Quiz about CHAPTER 01 - GOALS AND GOVERNANCE OF THE FIRM

Question 1

Capital structure refers to: *a/ decisions related to long-term debt and equity financing

Accepted Answer

decisions related to long-term debt and equity financing

Answer

the acquisition or disposition of a building or other long-term asset

Answer

the determination of the ideal mix of current versus long-term assets

Answer

the methods by which fixed assets are used to produce a tangible product.

Question 2

Generally, a corporation is owned by the: I) Managers; II) Board of Directors; III) Shareholders

Accepted Answer

a/ III only

Answer

b/ I only

Answer

c/ II and III

Answer

d/ I, II and III

Question 3

Finance, generally, deals with: I) Money; II) Markets; III) People

Accepted Answer

a/ I, II and III

Answer

b/ I only

Answer

c/ I and II only

Answer

d/ I and III only

Question 4

The following are examples of tangible assets except: *a/ Trademarks

Accepted Answer

Trademarks

Answer

Factories

Answer

Machinery

Answer

Offices

Question 5

The process of planning and managing a firm's long-term investments is referred to as: *a/ capital budgeting

Accepted Answer

capital budgeting

Answer

agency cost analysis

Answer

financial depreciation

Answer

working capital management

Question 6

The following are important functions of financial markets: I) Source of financing; II) Provide liquidity; III) Reduce risk; IV) Source of information *a/ I, II, III, and IV

Accepted Answer

I, II, III, and IV

Answer

I only

Answer

I and II only

Answer

IV only

Question 7

The following groups are some of the claimants to a firm's income stream: I) Shareholders; II) Bondholders; III) Employees; IV) Management and V) Government *a/ I, II, III, IV and V

Accepted Answer

I, II, III, IV and V

Answer

I and II only

Answer

I, II, and III only

Answer

I, II, III and IV only

Question 8

The following are some of the actions that shareholders can take if the corporation is not performing well: *a/ All of the answers are correct

Accepted Answer

Replace the board of directors in an election.

Accepted Answer

Force the board of directors to change the management team.

Accepted Answer

Sell their shares of stock in the corporation.

Question 9

The mixture of debt and equity, used to finance a corporation is also known as: *a/ Capital structure

Accepted Answer

Capital structure

Answer

Capital budgeting

Answer

Investing

Answer

Treasury

Question 10

Shareholders of a corporation may be, among others: I) Individuals; II) Pension Funds; III) Insurance Companies

Accepted Answer

a/ I, II and III

Answer

b/ I only

Answer

c/ I and II only

Answer

d/ II only

Question 11

Which one of the following statements is correct concerning the organizational structure of a corporation? *a/ The chief executive officer reports to the board of directors.

Accepted Answer

The chief executive officer reports to the board of directors.

Answer

The controller reports to the president

Answer

The chief operations officer reports to the vice president of production

Answer

The vice president of finance reports to the chairman of the board

Question 12

The following are examples of intangible assets except: *a/ Building

Accepted Answer

Building

Answer

Trademarks

Answer

Patents

Answer

Technical expertise

Question 13

The following are examples of financial assets except: *a/ Buildings

Accepted Answer

Common stock

Answer

Buildings

Answer

Bank loan

Answer

Preferred stock

Question 14

The following are examples of real assets: I) Machinery; II) Office buildings; III) Warehouse; IV) Common stock

Accepted Answer

I, II, and III only

Answer

I and II only

Answer

IV only

Answer

I only

Question 15

The treasurer is usually responsible the following functions of a corporation: I) Tax obligations; II) Investor relationships; III) Cash management; IV) raising new capital

Accepted Answer

a/ II, III and IV only

Answer

b/ I only

Answer

c/ I and II only

Answer

d/ I, II, III and IV

Question 16

The controller is usually responsible for the following functions of a corporation except: I) Preparation of financial statements; II) Internal accounting; III) Cash management; IV) Taxes

Accepted Answer

a/ III only

Answer

b/ I only

Answer

c/ I and II only

Answer

d/ IV only

Question 17

The treasurer usually oversees the following functions of a corporation except: I) Preparation of financial statements; II) Investor relationships; III) Cash management; IV) raising new capital

