Corporate Finance MCQs

The person generally directly responsible for overseeing the tax management, cost accounting, financial accounting, and data processing functions is ...

treasurer
director
controller
chairman of the board.

The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the:

treasurer
director
controller
chairman of the board.

The process of identifying projects which will produce positive cash flows is called:

working capital management.
financial depreciation.
agency cost analysis.
capital budgeting.

The mix of debt and equity capital for a firm is referred to as the firm's:

cash management.
cost analysis.
capital budgeting.
capital structure

The management of a firm's short-term assets and liabilities is called:

working capital management.
debt management.
equity management.
capital budgeting.

A business owned by a solitary individual is called a:

corporation
sole proprietorship
general partnership.
limited partnership.

The division of profits and losses among the members of a partnership is formalized in the:

indemnity clause.
indenture contract.
statement of purpose.
partnership agreement.

The business purpose and intended life of a corporation are set forth in the:

indenture agreement.
tax agreement.
corporate bylaws.
articles of incorporation

The rules governing the method of electing corporate directors are called:

indenture provisions.
indemnity provisions.
charter agreements.
bylaws

A business entity which taxes it owners like partners while providing those owners with limited liability is called a:

limited liability company.
general partnership.
limited proprietorship.
sole proprietorship.

A conflict of interest between the stockholders and company management is called:

stockholders' liability.
corporate breakdown.
the agency problem.
corporate activism.

Agency costs refer to:

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

A stakeholder is:

any person or entity that owns shares of stock of a corporation.
a person who initially started a firm and currently has management control over the cash flows of the firm due to his/her current ownership of company stock.
a creditor to whom the firm currently owes money and who consequently has a claim on the cash flows of the firm.
any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.

The primary market is the market in which:

trades occur on the floor of the NYSE only.
shareholders who are also company officers offer their securities for sale.
newly issued securities are offered for sale.
all securities which are included in the Dow Jones Industrial Average (DJIA) must trade.

The secondary market is the market in which:

the sale proceeds of a trade flow to the issuer of the security.
one shareholder sells securities to another shareholder.
publicly held firms issue new shares of stock.
trades occur on exchanges other than the New York Stock Exchange

A secondary market where an individual or entity buys and sells for themselves at their own risk is called a _____ market.

primary
secondary
dealer
auction

A market where brokers and agents match buyers with sellers is called a(n):

primary market.
OTC market.
dealer market.
auction market.

Which of the following questions are addressed by financial managers? I. How long will it take to produce a product? II. Should customers be given 3...

I and IV only
II and III only
I, II, and III only
II, III, and IV only

The treasurer of a corporation generally reports to the:

controller
vice president of finance.
president
chief executive officer.

Which one of the following correctly defines the chain of command in a typical corporate organizational structure?

The vice president of finance reports to the chairman of the board.
The chief executive officer reports to the board of directors.
The controller reports to the president.
The treasurer reports to the chief executive officer.

Which one of the following is a capital budgeting decision?

determining how much debt should be borrowed from a particular lender
deciding whether or not to open a new store
deciding when to repay a long-term debt
determining how much inventory to keep on hand

When considering a capital budgeting project the financial manager should consider the: I. size of the project. II. timing of the project's cas...

I only
II only
I and III only
I, II, and III

Capital structure decisions include which of the following?

determining the number of shares of stock to issue
determining whether the firm should purchase or lease some equipment
allocating funds to the various divisions within the firm
evaluating the size of inventory to be kept on hand

The decision to issue debt rather than additional shares of stock is an example of:

working capital management.
a net working capital decision.
capital budgeting.
the capital structure decision

Working capital management includes decisions concerning which of the following? I. accounts payable II. long-term debt III. accounts receivable I...

I and II only
I and III only
II and IV only
I, III, and IV only

Working capital management:

ensures that sufficient equipment is available to produce the amount of product desired on a daily basis.
ensures that long-term debt is acquired at the lowest possible cost.
balances the amount of company debt to the amount of available equity.
is concerned with having sufficient funds to operate the business on a daily basis

Which one of the following statements concerning a sole proprietorship is correct?

The owner of a sole proprietorship may be forced to sell his or her personal assets to pay company debts.
A sole proprietorship is designed to protect the personal assets of the owner.
The profits of a sole proprietorship are taxed twice.
The owners of a sole proprietorship share profits as established by the partnership agreement.

