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Fundamentals of Corporate Finance 2nd Canadian Edition Test Bank

Fundamentals of Corporate Finance, 2nd Cdn. Ed. (Berk et al.)
Chapter 1 Corporate Finance and the Financial Manager
1.1 Why Study Finance
1) The Valuation Principle shows how to make the costs and benefits of a decision
comparable so that we can evaluate them properly.
Answer: TRUE
Diff: 1 Type: TF
Skill: Conceptual
Objective: 1.1 Grasp the importance of financial information in both your personal and business lives
2) Which of the following best describes why the Valuation Principle is a key concept in
making financial decisions?
A) It shows how to assign monetary value to intangibles such as good health and wellbeing.
B) It allows fixed assets and liquid assets to be valued correctly.
C) It gives a good indication of the net worth of a person, item, or company and can be
used to estimate any changes in that net worth.
D) It shows how to make the costs and benefits of a decision comparable so that we can
weigh them properly.
E) It allows us to produce accurate financial statements.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Grasp the importance of financial information in both your personal and business lives
3) Both personal financial decisions and business financial decisions can best be made by
applying the:
A) Internal Ranking Criteria.
B) Best Alternatives Matrix.
C) Valuation Principle.
D) Financial Comparison Analysis.
E) Law of One Price.
Answer: C
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Grasp the importance of financial information in both your personal and business lives
1.2 The Three Types of Firms
1) Partnerships are the most common type of business firm in the world.
Answer: FALSE
Diff: 1 Type: TF
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
2) Corporations have come to dominate the business world through their ability to raise
large amounts of capital by sale of ownership shares to anonymous outside investors.
Answer: TRUE
Diff: 1 Type: TF
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
3) Which of the following types of firms do not have limited liability?
A) sole proprietorships
B) limited partnerships
C) private corporations
D) public corporations
E) limited liability partnerships
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
4) Over 60% of all Canadian business profit is generated by which type of firm?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
E) limited liability partnerships
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
5) What is the most common type of firm in Canada and the world?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
E) limited liability partnerships
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
6) Which of the following is typically the major factor in limiting the growth of a sole
proprietorship?
A) The organization of such firms tends to become extremely complicated over time.
B) It is extremely difficult to transfer control of such a firm to a new owner if the present
owner dies or wishes to sell the firm.
C) The amount of money that can be raised by the firm is limited by the fact that the
single owner must make good on all debts.
D) Investors have a great deal of control over the day-to-day running of the firm, leading
to confusion when conflicts in direction arise.
E) The owner’s personal reputation is the basis for the business.
Answer: C
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
7) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in
that same firm. Which of the following statements regarding their respective relationships
to the firm is correct?
A) Joe has no management authority within the partnership.
B) Jane is legally involved in the managerial decision making of the firm.
C) Jane’s liability for the firm’s debts consists solely of her investment in the firm.
D) Withdrawal of Jane from the partnership will dissolve that partnership.
E) Jane’s liability consists of all the firm’s outstanding debts.
Answer: C
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
8) What is the major way in which the roles and obligations of the owners of a limited
liability partnership differ from the roles and obligations of limited partners in a limited
partnership?
A) The owners of a limited liability partnership have personal obligation for debts
incurred by the company.
B) There is no separation between the company and its owners in a limited liability
partnership.
C) The owners of a limited liability partnership can withdraw from the company without
the company being dissolved.
D) The owners of a limited liability partnership can take an active role in running the
company.
E) The owners of a limited liability partnership are responsible for the negligence of other
partners.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
9) In which of the following ways is a limited liability partnership like a corporation?
A) Both types of firm were created and developed first in Canada.
B) Both can choose to be considered a partnership for tax purposes.
C) All of its owners’ liability is restricted to their investment in the firm.
D) It is directly managed by the owners of the firm.
E) Owners have unlimited personal liability for the negligence of those whom they
supervise.
Answer: C
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
10) Why is it possible for a corporation to enter into contracts, acquire assets, incur
obligations, and enjoy protection against the seizure of its property?
A) The number of owners, and hence the spread of risk among these owners, is not
limited.
B) Its owners are liable for any obligations it enters into.
C) The province in which the corporation is incorporated provides safeguards against any
wrongdoing by the corporation.
D) It is a legally defined, artificial entity that is separate from its owners.
