Corporate Finance Exam #1 UPDATED
ACTUAL Exam Questions and CORRECT
Answers
Which of the following statements is correct?
A. One advantage of forming a corporation is that equity investors are usually exposed to less
liability than they would be in a partnership.
B. Corporations face fewer regulations than proprietorships
C. One disadvantage of operating a business as a proprietor is that the firm is subject to double
taxation, because taxes are levied at both the firm and the owner level.
D. It is generally less expensive to form a corporation than a propreitorship because, with a
propreitorship, extensive legal documents are required - CORRECT ANSWER -A
Which of the following would explain why a business would rather operate as a corporation
rather than as a proprietorship or a partnership?
A. Corporations generally face fewer regulations
B. Less of a corporation's income is subject to federal taxes
C. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax
advantage of incorporation
D. Corporate investors are exposed to unlimited liability
E. Corporations generally find it easier to raise large amounts of capital. - CORRECT
ANSWER -E
The primary operating goal of a publicly-owned firm interested in serving serving its
stockholders should be to:
A. Maximize its expected total corporate income
B. Maximize its expected EPS
C. Minimize the chance of losses
D. Maximize the stock price per share over the long run, which is the stock's intrinsic value
E. Maximize the stock price on specific target date - CORRECT ANSWER -D
,Which of the following is a primary market transactions
A. You sell 200 shares of IBM stock on the NYSE through your broker
B. You buy 200 shares of IBM stock from your brother. The trade is not through a broker; you
just give him cash and he gives you the stock
C. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment
banker
D. One financial institution buys 200,000 shares of IBM stock from another institution. An
investment banker arranges the transaction
E. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that
were not granted in prior years. - CORRECT ANSWER -C
Money Markets are markets for
A. Foreign currencies
B. Consumer automobile loans
C. Common stocks
D. Long-term bonds
E. Short-term debt securities such as treasury bills and commerical paper. - CORRECT
ANSWER -E
Considered alone, which of the following would increase a company's current ratio?
A. An increase in net fixed assets
B. An increase in accrued liabilities
C. An increase in notes payable
D. An increase in accounts receivable
E. An increase in accounts payable - CORRECT ANSWER -D
Casey Communications recently issued new common stock and used the proceeds to pay off
some of its short-term notes payable. This action had no effect on the company's total assets or
operating income. Which of the following effects would occur as a result of this action?
, a. The company's current ratio increased.
b. The company's times interest earned ratio decreased.
c. The company's basic earning power ratio increased.
d. The company's equity multiplier increased.
e. The company's debt ratio increased. - CORRECT ANSWER -A
You observe that a firm's ROE is above the industry average, but its profit and equity multiplier
are below the industry average. Which of the following statements is CORRECT?
A. its total asset turnover must be above the industry average
B. its return on assets must equal the industry average
C. Its TIE ratio must be below the industry averag e
D. its total asset turnover must be below the industry average
E. its total asset turnover must equal the industry average - CORRECT ANSWER -A
36. Relaxant Inc. operates as a partnership. Now the partners have decided to convert the
business into a corporation. Which of the following statements is CORRECT?
a. Relaxant's shareholders (the ex-partners) will now be exposed to less liability.
b. The company will probably be subject to fewer regulations and required disclosures.
c. Assuming the firm is profitable, none of its income will be subject to federal income taxes.
d. The firm's investors will be exposed to less liability, but they will find it more difficult to
transfer their ownership.
e. The firm will find it more difficult to raise additional capital to support its growth. -
CORRECT ANSWER -A
39. The primary operating goal of a publicly-owned firm interested in serving its stockholders
should be to
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
ACTUAL Exam Questions and CORRECT
Answers
Which of the following statements is correct?
A. One advantage of forming a corporation is that equity investors are usually exposed to less
liability than they would be in a partnership.
B. Corporations face fewer regulations than proprietorships
C. One disadvantage of operating a business as a proprietor is that the firm is subject to double
taxation, because taxes are levied at both the firm and the owner level.
D. It is generally less expensive to form a corporation than a propreitorship because, with a
propreitorship, extensive legal documents are required - CORRECT ANSWER -A
Which of the following would explain why a business would rather operate as a corporation
rather than as a proprietorship or a partnership?
A. Corporations generally face fewer regulations
B. Less of a corporation's income is subject to federal taxes
C. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax
advantage of incorporation
D. Corporate investors are exposed to unlimited liability
E. Corporations generally find it easier to raise large amounts of capital. - CORRECT
ANSWER -E
The primary operating goal of a publicly-owned firm interested in serving serving its
stockholders should be to:
A. Maximize its expected total corporate income
B. Maximize its expected EPS
C. Minimize the chance of losses
D. Maximize the stock price per share over the long run, which is the stock's intrinsic value
E. Maximize the stock price on specific target date - CORRECT ANSWER -D
,Which of the following is a primary market transactions
A. You sell 200 shares of IBM stock on the NYSE through your broker
B. You buy 200 shares of IBM stock from your brother. The trade is not through a broker; you
just give him cash and he gives you the stock
C. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment
banker
D. One financial institution buys 200,000 shares of IBM stock from another institution. An
investment banker arranges the transaction
E. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that
were not granted in prior years. - CORRECT ANSWER -C
Money Markets are markets for
A. Foreign currencies
B. Consumer automobile loans
C. Common stocks
D. Long-term bonds
E. Short-term debt securities such as treasury bills and commerical paper. - CORRECT
ANSWER -E
Considered alone, which of the following would increase a company's current ratio?
A. An increase in net fixed assets
B. An increase in accrued liabilities
C. An increase in notes payable
D. An increase in accounts receivable
E. An increase in accounts payable - CORRECT ANSWER -D
Casey Communications recently issued new common stock and used the proceeds to pay off
some of its short-term notes payable. This action had no effect on the company's total assets or
operating income. Which of the following effects would occur as a result of this action?
, a. The company's current ratio increased.
b. The company's times interest earned ratio decreased.
c. The company's basic earning power ratio increased.
d. The company's equity multiplier increased.
e. The company's debt ratio increased. - CORRECT ANSWER -A
You observe that a firm's ROE is above the industry average, but its profit and equity multiplier
are below the industry average. Which of the following statements is CORRECT?
A. its total asset turnover must be above the industry average
B. its return on assets must equal the industry average
C. Its TIE ratio must be below the industry averag e
D. its total asset turnover must be below the industry average
E. its total asset turnover must equal the industry average - CORRECT ANSWER -A
36. Relaxant Inc. operates as a partnership. Now the partners have decided to convert the
business into a corporation. Which of the following statements is CORRECT?
a. Relaxant's shareholders (the ex-partners) will now be exposed to less liability.
b. The company will probably be subject to fewer regulations and required disclosures.
c. Assuming the firm is profitable, none of its income will be subject to federal income taxes.
d. The firm's investors will be exposed to less liability, but they will find it more difficult to
transfer their ownership.
e. The firm will find it more difficult to raise additional capital to support its growth. -
CORRECT ANSWER -A
39. The primary operating goal of a publicly-owned firm interested in serving its stockholders
should be to
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
