes tax payments. who manages the
accounting function and
B) the personnel manager who manages salaries and the treasurer who is
compensation and the production operations manager who responsible handling cash
manages facility operations. flow and making financial
C) the treasurer who is responsible handling cash flow decisions.
and making financial decisions and the tax manager who

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Topic : 01-01 What is Corporate Finance?

10) Value is created and recognized over time if:

D) management
A) cash raised is invested in the investment activities pursues activities to reduce
of the firm. taxes to zero.
B) funds are raised in the capital markets.
C) cash paid to shareholders and bondholders, is
greater than cash raised in the financial markets.

Difficulty : Medium
Question Details Bloom's : Understand
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Topic : 01-01 What is Corporate Finance?

11) Time preference refers to the fact that:

change of bankruptcy.
A) corporations match current assets with current C) investors prefer
liabilities to minimize the short-term financing cost. current cash flows to future
B) corporations match both current and long-term cash flows.
assets with current and long-term liabilities to minimize the D) investors seek to

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time cash flows to minimize tax liabilities.

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 Difficulty : Medium
Question Details Bloom's : Understand
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Topic : 01-01 What is Corporate Finance?

12) A corporate security can be viewed as a contingent

claim on the firm's value. This means that:

the firm's value is greater

A) debt holders will receive their payoff from the firm than the fixed claim of the
based on their fixed claim or the firm's value if less than the debt.
fixed claim. D) no debt payoff
B) debt holders will receive the maximum between the will be made if there is an
firm's value and the fixed claim. equity payoff.
C) no payoff will be made to the debtholders unless

Bloom's : Understand
Question Details Topic : 01-02 The Balance-
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Difficulty : Medium

13) If a firm has debt outstanding, the shareholders

contingent claim payoff is:

the firm.
A) equal to the promised payment to the debtholders E) equal to the
payment provided by the
B) equal to the firm's value minus the fixed debt stockholders when the
payment, if the residual value is positive. equity was issued
C) equal to the firm value minus the fixed debt
payment, whether it is positive or negative.
D) equal to the debt payment plus the residual value of

Bloom's : Understand
Question Details Topic : 01-02 The Balance-
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Difficulty : Medium

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14) The Simple Corporation has outstanding obligation to payoff to the debtholders
the Complex Corporation of $250. It is year-end and the total and the equity shareholders
cash flow of Simple from all sources is $325. The contingent is:

C) $250; $75.
A) $250; $325. D) $325; $250.
B) $75; $250.

Topic : 01-02 The Balance-

Question Details Sheet Model of the Firm
Accessibility : Keyboard Navigation Bloom's : Analyze
Difficulty : Medium

15) The general partner(s) in a general partnership agree to

share work, costs and profits and losses. Each partner:

D) never has any

A) has liability only up to the amount of their liability but the limited
investment. partners do.
B) has liability for the debts of the partnership.
C) has liability only if it is formally documented.

Bloom's : Remember
Question Details Difficulty : Medium
Accessibility : Keyboard Navigation Topic : 01-03 Capital Structure

16) In a general partnership, the general partners have

_____ liability and have _____ control over day-to-day
operations.

D) unlimited; no
A) limited; no E) no; total
B) unlimited; total
C) limited; total

Bloom's : Remember
Question Details Difficulty : Medium
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17) The ultimate control of a corporation lies in the hands
of the corporate:

D) chairman of the
A) board of directors. board
B) shareholders E) government
C) CEO of the firm

Bloom's : Remember
Question Details Difficulty : Easy
Accessibility : Keyboard Navigation Topic : 01-03 Capital Structure

18) The division of profits and losses among the members

of a partnership is formalized in the:

D) partnership
A) indemnity clause agreement
B) indenture contract
C) statement of purpose

Bloom's : Remember
Question Details Difficulty : Easy
Accessibility : Keyboard Navigation Topic : 01-03 Capital Structure

19) The cheapest business entity to form is typically the:

E) sole
A) limited liability company. proprietorship.
B) joint stock company.
C) general partnership.
D) limited partnership.

Bloom's : Remember
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Accessibility : Keyboard Navigation Topic : 01-03 Capital Structure

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20) The Splitz Corporation has borrowed $5 million in much do the debtholders
debt with a promise to repay $5.5 million in one year. The receive; and, how much do
corporation had 10 million shares outstanding worth $2 each the equity holders receive?
at the time of the borrowing. Splitz earns $6 million during
the year. What is the debtholder's contingent claim; how

D) $5.5 million;
A) $5.5 million; $6 million; $20 million $5.5 million; $0.5 million
B) $5 million; $5.5 million; $0
C) $5 million; $5.5 million; $20 million

Difficulty : Medium
Question Details Bloom's : Analyze
Accessibility : Keyboard Navigation Topic : 01-03 Capital Structure

21) The Splitz Corporation has borrowed $5 million in

debt with a promise to repay $5.5 million in one year. The
corporation had 10 million shares outstanding worth $2 each
at the time of the borrowing. Splitz earns $5 million during
the year. What is the debtholder's contingent claim; how
much does the debtholder receive; and, how much do the
equity holders receive?