E) Corporations represent their owners, who have all of those rights.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
11) What is one of the major advantages corporations have over other business entities?
A) It is harder for a corporation to raise capital than other forms of businesses.
B) The owners of the corporation are personally liable for its obligations.
C) Corporations are the only organizational structures not subject to double taxation.
D) There is no limitation on who can own its stock.
E) It is less costly to set up a corporation.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
12) A flow-through entity that holds all the debt and equity securities of a corporation is
called
A) an energy trust.
B) a real estate investment trust.
C) a business income trust.
D) a parent corporation.
E) an ownership trust.
Answer: C
Diff: 1 Type: MC
Skill: Definition
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
13) The collection of all the outstanding shares of a corporation is known as the
A) Debt.
B) Assets.
C) Liabilities.
D) Equity.
E) Ownership.
Answer: D
Diff: 1 Type: MC
Skill: Definition
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
14) Katie owns 12.5% of the stock of the Gimli Corporation. The tax rate on dividend
income is 24%. If Gimli makes a dividend payment of $25,000,000 paid proportionally to
its shareholders, how much of this amount would Katie receive after taxes?
A) $750,000
B) $2,375,000
C) $3,125,000
D) $6,000,000
E) $19,000,000
Answer: B
Explanation: B) Katie will receive 12.5% of the dividend payment proportional to her
ownership:
0.125 × 25,000,000 = $3,125,000. She pays taxes at 24%, and receives (3,125,000)(1 –
0.24) = 2,375,000 after taxes.
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
15) Kuljeet owns 20% of the stock of the Flin Flon Corporation. The tax rate on dividend
income is 15%. If Flin Flon makes a dividend payment of $2,000,000 paid proportionally
to its shareholders, how much of this amount would Kuljeet receive after taxes?
A) $450,000
B) $300,000
C) $60,000
D) $340,000
E) $400,000
Answer: D
Explanation: D) Kuljeet will receive 20% of the dividend payment proportional to her
ownership:
0.20 × 2,000,000 = $400,000. She pays taxes at 15%, and receives (400,000)(1 – 0.15) =
$340,000 after taxes.
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
16) Saskatoon Smelting is a corporation that earned $4 per share before it paid any taxes.
The firm retained $2 of after-tax earnings for reinvestment, and distributed what
remained in dividend payments. If the corporate tax rate was 25% and dividend earnings
were taxed at 15%, what was the value of the dividend earnings received after tax by a
holder of 10,000 shares of Saskatoon Smelting?
A) $7,500
B) $17,000
C) $8,500
D) $10,000
E) $20,000
Answer: C
Explanation: C) Corporate tax paid on $4 earnings = $4 × 0.25 = $1; earnings after tax
=4 – 1 = $3; earnings distributed as dividends = $3 – $2 = $1; taxes paid on dividends by
a shareholder = 1 × 0.15 = 0.15; after-tax dividends per share = 1 – 0.15 = $0.85; hence
a holder of 10,000 shares receives 0.85 × 100,000 = $8,500
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
17) Moncton Meats is a corporation that earned $3 per share before it paid any taxes. The
firm retained $1 of after-tax earnings for reinvestment, and distributed what remained in
dividend payments. You hold 20,000 shares of Moncton Meats in a tax-free savings
account. If the corporate tax rate was 30% and dividend earnings were taxed at 20%,
what was the value of your dividend earnings received after all taxes are paid?
A) $40,000
B) $16,000
C) $20,000
D) $17,600
E) $22,000
Answer: E
Explanation: E) Corporate tax paid on $3 earnings = $3 × 0.3 = 0.9; earnings after tax =
3 – 0.9 = $2.1; earnings distributed as dividends = $2.1 – $1 = $1.1; hence a holder of
20,000 shares in a TFSA receives 1.1 × 20,000 = $$22,000
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
18) Tofino Toffee is a corporation that earned $5 per share before it paid any taxes. The
firm retained $2.50 of after-tax earnings for reinvestment, and distributed what remained
in dividend payments. You hold 6,000 shares of Tofino Toffee in a tax-free savings account,
and 4,000 shares outside of a tax-free savings account. If the corporate tax rate was 25%
and dividend earnings were taxed at 15%, what was the value of your dividend earnings
received after all taxes are paid?
