Chapter 1 Self-Test
1. The five basic principles of finance include all of the following except
2. Cash and credit management are typically the responsibility of the
All of the following forms of business organizations provide limited liability to all owners
4. In finance, we assume that investors are generally
5. Which of the following is the most important goal that a corporation should strive for?
6. Which of the following forms of business organizations provide limited liability to all its owners?
7. The primary goal of a publicly owned corporation is to ________.
8. The financial manager most directly responsible for producing the company’s financial statements and directing its cost accounting functions is the
9. Suppose XYZ Corporation is traded on the New York Stock Exchange. XYZ’s closing price on Monday is $20 per share. After the market closes on Monday, XYZ makes a surprise announcement that it has obtained a major new customer. XYZ’s stock will likely
10. All of the following statements about agency problems are true except:
11. The goal of the firm should be:
12. The CEO of JLI Corp. decided to expand into a new market in 2010. At the end of 2010, JLI’s stock price had decreased 5% since the beginning of the year. Which of the following statements is most correct?
13. Company A reports sales of $100,000 and net income of $15,000. Company B reports sales of $100,000 and net income of $10,000. Therefore,
14. Which of the following statements about the corporate form of business organization is true?
15. The three basic types of issues addressed by the study of finance are
16. The true owners of the corporation are the
17. Which of the following is an advantage of the general partnership form of business organization?
18. An investor is considering two equally risky investments. Investment A is expected to return $1,000 per year for the next 5 years. Investment B is expected to return $6,000 at the end of 5 years. Which of the following statements is most correct if both investments A and B have the same cost
19. Investors generally don’t like risk. Therefore, a typical investor
20. High Tech Corp. cut its research and development budget in 2010 by $4,000,000 in order to improve its cash flow for the year. Which of the following statements is most correct?
21. Which form of organization is free of initial legal requirements?
22. Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it. If Joe invests and the business loses the lawsuits, the most Joe can lose is
23. Which of the following goals of the firm are synonymous (equivalent) to the maximization of shareholder wealth?
24. To measure value, the concept of time value of money is used
25. In terms of the costs to organize each, which of the following sequences is correct, moving from highest to lowest cost?
26. Which of the statements below are true?
27. In order to reduce agency problems, managers may be provided compensation that includes:
28. In which of the following cases will the agency problem between shareholders and managers be the greatest?
29. Ethical behavior
30. Assume that an investor is offered a choice of a risk-free government bond or a high-risk corporate stock. Further assume that the expected return is the same for both. According to one of the axioms of finance, which investment would be chosen?
Consider the after-tax cash flows for Project S and Project L:
Project a project b
1 3000 0
2 0 3000
31. A rational person would prefer ________.
32. Shareholder wealth maximization means:
33. A financial manager is considering two projects, A and B. A is expected to add $2 million to profits this year while B is expected to add $2 million to profits this year while B is expected to add $1 million to profits this year. Which of the following statements is most correct?
34. The recent financial crises was exacerbated by
35. A corporate manager decides to build a new store on a lot owned by the corporation that could be sold to a local developer for $250,000. The lot was purchased for $50,000 twenty years ago. When determining the value of the new store project,
36. The principle of risk-return tradeoff means that
37. Determining the best way to raise money to fund a firm’s long-term investments is called
38. Which of the following is an advantage of the sole proprietorship?
39. Which of the following forms of business organization has the greatest ability to attract new capital?
40. Which of the following forms of business organization limits the liability of owners?
41. Which of the following are characteristics of a limited partnership?
42. All of the following contributed to recent financial crises except
43. Which of the following is not considered to be a disadvantage of the sole proprietorship form of business organization?
44. When evaluating an investment project, which of the following best describes the financial information needed by the decision maker?
45. Capital budgeting is concerned with
46. Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it. If Joe invests and the business loses the lawsuits, the most Joe can lose is
47. S-type corporations have all of the following advantages except:
a. distributions are taxed twice, similar to corporate dividend payments.
48. Maximization of shareholder wealth
49. Executive compensation in the United States
50. Which of the following forms of organizations have earnings that are taxed twice, once as business income and once as personal income as the earnings are distributed to the owners in the form of dividends?
51. Profits are down so the controller decides to change the corporation’s accounting policy relating to inventory costing. The change will allow the corporation to report higher income and higher assets, although the physical inventory has not changed. Which of the following statements is most correct?
52. A limited partnership provides limited liability to
53. Assume that you won the Lotta Dough Lotto jackpot for $20 million. Further assume that you were offered a choice to receive the $20 million today, or receive it in equal installments of $1 million per year for 20 years. According to one of the principles of finance, which would you take?
54. Project A is expected to generate positive cash flow of $1 million in 10 years while Project B is expected to generate $500,000 in 5 years. Therefore,