Test Bank for Financial Management Theory and Practice, 4th Canadian Edition Eugene Brigham
Test Bank for Financial Management Theory and Practice, 4th Canadian Edition Eugene Brigham
,Name: Class: Date:
Chap 01_4ce
Indicate whether the statement is true or false.
1. Three disadvantages of a proprietorship are (1) the relative difficulty of raising new capital, (2) the owner’s
unlimited personal liability for the business’s debts, and (3) that the proprietorship is easily but expensively
formed.
True
False
2. Limited partners who are too involved in the business operation can keep their limited liability status.
True
False
3. Two key advantages to a proprietorship are that, as a business, it pays no corporate income tax and it is easy
for a proprietorship to obtain the capital needed for growth.
True
False
4. If an individual investor trades currently outstanding common shares through a broker, this is a primary market
transaction.
True
False
5. Today, banks can never provide trustee services and the difference between trusts and banks has become
clear over time.
True
False
6. Equity instruments are a claim upon a residual value, but preferred shares have some features like debt and
some like equity.
True
False
7. In a limited liability partnership (LLP), only some partners enjoy limited liability with regard to their business
partners’ professional negligence, and their potential losses are limited to their investment in the LLP.
True
False
8. If Firm A’s business is to obtain funds from savers in exchange for its own securities and then to use the money
to invest in other businesses’ securities, Firm A is a financial intermediary.
True
False
Copyright Cengage Learning. Powered by Cognero. Page 1
,Name: Class: Date:
Chap 01_4ce
9. Since a company’s value is determined by properties of its cash flows, managers could increase the size of the
expected cash flows or speed up their receipt to maximize the firm’s value.
True
False
10. The form of organization of a business is an important issue that reflects in some typical stages in the corporate
life cycle.
True
False
Indicate the answer choice that best completes the statement or answers the question.
11. Which of the following statements best describes financial instruments?
Investors will exchange cash for a financial instrument even if they expect to receive an unacceptable
rate of return.
Debt instruments usually do not have specified payments and a specified maturity.
Equity instruments typically have specified payments and a specified maturity.
Shareholders are entitled to cash flows after bondholders, creditors, and other claimants have been
satisfied.
12. In Canada, the Canada Deposit Insurance Corporation (CDIC) insures personal bank account balances up to
$100,000. What is the primary reason for this provision?
This can encourage banking institutions to expand their business.
This can prevent a “bank run” and ensure stability in times of economic uncertainty.
This would give the government more control over the banking system.
This is a common practice in the U.S. and all other developed economies.
13. Which statement regarding corporations is most accurate?
Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of businesses
begin as corporations.
Large corporations have more tax advantages than partnerships.
Due to legal considerations related to ownership transfers and limited liability, most business is
conducted by corporations in spite of large corporations’ often less favourable tax treatment.
Corporate shareholders have unlimited liability when the corporation becomes bankrupt.
Copyright Cengage Learning. Powered by Cognero. Page 2
, Name: Class: Date:
Chap 01_4ce
14. Which of the following statements best describes corporate goals and issues?
The proper goal of the financial manager should be to attempt to maximize the firm’s expected cash
flows, because this will add the most to the wealth of the individual shareholders.
Potential agency problems can arise between shareholders and managers, because managers hired as
agents to act on behalf of the owners may instead make decisions favourable to themselves rather than
the shareholders.
Large, publicly owned firms like Tesla and Apple are controlled by their management teams. Ownership is
generally widely dispersed; hence, managers have great freedom in how they run the firm. Managers
may operate in the shareholders’ best interests, but they also may operate in their own personal best
interests. As long as they stay within the law, there is no way to either force or motivate managers to act
in the shareholders’ best interests.
The primary goal of the corporation should be to maximize shareholder wealth, which means the
managers should be unmindful of employee welfare or community concerns.
15. What should be done to maximize shareholder wealth and thus the value of the firm?
Reduce the size of expected cash flows of the company.
Increase the free cash flows of the business.
Increase the risk level of the firm.
Arrange for cash to be received later.
16. Which of the following statements is true regarding hedge funds and private equity funds?
Hedge funds own shares in other companies and often control those companies, but private equity funds
usually own many different types of securities.
Investing in hedge funds is far riskier than investing in private equity funds.
Private equity funds are highly regulated, while there are even more controls over the activities of hedge
funds.
Both are limited to a relatively small number of large investors.
17. Recently, Hale Corporation, a public company, announced the sale of 4.5 million newly issued common shares
at a price of $32 per share. Hale sold the stock to an investment banker, which in turn sold it to individual and
institutional investors. What is the name of the market for this transaction?
private market
primary market
IPO market
secondary market
Copyright Cengage Learning. Powered by Cognero. Page 3
Test Bank for Financial Management Theory and Practice, 4th Canadian Edition Eugene Brigham
,Name: Class: Date:
Chap 01_4ce
Indicate whether the statement is true or false.
