(Test Bank) Essentials of Corporate Finance

Ross,Trayler,Hambusch,Koh,Westerfield,Jordan, 5

Business

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5th Edition

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Test Bank for Essentials of Corporate Finance, The downloadable file consists of 584 pages, and the total size of the file is 3.6 MB. Purchase now only for highly discounted price.

Author(s): Ross, Trayler, Hambusch, Koh, Westerfield, Jordan

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© McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank Chapter 01 Testbank 1. The primary market refers to: A. the original sale of securities by the issuer. B. transactions between two institutional shareholders. C. the sale of securities by an individual shareholder. D. the first trade of a firm's securities when the financial markets open in the morning. 2. The most important function of a financial market is: A. to facilitate the flow of funds between lenders and borrowers. B. to provide a market for shares. C. to provide information about an issuing company's financial situation. D. to secure profits for brokers and agents. 3. A primary financial market is one that: A. involves the sale of existing securities. B. offers securities with the highest expected return. C. offers the greatest choice of shares and debentures. D. involves the sale of securities for the first time. 4. Secondary markets: A. allow borrowers to raise long-term funds. B. facilitate capital-raising in the primary market. C. allow borrowers to raise short-term funds. D. all of the answers options are correct. 5. A corporation: A. can neither sue another party nor be sued. B. may not own property. C. may enter into contracts to borrow funds. D. can issue its own shares but cannot purchase shares in another entity. 6. The amount of debt and equity used by a firm to finance its operations is called the firm's: A. debt ratio. B. working capital ratio. C. capital structure. D. financial position. © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank 7. Short-term assets and short-term liabilities are referred to as the firm's: A. cash flow. B. capital budget. C. capital structure. D. working capital. 8. The management of a firm's cash, inventory and payables is referred to as: A. cash-flow forecasting. B. asset management. C. capital management. D. working capital management. 9. A business organisation that is similar to a sole proprietorship but has two or more owners is called a: A. limited liability company. B. corporation. C. dual company. D. partnership. 10. The legal papers which designate a firm's name, nature of business and intended life are called the: A. corporate by-laws. B. charter or constitution. C. partnership agreement. D. joint share company forms. 11. Any situation where a conflict may arise between the firm's owners and its managers is referred to as a(n): A. organisational problem. B. personnel conflict. C. agency problem. D. control issue. 12. A negotiated sale of securities by an issuer to a specific buyer is called a(n): A. public offering. B. secondary placement. C. independent placement. D. private placement. 13. Over-the-counter markets are __________ markets. A. dealer © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank B. franchise C. private D. auction 14. A securities market with a physical location that is designed to match buyers with sellers is called a(n) ________ market: A. dealer B. private C. auction D. franchise 15. Which one of the following statements is related to capital budgeting? A. A firm should monitor the ratio of debt to equity financing that it uses. B. A firm should monitor the amount of its current assets as compared to its current liabilities. C. A firm should consider the size, risk and timing of an asset's cash flows before deciding to purchase that asset. D. A firm should consider various types of loans offered by various lenders before taking out a loan. 16. Working capital management includes which of the following? I. Controlling the inventory level II. Determining when to pay suppliers III. Deciding how much non-current debt to assume IV. Controlling the amount of cash that is readily available A. I and II only B. I and IV only C. II and III only D. I, II and IV only 17. Who of the following are the actual owners of firms? A. All the shareholders. B. The bondholders. C. The largest shareholders. D. The senior management team. 18. Will and Bill both enjoy sunshine, water and surfboards. Thus, the two friends decided to create a business together in Sydney renting surfboards, paddle boats and inflatable devices. Will and Bill will equally share in the decision making and in the profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts? A. Sole proprietorship B. Limited partnership C. Joint share company © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank D. General partnership 19. Which one of the following best matches the primary goal of financial management? A. Increasing the dollar amount of each sale B. Increasing traffic flow within the firm's stores C. Transforming fixed costs into variable costs D. Increasing the market value of the firm 20. What is the goal of financial management for a sole proprietorship? A. Maximise profit for the period given the current resources of the firm B. Decrease non-current debt to reduce the risk to the owner C. Minimise the tax impact on the proprietor D. Maximise the market value of the equity 21. Which one of the following is most likely to create a situation where an agency conflict could arise? A. Increasing the size of a firm's operations B. Downsizing a firm C. Separating management from ownership D. Decreasing employee turnover 22. Large Australian company stocks such as BHP and Telstra: A. can only trade on the ASX. B. can trade on the stock exchange of their choosing as long as they qualify for listing. C. trade only in dealer markets. D. are sold to investors as private placement and are held to maturity. 