Chapter 1—The Scope of Corporate Finance
MULTIPLE CHOICE
1. One of the tasks for financial managers when identifying projects that increase firm value is to
identify those projects where
a. marginal benefits are at least equal to the project’s marginal costs.
b. taking the project will increase the book value of the firm’s common stock.
c. taking the project wll decrease the book value of the firm’s debt outstanding.
d. none of the above
ANS: A DIF: E REF: Learning Objectives
2. Which finance career classification involves analyzing a firm’s business processes and strategies
as well as recommending a change in practice in order to make a firm more competitive?
a. corporate finance
b. commercial banking
c. investment banking
d. consulting
ANS: D DIF: M REF: 1.1 Career Opportunities in Finance
3. If you would like to work in finance by trading debt and equity securities for customers, then
which finance career classification should you target?
a. corporate finance
b. commercial banking
c. investment banking
d. money management
, ANS: C DIF: M REF: 1.1 Investment Banking
4. Which form of invested capital is subject to most of the firm’s business and financial risk?
a. debt capital
b. equity capital
c. borrowed capital
d. intellectual capital
ANS: B DIF: E
REF: 1.2 Debt and Equity: The Two Flavors of Capital Used by All BusinessesCareer
Opportunities in Finance
5. Which of the following is not a true capital-raising event for the firm?
a. primary market transaction
b. secondary market transaction
c. initial public offering
d. a corporate loan from a bank
ANS: B DIF: E REF: 1.2 The Growing Importance of Financial
Markets
6. The total value of primary stock and bond offerings sold by corporations and other entitites per
year increased by a significant amount during the 1993 -2003 period. That increase most closely
corresponds to
a. a factor of 2.
b. a factor of 5.
c. a factor of 10.
d. a factor of 20.
ANS: C
, An increase from $504 billion to $5.33 trillion is best described by a factor of 10.
DIF: H REF: 1.2 The Growing Importance of Financial Markets
7. Which of the following is not one of the five basic corporate finance functions?
a. external financing function
b. captial budgeting function
c. risk management
d. auditing
ANS: D DIF: M REF: 1.2 The Five Basic Corporate Finance
Functions
8. William and Theodore have decided to start a travel business called Excellent Adventures. Since
their business primarily involves time-travel their clients may be harmed during a small but
significant portion of the travels. Consequently, William and Theodore would like a business
form that will shield their personal wealth from any legal claims that the firm might be subject to
after one of the travel mishaps. If William and Theodore are the only investors in this U.S.
domiciled firm, which legal form of organization would be best for Excellent Adventures to
protect both William and Theodore?
a. sole proprietorship
b. partnership
c. limited partnership
d. corporation
ANS: D
sole proprietorship - not possible with 2 owners
partnership - has joint and several liability that will not help the owners
limited partnership - one partner must be the general partner and consequently could not protect
both owners
corportion - has limited liability
, DIF: H REF: 1.3 Legal Forms of Business Organizations
9. Within a limited partnership context, what are the conditions on a limited partner?
a. There is a limit to the amount of capital that a limited partner can contribute, as mandated
by law.
b. There is a limit to the number of limited partners that the firm may take on as investors.
c. The limited partner must remain a low level employee and cannot ever serve in a
managerial role in the firm.
d. A limited partner may not take any active role in the operation of the business.
ANS: D DIF: H
REF: 1.3 Legal Forms of Business Organizations, Partnerships
10. The rules dictating voting procedures and other aspects of corporate governance for a corporation
are
a. the minutes of the board of directors meeting.
b. the corporate charter.
c. the Institute for Corporate Governance corporte governance procedures.
d. the Securities and Exchange Commision rules for corporate governance.
ANS: B DIF: M
REF: 1.3 Legal Forms of Business Organizations, Corporations
11. The ultimate owner(s) of an ongoing corporation are
a. the federal government.
b. the debt holders.
c. the equity holders.
d. the executive staff of the corporation.
