8. Which of the following is not considered one of the basic questions of corporate finance? A) What long-lived assets should the firm invest? B) How much inventory should the firm hold? C) How can the firm raise cash for required capital expenditures? D) How should the short-term operating cash flows be managed? E) All of the above. Answer: B Difficulty: Medium Page: 4
3. The balance sheet is made up of what five key components? A) Fixed assets, current liabilities, long term debt, tangible current assets and shareholders equity B) Intangible fixed assets, current liabilities, long-term debt, net income and current assets C) Fixed assets, long-term debt, current assets, current liabilities and shareholders equity D) Current assets, fixed assets, long term debt, shareholders equity and retained earnings E) None of the above. Answer: C Difficulty: Medium Page: 3
6. Capital structure is defined as the major financing of the firm. The capital structure is divided A) between debtholders and creditors. B) creditors and shareholders. C) assets and liabilities. D) All of the above. E) None of the above. Answer: B Difficulty: Medium Page: 4
Ross/Westerfield/Jaffe, CorporaInventory is a(n) ________ account. A) current asset B) current liability C) equity D) fixed asset E) long-term liability Answer: A Difficulty: Easy Page: 3
2. Firms issue securities or financial instruments (or claims) to raise capital. These claims are classified as A) stocks or bonds. B) debt or equity. C) contingent claims on the value of the firm. D) All of the above. E) None of the above. Answer: D Difficulty: Medium Page: 2
12. Generally accepted accounting principles may recognize and record a sale A) before a customer pays assuming they will pay soon. B) only after the company receives payment in full. C) when the company receives at least 50% of the total revenue from the customer. D) All of the above. E) None of the above. Answer: A Difficulty: Medium Page: 7
13. Time preference refers to the fact that A) corporations match current assets with current liabilities to minimize the chance of bankruptcy. B) corporations match both current and long-term assets with current and long-term liabilities to minimize the change of bankruptcy. C) investors prefer current cash flows to future cash flows. D) investors seek to time cash flows to minimize tax liabilities. E) None of the above. Answer: C Difficulty: Medium Page: 8
Chapter 1 Introduction to Corporate Finance
Multiple Choice Questions
1. Conflicts between shareholders and managers are usually resolved A) by arbitration. B) in favor of shareholders. C) in favor of managers. D) by rules of first priority. E) None of the above. Answer: B Difficulty: Easy Page: 1
11. Value is created and recognized over time if A) cash raised is invested in the investment activities of the firm. B) funds are raised in the capital markets. C) cash paid to investors, shareholders and bondholders, is greater than cash raised in the financial markets. D) management pursues activities to reduce taxes to zero. E) All of the above. Answer: C Difficulty: Medium Page: 7
7. Using the balance sheet model of the firm, finance may be thought of as analysis of three primary subject areas. Which of the following groups correctly lists these three areas? A) Capital budgeting, capital structure, net working capital B) Capital budgeting, capital structure, security marketing C) Capital budgeting, net working capital, tax analysis D) Capital budgeting, tax analysis, security marketing E) Net working capital, tax analysis, security marketing Answer: A Difficulty: Easy Page: 4
9. The need to manage net working capital arises because A) financial management is naturally broken into those areas. B) shareholders want to ensure they receive dividend payments. C) there is a mismatch between the timing of cash inflows and cash outflows. D) the sum of current assets and current liabilities usually is zero. E) the capital structure pie is limited in size. Answer: C Difficulty: Easy Page: 4
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Test Bank, Chapter 1
10. In the managerial structure of the corporation the two officers and their responsibilities that report directly to the Chief Financial Officer (CFO) are A) the credit manager who handles accounts receivable and the tax manager who minimizes tax payments. B) the personnel manager who manages salaries and compensation, and the production operations manager who manages facility operations. C) the treasurer who is responsible handling cash flow and making financial decisions and the tax manager who minimizes tax payments. D) the controller who manages the accounting function and the treasurer who is responsible handling cash flow and making financial decisions. E) None of the above. Answer: D Difficulty: Easy Page: 5-6