COMPREHENSIVE TEST BANK:
FUNDAMENTALS OF CORPORATE
FINANCE (CANADIAN 4E) QUESTIONS
AND CORRECT ANSWERS LATEST
UPDATE THIS YEAR
1. Which of the following best describes the goal of the financial manager in a corporation?
A. Maximizing the market share of the company’s products.
B. Maximizing the net income as reported on the income statement.
C. Minimizing the total costs of production and administration.
D. Maximizing the current value per share of the existing stock.
Answer: D
Conceptual Explanation: The primary goal of financial management is to maximize the
wealth of the current shareholders, which is reflected in the market price of the stock.
2. In the context of the agency problem, which mechanism is least likely to align managers’
interests with those of shareholders?
A. Granting stock options to senior executives.
B. Monitoring by the Board of Directors.
C. Increasing the base salary of managers regardless of performance.
,D. Threat of a hostile takeover.
Answer: C
Conceptual Explanation: Fixed salaries do not provide incentives for managers to
maximize share price, whereas stock options, monitoring, and takeover threats align
interests through rewards or penalties.
3. Which of the following accounts is considered a current liability on a Canadian firm’s
balance sheet?
A. Accounts Receivable
B. The portion of long-term debt due within one year
C. Deferred Income Taxes (Long-term)
D. Common stock at par value
Answer: B
Conceptual Explanation: Current liabilities are obligations expected to be settled within
one year. The current portion of long-term debt meets this definition.
4. Under the Canadian tax system, how is the Capital Cost Allowance (CCA) typically
calculated for most equipment?
A. Declining balance method based on specific asset classes.
B. Straight-line method over the useful life.
C. Units-of-production method.
, D. Sum-of-the-years’-digits method.
Answer: A
Conceptual Explanation: The Canada Revenue Agency (CRA) requires firms to use the
declining balance method for CCA, where a fixed percentage is applied to the
Undepreciated Capital Cost (UCC) of an asset class.
5. A firm has a Total Asset Turnover of 1.5, a Net Profit Margin of 10%, and an Equity
Multiplier of 2.0. According to the Du Pont Identity, what is the Return on Equity (ROE)?
A. 15%
B. 20%
C. 30%
D. 3.5%
Answer: C
Conceptual Explanation: ROE = Net Profit Margin * Total Asset Turnover * Equity
Multiplier. ROE = 0.10 * 1.5 * 2.0 = 0.30 or 30%.
6. When calculating the Statement of Cash Flows using the indirect method, an increase in
Accounts Receivable is:
A. Added to net income in the operating section.
B. Included as a cash inflow in the investing section.
C. Subtracted from net income in the operating section.
FUNDAMENTALS OF CORPORATE
FINANCE (CANADIAN 4E) QUESTIONS
AND CORRECT ANSWERS LATEST
UPDATE THIS YEAR
1. Which of the following best describes the goal of the financial manager in a corporation?
A. Maximizing the market share of the company’s products.
B. Maximizing the net income as reported on the income statement.
C. Minimizing the total costs of production and administration.
D. Maximizing the current value per share of the existing stock.
Answer: D
Conceptual Explanation: The primary goal of financial management is to maximize the
wealth of the current shareholders, which is reflected in the market price of the stock.
2. In the context of the agency problem, which mechanism is least likely to align managers’
interests with those of shareholders?
A. Granting stock options to senior executives.
B. Monitoring by the Board of Directors.
C. Increasing the base salary of managers regardless of performance.
,D. Threat of a hostile takeover.
Answer: C
Conceptual Explanation: Fixed salaries do not provide incentives for managers to
maximize share price, whereas stock options, monitoring, and takeover threats align
interests through rewards or penalties.
3. Which of the following accounts is considered a current liability on a Canadian firm’s
balance sheet?
A. Accounts Receivable
B. The portion of long-term debt due within one year
C. Deferred Income Taxes (Long-term)
D. Common stock at par value
Answer: B
Conceptual Explanation: Current liabilities are obligations expected to be settled within
one year. The current portion of long-term debt meets this definition.
4. Under the Canadian tax system, how is the Capital Cost Allowance (CCA) typically
calculated for most equipment?
A. Declining balance method based on specific asset classes.
B. Straight-line method over the useful life.
C. Units-of-production method.
, D. Sum-of-the-years’-digits method.
Answer: A
Conceptual Explanation: The Canada Revenue Agency (CRA) requires firms to use the
declining balance method for CCA, where a fixed percentage is applied to the
Undepreciated Capital Cost (UCC) of an asset class.
5. A firm has a Total Asset Turnover of 1.5, a Net Profit Margin of 10%, and an Equity
Multiplier of 2.0. According to the Du Pont Identity, what is the Return on Equity (ROE)?
A. 15%
B. 20%
C. 30%
D. 3.5%
Answer: C
Conceptual Explanation: ROE = Net Profit Margin * Total Asset Turnover * Equity
Multiplier. ROE = 0.10 * 1.5 * 2.0 = 0.30 or 30%.
6. When calculating the Statement of Cash Flows using the indirect method, an increase in
Accounts Receivable is:
A. Added to net income in the operating section.
B. Included as a cash inflow in the investing section.
C. Subtracted from net income in the operating section.
