Quiz for Corporate Finance Foundation

FM - Foundation of Corporate Financial Management

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Question 1

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	Determining how much money should be kept in the checking account.
D	Deciding whether or not to open a new store.

Question 1 Explanation:

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

Question 2

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

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

Question 2 Explanation:

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

Question 3

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

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

Question 3 Explanation:

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

Question 4

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 4 Explanation:

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

Question 5

What is the primary goal of financial management?

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

Question 5 Explanation:

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

Question 6

Working capital management _____:

A	balances the amount of company debt to the amount of available equity.
B	ensures that long-term debt is acquired at the lowest possible cost.
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 6 Explanation:

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

Question 7

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 7 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 8

A partnership _____.

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

Question 8 Explanation:

A partnership terminates at the death of any general partner.

Question 9

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

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

Question 9 Explanation:

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

Question 10

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

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

Question 10 Explanation:

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

Question 11

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

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

Question 11 Explanation:

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

Question 12

A general partner _____.

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

Question 12 Explanation:

Has more management responsibility than a limited partner.

Question 13

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

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

Question 13 Explanation:

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

Question 14

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

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

Question 14 Explanation:

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

Question 15

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

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

Question 15 Explanation:

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

Question 16

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

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

Question 16 Explanation:

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

Question 17

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

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

Question 17 Explanation:

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

Question 18

Working capital management includes decisions concerning which of the following?

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

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

Question 18 Explanation:

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

Question 19

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

Question 19 Explanation:

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

Question 20

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

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

Question 20 Explanation:

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

Question 21

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 owner can generally raise large sums of capital quite easily.
C	The life of the firm is limited to the life span of the owner.
D	The ownership of the firm is easy to transfer to another individual.

Question 21 Explanation:

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

Question 22

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

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

Question 22 Explanation:

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

Question 23

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

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

Question 23 Explanation:

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

Question 24

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

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

Question 24 Explanation:

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

Question 25

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

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

Question 25 Explanation:

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

Question 26

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

Question 26 Explanation:

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

Question 27

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 27 Explanation:

The chief executive officer reports to the board of directors.

Question 28

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

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

Question 28 Explanation:

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

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

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

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

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

Question 30 Explanation:

Secondary market supports transactions directly between shareholders.

Question 31

Which document represents the rules by which corporations govern themselves?

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

Question 31 Explanation:

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

Question 32

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 owns shares of stock 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 has voting rights based on stock ownership of a corporation.

Question 32 Explanation:

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

Question 33

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 33 Explanation:

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

Question 34

What an agency costs refers to?

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

Question 34 Explanation:

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

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