Quiz for Corporate Finance Foundation

FM - Foundation of Corporate Financial Management

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Question 1

The decision of which lender to use and which type of long-term loan is best for a project is part of:

A	The capital structure decision.
B	Working capital management.
C	Capital budgeting.
D	The net working capital decision.

Question 1 Explanation:

This is a capital structure decision because it is made based on analysis of the mixture of debt and equity that used by a company to finance its operations.

Question 2

What of the following refers to the original sale of securities by governments and corporations to the general public?

A	Secondary market.
B	Primary market.
C	Private placement market.
D	Liquidation market.

Question 2 Explanation:

The original sale of securities by governments and corporations to the general public called primary market.

Question 3

Who is generally directly responsible for overseeing the tax management, cost accounting, financial accounting, and appropriate data processing functions?

A	Controller.
B	Auditor.
C	Director.
D	Treasurer.

Question 3 Explanation:

Controller is the role that normally directly responsible for overseeing the tax management, cost accounting, financial accounting, and appropriate data processing functions.

Question 4

Working capital management _____:

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

Question 4 Explanation:

Working capital management is concerned with having sufficient funds to operate the business on a daily basis.

Question 5

What type of the market supports transactions when one shareholder sells stock directly to another?

A	Primary market.
B	Dealer market.
C	Secondary market.
D	OTC market.

Question 5 Explanation:

Secondary market supports transactions directly between shareholders.

Question 6

What corporate document sets forth the business purpose of a firm?

A	Articles of incorporation.
B	Indenture contract.
C	Corporate bylaws.
D	Business plan.

Question 6 Explanation:

What is the corporate document that sets forth the business purpose of a firm.

Question 7

Which one of the following statements is correct concerning the organizational structure of a corporation?

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

Question 7 Explanation:

The chief executive officer reports to the board of directors.

Question 8

What type of businesses is formed by two or more individuals who each has unlimited liability for business debts?

A	General partnership.
B	Limited Liability partnership.
C	Corporation.
D	Limited partnership.

Question 8 Explanation:

A business that formed by two or more individuals who each have unlimited liability for business debts called general partnership.

Question 9

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	Greater management responsibility.
D	Liability for firm debts limited to the capital invested.

Question 9 Explanation:

Liability for firm debts limited to the capital invested is the primary advantage.

Question 10

What type of the businesses is owned by a single individual?

A	Sole proprietorship.
B	Corporation.
C	business that owned by a single individual
D	Partnership.
E	Limited liability company.

Question 10 Explanation:

A business that owned by a single individual called sole proprietorship.

Question 11

A general partner _____.

A	Is the term applied only to corporations which invest in partnerships.
B	Cannot lose more than the amount of his/her equity investment.
C	Has more management responsibility than a limited partner.
D	Has less legal liability than a limited partner.

Question 11 Explanation:

Has more management responsibility than a limited partner.

Question 12

Who is generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures?

A	Controller.
B	Director.
C	President.
D	Treasurer.

Question 12 Explanation:

Treasurer is the role generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures.

Question 13

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 owners of a sole proprietorship share profits as established by the partnership agreement.
C	The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.
D	A sole proprietorship is often structured as a limited liability company.

Question 13 Explanation:

Owner of a sole proprietorship business has unlimited liability where personal assets considered as business equity.

Question 14

What is the name of a market where trading takes place directly between buyers and sellers?

A	Liquidation market.
B	Dealer market.
C	Primary market.
D	Auction market.

Question 14 Explanation:

A market where trading takes place directly between buyers and sellers called auction market.

Question 15

The treasurer and the controller of a corporation generally report to the _____.

A	Chief of Executive Officer.
B	Prosident.
C	Board of Directors.
D	Vice President of finance.

Question 15 Explanation:

The treasurer and the controller of a corporation generally report to the Vice President of finance.

Question 16

What is the management of a firm’s short-term assets and liabilities?

A	Capital structure management.
B	Capital budgeting.
C	Assets management.
D	Working capital management.

Question 16 Explanation:

Management of a firm’s short-term assets and liabilities called working capital management.

Question 17

What document formalizes the division of profits and losses among the members of a partnership?

A	Financial plan.
B	Partnership agreement.
C	Articles of incorporation.
D	Business plan.

Question 17 Explanation:

Partnership agreement is the document that formalized the division of profits and losses among the members of a partnership.

Question 18

Which document represents the rules by which corporations govern themselves?

A	Articles of incorporation.
B	Charter agreement.
C	Bylaws.
D	Partnership agreement.

Question 18 Explanation:

Bylaws is the document that represents the rules by which corporations govern themselves.