D) $-0.5 million;
A) $5 million; $5.5 million; $20 million $5 million; $0
B) $5.5 million; $5 million; $0
C) $5 million; $-0.5 million; $20 million

Difficulty : Medium
Question Details Bloom's : Analyze
Accessibility : Keyboard Navigation Topic : 01-03 Capital Structure

22) Corporate securities are contingent claims because:

of the firm.
A) they don't represent a direct claim on the firm. D) book value can
B) the firm may be bought out. be negative.
C) the securities value is derived from the total value

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 Topic : 01-02 The Balance-
Question Details Sheet Model of the Firm
Accessibility : Keyboard Navigation Difficulty : Hard
Bloom's : Understand

23) If a firm promised a payment to the debtholders

greater than the firm's value, then:

D) the shareholders
A) the firm will be broke and the debtholder will will get nothing from the
receive the firm's value. firm.
B) the debtholders receive the promised payment E) the firm would
while the shareholders pay the difference between the firm's be broke, the debtholder
value and the payment to the debtholders. will receive the firm's
C) the firm's value will be shared between equity and value, and the shareholders
debtholders and shareholders according to the payment with get nothing.
promised by the firm.

Topic : 01-02 The Balance-

Question Details Sheet Model of the Firm
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Bloom's : Understand

24) Agency costs as the sum costs of:

behavior.
A) monitoring costs of the shareholders and the D) the set-of-
residual loss of wealth due to divergent management contracts needed to
behavior. structure the firm and
B) the costs of implementing control devices and the residual wealth.
monitoring costs of the shareholders.
C) the costs of implementing control devices and the
residual loss of wealth due to divergent management

Difficulty : Hard
Question Details Topic : 01-04 The Financial
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25) Which one of these best fits the description of an
agency cost?

firm
A) increasing the dividend payments per share E) the payment of
B) the benefits received from reducing production interest on a firm's debts
costs per unit
C) the payment of corporate income taxes
D) the payment required for an outside audit of the

Bloom's : Understand
Question Details Topic : 01-04 The Financial
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Difficulty : Medium

26) Agency costs refer to:

stockholders and
A) the total dividends paid to stockholders over the management.
lifetime of a firm. E) the total interest
B) the costs that result from default and bankruptcy of paid to creditors over the
a firm. lifetime of the firm.
C) corporate income subject to double taxation.
D) the costs of any conflicts of interest between

Difficulty : Easy
Question Details Topic : 01-04 The Financial
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27) Managerial goals may differ from those of the

shareholders. It is noted that managers may:

internally generated funds.

A) have a preference for expense consumption. D) be wanted to
B) be motivated by controlling sufficient resources to depend on external parties.
stay in business.
C) avoid the control of the capital market and rely on

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 Difficulty : Hard
Question Details Topic : 01-04 The Financial
Accessibility : Keyboard Navigation Manager
Bloom's : Understand

28) What is the primary goal of the corporation?

maximize the wealth of

A) Maximize the pay and compensation of employees managers.
and managers of the firm. D) Maximize the
B) Maximize the value of the stockholders as they are societal value to minimize
the owners of the corporation. governmental interference.
C) Minimize the wealth of the shareholders and

Difficulty : Easy
Question Details Topic : 01-04 The Financial
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29) Financial markets are composed of:

D) equity markets
A) capital markets and equity markets. and money markets.
B) capital markets and debt markets.
C) capital markets and money markets.
Difficulty : Easy
Question Details Topic : 01-05 Identification of
Accessibility : Keyboard Navigation Cash Flows
Bloom's : Remember

30) The primary market is defined as:

D) the over-the-
A) the market for insured securities. counter market.
B) the market for new issues.
C) the market for securities of the largest firms.

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 Difficulty : Easy
Question Details Topic : 01-05 Identification of
Accessibility : Keyboard Navigation Cash Flows
Bloom's : Remember

31) Which one of the following is a primary market

transaction?

another individual.
A) A dealer selling shares of stock to an individual D) A bank selling
investor. shares of a medical firm to
B) A dealer buying newly issued shares of stock from an individual.
a corporation.
C) An individual investor selling shares of stock to

Bloom's : Understand
Question Details Topic : 01-05 Identification of
Accessibility : Keyboard Navigation Cash Flows
Difficulty : Medium

32) Flea Fall Inc., a maker of dog flea collars, paid well as its cash flow as of
$125,000 cash for inventory on January 1, 2014. On December 31.
December 31, 2014, the company's sales total $147,000 of
which $117,000 has been collected. If inventory represents
Flea Falls only cost, calculate the firms accounting profit as

Difficulty : Medium
Question Details Bloom's : Analyze
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Topic : 01-01 What is Corporate Finance?

33) The Harlow

Corporation has promised
to pay its debtholders an

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amount of $2,700 over the next year. The firm's shareholders asset levels of $2,200 and
hold claim to whatever is left after the debtholders' claims $6,000.
have been satisfied. Calculate Harlow's debt and equity level
if its assets total $1,100 at the end of the year. Recalculate for

Difficulty : Medium
Question Details Bloom's : Analyze
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Topic : 01-01 What is Corporate Finance?

