Test Bank for Fundamentals of Corporate Finance 12th Edition By Stephen Ross and Randolph Westerfield and Bradford Jordan

Chapter 01

Introduction to Corporate Finance

True / False Questions

1. In capital budgeting, the financial manager tries to identify investment opportunities that

are worth more to the firm than they cost to acquire.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Easy

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

2. The size, timing and risk of cash flows are important when evaluating a capital budgeting

decision.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

3. A capital expenditure project becomes desirable when the project is worth more to the firm

than the cost to acquire it.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

1-1

Chapter 01 - Introduction to Corporate Finance

4. A capital expenditure project becomes desirable when the value of the cash flow generated

by the project exceeds the project's cost.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

5. Capital structure determines the least expensive sources of funds for the firm to borrow.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

6. Capital structure determines how much debt the firm should have in relation to its level of

equity.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

7. Capital structure determines the level of current assets that is required to maintain the firm's

operational level.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

1-2

Chapter 01 - Introduction to Corporate Finance

8. Capital structure determines how much risk is associated with the future cash flows of a

project.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

9. Determining when a supplier should be paid is a capital structure decision.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

10. Establishing the accounts receivable policies is a capital structure decision.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

11. Determining the amount of money to borrow to finance a 10-year project is a capital

structure decision.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

1-3

Chapter 01 - Introduction to Corporate Finance

12. Deciding if a new project should be accepted is a working capital decision.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

13. When evaluating a project in which a firm might invest, the size but not the timing of the

cash flows is important.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Easy

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

14. Working capital management addresses the firm's appropriate level of inventory.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Easy

Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.

Topic: 01-04 Financial Management Decisions

15. Common stockholders or limited partners can lose, at most, what they have invested in a

firm.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-02 The financial implications of the different forms of business organization.

Topic: 01-07 Partnership

Topic: 01-08 Corporation

1-4

Chapter 01 - Introduction to Corporate Finance

16. Partnership income is treated as personal income of the partners.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-02 The financial implications of the different forms of business organization.

Topic: 01-07 Partnership

17. A limited partner can lose his or her investment in the partnership.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-02 The financial implications of the different forms of business organization.

Topic: 01-07 Partnership

18. Maximization of the current earnings of the firm is the main goal of the financial

manager.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-03 The goal of financial management.

Topic: 01-13 The Goal of Financial Management

19. The primary goal of a financial manager should be to maximize the value of shares issued

to new investors in the corporation.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-03 The goal of financial management.

Topic: 01-13 The Goal of Financial Management

1-5

Chapter 01 - Introduction to Corporate Finance

20. The primary goal of financial management is to minimize the corporate tax liability.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-03 The goal of financial management.

Topic: 01-11 The Goal of Financial Management

21. Control of the firm ultimately rests with board of directors. They elect the management,

who, in turn, lead the company.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-18 Do Managers Act in the Shareholders' Interests?

22. The goal of financial managers does not imply that illegal or unethical actions should be

taken in the hope of increasing the value of the firm.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Hard

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-19 Corporate Social Responsibility and Ethical Investing

23. The collapse of companies like Enron and Hollinger International illustrates the impact

unethical behaviour on public trust and confidence.

TRUE

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: Hard

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-19 Corporate Social Responsibility and Ethical Investing

1-6

Chapter 01 - Introduction to Corporate Finance

24. Unethical behaviour does not impact volatility of the stock markets.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Hard

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-19 Corporate Social Responsibility and Ethical Investing

25. The board of directors has the power to act on behalf of the shareholders to hire and fire

the operating management of the firm. In a legal sense, the directors are "principals" and the

shareholders are "agents".

FALSE

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: Easy

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-15 The Agency Problem and Control of the Corporation

Topic: 01-18 Do Managers Act in the Shareholders' Interests?

26. When owners are managers (such as in a sole proprietorship), a firm will have agency

costs.

FALSE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-17 Management Goals

27. IBEC Inc. of Toronto spends approximately $2 million annually to hire auditors to go over

the firm's financial statements. This is an example of an indirect agency cost.

FALSE

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: Medium

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-17 Management Goals

1-7

Chapter 01 - Introduction to Corporate Finance

28. Control of the firm ultimately rests with shareholders. They elect the board of directors,

who then hire and fire management.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-18 Do Managers Act in the Shareholders' Interests?

29. Stakeholder theory suggests that employees, customers, suppliers, and various levels of

government all have financial interests in the firm.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-18 Do Managers Act in the Shareholders' Interests?

