Corporate Finance Quiz 1

Which of the following best describes why the Valuation Principle is a key concept in making financial decisions?

• It shows how to assign monetary value to intangibles such as good health and well-being.

• It allows fixed assets and liquid assets to be valued correctly.

• 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.

• It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.

Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct?

• Joe has no management authority within the partnership.

• Jane is legally involved in the managerial decision making of the firm.

• Jane's liability for the firm's debts consists solely of her investment in the firm.

• Withdrawal of Jane from the partnership will dissolve the partnership.

What is the major advantage corporations have over other business entities?

• It is easier for a corporation to raise capital than other forms of businesses.

• A corporation is treated as a separate legal entity for tax and legal purposes.

• A corporation's shares can be freely traded among its shareholders.

• All of the above are advantages that a corporation has over other business forms.

A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which 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?

• Profits from the sales of popular models will be lost when returned to the shareholders in the form of dividends.

• New models will require a lot of money to develop and bring to market before they generate any revenue.

• The company will have built up debts which must be repaid in order to bring the current models to market.

• Equity must be raised to finance the development of new models to replace the existing models.

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?

• The financial manager should seek to make investments that do not harm the interests of the stockholders.

• 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.

• 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.

• In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.

Which of the following is NOT a function of the board of directors?

• determining how top executives should be compensated

• monitoring the performance of the company

• answering to shareholders of the company

• day-to-day running of the company

Which of the following would be more typically the responsibility of a controller rather than a treasurer?

• overseeing accounting and tax functions

• capital budgeting

• managing credit

• making investment decisions

What is the most common way that agency conflict problems are addressed in most corporations?

• by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders

• by terminating the employment of employees who are found to have put their own interests above those of the company

• by using disinterested outside bodies to adjudicate between managers and shareholders when such conflicts arise

• by prosecuting managers who have been found to have illegally used company moneys for their own benefit

A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.

• shareholder proposal

• leveraged buyout

• shareholder action

• hostile takeover

What is the bid-ask spread?

• the difference in price available for an immediate sale of a stock and the immediate purchase of the stock

• all of the costs and fees that a stock exchange charges in order to process a transaction

• the rise or fall in the value of a stock between the time it is acquired by an investor and sold by that investor

• the difference in the selling price of a stock between different exchanges