Quiz for Corporate Finance Foundation

FM - Foundation of Corporate Financial Management

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Question 1

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 1 Explanation:

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

Question 2

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

Question 2 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 3

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

A	Greater management responsibility.
B	Liability for firm debts limited to the capital invested.
C	Ability to manage the day-to-day affairs of the business.
D	Entitlement to a larger portion of the partnership’s income.

Question 3 Explanation:

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

Question 4

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

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

Question 4 Explanation:

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

Question 5

A partnership _____.

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

Question 5 Explanation:

A partnership terminates at the death of any general partner.

Question 6

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	Capital budgeting.
C	The net working capital decision.
D	The capital structure decision.

Question 6 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 7

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

Question 7 Explanation:

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

Question 8

Which document represents the rules by which corporations govern themselves?

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

Question 8 Explanation:

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

Question 9

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

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

Question 9 Explanation:

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

Question 10

What is the primary goal of financial management?

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

Question 10 Explanation:

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

Question 11

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

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

Question 11 Explanation:

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

Question 12

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

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

Question 12 Explanation:

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

Question 13

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

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

Question 13 Explanation:

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

Question 14

Who is a company stakeholder?

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

Question 14 Explanation:

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

Question 15

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

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

Question 15 Explanation:

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

Question 16

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

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

Question 16 Explanation:

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

Question 17

A general partner _____.

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

Question 17 Explanation:

Has more management responsibility than a limited partner.

Question 18

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

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

Question 18 Explanation:

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

Question 19

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

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

Question 19 Explanation:

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

Question 20

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

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

Question 20 Explanation:

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

Question 21

Working capital management _____:

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

Question 21 Explanation:

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

Question 22

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

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

Question 22 Explanation:

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

Question 23

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

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

Question 23 Explanation:

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

Question 24

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 treasurer reports to the chief executive officer.
C	The chief executive officer reports to the board of directors.
D	The controller reports to the president.

Question 24 Explanation:

The chief executive officer reports to the board of directors.

Question 25

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

A	The owners of a sole proprietorship share profits as established by the partnership agreement.
B	A sole proprietorship is often structured as a limited liability company.
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 the least common form of business ownership.

Question 25 Explanation:

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

Question 26

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

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

Question 26 Explanation:

Secondary market supports transactions directly between shareholders.

Question 27

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

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

Question 27 Explanation:

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

Question 28

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

Question 28 Explanation:

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

Question 29

What an agency costs refers to?

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

Question 29 Explanation:

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

Question 30

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

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

Question 30 Explanation:

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

Question 31

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

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

Question 31 Explanation:

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

Question 32

Which one of the following is a capital budgeting decision?

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

Question 32 Explanation:

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

Question 33

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

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

Question 33 Explanation:

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

Question 34

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

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

Question 34 Explanation:

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

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