30. Corporate social responsibility (CSR) is also referred to as corporate sustainability.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Easy

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-19 Corporate Social Responsibility and Ethical Investing

31. Corporate social responsibility (CSR) is also referred to as the triple bottom line.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Easy

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-19 Corporate Social Responsibility and Ethical Investing

1-8

Chapter 01 - Introduction to Corporate Finance

32. The triple bottom line is defined as a company's commitment to operate in an

economically, socially and environmentally sustainable manner.

TRUE

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Medium

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-19 Corporate Social Responsibility and Ethical Investing

33. There is a significant relationship between CSR activity and corporate performance.

FALSE

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: Medium

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-19 Corporate Social Responsibility and Ethical Investing

34. Research results on CSR activity and corporate performance has been mixed.

TRUE

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: Medium

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-19 Corporate Social Responsibility and Ethical Investing

Multiple Choice Questions

1-9

Chapter 01 - Introduction to Corporate Finance

35. A proprietorship is:

A. A business formed by two or more individuals.

B. A separate legal body formed by an individual who has limited personal liability.

C. A business owned by an individual who has unlimited personal liability.

D. A business managed by a single general partner.

E. A limited liability form of business ownership.

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Easy

Learning Objective: 01-02 The financial implications of the different forms of business organization.

Topic: 01-06 Sole Proprietorship

36. Which of the following would be considered a primary market transaction?

A. A buy order to an investment banker for a new public stock offering.

B. A buy order to a broker for shares of a company on the TSX.

C. A buy order to a broker for shares of a company on the Venture Exchange.

D. A buy order to a dealer for shares of a company OTC.

E. A sell order to a broker for a stock listed on the TSX.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: Easy

Learning Objective: 01-05 The roles of financial institutions and markets.

Topic: 01-23 Primary versus Secondary Markets

37. A stakeholder is:

A. Given to each stockholder when they first purchase their stock.

B. A proxy vote made at a shareholders' meeting.

C. A founding stockholder of the firm.

D. An original creditor of the firm.

E. A person or entity including a stockholder or creditor, who potentially has a claim on the

cash flows of the firm.

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Easy

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-18 Do Managers Act in the Shareholders' Interests?

1-10

Chapter 01 - Introduction to Corporate Finance

38. In a limited partnership:

A. Only the limited partners are involved in the daily management of the firm.

B. Both general and limited partners are involved in the daily management of the firm.

C. A limited partner is liable only for the amount he/she contributed to the partnership.

D. A general partner is liable only for the amount he/she contributed to the partnership.

E. The income earned is taxed like a corporation.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: Medium

Learning Objective: 01-02 The financial implications of the different forms of business organization.

Topic: 01-07 Partnership

39. A stakeholder is:

A. Any person or entity that owns shares of stock of a corporation.

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. A creditor to whom the firm currently owes money and who consequently has a claim on

the cash flows of the firm.

E. Any person or entity who potentially has a claim on the cash flows of the firm.

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Easy

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-18 Do Managers Act in the Shareholders' Interests?

40. An agency problem is said to exist when there is a conflict of interest between _____ and

_____.

A. An agent; his or her representative.

B. A broker; a dealer.

C. A principal; his or her agent.

D. One shareholder; another shareholder.

E. A shareholder; a stakeholder.

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: Easy

Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners.

Topic: 01-16 Agency Relationships

1-11

Chapter 01 - Introduction to Corporate Finance

41. Which one of the following statements concerning a proprietorship is true?

A. A proprietorship can be a business jointly owned by two family members.

B. Income from a proprietorship is taxed as a separate entity.

C. A proprietor is personally responsible for 100% of the firm's liabilities.

D. A partial transfer of ownership is easier with a proprietorship than with a corporation.

E. Income from a proprietorship is taxed at a lower rate than other personal income.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: Medium

Learning Objective: 01-02 The financial implications of the different forms of business organization.

Topic: 01-06 Sole Proprietorship

42. You are interested in purchasing 100 shares of stock in one of the largest corporations in

the Canada. You would most likely purchase the shares in _______________.

A. A secondary market operated as an auction market.

B. A primary market operated as an auction market.

C. A secondary market operated as a dealer market.

D. A primary market operated as a dealer market.

E. A secondary market operated as a money market.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: Easy

Learning Objective: 01-05 The roles of financial institutions and markets.

Topic: 01-23 Primary versus Secondary Markets

43. Which one of the following is a correct statement concerning a sole proprietorship?

A. A sole proprietorship is relatively difficult to form.

B. The profits earned by a sole proprietorship are subject to double taxation.

C. A sole proprietorship is more highly regulated than a corporation.

D. The losses incurred by a sole proprietor are limited to the amount invested in the firm.

E. It may be difficult to transfer the ownership of a sole proprietorship.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: Easy

Learning Objective: 01-02 The financial implications of the different forms of business organization.

Topic: 01-06 Sole Proprietorship