A) $12,500
B) $11,750
C) $10,625
D) $23,500
E) $13,175
Answer: B
Explanation: B) Corporate tax paid on $5 earnings = $5 × 0.25 =1.25; earnings after tax
= 5 – 1.25 = $3.75; earnings distributed as dividends = $3.75 – $2.50 = $1.25;
after-tax dividends = 1.25 × (1 – 0.15) = $1.0625;
Inside TFSA: 1.25 × 6,000 = $7,500
Outside TFSA: 1.0625 × 4,000 = $4,250; Total earnings =7,500 + 4,250 = $11,750
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
19) You are a unit holder in Pembina Properties, a real estate investment trust (REIT). The
REIT announces a profit of $8 per share, of which it retains $3 for reinvestment and
distributes the rest as dividend payments. Given your personal tax rate of 30%, and the
tax rate on dividends is 15%, how much tax must you pay per unit?
A) $0.90
B) $1.20
C) $0.75
D) $0.45
E) $0
Answer: B
Explanation: B) Tax paid by unit holder of a REIT = 5 × 0.3 = $1.50
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
20) You hold 1,000 units of Calgary Commercial Property, a real estate investment trust
(REIT). The REIT announces a profit of $10 per share, of which it retains $4 for
reinvestment and distributes the rest as dividend payments. Given your personal tax rate
of 40%, and the tax rate on dividends is 15%, how much tax must you pay on your
holdings?
A) $900
B) $4,000
C) $2,400
D) $1,500
E) $1,600
Answer: C
Explanation: C) Tax paid by unit holder of a REIT = 6 × 0.4 × 1,000 units = $2,400
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
21) You hold 1,000 units of Calgary Commercial Property, a real estate investment trust
(REIT). 500 of those units are held inside a tax-free savings account, the other 500 are
outside the tax-free savings account. The REIT announces a profit of $10 per share, of
which it retains $4 for reinvestment and distributes the rest as dividend payments. Given
your personal tax rate of 30%, and the tax rate on dividends is 15%, how much tax must
you pay on your holdings?
A) $900
B) $450
C) $1,800
D) $1,500
E) $1,600
Answer: A
Explanation: A) Tax paid by unit holder of a REIT = 6 × 0.3 × 500 units = $900
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
22) You hold 1,000 units of Calgary Commercial Property, a real estate investment trust
(REIT). 500 of those units are held inside a tax-free savings account, the other 500 are
outside the tax-free savings account. The REIT announces a profit of $10 per share, of
which it retains $4 for reinvestment and distributes the rest as dividend payments. Given
your personal tax rate of 30%, and the tax rate on dividends is 15%, what is your total
after-tax income?
A) $6,000
B) $5,100
C) $5,550
D) $4,200
E) $5,000
Answer: B
Explanation: B) Tax paid by unit holder of a REIT = 6 × 0.3 × 500 units = $900
Total dividends = 6 × 1,000 = $6,000. After-tax income = 6,000 – 900 = $5,100
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
23) Red Deer Plumbing Supply Co. earns $4.50 per share before taxes. The corporate tax
rate is 30%, the personal tax rate on dividends is 15%, and the personal tax rate on nondividend
income is 40%. What is the total amount of taxes paid per share if the company
pays a $2.00 dividend?
A) $0.30
B) $2.15
C) $1.35
D) $1.65
E) $0.80
Answer: D
Explanation: D) Corporate tax = $4.50 × 30% = $1.35, Personal tax = $2.00 × 15% =
$0.30.
Total = $1.35 + $0.30 = $1.65
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
24) Windsor Windows earns $4.50 per share before taxes. The corporate tax rate is 30%,
the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend
income is 40%. What is the total amount of taxes paid per share if the company pays a
$2.00 dividend but all of the shares are held in a tax-free savings account?
A) $0.30
B) $2.15
C) $1.35
D) $1.65
E) $0.80
Answer: C
Explanation: C) Corporate tax = $4.50 × 30% = $1.35, no personal tax.
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
25) Windsor Windows earns $4.50 per share before taxes and pays a dividend of $2.00 per
share. The corporate tax rate is 30%, the personal tax rate on dividends is 15%, and the
personal tax rate on non-dividend income is 40%. What is the after-tax amount an
individual would receive per share from the dividend?
