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FUNDAMENTALS OF CORPORATE FINANCE PREP 2026 QUESTIONS WITH VERIFIED
ANSWERS DETAILED RATIONALES GRADED A+
Section 1: Introduction to Corporate Finance (Questions 1-20)
1. What is the primary goal of financial management?
A. Maximize current profits
B. Maximize the current value per share of the existing stock
C. Minimize the tax liability of the firm
D. Maximize market share
Rationale: The goal of financial management is to maximize the current value per
share of the existing stock, which reflects the long-term value of the firm.
2. A business owned by a solitary individual who has unlimited liability for its
debt is called a:
A. General partnership
B. Limited liability company
C. Sole proprietorship
D. Corporation
Rationale: A sole proprietorship is the simplest type of business. The owner has
unlimited liability for business debts, and the life of the business is limited to the
owner's life span.
3. Which of the following is an advantage of a corporation?
A. Limited liability for owners
B. Unlimited life
C. Ease of formation
D. No double taxation
Rationale: An advantage of a corporation is limited liability for owners; however, a
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disadvantage is double taxation (corporate profits are taxed and then dividends
are taxed again).
4. The purchase and sale of securities after the original issuance occurs in the:
A. Primary market
B. Auction market
C. Dealer market
D. Secondary market
Rationale: The secondary market is where securities are bought and sold after the
original issuance. The primary market is where new securities are first issued.
5. Corporate bylaws:
A. Describe the intended life and purpose of the organization
B. Determine how a corporation regulates itself
C. Cannot be amended once adopted
D. Define the name by which the firm will operate
Rationale: Corporate bylaws determine how a corporation regulates itself. They
can be amended if needed.
6. The agency problem is best described as:
A. The conflict of interest between the firm's owners and its managers
B. The conflict between the firm and its customers
C. The conflict between the firm and the government
D. The conflict between the firm's bondholders and shareholders
Rationale: The agency problem arises from the conflict of interest between
principals (owners/shareholders) and agents (managers), who may prioritize their
own interests over shareholder wealth maximization.
7. Which of the following is a secondary market transaction?
A. A firm issues new shares to the public
B. An investor sells shares of stock to another investor
C. A firm issues new bonds to the public
D. A firm conducts an IPO
Rationale: The secondary market is where securities are bought and sold after the
original issuance; the stock is transferred from one investor to another.
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8. Which type of business organization has the greatest ability to raise capital?
A. Sole proprietorship
B. Partnership
C. Corporation
D. Limited partnership
Rationale: Corporations have the greatest ability to raise capital because they can
issue stocks and bonds, have limited liability, and have an unlimited life.
9. The Sarbanes-Oxley Act was enacted to:
A. Protect investors from corporate abuse
B. Reduce corporate taxes
C. Increase corporate profits
D. Encourage corporate takeovers
Rationale: The Sarbanes-Oxley Act (2002) was enacted to protect investors from
fraudulent accounting activities by corporations.
10. The financial manager's primary responsibility is to:
A. Maximize shareholder wealth
B. Minimize the firm's tax liability
C. Maximize the firm's market share
D. Minimize the firm's risk
Rationale: The primary responsibility of the financial manager is to maximize
shareholder wealth, typically measured by the firm's stock price.
11. Which of the following is a disadvantage of a sole proprietorship?
A. Limited liability
B. Unlimited life
C. Unlimited liability
D. Double taxation
Rationale: A disadvantage of a sole proprietorship is unlimited liability, meaning
the owner is personally responsible for all business debts.
12. A partnership must have at least how many owners?
A. One
B. Two
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C. Three
D. Five
Rationale: A partnership requires at least two owners (partners) to operate.
13. The goal of maximizing shareholder wealth differs from maximizing profits
because:
A. Shareholder wealth considers the time value of money and risk
B. Profits are not measurable
C. Shareholder wealth ignores long-term profitability
D. Profits always equal shareholder wealth
Rationale: Maximizing shareholder wealth considers the time value of money and
risk, while maximizing profits focuses only on accounting profits.
14. Financial managers should make decisions that:
A. Increase the value of the firm to its investors
B. Reduce the firm's costs
C. Increase the firm's market share
D. Minimize the firm's debt
Rationale: Financial managers should make decisions that increase the value of
the firm to its investors.
15. A proxy fight occurs when:
A. A firm issues new shares
B. A firm merges with another firm
C. A group of shareholders attempts to gain control of the firm
D. A firm repurchases its own shares
Rationale: A proxy fight is an attempt by a group of shareholders to gain control of
a firm by soliciting enough shareholder votes.