Which one of the following best describes the primary advantage of being a limited partner rather than a general partner?

entitlement to a larger portion of the partnership's income
ability to manage the day-to-day affairs of the business
no potential financial loss
liability for firm debts is limited to the capital invested

A general partner:

has less legal liability than a limited partner.
has more management responsibility than a limited partner.
faces double taxation whereas a limited partner does not.
cannot lose more than the amount he or she invested in the entity.

A partnership:

is taxed the same as a corporation.
agreement defines whether the business income will be taxed like a partnership or a corporation.
terminates at the death of any general partner.
has less of an ability to raise capital than a sole proprietorship.

Which of the following are disadvantages of a partnership? I. limited life of the firm II. personal liability for firm debt III. greater ability to...

I and II only
III and IV only
II and III only
I, II, and IV only

Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. abil...

I and II only
III and IV only
II, III, and IV only
I, III, and IV only

Which one of the following statements is correct concerning corporations?

The largest firms are usually corporations.
The majority of firms are corporations.
The stockholders are usually the managers of a corporation.
The ability of a corporation to raise capital is quite limited.

Which one of the following statements is correct?

Both partnerships and corporations incur double taxation.
Both sole proprietorships and partnerships are taxed in a similar fashion.
Partnerships are the most complicated type of business to form.
Both partnerships and corporations have bylaws.

The articles of incorporation:

can be used to remove company management.
are amended annually by the company stockholders.
set forth the number of shares of stock that can be issued.
set forth the rules by which a corporation regulates its existence.

The bylaws:

establish the name of a corporation.
are rules which apply only to limited liability companies.
set forth the purpose of a firm.
mandate the procedure for electing corporate directors.

The owners of a limited liability company prefer:

being taxed like a corporation.
having liability exposure similar to that of a sole proprietor.
being taxed personally on all business income.
having liability exposure similar to that of a general partner.

Which one of the following business types is best suited to raising large amounts of capital?

sole proprietorship
limited liability company
corporation
general partnership

Which type of business organization has all the respective rights and privileges of a legal person?

sole proprietorship
general partnership
limited partnership
corporation

The primary goal of financial management is to:

maximize current dividends per share of the existing stock.
maximize the current value per share of the existing stock.
avoid financial distress.
minimize operational costs and maximize firm efficiency.

Financial managers should strive to maximize the current value per share of the existing stock because:

doing so guarantees the company will grow in size at the maximum possible rate.
doing so increases the salaries of all the employees.
they have been hired for the purpose of representing the interest of the current shareholders.
doing so means the firm is growing in size faster than its competitors.

The decisions made by financial managers should all be ones which increase the:

size of the firm.
growth rate of the firm.
marketability of the managers.
market value of the existing owners’ equity.

The Sarbanes-Oxley Act of 2002 is a governmental response to:

increased federal taxes.
the terrorists attacks on 9/11/2001.
new stock trading regulations by the stock exchanges.
corporate scandals

The Sarbanes-Oxley Act of 2002:

imposed insignificant compliance costs on smaller corporations.
caused some firms to "go dark".
increases the ability of corporate officers to borrow money from their employer.
required that the smaller firms on the NYSE be delisted.

A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:

must continue to provide audited financial statements which have been signed by the corporate officers.
must continue to provide a detailed list of internal control deficiencies on an annual basis.
can, and mostly likely will, provide less information to its shareholders than it did prior to the act.
will rarely experience any resulting change in the price of their stock

Which one of the following actions by a financial manager creates an agency problem?

refusing to borrow money when doing so will create losses for the firm
refusing to lower selling prices if doing so will reduce the net profits
agreeing to expand the company at the expense of stockholders’ value
agreeing to pay bonuses based on the market value of the company stock

Which of the following help convince managers to work in the best interest of the stockholders? I. compensation based on the value of the stock II....

I and II only
III and IV only
I, II, and III only
I, II, III, and IV

Which of the following are agency costs? I. forgoing an investment opportunity which would add to the market value of the owner's equity II. p...

II and III only
I and III only
I and IV only
II and IV only

Which of the following represent cash outflows from a firm? I. issuance of securities II. payment of dividends III. new loan proceeds IV. payment ...

I and III only
II and IV only
I and IV only
I, II, and IV only

Which one of the following parties is considered a stakeholder of a firm?

employee
short-term creditor
long-term creditor
preferred stockholder

Which of the following represent means by which cash flows from a corporation back into the financial markets? I. repayment of long-term debt II. p...

I and II only
I and III only
II and IV only
I, III, and IV only

Which one of the following is a primary market transaction?

a dealer selling shares of stock to an individual investor
a dealer buying newly issued shares of stock from a corporation
an individual investor selling shares of stock to another individual
a bank selling shares of a medical firm to an individual

The transfer of ownership of outstanding shares of a NYSE listed stock:

takes place in the primary market.
occurs in a dealer market.
is facilitated in the secondary markets.
creates an immediate tax liability for both the seller and the buyer.