23. Which of the following are effective means of aligning management goals with shareholder interests? I. Employee share options II. Threat of a takeover III. Management bonuses tied to performance goals IV. Threat of a proxy fight A. I and III only B. II and IV only C. I, II and III only D. I, II, III and IV 24. Which of the following is an example of the agency problem? A. Managers always invest in projects that have appropriate returns and that will increase shareholder wealth. © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank B. Managers resign when they believe they have not always acted in the best interests of shareholders. C. Managers conduct an acquisition program purely to increase the size of an organisation. D. Managers look for new projects as they want to avoid business risk. 25. Which one of the following situations is most likely to create an agency conflict? A. Compensating a manager based on his or her division's profit for the period B. Giving all employees a bonus if a certain level of efficiency is maintained C. Hiring an independent consultant to study the operating efficiency of the firm D. Rejecting a profitable project to protect employee jobs 26. The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict? A. Organisational B. Structural C. Formation D. Agency 27. The goal of a financial manager should be: A. to maximise next year's profit. B. to minimise next year's cost. C. to maximise the value of the existing equity. D. to take no risks with shareholders' investments. 28. Tim works for a large manufacturing company and is now in charge of all fixed asset purchases. In other words, Tim is in charge of: A. capital structure management. B. asset allocation. C. risk management. D. capital budgeting. 29. The Australian government has a tax claim on the cash flows of a corporation. This claim is defined as a claim by one of the firm's: A. residual owners. B. shareholders. C. financiers. D. stakeholders. 30. Which one of the following correctly defines a common chain of command within a corporation? A. The chief accountant reports directly to the corporate treasurer. © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank B. The treasurer reports directly to the board of directors. C. The chief financial officer reports directly to the board of directors. D. The accountant reports directly to the chief financial officer. 31. Uptown Markets is financed with 45 per cent debt and 55 per cent equity. This mixture of debt and equity is referred to as the firm's: A. capital structure. B. capital budget. C. asset allocation. D. working capital. E. risk structure. 32. Theo’s BBQ has $48 000 in current assets and $39 000 in current liabilities. Decisions related to these accounts are referred to as: A. capital structure decisions. B. capital budgeting decisions. C. working capital management. D. operating management. E. fixed account structure. 33. Margie opened a used bookstore and is both the 100 per cent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts? A. Sole proprietorship B. Limited partnership C. Corporation D. Joint share company E. General partnership 34. One advantage of the corporate form of organisation is the: A. taxation of the corporate profits. B. unlimited liability for its shareholders. C. double taxation of profits. D. ownership can be transferred more quickly and easily. E. ease of formation compared to other organisational forms. 35. Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts? A. Limited partnership B. Corporation C. Sole proprietorship © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank D. General partnership E. Public company 36. An employee has a claim on the cash flows of Martin’s Machines. This claim is defined as a claim by one of the firm's: A. residual owners. B. shareholders. C. financiers. D. provisional partners. E. stakeholders. 37. The shareholders of Weil’s Markets would benefit if the firm were to be acquired by Better Foods. However, Weil’s board of directors rejects the acquisition offer. This is an example of: A. a corporate takeover. B. a capital structure issue. C. a working capital decision. D. an agency conflict. E. a compensation issue. 38. Jamie is employed as a currency trader in the Japanese yen market. Her job falls into which one of the following areas of finance? A. International finance B. Financial institutions C. Corporate finance D. Capital management E. Personal finance 39. If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas? A. International finance B. Private placements C. Corporate finance D. Capital management E. Investments 40. Which one of the following occupations best fits into the corporate area of finance? A. Mortgage broker B. Treasury bill analyst C. Chief financial officer D. Insurance risk manager E. Local bank manager © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank 41. Which one of the following functions should be assigned to the corporate treasurer rather than to the controller? A. Data processing B. Cost accounting C. Tax management D. Cash management E. Financial accounting 42. Which one of the following is a working capital decision? A. How should the firm raise additional capital to fund its expansion? B. What debt-equity ratio is best suited to the firm? C. What is the cost of debt financing? D. Should the firm borrow money for five or for 10 years? E. How much cash should the firm keep in reserve? 