FINA 415 Corporate Finance Exam with 100% Correct
Answers
1. Which of the following represents an investment activity?
a. The firm buys a new piece of equipment
b. The firm buys back shares of stock
c. The firm pays dividends on common stock
d. The firm retires some bonds before they were due to mature
e. The firm issues bonds
The best answer is A.
2. Which of the following statements is most correct?
a. An advantage of the sole proprietorship is unlimited liability.
b. A disadvantage of a partnership is separation of decision-making and control.
c. A disadvantage of a sole proprietorship is double taxation.
d. A disadvantage of a sole proprietorship is limited life.
e. An advantage of the partnership is easy access to capital.
The best answer is D. The sole proprietor ship’ s life is limited to that of its owner
.
3. A cost incurred by the principal in an agency relationship to limit the actions of the agent is
referred to as:
a. Bonding cost
b. Monitoring cost
c. Residual loss
d. Fiduciary cost
e. Cost of working capital
The best answer is B. Monitoring costs are borne by the principal to “ watch”
the agent.
4. Which of the following is an internal source of financing for the firm?
a. Current assets
b. Retained earnings
c. Depreciation
d. Long-term debt
The best answer is B. The only sources of financing listed below are B and D, but D is
an external source of financing.
5. Which of the following items is deductible by corporations in computing their taxable
income?
a. Interest paid
b. Dividends paid to common shareholders
c. Dividends paid to preferred shareholders
d. b and c only
e. a, b, and c are all deductible for corporations
The best answer is A. Dividends paid are not deductible.
, 6. Comparing the financial performance of Google, Inc. to a major group of competitors in the
same industry is one example of a(n):
a. Benchmarking analysis
b. Trend analysis
c. Peer group analysis
d. Agency analysis
The best answer is C.
7. Beta is a measure of:
a. Firm-specific risk
b. Total risk
c. Systematic risk
d. Unsystematic risk
e. Diversifiable risk
The best answer C. Beta measures systematic risk (which is the same as non-
diversifiable or market risk).
8. Which of the following statements is false?
a. The CAPM has one factor while the APT allows many factors
b. The CAPM assumes a positive relationship between expected return and risk.
c. The APT assumes a negative relationship between expected return and risk.
d. All of the above statements are true.
The best answer is C. The APT also assumes a positive relationship between expected
return and risk. It just uses different factors to account for this than those used in the
traditional CAPM
9. If an investor holds only stock in IBM Corporation the relevant measure of risk will be
a. Beta
b. Expected return
c. Standard deviation
d. Covariance
e. Correlation
The best answer is C. The appropriate measure of risk when only one stock is holed is
standard deviation. Beta is appropriate risk measure when holding more than one
security. The others are not risk measures.
10. The CAPM implicitly assumes that investors will not be compensated for since it
is diversifiable.
a. Systematic risk
b. Total risk
c. Market risk
d. Unsystematic risk
The best answer D. The CAPM uses beta to indicate that investors will be compensated
for market risk (same as systematic risk). They will not be compensated for total risk,
but total risk does not fit the second half of the sentence. Some of total risk is
Answers
1. Which of the following represents an investment activity?
a. The firm buys a new piece of equipment
b. The firm buys back shares of stock
c. The firm pays dividends on common stock
d. The firm retires some bonds before they were due to mature
e. The firm issues bonds
The best answer is A.
2. Which of the following statements is most correct?
a. An advantage of the sole proprietorship is unlimited liability.
b. A disadvantage of a partnership is separation of decision-making and control.
c. A disadvantage of a sole proprietorship is double taxation.
d. A disadvantage of a sole proprietorship is limited life.
e. An advantage of the partnership is easy access to capital.
The best answer is D. The sole proprietor ship’ s life is limited to that of its owner
.
3. A cost incurred by the principal in an agency relationship to limit the actions of the agent is
referred to as:
a. Bonding cost
b. Monitoring cost
c. Residual loss
d. Fiduciary cost
e. Cost of working capital
The best answer is B. Monitoring costs are borne by the principal to “ watch”
the agent.
4. Which of the following is an internal source of financing for the firm?
a. Current assets
b. Retained earnings
c. Depreciation
d. Long-term debt
The best answer is B. The only sources of financing listed below are B and D, but D is
an external source of financing.
5. Which of the following items is deductible by corporations in computing their taxable
income?
a. Interest paid
b. Dividends paid to common shareholders
c. Dividends paid to preferred shareholders
d. b and c only
e. a, b, and c are all deductible for corporations
The best answer is A. Dividends paid are not deductible.
, 6. Comparing the financial performance of Google, Inc. to a major group of competitors in the
same industry is one example of a(n):
a. Benchmarking analysis
b. Trend analysis
c. Peer group analysis
d. Agency analysis
The best answer is C.
7. Beta is a measure of:
a. Firm-specific risk
b. Total risk
c. Systematic risk
d. Unsystematic risk
e. Diversifiable risk
The best answer C. Beta measures systematic risk (which is the same as non-
diversifiable or market risk).
8. Which of the following statements is false?
a. The CAPM has one factor while the APT allows many factors
b. The CAPM assumes a positive relationship between expected return and risk.
c. The APT assumes a negative relationship between expected return and risk.
d. All of the above statements are true.
The best answer is C. The APT also assumes a positive relationship between expected
return and risk. It just uses different factors to account for this than those used in the
traditional CAPM
9. If an investor holds only stock in IBM Corporation the relevant measure of risk will be
a. Beta
b. Expected return
c. Standard deviation
d. Covariance
e. Correlation
The best answer is C. The appropriate measure of risk when only one stock is holed is
standard deviation. Beta is appropriate risk measure when holding more than one
security. The others are not risk measures.
10. The CAPM implicitly assumes that investors will not be compensated for since it
is diversifiable.
a. Systematic risk
b. Total risk
c. Market risk
d. Unsystematic risk
The best answer D. The CAPM uses beta to indicate that investors will be compensated
for market risk (same as systematic risk). They will not be compensated for total risk,
but total risk does not fit the second half of the sentence. Some of total risk is
