,Fundamentals of Corporate Finance (14th Edition) Test Bank
Chapter 1: Introduction to Corporate Finance
Section A: Multiple Choice Questions (1–30)
1. Which one of the following terms is defined as the management of a firm's long-term investments? A)
Working capital management
B) Financial allocation
C) Agency cost analysis
D) Capital budgeting
Answer: D
Rationale: Capital budgeting is the process of planning and managing a firm's long-term investments.
2. Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A)
Working capital management
B) Cash management
C) Cost analysis
D) Capital structure
Answer: D
Rationale: Capital structure refers to the specific mixture of long-term debt and equity the firm uses to
finance its operations.
3. Which one of the following terms is defined as a conflict of interest between the corporate
shareholders and the corporate managers?
A) Articles of incorporation
B) Corporate breakdown
C) Agency problem
D) Bylaws
Answer: C
Rationale: The agency problem is the possibility of conflict of interest between the owners
(shareholders) and management (agents) of a firm.
4. A business owned by a solitary individual who has unlimited liability for its debt is called a: A)
Corporation
B) Sole proprietorship
C) General partnership
D) Limited partnership
Answer: B
,Rationale: A sole proprietorship is a business owned by a single individual who has unlimited liability for
all of the firm's debts.
5. A business formed by two or more individuals who each have unlimited liability for all of the firm's
business debts is called a: A) Corporation
B) Sole proprietorship
C) General partnership
D) Limited partnership
Answer: C
Rationale: A general partnership is a business formed by two or more individuals who each have
unlimited liability for all of the firm's debts.
6. A business partner whose potential financial loss in the partnership will not exceed his or her
investment in that partnership is called a:
A) General partner
B) Sole proprietor
C) Limited partner
D) Corporate shareholder
Answer: C
Rationale: A limited partner's liability is limited to the amount of their investment in the partnership.
7. Which one of the following statements concerning a sole proprietorship is correct? A)
The life of the firm is limited to the owner's life span.
B) The owner can generally raise large sums of capital quite easily.
C) The ownership of the firm is easy to transfer to another individual.
D) The company must pay separate taxes from those paid by the owner.
Answer: A
Rationale: The life of a sole proprietorship is limited to the owner's lifespan.
8. Which one of the following best describes the primary advantage of being a limited partner rather
than a general partner?
A) Entitlement to a larger portion of the partnership's income
B) Ability to manage the day-to-day affairs of the business
C) No potential financial loss
D) Liability for firm debts limited to the capital invested
Answer: D
Rationale: A limited partner's liability for firm debts is limited to the amount of capital they invested.
, 9. A business created as a distinct legal entity and treated as a legal "person" is called a:
A) Corporation
B) Sole proprietorship
C) General partnership
D) Limited partnership
Answer: A
Rationale: A corporation is a distinct legal entity owned by one or more individuals or entities.
10. Which one of the following statements concerning a sole proprietorship is correct? A)
A sole proprietorship is designed to protect the personal assets of the owner.
B) The profits of a sole proprietorship are subject to double taxation.
C) The owner of a sole proprietorship is personally responsible for all of the company's debts.
D) There are very few sole proprietorships remaining in the U.S. today.
Answer: C
Rationale: The owner of a sole proprietorship has unlimited liability for all of the company's debts.
11. Which one of the following statements concerning a corporation is correct? A)
The owners of a corporation have unlimited liability for the firm's debts.
B) The corporation is taxed the same as a partnership.
C) A corporation is subject to double taxation.
D) A corporation has a limited life.
Answer: C
Rationale: A corporation is subject to double taxation — the corporation pays taxes on its income, and
shareholders pay taxes on dividends received.
12. Which one of the following is a primary market transaction?
A) A sale of a new share of stock from a corporation to an individual investor
B) A sale of currently outstanding stock by a dealer to an individual investor
C) A sale of a share of stock from one individual to another individual
D) A gift of stock from one individual to another individual
Answer: A
Rationale: A primary market transaction involves the sale of new securities by a corporation to investors.