A) $2.68
B) $2.15
C) $1.35
D) $1.65
E) $1.70
Answer: E
Explanation: E) Personal tax = $2.00 × 0.15 = $0.30. After-tax income = $2.00 – $0.30 =
$1.70.
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
26) You own shares in two different companies, Ace Holdings, and Beta Inc. Ace Holdings
earns $6.00 per share before taxes, has a corporate tax rate of 25%, and pays out 50% of
its after-tax earnings as dividends. Beta Inc. earns $4.00 per share before taxes, has a
corporate tax rate of 15%, and pays out 100% of its after-tax earnings as dividends. Which
company pays you a higher dividend, and by how much?
A) Beta Inc., by $1.15
B) Beta Inc., by $1.75
C) Ace Holdings, by $0.15
D) Ace Holdings, by $1.10
E) Ace Holdings, by $2.25
Answer: A
Explanation: A) Ace Holdings dividend = $6.00(1 – 0.25)(0.5) = $2.25. Beta Inc. dividend
= $4.00(1 – 0.15) = $3.40. $3.40 – 2.25 = $1.15.
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
27) You own 100 shares in each of two different companies, Ace Holdings, and Beta Inc.
Ace Holdings earns $6.00 per share before taxes, has a corporate tax rate of 25%, and
pays out 50% of its after-tax earnings as dividends. Beta Inc. earns $4.00 per share before
taxes, has a corporate tax rate of 15%, and pays out 100% of its after-tax earnings as
dividends. The tax rate on dividend income is 15%. If all of your shares are held outside a
TFSA, what is the total after-tax income you receive from your dividends?
A) $191.25
B) $289.00
C) $480.25
D) $565.00
E) $739.00
Answer: C
Explanation: C) Ace Holdings dividend = $6.00(1 – 0.25)(0.5) = $2.25. After dividend tax:
$2.25(1 – 0.15) = $1.9125. $1.9125 × 100 shares = $191.25. Beta Inc. dividend = $4.00(1
– 0.15) = $3.40. After dividend tax: $3.40(1 – 0.15) = $2.89. $2.89 × 100 shares = $289.
Total received = $191.25 + $289 = $480.25.
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
28) You own 100 shares in each of two different companies, Ace Holdings, and Beta Inc.
Ace Holdings earns $6.00 per share before taxes, has a corporate tax rate of 25%, and
pays out 50% of its after-tax earnings as dividends. Beta Inc. earns $4.00 per share before
taxes, has a corporate tax rate of 15%, and pays out 100% of its after-tax earnings as
dividends. The tax rate on dividend income is 15%. If your shares of Ace Holdings are held
outside of a TFSA, and your shares of Beta Inc. are held inside a TFSA, what is the total
after-tax income you receive from your dividends?
A) $191.25
B) $289.00
C) $480.25
D) $531.25
E) $565.00
Answer: D
Explanation: D) Ace Holdings dividend = $6.00(1 – 0.25)(0.5) = $2.25. After dividend tax:
$2.25(1 – 0.15) = $1.9125. $1.9125 × 100 shares = $191.25. Beta Inc. dividend = $4.00(1
– 0.15) = $3.40. $3.40 × 100 shares = $340. Total received = $191.25 + $289 = $531.25.
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
29) You own 50 units of a real estate investment trust (REIT) and 50 shares of a public
corporation. The REIT earns $6.00 per unit.The corporation earns $4.00 per share before
taxes. The corporate tax rate is 25%, your personal tax rate is 35%, and the tax rate on
dividend income is 15%. What is the total after-tax income you receive, if everything is
held outside a TFSA?
A) $273.75
B) $318.75
C) $322.50
D) $382.50
E) $450.00
Answer: C
Explanation: C) REIT distribution: $6.00 × 50 = $300.00. After tax: $300.00( 1 – 0.35) =
$195.00. Dividends after corporate taxes: ($4.00 × 50)(1 – 0.25) = $150. After dividend
tax: $150(1 – 0.15) = $127.50. Total income = $195.00 + 127.50 = $322.50
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
30) You own 50 units of a real estate investment trust (REIT) and 50 shares of a public
corporation. The REIT earns $6.00 per unit.The corporation earns $4.00 per share before
taxes. The corporate tax rate is 25%, your personal tax rate is 35%, and the tax rate on
dividend income is 15%. What is the total after-tax income you receive, if your REIT
holdings are outside of a TFSA, and your corporation shares are held inside a TFSA?
