CHAPTER 1

Introduction to Corporate Finance

II. CONCEPTS

FINANCIAL MANAGEMENT

d 21. Which of the following questions are addressed by financial managers? I. How long will it take to produce a product? II. How long should customers be given to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm build a new factory? a. I and IV only b. II and III only c. I, II, and III only d. II, III, and IV only e. I, II, III, and IV

ORGANIZATIONAL STRUCTURE

e 22. The treasurer and the controller of a corporation generally report to the: a. board of directors. b. chairman of the board. c. chief executive officer. d. president. e. vice president of finance.

ORGANIZATIONAL STRUCTURE

b 23. Which one of the following statements is correct concerning the organizational structure of a corporation? a. The vice president of finance reports to the chairman of the board. b. The chief executive officer reports to the board of directors. c. The controller reports to the president. d. The treasurer reports to the chief executive officer. e. The chief operations officer reports to the vice president of production.

CAPITAL BUDGETING

b 24. Which one of the following is a capital budgeting decision? a. determining how much debt should be borrowed from a particular lender b. deciding whether or not to open a new store c. deciding when to repay a long-term debt d. determining how much inventory to keep on hand e. determining how much money should be kept in the checking account

CAPITAL BUDGETING

e 25. When considering a capital budgeting project the financial manager should consider:

a. b. c. d. e. only the size of the project.

only the timing of the project cash flows. only the risk of the project cash flows.

only the size and timing of the project cash flows. the size, timing, and risk of the project cash flows.

CAPITAL STRUCTURE

a 26. Capital structure decisions include consideration of the: I. amount of long-term debt to assume. II. cost of acquiring funds. III. current assets and liabilities. IV. net working capital. a. I and II only b. II and III only c. IIIand IV only d. I, II, and IV only e. I, III, and IV only

CAPITAL STRUCTURE

e 27. The decision of which lender to use and which type of long-term loan is best for a project is part of: a. working capital management. b. the net working capital decision. c. capital budgeting. d. a controller’s duties. e. the capital structure decision.

WORKING CAPITAL MANAGEMENT

e 28. Working capital management includes decisions concerning which of the following? I. accounts payable II. long-term debt III. accounts receivable IV. inventory a. I and II only b. I and III only c. II and IV only d. I, II, and III only e. I, III, and IV only

WORKING CAPITAL MANAGEMENT e 29. Working capital management: a. ensures that sufficient equipment is available to produce the amount of product desired on a daily basis. b. ensures that long-term debt is acquired at the lowest possible cost. c. ensures that dividends are paid to all stockholders on an annual basis. d. balances the amount of company debt to the amount of available equity. e. is concerned with having sufficient funds to operate the business on a daily basis.

SOLE PROPRIETORSHIP

d 30. Which one of the following statements concerning a sole proprietorship is correct? a. A sole proprietorship is the least common form of business ownership. b. The profits of a sole proprietorship are taxed twice. c. The owners of a sole proprietorship share profits as established by the partnership agreement. d. The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts. e. A sole proprietorship is often structured as a limited liability company.

SOLE PROPRIETORSHIP

a 31. Which one of the following statements concerning a sole proprietorship is correct? a. The life of the firm is limited to the life span of the owner. b. The owner can generally raise large sums of capital quite easily. c. The ownership of the firm is easy to transfer to another individual. d. The company must pay separate taxes from those paid by the owner. e. The legal costs to form a sole proprietorship are quite substantial.

PARTNERSHIP

e 32. Which one of the following best describes the primary advantage of being a limited partner rather than a general partner? a. entitlement to a larger portion of the partnership’s income b. ability to manage the day-to-day affairs of the business c. no potential financial loss d. greater management responsibility e. liability for firm debts limited to the capital invested

PARTNERSHIP

b 33. A general partner: a. has less legal liability than a limited partner. b. has more management responsibility than a limited partner. c. faces double taxation whereas a limited partner does not. d. cannot lose more than the amount of his/her equity investment. e. is the term applied only to corporations which invest in partnerships.

PARTNERSHIP

c 34. A partnership: a. is taxed the same as a corporation. b. agreement defines whether the business income will be taxed like a partnership or a corporation. c. terminates at the death of any general partner. d. has less of an ability to raise capital than a proprietorship. e. allows for easy transfer of interest from one general partner to another.