Accepted Answer

III only

Answer

I only

Answer

I and II only

Answer

II, III and IV only

Question 18

Managers' actions are monitored by: *a/ All the answers are correct

Accepted Answer

The board of directors

Accepted Answer

Commercial banks that have loaned funds to the firm

Accepted Answer

The Wall Street analysts

Question 19

The following are examples of tangible assets except: I) Machinery; II) Office buildings; III) Warehouse; IV) Training for employees

Accepted Answer

IV only

Answer

I only

Answer

I and II only

Answer

I, II, and III only

Question 20

Which one of the following is a capital budgeting decision? *a/ Deciding whether or not to open a new store

Accepted Answer

Deciding whether or not to open a new store

Answer

Determining how much inventory to keep on hand

Answer

Determining how much debt should be borrowed from a particular lender

Answer

Determining how much cash to keep on hand

Question 21

Which one of these best describes the key difference between the duties of the controller and those of the treasurer? *a/ Separation of cash control from accounting records

Accepted Answer

Separation of cash control from accounting records

Answer

Separation of duties related to assets versus those related to debt and equity

Answer

Separation of authority over tax records versus accounting records

Answer

Separation of duties related to production versus marketing

Question 22

The controller usually oversees the following functions of a corporation: I) Preparation of financial statements; II) Internal accounting; III) Cash management and IV) Taxes

Accepted Answer

a/ I, II and IV only

Answer

b/ III only

Answer

c/ I and II only

Answer

d/ II and III

Question 23

Which one of the following best describes the primary advantage of being a limited partner rather than a general partner? *a/ Liability for firm debts limited to the capital invested

Accepted Answer

Liability for firm debts limited to the capital invested

Answer

Entitlement to a larger portion of the partnership's income

Answer

No potential financial loss

Answer

Greater management responsibility

Question 24

Of the following list, which is a stakeholder? I) Employee; II) Customer; III) Community; IV) Supplier

Accepted Answer

All of the answers are correct

Answer

I, II and IV only

Answer

III only

Answer

I and II only

Question 25

If you receive $1,000 payment at the end each year for the next five years, what type of cash flow do you have?

Accepted Answer

An annuity

Answer

Uneven cash flow stream

Answer

An annuity due

Answer

None of the answers are correct

Question 26

An annuity is defined as

Accepted Answer

Equal cash flows at equal intervals of time for a specified period of time

Answer

Equal cash flows at equal intervals of time forever

Answer

Unequal cash flows at equal intervals of time forever

Answer

None of the answers are correct

Question 27

A general partner: *a/ has more management responsibility than a limited partner

Accepted Answer

has more management responsibility than a limited partner

Answer

cannot lose more than the amount of his/her equity investment

Answer

has less legal liability than a limited partner

Answer

faces double taxation whereas a limited partner does not

Question 28

A limited partnership generally:

Accepted Answer

a/ permits limited partners to sell their ownership interest without the partnership terminating.

Answer

b/ has less of an ability to raise capital than a proprietorship

Answer

c/ has ten or more limited partners and no general partners

Answer

d/ provides for the transfer of a general partner's ownership interest to any outside party

Question 29

John House has taken a $250,000 mortgage on his house at an interest rate of 6% per year. If the mortgage calls for twenty equal annual payments, what is the amount of each payment?

Accepted Answer

$16,882.43

Answer

$21,796.14

Answer

$10,500.00

Answer

$3,500,000

Question 30

Present Value is defined as:

Accepted Answer

a/ Future cash flows discounted to the present at an appropriate discount rate

Answer

b/ Inverse of future cash flows

Answer

c/ Present cash flow compounded into the future

Answer

d/ None of the answers are correct

Question 31

The present value formula for one period cash flow is:

Accepted Answer

PV = C1/(1 + r)

Answer

PV = C1(1 + r)

Answer

PV = C1/r

Answer

None of the answers are correct

Question 32

If the present value of $480 to be paid at the end of one year is $400, what is the one-year discount factor?