Which of the following statements concerning auction markets is (are) correct? I. NASDAQ is an auction market. II. The NYSE is an auction market. I...

I only
II only
I and III only
II and III only

Which one of the following statements concerning stock exchanges is correct?

The NYSE has more listed stocks than NASDAQ.
The NYSE is a dealer market.
The exchange with the strictest listing requirements is NASDAQ.
Some large companies are listed on NASDAQ.

Dealer markets:

are reserved strictly for trading debt securities.
only exist outside of the United States.
are called over-the-counter markets.
include the American and the Pacific Stock Exchanges.

Which one of the following statements is correct concerning the NYSE?

A firm is expected to have a market value for its publicly held shares of at least $100 million to be listed on the NYSE.
The NYSE is the largest dealer market for listed securities in the United States.
The NYSE accounts for only 50 percent of the shares traded in the auction markets.
Any corporation desiring to be listed on the NYSE can do so.

Which of the following statements concerning NASDAQ are correct? I. Most smaller firms are listed on NASDAQ rather than on the NYSE. II. NASDAQ is a...

I and II only
I and III only
II and IV only
I, II, and IV only

You are considering a project that has been assigned a discount rate of 14 percent. If you start the project today, you will incur an initial cost of ...

-$331.40
-$194.46
$228.51
$230.49

Southern Shores is considering a project that has an initial cost today of $12,500. The project has a two-year life with cash inflows of $7,500 a year...

$614.52
$721.56
$914.62
$982.67

Western Industrial Products is considering a project with a four-year life and an initial cost of $212,000. The discount rate for the project is 16 pe...

1,113 units
1,267 units
1,922 units
2,034 units

Dressler Technologies is considering a project with a 3-year life and an initial cost of $85,000. The discount rate for the project is 14.5 percent. T...

-$3,474
-$2,526
$4,191
$6,192

Patience is reviewing a project with projected sales of 4,200 units a year, a cash flow of $28 a unit, and a four-year project life. Assume all operat...

2,119 units
2,355 units
2,367 units
2,516 units

You own a convertible bond with a face value of $1,000 and a market value of $1,034. The bond can be converted into 14 shares of stock. What is the co...

$71.43
$72.00
$72.67
$73.86

You own nine convertible bonds. These bonds have a 7 percent coupon, a $1,000 face value, and mature in 6 years. The bonds are convertible into shares...

285
300
350
360

A convertible bond has a face value of $5,000 and a conversion price of $80. The bond has a 6 percent coupon, pays interest semi-annually, and matures...

$1,680
$2,415
$2,575
$4,651

A convertible bond has a face value of $1,000 and a conversion price of $12.50. The bond has a 6 percent coupon, pays interest semi-annually, and matu...

$782.57
$781.82
$827.74
$832.09

Kurt owns a convertible bond that matures in three years. The bond has a 7.5 percent coupon and pays interest semi-annually. The face value of the bon...

$948.20
$955.05
$972.80
$987.78

Lucinda owns a convertible bond that matures in six years. The bond has a 9 percent coupon and pays interest annually. The face value of the bond is $...

$835.60
$848.40
$942.11
$981.82

T-bills currently yield 6.3 percent. Stock in Pinta Manufacturing is currently selling for $46 per share. There is no possibility that the stock will ...

$21.40
$22.00
$24.00
$25.30

The price of Time Squared Corp. stock will be either $80 or $95 at the end of the year. Call options are available with one year to expiration. T-bill...

$14.25
$15.06
$18.78
$24.25

The price of Dimension, Inc. stock will be either $65 or $85 at the end of the year. Call options are available with one year to expiration. T-bills c...

$6.07
$8.48
$11.58
$15.39

Rackin Pinion Corporation's assets are currently worth $1,260. In one year, they will be worth either $1,200 of $1,610. The risk-free interest ra...

$60.00
$114.14
$1,142.86
$1,263.19

Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Buckeye's assets is currently $1,200...

$601.18
$796.57
$844.24
$878.78

A $1,000 convertible debenture has a conversion price for common stock of $85 per share. The common stock is selling at $92 a share. What is the conve...

$920.00
$923.91
$1,000.00
$1,082.35

A bond with 10 detachable warrants has just been offered for sale at $1,000. The bond matures in 15 years and has an annual coupon of $80. Each warran...