A) $273.75
B) $318.75
C) $322.50
D) $345.00
E) $450.00
Answer: D
Explanation: D) REIT distribution: $6.00 × 50 = $300.00. After tax: $300.00( 1 – 0.35) =
$195.00. Dividends after corporate taxes: ($4.00 × 50)(1 – 0.25) = $150. Total income =
$195.00 + 150.00 = $345.00
Diff: 2 Type: MC
Skill: Analytical
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
31) What is the process of double taxation for the stockholders in a corporation?
A) Their shares are taxed when they are both bought and sold.
B) The corporation is taxed on the profits it makes, and the owners are taxed when this
profit is distributed to them.
C) The owners of a corporation are taxed when they receive dividend payments and when
they make a profit from the sale of shares.
D) The corporation must pay taxes on any profits it makes, and the capital raised by the
sale of shares is also subject to taxation.
E) The corporation is taxed on any profits it makes, and owners are taxed when they sell
their shares.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
32) Which of the following is an advantage of a sole proprietorship?
A) double taxation
B) ease of setup
C) limited liability
D) separation of ownership and control
E) the ability to raise substantial amounts of capital
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
33) What are the main differences between a partnership and sole proprietorship?
Answer: While a sole proprietor has the same identity as its single owner, a partnership
of general partners has the same identity as its partners. Each general partner is
responsible for the decisions taken by that partner as well as any other general partner.
Diff: 1 Type: SA
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
34) What are the main differences between a limited partnership and limited liability
partnership?
Answer: A limited partnership is required to have at least one general partner. A limited
liability partnership can only be used in the legal and accounting professions. The
limitation on a partner’s liability is only in cases related to actions of negligence of other
partners or those supervised by other partners.
Diff: 2 Type: SA
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
35) How is a corporation different from most of the other forms of business organizations?
Answer: A corporation has a separate legal identity from those of its owners. This
separation gives the owners limited liability for the actions of the corporation. The down
side is the process of double taxation for each dollar earned by the corporation, once
when it is earned by the corporation and subsequently when it is passed on to the owners
as a dividend.
Diff: 2 Type: SA
Skill: Conceptual
Objective: 1.2 Understand the important features of the three main types of firms and see why the
advantages of the corporate form have led it to dominate economic activity
1.3 The Financial Manager
1) The principal goal of the financial manager is to maximize the wealth of the
shareholders.
Answer: TRUE
Diff: 1 Type: TF
Skill: Conceptual
Objective: 1.3 Explain the goal of the financial manager and the reasoning behind that goal, as well
as understand the three main types of decisions a financial manager makes
2) It is generally not the duty of financial managers to ensure that a firm has the cash it
needs for day-to-day transactions.
Answer: FALSE
Diff: 1 Type: TF
Skill: Conceptual
Objective: 1.3 Explain the goal of the financial manager and the reasoning behind that goal, as well
as understand the three main types of decisions a financial manager makes
3) Which of the following are major duties of a financial manager?
I. To make investment decisions
II. To make financing decisions
III. To manage cash flow from operating activities
A) I only
B) I and II only
C) I and III only
D) II and III only
E) I, II and III
Answer: E
Diff: 3 Type: MC
Skill: Conceptual
Objective: 1.3 Explain the goal of the financial manager and the reasoning behind that goal, as well
as understand the three main types of decisions a financial manager makes
4) Why in general do financial managers make financial decisions in a corporation, rather
than the owners making these decisions themselves?
A) It is best for the control of the finances of a corporation to be in the hands of a
disinterested third party.
B) The interests of the various owners may conflict with each other.
C) The owners may not be Canadian citizens or residents.
D) There are often many owners, and they can often change as they buy and sell stock.
E) The owners will make decisions for their own self-interest rather than the corporation’s
interests.
Answer: D
Diff: 2 Type: MC
Skill: Conceptual
Objective: 1.3 Explain the goal of the financial manager and the reasoning behind that goal, as well
as understand the three main types of decisions a financial manager makes
5) What is the most important duty of a financial manager?