13. Which one of the following is a secondary market transaction?
A) The sale of new corporate bonds to the public
B) The sale of a new share of stock to an individual investor
Chapter 1: Introduction to Corporate Finance
Section A: Multiple Choice Questions (1–30)
1. Which one of the following terms is defined as the management of a firm's long-term investments? A)
Working capital management
B) Financial allocation
C) Agency cost analysis
D) Capital budgeting
Answer: D
Rationale: Capital budgeting is the process of planning and managing a firm's long-term investments.
2. Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A)
Working capital management
B) Cash management
C) Cost analysis
D) Capital structure
Answer: D
Rationale: Capital structure refers to the specific mixture of long-term debt and equity the firm uses to
finance its operations.
3. Which one of the following terms is defined as a conflict of interest between the corporate
shareholders and the corporate managers?
A) Articles of incorporation
B) Corporate breakdown
C) Agency problem
D) Bylaws
Answer: C
Rationale: The agency problem is the possibility of conflict of interest between the owners
(shareholders) and management (agents) of a firm.
4. A business owned by a solitary individual who has unlimited liability for its debt is called a: A)
Corporation
B) Sole proprietorship
C) General partnership
D) Limited partnership
Answer: B
,Rationale: A sole proprietorship is a business owned by a single individual who has unlimited liability for
all of the firm's debts.
5. A business formed by two or more individuals who each have unlimited liability for all of the firm's
business debts is called a: A) Corporation
B) Sole proprietorship
C) General partnership
D) Limited partnership
Answer: C
Rationale: A general partnership is a business formed by two or more individuals who each have
unlimited liability for all of the firm's debts.
6. A business partner whose potential financial loss in the partnership will not exceed his or her
investment in that partnership is called a:
A) General partner
B) Sole proprietor
C) Limited partner
D) Corporate shareholder
Answer: C
Rationale: A limited partner's liability is limited to the amount of their investment in the partnership.
7. Which one of the following statements concerning a sole proprietorship is correct? A)
The life of the firm is limited to the owner's life span.
B) The owner can generally raise large sums of capital quite easily.
C) The ownership of the firm is easy to transfer to another individual.
D) The company must pay separate taxes from those paid by the owner.
Answer: A
Rationale: The life of a sole proprietorship is limited to the owner's lifespan.
8. Which one of the following best describes the primary advantage of being a limited partner rather
than a general partner?
A) Entitlement to a larger portion of the partnership's income
B) Ability to manage the day-to-day affairs of the business
C) No potential financial loss
D) Liability for firm debts limited to the capital invested
Answer: D
Rationale: A limited partner's liability for firm debts is limited to the amount of capital they invested.
, 9. A business created as a distinct legal entity and treated as a legal "person" is called a:
A) Corporation
B) Sole proprietorship
C) General partnership
D) Limited partnership
Answer: A
Rationale: A corporation is a distinct legal entity owned by one or more individuals or entities.
10. Which one of the following statements concerning a sole proprietorship is correct? A)
A sole proprietorship is designed to protect the personal assets of the owner.
B) The profits of a sole proprietorship are subject to double taxation.
C) The owner of a sole proprietorship is personally responsible for all of the company's debts.
D) There are very few sole proprietorships remaining in the U.S. today.
Answer: C
Rationale: The owner of a sole proprietorship has unlimited liability for all of the company's debts.
11. Which one of the following statements concerning a corporation is correct? A)
The owners of a corporation have unlimited liability for the firm's debts.
B) The corporation is taxed the same as a partnership.
C) A corporation is subject to double taxation.
D) A corporation has a limited life.
Answer: C
Rationale: A corporation is subject to double taxation — the corporation pays taxes on its income, and
shareholders pay taxes on dividends received.
12. Which one of the following is a primary market transaction?
A) A sale of a new share of stock from a corporation to an individual investor
B) A sale of currently outstanding stock by a dealer to an individual investor
C) A sale of a share of stock from one individual to another individual
D) A gift of stock from one individual to another individual
Answer: A
Rationale: A primary market transaction involves the sale of new securities by a corporation to investors.
13. Which one of the following is a secondary market transaction?
A) The sale of new corporate bonds to the public
B) The sale of a new share of stock to an individual investor