$13.58
$14.00
$16.67
$21.57

We are examining a new project. We expect to sell 9,000 units per year at $45 net cash flow apiece for the next 20 years. In other words, the annual o...

4,580 units
4,620 units
4,750 units
4,810 units

We are examining a new project. We expect to sell 8,000 units per year at $80 net cash flow apiece for the next 15 years. In other words, the annual o...

$1,774,328
$1,809,941
$1,828,406
$1,848,920

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of t...

abating
deriving
hedging
forwarding

The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a:

forward agreement.
derivative security.
mezzanine asset.
contingent security.

Farmer Mac owns a large orange grove in Florida. The value of his business is directly related to the price of oranges. Which one of the following is ...

exchange line
net present value profile
risk profile
market line

Farmer Ted planted 200 acres in wheat this year. The weather has been perfect and he expects to harvest a record crop within the next two weeks. At pr...

futures risk
volatility exposure
surplus risk
transactions exposure

For years, your family has operated a business that produces lawn mowers. Over the years, the industry has progressed and new mass production techniqu...

forward risk
volatility exposure
economic exposure
transactions exposure

This morning a cereal maker agreed to pay a farmer $4.40 a bushel for 5,000 bushels of wheat that the farmer will ship to the factory four months from...

forward contract
spot contract
swap
exchange

A graph depicting the gains and losses a seller of a forward contract would earn at various market prices is referred to as a:

risk profile
payoff profile.
risk offer line.
scatter plot.

By definition, which one of the following contracts is marked to the market on a daily basis?

forward contract
hedge
swap
futures contract

Southern Groves raises tangerines. To hedge its risk, the firm trades in the orange futures market. This process is known as:

secondary trading.
open trading.
open-hedging.
cross-hedging.

The National Bank has an agreement with The Foreign Bank to exchange 500,000 U.S. dollars for 380,000 Euros on the first day of each of the next 3 cal...

spot trade.
option
futures contract.
swap contract.

Sue recently purchased a right to buy 100 shares of ABC stock for $27.50 a share if she so chooses at any time within the next four months. Which one ...

futures contract
call option
put option
straddle

Steve recently sold an option that requires him to purchase 100 shares of Omega stock at $40 a share should the option owner decide to exercise the op...

futures option
call option
put option
straddle

Which one of the following statements is correct?

Price levels increased more in the late 1800's than they did in the late 1900's in the U.S.
10-year U.S. Treasury interest rates since 1979 have been managed by the Federal Reserve such that the rates vary by less than 50 basis points in any given year.
The Bretton Woods accord has reduced exchange rate volatility between the U.S. dollar and the U.K. pound since it was passed in 1993.
Both U.S. inflation rates and exchange rates are more volatile now than they were 50 years ago.

A strong argument can be made that the collapse of the savings and loan industry began when:

the inflation rates in the U.S. began rising rapidly.
the volatility of interest rates increased significantly.
fluctuating commodity prices became the norm.
the Bretton Woods accord became effective.

The breakdown of the Bretton Woods accord caused _____ volatility to increase.

interest rate
inflation rate
exchange rate
commodity price

Which one of the following can a firm do if it effectively manages its financial risks?

eliminate all the risks faced by the firm
totally eliminate all financial risks
reduce the price volatility it faces
guarantee the firm's financial success

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

wheat farmer and bakery
oil producer and coal miner
wheat grower and pharmaceutical firm
pastry bakery and cotton farmer

Which one of the following statements is correct in relation to a firm's short-run financial risk?

Short-run financial risk results from permanent changes in prices due to new technology.
A financially sound firm can become financially distressed as the result of its short-run exposure to financial risk.
Each segment of a business should be responsible for hedging its own short-run financial risk.
Short-run financial risk is defined as temporary price changes which result directly from natural disasters, such as tornadoes, droughts, and floods.

Long-run financial risk:

can frequently be hedged on a permanent basis.
is best hedged on a division by division basis within a conglomerate.
is related more to near-term transactions than to advancements in technology.
generally results from changes in the underlying economics of a business.

By hedging financial risk, a firm can:

ensure a steady rate of return for its shareholders.
eliminate price changes over the long-term.
ensure its own economic viability.
gain time to adapt to changing market conditions.

The seller of a forward contract:

is obligated to make delivery and accept the forward price.
has the option of making delivery and receiving the greater of the spot price or the contract price.
has the option of either making delivery or accepting delivery.
is obligated to take delivery and pays the lower of the spot market price or the contract price.

A bakery generally enters into a forward contract in wheat as a:

hedger
speculator
spot trader.
broker

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Corporate Finance MCQs