A) to ensure that the firm has enough cash on hand to meet its commitments at any given
time
B) to decide how to pay for investments
C) to manage working capital
D) to make investment decisions
E) to minimize taxes
Answer: D
Diff: 2 Type: MC
Skill: Conceptual
Objective: 1.3 Explain the goal of the financial manager and the reasoning behind that goal, as well
as understand the three main types of decisions a financial manager makes
6) The financial manager of a well-regarded book publishing firm wishes to buy a small
Internet publishing company to provide an avenue for sale of its materials online. In order
to raise the funds to make this purchase, the financial manager decides to sell more stock
in the company. How is the financial manager raising funds in this case?
A) by increasing the debt burden carried by the company
B) by raising the company’s equity by encouraging new owners to take a stake in the
company
C) by decreasing the ratio of equity to debt held by the company
D) by increasing the value of shares held by the existing owners of the company
E) by adding a new revenue stream from the Internet publishing company
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.3 Explain the goal of the financial manager and the reasoning behind that goal, as well
as understand the three main types of decisions a financial manager makes
7) A company that produces racing motorbikes has several models that sell well within
the motorcycle racing community and that are very profitable for the company. Despite
having a profitable product, why must this company take care to ensure that it has
sufficient cash on hand to meet its obligations?
A) Profits from the sales of popular models will be lost when returned to the shareholders
in the form of dividends.
B) New models will require a lot of money to develop and bring to market before they
generate any revenue.
C) The company will have built up debts which must be repaid in order to bring the
current models to market.
D) Equity must be raised to finance the development of new models to replace the
existing models.
E) This will enable the company to maintain a high share price for its stock.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.3 Explain the goal of the financial manager and the reasoning behind that goal, as well
as understand the three main types of decisions a financial manager makes
8) A typical company has many types of shareholders, from individuals holding a few
shares, to large institutions that hold very large numbers of shares. How does a financial
manager ensure that the priorities and concerns of such disparate stockholders are met?
A) The financial manager should seek to make investments that do not harm the interests
of the stockholders.
B) The decisions taken by the financial manager should be solely influenced by the benefit
to the company since, by maximizing its fitness, he or she will also maximize the benefits
of that company to the shareholders.
C) The financial manager should consider the interests and concerns of large
shareholders a priority, so the needs of those who hold a controlling interest in the
company are met.
D) In general, all shareholders will agree that they are better off if the financial manager
works to maximize the value of their investment.
E) The financial manager will consider the priorities of all the shareholders at the annual
shareholders’ meeting.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.3 Explain the goal of the financial manager and the reasoning behind that goal, as well
as understand the three main types of decisions a financial manager makes
9) Whose interests should a financial manager consider paramount when making a
decision?
A) the stockholders who have risked their money to become owners of the company
B) the employees and associated stakeholders who are employed by the company
C) the public who consume the company’s goods and services
D) the senior management and associated colleagues at the executive level within the
company
E) the financial manager’s own interests
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.3 Explain the goal of the financial manager and the reasoning behind that goal, as well
as understand the three main types of decisions a financial manager makes
10) What is the principal guiding factor for the financial manager?
Answer: Maximizing shareholder wealth is the paramount guiding factor for the financial
manager.
Diff: 1 Type: SA
Skill: Conceptual
Objective: 1.3 Explain the goal of the financial manager and the reasoning behind that goal, as well
as understand the three main types of decisions a financial manager makes
1.4 The Financial Manager’s Place in the Corporation
1) In most corporations the owners exercise direct control of the corporation.
Answer: FALSE
Diff: 1 Type: TF
Skill: Conceptual
Objective: 1.4 Know how a corporation is managed and controlled, the financial manager’s place in
it, and some of the ethical issues financial managers face
2) How do the shareholders of most corporations exercise their control of that
corporation?
A) by voting on issues that concern them
B) by electing members of a board of directors
C) by vetting the decisions of the board of directors
D) by providing oversight of the day-to-day running of the corporation
E) by hiring other shareholders to run the corporation
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.4 Know how a corporation is managed and controlled, the financial manager’s place in
it, and some of the ethical issues financial managers face
3) Who is typically responsible for the day-to-day running of a corporation?
A) the shareholders
B) the board of directors
C) the management team
D) the sole proprietor
E) the limited partner
Answer: C
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.4 Know how a corporation is managed and controlled, the financial manager’s place in
it, and some of the ethical issues financial managers face
4) What are the responsibilities of the board of directors?
A) make rules on how the corporation is run, set policy, and monitor the performance of
the company
B) oversee the day-to-day running of the corporation.