Accepted Answer

a/ 0.83

Answer

b/ 1.20

Answer

c/ 0.20

Answer

d/ 1.83

Question 33

The articles of incorporation:

Accepted Answer

a/ set forth the number of shares of stock that can be issued

Answer

b/ are amended annually by the company stockholders

Answer

c/ set forth the rules by which the corporation regulates its existence

Answer

d/ can set forth the conditions under which the firm can avoid double taxation

Question 34

The division of profits and losses among the members of a partnership is formalized in the:

Accepted Answer

a/ partnership agreement

Answer

b/ indemnity clause

Answer

c/ statement of purpose

Answer

d/ group charter

Question 35

Which of the following is not a common function of the firm's chief financial officer? *a/ Hiring CEO

Accepted Answer

Hiring CEO

Answer

Hiring controller

Answer

Investing capital

Answer

Paying dividends

Question 36

You are considering investing in a retirement fund that requires you to deposit $5,000 per year, and you want to know how much the fund will be worth when you retire. What financial technique should you use to calculate this value?

Accepted Answer

Future value of an annuity

Answer

Future value of a single payment

Answer

Present value of an annuity

Answer

None of the answers are correct

Question 37

The managers of a firm can maximize stockholder wealth by:

Accepted Answer

Taking all projects with NPVs greater than the cost of investment

Answer

Taking all projects with positive NPVs

Answer

Taking all projects with NPVs greater than present value of cash flow

Answer

All of the answers are correct

Question 38

You would like to have enough money saved to receive a growing annuity for 20 years, growing at a rate of 5% per year, the first payment being $50,000 after retirement. That way, you hope that you and your family can lead a good life after retirement. How much would you need to save in your retirement fund to achieve this goal. (assume that the growing annuity payments start one year from the date of your retirement. The interest rate is 10%)?

Accepted Answer

$605,604.20

Answer

$1,000,000

Answer

$425,678.19

Answer

$1,800,000

Question 39

Which one of these is a corporate document that sets forth the intended life of the firm?

Accepted Answer

a/ Articles of incorporation

Answer

b/ Corporate bylaws

Answer

c/ Indenture contract

Answer

d/ Federal charter

Question 40

The primary goal of financial management is to:

Accepted Answer

a/ maximize the current value per share of the existing stock

Answer

b/ maximize current dividends per share of the existing stock

Answer

c/ minimize operational costs and maximize firm efficiency

Answer

d/ maintain steady growth in both sales and net earnings

Question 41

The concept of compound interest is most appropriately described as:

Accepted Answer

a/ Interest earned on interest

Answer

b/ Interest earned on an investment

Answer

c/ The total amount of interest earned over the life of an investment

Answer

d/ None of the answers are correct

Question 42

The following statements regarding the NPV rule and the rate of return rule are true except:

Accepted Answer

b/ Accept a project if its NPV > 0

Accepted Answer

c/ Reject a project if the NPV < 0

Accepted Answer

d/ Accept a project if its rate of return > opportunity cost of capital

Answer

a/ Accept a project if its rate of return > 0

Question 43

You would like to have enough money saved to receive an $80,000 per year perpetuity after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the perpetuity payments starts on the day of retirement. The interest rate is 10%)?

Accepted Answer

$800,000

Answer

$880,000

Answer

$1,500,000

Answer

$3,500,000

Question 44

Present Value of $100,000 that is, expected, to be received at the end of one year at a discount rate of 25% per year is:

Accepted Answer

c/ $100,000

Answer

a/ $80,000

Answer

b/ $125,000

Answer

d/ $90,000

Question 45

Which one of the following statements concerning a sole proprietorship is correct?

Accepted Answer

a/ The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts

Answer

b/ The owners of a sole proprietorship share profits as established by the partnership agreement.