43. A sole proprietorship: A. provides limited financial liability for its owner. B. involves significant legal costs during the formation process. C. has an unlimited life. D. has its profits taxed as personal income. E. can generally raise significant capital from non-owner sources. 44. Which one of the following forms of business organisation offers liability protection to some of its owners but not to all of its owners? A. Sole proprietorship B. General partnership C. Limited partnership D. Limited liability company E. Corporation 45. Maria is the sole proprietor of an antique store that is located in a rented warehouse. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and apply the proceeds to the debt II. Sell the lighting fixtures from the building and apply the proceeds to the debt III. Withdraw funds from Maria’s personal account at the bank to pay the store’s debt IV. Sell any assets Maria personally owns and apply the proceeds to the store’s debt A. I only B. III only C. I and II only D. I, II, and III only © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank E. I, III, and IV only 46. Which one of the following statements correctly applies to a sole proprietorship? A. The business entity has an unlimited life. B. The ownership can easily be transferred to another individual. C. The owner enjoys limited liability for the firm's debts. D. Debt financing is easy to arrange in the firm's name. E. Obtaining additional equity is dependent on the owner's personal finances. 47. Which one of the following statements is correct? A. All secondary markets are dealer markets. B. All secondary markets are broker markets. C. All share trades between existing shareholders are primary market transactions. D. All share transactions are secondary market transactions. E. All over-the-counter sales occur in dealer markets. 48. The issuer of a security must be involved in all _____ transactions involving that security. A. exchange-listed B. secondary market C. over-the-counter D. dealer market E. primary market 49. Which one of the following is most apt to align management's priorities with shareholders' interests? A. Holding corporate and shareholder meetings at high-end resort-type locations preferred by managers B. Compensating managers with company shares that must be held for a minimum of three years C. Paying a special management bonus on every fifth year of employment D. Increasing the number of paid holidays that long-term employees are entitled to receive E. Allowing employees to retire early with full retirement benefits 50. Which one of the following is a capital structure decision? A. Determining the optimal inventory level B. Establishing the preferred debt-equity level C. Selecting new equipment to purchase D. Setting the terms of sale for credit sales E. Determining when suppliers should be paid 51. Which one of the following situations is most apt to create an agency conflict? A. Compensating a manager based on his or her division's profit for the period © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank B. Giving all employees a bonus if a certain level of efficiency is maintained C. Hiring an independent consultant to study the operating efficiency of the firm D. Basing management bonuses on the length of employment E. Laying off employees during a slack period 52. An agency issue is most likely to develop when: A. a firm encounters a period of stagnant growth. B. a firm downsizes. C. the control of a firm is separated from the firm’s ownership. D. the firm’s owner is also its key manager. E. a firm is structured as a general partnership. 53. Probably the least effective means of aligning management goals with shareholder interests is: A. the potential for a proxy fight by an unhappy segment of shareholders. B. basing all management bonuses on performance goals. C. holding management salaries steady while increasing share option grants. D. the threat of a takeover of the firm. E. automatically increasing management salaries on an annual basis. 54. Levi had an unexpected surprise when he returned home this morning. He found that a chemical spill from a local manufacturer had spilled over onto his property. The potential claim that he has against this manufacturer is that of a(n): A. general creditor. B. debtholder. C. shareholder. D. stakeholder. E. agent. 55. One example of a primary market transaction would be the: A. sale of 100 shares of share by Maria to her best friend. B. purchase by Theo of 5000 shares of share from his father. C. sale of 1000 shares of newly issued share by Alt Company to Miquel. D. sale by Terry of 50 000 shares of share to his brother. E. sale of 5000 shares of share owned by a corporate CEO to his son. 56. You contacted your share broker this morning and placed an order to sell 300 shares of a share that trades on the ASX. This sale will occur in the: A. dealer market. B. over-the-counter market. C. secondary market. D. primary market. © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank E. tertiary market. 57. Which one of the following applies to a general partnership? A. The firm's operations must be controlled by a single partner. B. Any one of the partners can be held solely liable for all of the partnership's debt. C. The profits of the firm are taxed as a separate entity. D. Each partner's liability for the firm's debts is limited to each partner's investment in the firm. E. The profits of a general partnership are taxed the same as those of a corporation. 58. In a general partnership, each partner is personally liable for: A. only the partnership debts that he or she personally created. B. his or her proportionate share of all partnership debts regardless of which partner incurred that debt. C. the total debts of the partnership, even if he or she was unaware of those debts. D. the debts of the partnership up to the amount he or she invested in the firm. E. all personal and partnership debts incurred by any partner, even if he or she was unaware of those debts. 