MULTIPLE CHOICE
1. One of the tasks for financial managers when identifying projects that increase firm value is to
identify those projects where
a. marginal benefits are at least equal to the project’s marginal costs.
b. taking the project will increase the book value of the firm’s common stock.
c. taking the project wll decrease the book value of the firm’s debt outstanding.
d. none of the above
ANS: A DIF: E REF: Learning Objectives
2. Which finance career classification involves analyzing a firm’s business processes and strategies
as well as recommending a change in practice in order to make a firm more competitive?
a. corporate finance
b. commercial banking
c. investment banking
d. consulting
ANS: D DIF: M REF: 1.1 Career Opportunities in Finance
3. If you would like to work in finance by trading debt and equity securities for customers, then
which finance career classification should you target?
a. corporate finance
b. commercial banking
c. investment banking
d. money management
, ANS: C DIF: M REF: 1.1 Investment Banking
4. Which form of invested capital is subject to most of the firm’s business and financial risk?
a. debt capital
b. equity capital
c. borrowed capital
d. intellectual capital
ANS: B DIF: E
REF: 1.2 Debt and Equity: The Two Flavors of Capital Used by All BusinessesCareer
Opportunities in Finance
5. Which of the following is not a true capital-raising event for the firm?
a. primary market transaction
b. secondary market transaction
c. initial public offering
d. a corporate loan from a bank
ANS: B DIF: E REF: 1.2 The Growing Importance of Financial
Markets
6. The total value of primary stock and bond offerings sold by corporations and other entitites per
year increased by a significant amount during the 1993 -2003 period. That increase most closely
corresponds to
a. a factor of 2.
b. a factor of 5.
c. a factor of 10.
d. a factor of 20.
ANS: C
, An increase from $504 billion to $5.33 trillion is best described by a factor of 10.
DIF: H REF: 1.2 The Growing Importance of Financial Markets
7. Which of the following is not one of the five basic corporate finance functions?
a. external financing function
b. captial budgeting function
c. risk management
d. auditing
ANS: D DIF: M REF: 1.2 The Five Basic Corporate Finance
Functions
8. William and Theodore have decided to start a travel business called Excellent Adventures. Since
their business primarily involves time-travel their clients may be harmed during a small but
significant portion of the travels. Consequently, William and Theodore would like a business
form that will shield their personal wealth from any legal claims that the firm might be subject to
after one of the travel mishaps. If William and Theodore are the only investors in this U.S.
domiciled firm, which legal form of organization would be best for Excellent Adventures to
protect both William and Theodore?
a. sole proprietorship
b. partnership
c. limited partnership
d. corporation
ANS: D
sole proprietorship - not possible with 2 owners
partnership - has joint and several liability that will not help the owners
limited partnership - one partner must be the general partner and consequently could not protect
both owners
corportion - has limited liability
, DIF: H REF: 1.3 Legal Forms of Business Organizations
9. Within a limited partnership context, what are the conditions on a limited partner?
a. There is a limit to the amount of capital that a limited partner can contribute, as mandated
by law.
b. There is a limit to the number of limited partners that the firm may take on as investors.
c. The limited partner must remain a low level employee and cannot ever serve in a
managerial role in the firm.
d. A limited partner may not take any active role in the operation of the business.
ANS: D DIF: H
REF: 1.3 Legal Forms of Business Organizations, Partnerships
10. The rules dictating voting procedures and other aspects of corporate governance for a corporation
are
a. the minutes of the board of directors meeting.
b. the corporate charter.
c. the Institute for Corporate Governance corporte governance procedures.
d. the Securities and Exchange Commision rules for corporate governance.
ANS: B DIF: M
REF: 1.3 Legal Forms of Business Organizations, Corporations
11. The ultimate owner(s) of an ongoing corporation are
a. the federal government.
b. the debt holders.
c. the equity holders.
d. the executive staff of the corporation.