1. Three disadvantages of a proprietorship are (1) the relative difficulty of raising new capital, (2) the owner’s
unlimited personal liability for the business’s debts, and (3) that the proprietorship is easily but expensively
formed.
True
False
2. Limited partners who are too involved in the business operation can keep their limited liability status.
True
False
3. Two key advantages to a proprietorship are that, as a business, it pays no corporate income tax and it is easy
for a proprietorship to obtain the capital needed for growth.
True
False
4. If an individual investor trades currently outstanding common shares through a broker, this is a primary market
transaction.
True
False
5. Today, banks can never provide trustee services and the difference between trusts and banks has become
clear over time.
True
False
6. Equity instruments are a claim upon a residual value, but preferred shares have some features like debt and
some like equity.
True
False
7. In a limited liability partnership (LLP), only some partners enjoy limited liability with regard to their business
partners’ professional negligence, and their potential losses are limited to their investment in the LLP.
True
False
8. If Firm A’s business is to obtain funds from savers in exchange for its own securities and then to use the money
to invest in other businesses’ securities, Firm A is a financial intermediary.
True
False
Copyright Cengage Learning. Powered by Cognero. Page 1
,Name: Class: Date:
Chap 01_4ce
9. Since a company’s value is determined by properties of its cash flows, managers could increase the size of the
expected cash flows or speed up their receipt to maximize the firm’s value.
True
False
10. The form of organization of a business is an important issue that reflects in some typical stages in the corporate
life cycle.
True
False
Indicate the answer choice that best completes the statement or answers the question.
11. Which of the following statements best describes financial instruments?
Investors will exchange cash for a financial instrument even if they expect to receive an unacceptable
rate of return.
Debt instruments usually do not have specified payments and a specified maturity.
Equity instruments typically have specified payments and a specified maturity.
Shareholders are entitled to cash flows after bondholders, creditors, and other claimants have been
satisfied.
12. In Canada, the Canada Deposit Insurance Corporation (CDIC) insures personal bank account balances up to
$100,000. What is the primary reason for this provision?
This can encourage banking institutions to expand their business.
This can prevent a “bank run” and ensure stability in times of economic uncertainty.
This would give the government more control over the banking system.
This is a common practice in the U.S. and all other developed economies.
13. Which statement regarding corporations is most accurate?
Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of businesses
begin as corporations.
Large corporations have more tax advantages than partnerships.
Due to legal considerations related to ownership transfers and limited liability, most business is
conducted by corporations in spite of large corporations’ often less favourable tax treatment.
Corporate shareholders have unlimited liability when the corporation becomes bankrupt.
Copyright Cengage Learning. Powered by Cognero. Page 2
, Name: Class: Date:
Chap 01_4ce
14. Which of the following statements best describes corporate goals and issues?
The proper goal of the financial manager should be to attempt to maximize the firm’s expected cash
flows, because this will add the most to the wealth of the individual shareholders.
Potential agency problems can arise between shareholders and managers, because managers hired as
agents to act on behalf of the owners may instead make decisions favourable to themselves rather than
the shareholders.
Large, publicly owned firms like Tesla and Apple are controlled by their management teams. Ownership is
generally widely dispersed; hence, managers have great freedom in how they run the firm. Managers
may operate in the shareholders’ best interests, but they also may operate in their own personal best
interests. As long as they stay within the law, there is no way to either force or motivate managers to act
in the shareholders’ best interests.
The primary goal of the corporation should be to maximize shareholder wealth, which means the
managers should be unmindful of employee welfare or community concerns.
15. What should be done to maximize shareholder wealth and thus the value of the firm?
Reduce the size of expected cash flows of the company.
Increase the free cash flows of the business.
Increase the risk level of the firm.
Arrange for cash to be received later.
16. Which of the following statements is true regarding hedge funds and private equity funds?
Hedge funds own shares in other companies and often control those companies, but private equity funds
usually own many different types of securities.
Investing in hedge funds is far riskier than investing in private equity funds.
Private equity funds are highly regulated, while there are even more controls over the activities of hedge
funds.
Both are limited to a relatively small number of large investors.
17. Recently, Hale Corporation, a public company, announced the sale of 4.5 million newly issued common shares
at a price of $32 per share. Hale sold the stock to an investment banker, which in turn sold it to individual and
institutional investors. What is the name of the market for this transaction?
private market
primary market
IPO market
secondary market
Copyright Cengage Learning. Powered by Cognero. Page 3
