Quiz for Corporate Finance Foundation

FM - Foundation of Corporate Financial Management

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Question 1

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 1 Explanation:

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

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

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

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

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

Question 3 Explanation:

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

Question 4

A partnership _____.

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

Question 4 Explanation:

A partnership terminates at the death of any general partner.

Question 5

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

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

Question 5 Explanation:

Secondary market supports transactions directly between shareholders.

Question 6

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

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

Question 6 Explanation:

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

Question 7

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

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

Question 7 Explanation:

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

Question 8

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

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

Question 8 Explanation:

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

Question 9

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 9 Explanation:

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

Question 10

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	Corporate income subject to double taxation.
D	The costs that result from default and bankruptcy of a firm.

Question 10 Explanation:

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

Question 11

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

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

Question 11 Explanation:

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

Question 12

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

Question 12 Explanation:

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

Question 13

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

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

Question 13 Explanation:

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

Question 14

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

Question 14 Explanation:

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

Question 15

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 15 Explanation:

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

Question 16

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 the least common form of business ownership.
C	A sole proprietorship is often structured as a limited liability company.
D	The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.

Question 16 Explanation:

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

Question 17

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

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

Question 17 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 18

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	Entitlement to a larger portion of the partnership’s income.
D	Ability to manage the day-to-day affairs of the business.

Question 18 Explanation:

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

Question 19

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

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

Question 19 Explanation:

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

Question 20

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

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

Question 20 Explanation:

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

Question 21

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

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

Question 21 Explanation:

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

Question 22

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

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

Question 22 Explanation:

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

Question 23

Working capital management _____:

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

Question 23 Explanation:

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

Question 24

Who is a company stakeholder?

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

Question 24 Explanation:

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

Question 25

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

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

Question 25 Explanation:

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

Question 26

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 26 Explanation:

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

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	Secondary market.
C	Liquidation market.
D	Dealer market.

Question 27 Explanation:

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

Question 28

A general partner _____.

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

Question 28 Explanation:

Has more management responsibility than a limited partner.

Question 29

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

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

Question 29 Explanation:

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

Question 30

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

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

Question 30 Explanation:

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

Question 31

Which document represents the rules by which corporations govern themselves?

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

Question 31 Explanation:

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

Question 32

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 legal costs to form a sole proprietorship are quite substantial.
D	The ownership of the firm is easy to transfer to another individual.

Question 32 Explanation:

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

Question 33

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

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

Question 33 Explanation:

The chief executive officer reports to the board of directors.

Question 34

Which one of the following is a capital budgeting decision?

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

Question 34 Explanation:

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

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