34) A financial manager's most important job is to create

value from capital budgeting, financing, and liquidity
activities. Explain how financial managers create value.

Difficulty : Medium
Question Details Bloom's : Understand
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Topic : 01-01 What is Corporate Finance?

35) List and briefly describe the three basic areas

addressed by a financial manager.

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Question Details Difficulty : Medium
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Topic : 01-01 What is Corporate Finance?

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36) The decision to incorporate must consider the fact that why one may want to
earnings will be taxed at both the corporate and personal incorporate.
levels. Since this is disadvantageous, provide three reasons

Bloom's : Understand
Question Details Topic : 01-03 Capital Structure
Accessibility : Keyboard Navigation Difficulty : Hard

37) How can shareholders attempt to control managerial

behavior to match shareholder interest?

Difficulty : Hard
Question Details Topic : 01-04 The Financial
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Bloom's : Understand

38) Do you think agency problems arise in sole

proprietorships and/or partnerships?

Difficulty : Hard
Question Details Topic : 01-04 The Financial
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Bloom's : Understand

39) If the corporate

form of business

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organization has so many advantages over the sole initially be formed as sole
proprietorship, why is it so common for small businesses to proprietorships?

Difficulty : Medium
Question Details Bloom's : Understand
Accessibility : Keyboard Navigation Topic : 01-03 Capital Structure

40) One thing lenders sometimes require when loaning such an assignment? What
money to a small corporation is an assignment of the common advantage of the corporate
stock as collateral on the loan. Then, if the business fails to form of organization
repay its loan, the ownership of the stock certificates can be comes into play here?
transferred directly to the lender. Why might a lender want

Difficulty : Medium
Question Details Bloom's : Understand
Accessibility : Keyboard Navigation Topic : 01-03 Capital Structure

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Answer Key

Test name: Corporate Finance 9ce Ross TB 01

1) C
2) D
the value of the debt plus the value of the
equity.
3) A
4) A
5) B
How much inventory should the firm hold?
6) C
7) B
8) C
9) D
10) C
cash paid to shareholders and bondholders, is
greater than cash raised in the financial
markets.
11) C
investors prefer current cash flows to future
cash flows.
12) A

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debt holders will receive their payoff from the value if less than the
firm based on their fixed claim or the firm's fixed claim.
13) B
equal to the firm's value minus the fixed debt
payment, if the residual value is positive.
14) C
15) B
16) B
17) B
18) D
19) E
20) D
21) B
22) C
23) E
A and D are correct. D. the shareholders
A. the firm will be broke and the debtholder will get nothing
will receive the firm's value. from the firm.
24) B
25) D
26) D
27) C

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28) B
29) C
30) B
31) B
32) Accounting Profit = Sales - Cost ($117,000 -
($147,000 - $125,000 = $22,000) $125,000 = $8,000)
Cash Flow = Cash Inflow - Cash Outflow
33) If assets total $1,100: Value of Debt = Value of Equity =
$1,100, Value of Equity = $0 $3,300
If assets total $2,200: Value of Debt = $2,200,
Value of Equity = $0
If assets total $6,000: Value of Debt = $2,700,
34) Buy assets that generate more than their Minimize cash
cost. payouts to non-
Sell financial securities that raise more cash investors, ie., taxes
than they cost. to governments.
35) The three areas are: liabilities.
Managing the firm's
1. Capital budgeting: The financial manager working capital is a
tries to identify investment opportunities that day-to-day activity
are worth more to the firm than they cost to that ensures the firm
acquire. has sufficient
2. Capital structure: This refers to the specific resources to
mixture of current and long-term debt and continue its
equity a firm uses to finance its operations. operations and
3. Working capital management: This refers to avoid costly
a firm's short-term assets and short-term interruptions.

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36) Easier access to capital markets. Market pricing and
Retention of funds for reinvestment trading of securities.
opportunities.
37) Vote for directors with shareholder's be willing to launch
interest to select management. poison pills.)
Provide incentive contracts; performance Managerial labor
shares or options. market.
Outside threat of takeover, (Board should not
38) Agency conflicts typically arise when employees are hired
there is a separation of ownership and to represent the
management of a business. In a sole firm, there is once
proprietorship and a small partnership, such again a separation
separation is not likely to exist to the degree it of ownership and
does in a corporation. However, there is still management.
potential for agency conflicts. For example, as
39) A significant advantage of the sole business is the
proprietorship is that it is cheap and easy to person who founded
form. If the sole proprietor has limited capital it, so the life of the
to start with, it may not be desirable to spend business may
part of that capital forming a corporation. effectively be
Also, limited liability for business debts may limited to the life of
not be a significant advantage if the proprietor the founder during
has limited capital, most of which is tied up in its early years.
the business anyway. Finally, for a typical
small business, the heart and soul of the
40) In the event of a loan default, a lender may the business assets
wish to liquidate the business. Often it is time individually. By
consuming and difficult to take title of all of taking control of the

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stock, the lender is able to sell the business ownership of a
simply by reselling the stock in the business. corporation.
This illustrates the ease of transfer of

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