C) making investment decisions
D) risk management
E) implementing the rules and policies set by the CEO
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.4 Know how a corporation is managed and controlled, the financial manager’s place in
it, and some of the ethical issues financial managers face
5) Which of the following would be more typically the responsibility of a controller rather
than a treasurer?
A) overseeing accounting and tax functions
B) capital budgeting
C) managing credit
D) making investment decisions
E) managing risk
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.4 Know how a corporation is managed and controlled, the financial manager’s place in
it, and some of the ethical issues financial managers face
6) Which of the following would be best considered to be a principal-agent problem in the
behaviour of the following financial managers?
A) Bill chooses to pursue a risky investment for the company’s funds, because his
compensation will substantially rise if it succeeds.
B) Sue instructs her staff to skip safety inspections in one of the company’s factories,
knowing that it will likely fail the inspection and incur significant costs to fix.
C) James ignores an opportunity for his company to invest in a new drug to fight
Alzheimer’s disease, judging the drug’s chances of succeeding as low.
D) Michael chooses to enhance his firm’s reputation at some cost to its shareholders by
sponsoring a team of athletes for the Special Olympics.
E) Tara treats her staff to a free lunch at the company’s expense to increase morale.
Answer: A
Diff: 3 Type: MC
Skill: Conceptual
Objective: 1.4 Know how a corporation is managed and controlled, the financial manager’s place in
it, and some of the ethical issues financial managers face
7) A factory owner wants his workers to produce as many widgets as they can, so he pays
his workers based on how many widgets they produce. However, in order to make sure
that the workers do not rush and produce a large number of poorly made widgets, he
checks the widgets at random at various stages of their manufacture. If a defect is found
in a widget, the pay of the entire section of the factory responsible for that defect is
docked. How is this factory owner seeking to solve the principal-agent problem in this
case?
A) by supplying incentives so the agents act in the way principal desires
B) by ensuring that all workers co-operate to maximize the gains of their section
C) by making the agents into principals themselves
D) by maximizing the information that the principal obtains about the behaviour of the
agents
E) by using quality control techniques
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.4 Know how a corporation is managed and controlled, the financial manager’s place in
it, and some of the ethical issues financial managers face
8) What is the most common way that principal-agent problems are addressed in most
corporations?
A) by minimizing the number of decisions that a manager makes where there is a conflict
between the managers interests and those of the shareholders
B) by terminating the employment of employees who are found to have put their own
interests above those of the company
C) by using disinterested outside bodies to adjudicate between managers and
shareholders when such conflicts arise
D) by prosecuting managers who have been found to have illegally used company moneys
for their own benefit
E) by paying the managers high salaries to encourage them to act in the company’s
interests.
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.4 Know how a corporation is managed and controlled, the financial manager’s place in
it, and some of the ethical issues financial managers face
9) A company’s board of directors chooses to provide a comprehensive health care plan
for the families of all employees, despite the large cost. They argue that this will not only
increase the number of employees who stay with the firm, and thus reduce some costs
involved in employee turnover, but also increase the employees’ diligence and industry.
What general principle is being argued by the board of directors?
A) In a conflict between stakeholders in a company, the most important stakeholder is not
always the stockholders.
B) Some activities that decrease shareholders’ wealth may have intangible benefits which
increase the strength of the company overall.
C) When a conflict of interest arises between shareholders and other stakeholders, in
general, the correct solution is the one that creates the greatest good for the greatest
number of stakeholders.
D) Ethical decisions should be assessed on their moral value, not on their value in dollars
and cents.
E) Decisions involving employees must take fairness into account.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.4 Know how a corporation is managed and controlled, the financial manager’s place in
it, and some of the ethical issues financial managers face
10) Why is the stock price of a company an indication of the performance of that
company’s senior managers?
A) Well-run companies are invariably highly profitable, which leads to a higher share
price.
B) In general, people want to invest in a well-managed corporation, which will drive up
the price of shares.
C) Investors who can see that a company is well-run will hold on to their shares, even if
the company faces temporary setbacks, since they know that the stock price will likely
rise again.
D) Larger companies tend to be better run and so have higher stock prices.
E) Managers who perform well get paid well, and can afford to buy more shares of their
own company, driving up the share price.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.4 Know how a corporation is managed and controlled, the financial manager’s place in