Question 19

What type of the businesses created as a distinct legal entity composed of one or more individuals or entities?

A	Corporation.
B	General partnership.
C	Sole proprietary.
D	Limited liability partnership.

Question 19 Explanation:

Corporation is the business created as a distinct legal entity composed of one or more individuals or entities.

Question 20

What an agency costs refers to?

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

Question 20 Explanation:

An agency costs refers to the costs of any conflicts of interest between stockholders and management.

Question 21

What is the primary goal of financial management?

A	Maximize the current value per share of the existing stock.
B	Maximize current dividends per share of the existing stock.
C	Minimize operational costs and maximize firm efficiency.
D	Maintain steady growth in both sales and net earnings.

Question 21 Explanation:

Maximizing the current value per share of the existing stock is the primary goal of financial management

Question 22

How a conflict of interest between the stockholders and management of a firm is called?

A	Stockholders’ liability.
B	Corporate breakdown.
C	Legal liability.
D	The agency problem.

Question 22 Explanation:

A conflict of interest between the stockholders and management of a firm is called the agency problem.

Question 23

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 ownership of the firm is easy to transfer to another individual.
C	The owner can generally raise large sums of capital quite easily.
D	The legal costs to form a sole proprietorship are quite substantial.

Question 23 Explanation:

The life of the firm is limited to the life span of the owner.

Question 24

What is the type of a market where dealers buy and sell securities for themselves, at their own risk?

A	Liquidation market.
B	Primary market.
C	Secondary market.
D	Dealer market.

Question 24 Explanation:

A market where dealers buy and sell securities for themselves, at their own risk called dealer market.

Question 25

Working capital management includes decisions concerning which of the following?

I. Accounts payable.
II. Long-term debt.
III. Accounts receivable.
IV. Inventory.

A	II and IV only
B	I, II, and III only
C	I, III, and IV only
D	I and III only

Question 25 Explanation:

Working capital management includes decisions concerning accounts payable, accounts receivable, and inventory because, which means managing the short-term assets and liabilities.

Question 26

A partnership _____.

A	agreement defines whether the business income will be taxed like a partnership or a corporation.
B	terminates at the death of any general partner.
C	allows for easy transfer of interest from one general partner to another.
D	is taxed the same as a corporation.

Question 26 Explanation:

A partnership terminates at the death of any general partner.

Question 27

What type of business entities is operated and taxed like a partnership, but with limited liability for the owners?

A	Sole proprietorship.
B	General partnership.
C	Limited liability company.
D	Corporation.

Question 27 Explanation:

Limited liability company is the business entity that is operated and taxed like a partnership, but with limited liability for the owners.

Question 28

The process of planning and managing a firm’s long-term investments is called:

A	Capital structure.
B	Financial modeling.
C	Working capital management.
D	Capital budgeting.

Question 28 Explanation:

Capital budgeting is the process of planning and managing a firm’s long-term investments.

Question 29

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	II and III only
B	II, III, and IV only
C	I, II, and III only
D	I, II, III, and IV

Question 29 Explanation:

Financial managers are responsible for planning and managing financial areas of the business; time and schedule of the production is a direct responsibility of operations.

Question 30

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	II and III only
B	I and II only
C	III and IV only
D	I, II, and IV only

Question 30 Explanation:

Capital structure decisions include consideration of the amount of long-term debt to assume and cost of acquiring funds.

Question 31

Which one of the following is a capital budgeting decision?

A	Deciding when to repay a long-term debt.
B	Determining how much money should be kept in the checking account.
C	Determining how much debt should be borrowed from a particular lender.
D	Deciding whether or not to open a new store.

Question 31 Explanation:

Whether or not to open a new store is a capital budgeting decision.

Question 32

When considering a capital budgeting project the financial manager should consider _____.

A	Only the size and timing of the project cash flows.
B	The timing of the project cash flows only.
C	The size, timing, and risk of the project cash flows.
D	The risk of the project cash flows only.

Question 32 Explanation:

As for any other projects, the size, timing, and risk of the project cash flows should be considered.

Question 33

Who is a company stakeholder?

A	Any person or entity that owns shares of stock of a corporation.
B	Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.
C	Any person or entity that has voting rights based on stock ownership of a corporation.
D	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.

Question 33 Explanation:

Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.

Question 34

What is the mixture of debt and equity used by a firm to finance its operations?

A	Capital structure.
B	Working capital management.
C	Assets and liabilities.
D	Capital budgeting.

Question 34 Explanation:

Capital structure is the mixture of debt and equity used by a firm to finance its operations.

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