59. Which one of the following is an advantage of being a limited partner? A. Non-taxable share of any profits B. Control over the daily operations of the firm C. Losses limited to capital invested D. Unlimited profits without risk of incurring a loss E. Active market for ownership interest 60. Which one of the following statements about a limited partnership is correct? A. All partners have their losses limited to their capital investment in the partnership. B. All partners are treated equally. C. There must be at least one general partner. D. Equity financing is easy to obtain and unlimited. E. Any partner can transfer his or her ownership interest without ending the partnership. © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank Chapter 01 Testbank Key 1. The primary market refers to: A. the original sale of securities by the issuer. B. transactions between two institutional shareholders. C. the sale of securities by an individual shareholder. D. the first trade of a firm's securities when the financial markets open in the morning. Ans: A AACSB: Analytic Blooms: Analysis Difficulty: Easy Learning Objective: 1.03 Compare the financial implications of the different forms of business organisation Topic: Financial markets and the corporation 2. The most important function of a financial market is: A. to facilitate the flow of funds between lenders and borrowers. B. to provide a market for shares. C. to provide information about an issuing company's financial situation. D. to secure profits for brokers and agents. Ans: A AACSB: Analytic Blooms: Analysis Difficulty: Hard Learning Objective: 1.03 Compare the financial implications of the different forms of business organisation Topic: Financial markets and the corporation 3. A primary financial market is one that: A. involves the sale of existing securities. B. offers securities with the highest expected return. C. offers the greatest choice of shares and debentures. D. involves the sale of securities for the first time. Ans: D AACSB: Analytic Blooms: Analysis Difficulty: Easy Learning Objective: 1.03 Compare the financial implications of the different forms of business organisation Topic: Financial markets and the corporation 4. Secondary markets: A. allow borrowers to raise long-term funds. B. facilitate capital-raising in the primary market. C. allow borrowers to raise short-term funds. D. all of the answers options are correct. © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank Ans: D AACSB: Analytic Blooms: Analysis Difficulty: Hard Learning Objective: 1.03 Compare the financial implications of the different forms of business organisation Topic: Financial markets and the corporation 5. A corporation: A. can neither sue another party nor be sued. B. may not own property. C. may enter into contracts to borrow funds. D. can issue its own shares but cannot purchase shares in another entity. Ans: C AACSB: Analytic Blooms: Analysis Difficulty: Medium Learning Objective: 1.03 Compare the financial implications of the different forms of business organisation Topic: Forms of business organisation 6. The amount of debt and equity used by a firm to finance its operations is called the firm's: A. debt ratio. B. working capital ratio. C. capital structure. D. financial position. Ans: C AACSB: Analytic Blooms: Analysis Difficulty: Easy Learning Objective: 1.01 Discuss the basic types of financial management decisions and the role of the financial manager Topic: Business finance and the financial manager 7. Short-term assets and short-term liabilities are referred to as the firm's: A. cash flow. B. capital budget. C. capital structure. D. working capital. Ans: D AACSB: Analytic Blooms: Analysis Difficulty: Easy Learning Objective: 1.01 Discuss the basic types of financial management decisions and the role of the financial manager Topic: Business finance and the financial manager 8. The management of a firm's cash, inventory and payables is referred to as: A. cash-flow forecasting. B. asset management. © McGraw-Hill Australia Ross, Essentials of Corporate Finance, Fifth Edition Chapter 01 Testbank C. capital management. D. working capital management. Ans: D AACSB: Analytic Blooms: Analysis Difficulty: Easy Learning Objective: 1.01 Discuss the basic types of financial management decisions and the role of the financial manager Topic: Business finance and the financial manager 9. A business organisation that is similar to a sole proprietorship but has two or more owners is called a: A. limited liability company. B. corporation. C. dual company. D. partnership. Ans: D AACSB: Analytic Blooms: Analysis Difficulty: Easy Learning Objective: 1.03 Compare the financial implications of the different forms of business organisation Topic: Forms of business organisation 10. The legal papers which designate a firm's name, nature of business and intended life are called the: A. corporate by-laws. B. charter or constitution. C. partnership agreement. D. joint share company forms. Ans: B AACSB: Analytic Blooms: Analysis Difficulty: Medium Learning Objective: 1.03 Compare the financial implications of the different forms of business organisation Topic: Forms of business organisation 11. Any situation where a conflict may arise between the firm's owners and its managers is referred to as a(n): A. organisational problem. B. personnel conflict. C. agency problem. D. control issue. Ans: C AACSB: Ethics Blooms: Comprehension Difficulty: Easy Learning Objective: 1.04 Describe the conflicts of interest that can arise between managers and owners Topic: The agency problem and control of the corporation