16. Which of the following is NOT a primary market transaction?
A. A firm issues new shares to the public
B. A firm issues new bonds to the public
C. A firm conducts an IPO
D. An investor buys shares from another investor
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FUNDAMENTALS OF CORPORATE FINANCE PREP 2026 QUESTIONS WITH VERIFIED
ANSWERS DETAILED RATIONALES GRADED A+
Section 1: Introduction to Corporate Finance (Questions 1-20)
1. What is the primary goal of financial management?
A. Maximize current profits
B. Maximize the current value per share of the existing stock
C. Minimize the tax liability of the firm
D. Maximize market share
Rationale: The goal of financial management is to maximize the current value per
share of the existing stock, which reflects the long-term value of the firm.
2. A business owned by a solitary individual who has unlimited liability for its
debt is called a:
A. General partnership
B. Limited liability company
C. Sole proprietorship
D. Corporation
Rationale: A sole proprietorship is the simplest type of business. The owner has
unlimited liability for business debts, and the life of the business is limited to the
owner's life span.
3. Which of the following is an advantage of a corporation?
A. Limited liability for owners
B. Unlimited life
C. Ease of formation
D. No double taxation
Rationale: An advantage of a corporation is limited liability for owners; however, a
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,Page 2 of 48
disadvantage is double taxation (corporate profits are taxed and then dividends
are taxed again).
4. The purchase and sale of securities after the original issuance occurs in the:
A. Primary market
B. Auction market
C. Dealer market
D. Secondary market
Rationale: The secondary market is where securities are bought and sold after the
original issuance. The primary market is where new securities are first issued.
5. Corporate bylaws:
A. Describe the intended life and purpose of the organization
B. Determine how a corporation regulates itself
C. Cannot be amended once adopted
D. Define the name by which the firm will operate
Rationale: Corporate bylaws determine how a corporation regulates itself. They
can be amended if needed.
6. The agency problem is best described as:
A. The conflict of interest between the firm's owners and its managers
B. The conflict between the firm and its customers
C. The conflict between the firm and the government
D. The conflict between the firm's bondholders and shareholders
Rationale: The agency problem arises from the conflict of interest between
principals (owners/shareholders) and agents (managers), who may prioritize their
own interests over shareholder wealth maximization.
7. Which of the following is a secondary market transaction?
A. A firm issues new shares to the public
B. An investor sells shares of stock to another investor
C. A firm issues new bonds to the public
D. A firm conducts an IPO
Rationale: The secondary market is where securities are bought and sold after the
original issuance; the stock is transferred from one investor to another.
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8. Which type of business organization has the greatest ability to raise capital?
A. Sole proprietorship
B. Partnership
C. Corporation
D. Limited partnership
Rationale: Corporations have the greatest ability to raise capital because they can
issue stocks and bonds, have limited liability, and have an unlimited life.
9. The Sarbanes-Oxley Act was enacted to:
A. Protect investors from corporate abuse
B. Reduce corporate taxes
C. Increase corporate profits
D. Encourage corporate takeovers
Rationale: The Sarbanes-Oxley Act (2002) was enacted to protect investors from
fraudulent accounting activities by corporations.
10. The financial manager's primary responsibility is to:
A. Maximize shareholder wealth
B. Minimize the firm's tax liability
C. Maximize the firm's market share
D. Minimize the firm's risk
Rationale: The primary responsibility of the financial manager is to maximize
shareholder wealth, typically measured by the firm's stock price.
11. Which of the following is a disadvantage of a sole proprietorship?
A. Limited liability
B. Unlimited life
C. Unlimited liability
D. Double taxation
Rationale: A disadvantage of a sole proprietorship is unlimited liability, meaning
the owner is personally responsible for all business debts.
12. A partnership must have at least how many owners?
A. One
B. Two
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C. Three
D. Five
Rationale: A partnership requires at least two owners (partners) to operate.
13. The goal of maximizing shareholder wealth differs from maximizing profits
because:
A. Shareholder wealth considers the time value of money and risk
B. Profits are not measurable
C. Shareholder wealth ignores long-term profitability
D. Profits always equal shareholder wealth
Rationale: Maximizing shareholder wealth considers the time value of money and
risk, while maximizing profits focuses only on accounting profits.
14. Financial managers should make decisions that:
A. Increase the value of the firm to its investors
B. Reduce the firm's costs
C. Increase the firm's market share
D. Minimize the firm's debt
Rationale: Financial managers should make decisions that increase the value of
the firm to its investors.
15. A proxy fight occurs when:
A. A firm issues new shares
B. A firm merges with another firm
C. A group of shareholders attempts to gain control of the firm
D. A firm repurchases its own shares
Rationale: A proxy fight is an attempt by a group of shareholders to gain control of
a firm by soliciting enough shareholder votes.
16. Which of the following is NOT a primary market transaction?
A. A firm issues new shares to the public
B. A firm issues new bonds to the public
C. A firm conducts an IPO
D. An investor buys shares from another investor
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