Answer

c/ The profits of a sole proprietorship are taxed twice

Answer

d/ A sole proprietorship is often structured as a limited liability company

Question 46

The opportunity cost of capital for a risky project is

Accepted Answer

a/ The expected rate of return on a portfolio of securities of similar risks as the project

Answer

b/ The expected rate of return on a government security having the same maturity as the project

Answer

c/ The expected rate of return on a well-diversified portfolio of common stocks

Answer

d/ None of the answers are correct

Question 47

One year discount factor at a discount rate of 25% per year is:

Accepted Answer

a/ 0.8

Answer

b/ 1.25

Answer

c/ 1.0

Answer

d/ 1.53

Question 48

The net present value formula for one period is: I) NPV = C0 + [C1/(1 + r)]; II) NPV = PV required investment; and III) NPV = C0/C1

Accepted Answer

a/ I and II only

Answer

b/ I only

Answer

c/ III only

Answer

d/ None of the answers are correct

Question 49

If the present value of a cash flow generated by an initial investment of $200,000 is $250,000. What is the NPV of the project?

Accepted Answer

$50,000

Answer

$250,000

Answer

$200,000

Answer

$100,000

Question 50

If the one-year discount factor is 0.90, what is the present value of $120 to be received one year from today?

Accepted Answer

$108

Answer

$100

Answer

$96

Answer

$85

Question 51

Mr. William expects to retire in 30 years and would like to accumulate $1 million in the pension fund. If the annual interest rate is 12% per year, how much should Mr. Williams put into the pension fund each month in order to achieve his goal? Assume that Mr. Williams will deposit the same amount each month into his pension fund and also use monthly compounding.

Accepted Answer

b/ $771.60

Answer

a/ $286.13

Answer

c/ $345.30

Answer

d/ $180.04

Question 52

The one-year discount factor at an interest rate of 100% per year is:

Accepted Answer

a/ 0.5

Answer

b/ 1.5

Answer

c/ 0.25

Answer

d/ 0.75

Question 53

If you invest $100 at 12% APR for three years, how much would you have at the end of 3 years using simple interest?

Accepted Answer

$136

Answer

$140.49

Answer

$240.18

Answer

$163

Question 54

What is the present value annuity factor at a discount rate of 11% for 8 years?

Accepted Answer

5.1461

Answer

6.7122

Answer

11.8594

Answer

8.2736

Question 55

You would like to have enough money saved to receive $100,000 per year perpetuity after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the perpetuity payments start one year from the date of your retirement. The interest rate is 12.5%)?

Accepted Answer

$800,000

Answer

$1,000,000

Answer

$10,000,000

Answer

$3,500,000

Question 56

If the present value annuity factor at 8% APR for 10 years is 6.71, what is the equivalent future value annuity factor?

Accepted Answer

2.159

Answer

14.487

Answer

3.108

Answer

7.827

Question 57

If the present value of the cash flow X is $240, and the present value cash flow Y $160, then the present value of the combined cash flow is:

Accepted Answer

a/ $400

Answer

b/ $240

Answer

c/ $160

Answer

d/ $80

Question 58

Which of the following is generally considered an example of a perpetuity?

Accepted Answer

a/ Consols

Answer

b/ Interest payments on a 10-year bond

Answer

c/ Interest payments on a 30-year bond

Answer

d/ None of the answers are correct

Question 59

If the present value of $600 expected to be received one year from today is $400, what is the one-year discount rate?

Accepted Answer

50%

Answer

15%

Answer

20%

Answer

25%

Question 60

If the present value of $250 expected to be received one year from today is $200, what is the discount rate?

Accepted Answer

c/ 20%

Answer

a/ 25%

Answer

b/ 10%

Answer

d/ 15%

Question 61

An investment at 12% nominal rate compounded monthly is equal to an annual rate of:

Accepted Answer

12.68%

Answer

12.36%

Answer

12%

Answer

7.88%

Question 62

The articles of incorporation:

Accepted Answer

a/ establish the rights of the shareholders

Answer

b/ address only those issues related to a corporation's managers and directors

Answer

c/ establish the compensation to be granted to senior managers.

Answer

d/ are rules which apply only to limited liability companies

Question 63

If the interest rate is 12%, what is the 2-year discount factor?

Accepted Answer

a/ 0.7972

Answer

b/ 0.8929

Answer

c/ 1.2544

Answer

d/ 1.8672

Question 64

Present value of $121,000 expected to be received one year from today at an interest rate (discount rate) of 10% per year is:

Accepted Answer

a/ $110,000

Answer

b/ $121,000

Answer

c/ $100,000

Answer

d/ 80,000

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