7) Capital structure determines how much risk is associated with the future cash flows of a
Test Bank for project.
Fundamentals Of Corporate Finance 11ce Stephen A. Ross, Randolph W. Westerfield, Bradford ⊚ true
D. Jordan, J. Ari Pandes, Thomas Holloway ⊚ false
Chapter 1-26 Answers are at the Eand of Each Chapter
8) Determining when a supplier should be paid is a capital structure decision.
⊚ true
Chapter 1
⊚ false
Student name:__________ 9) Establishing the accounts receivable policies is a capital structure decision.
TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. ⊚ true
1) The size, timing and risk of cash flows are important when evaluating a capital budgeting ⊚ false
decision.
⊚ true 10) Determining the amount of money to borrow to finance a 10-year project is a capital
⊚ false structure decision.
⊚ true
2) A capital expenditure project becomes desirable when the project is worth more to the firm ⊚ false
than the cost to acquire it.
⊚ true 11) Deciding if a new project should be accepted is a working capital decision.
⊚ false ⊚ true
⊚ false
3) A capital expenditure project becomes desirable when the present value of the cash flow
generated by the project exceeds the project's present value of cost. 12) When evaluating a project in which a firm might invest, the size but not the timing of the
⊚ true cash flows is important.
⊚ false ⊚ true
⊚ false
4) Optimal capital structure determines the least expensive sources of funds for the firm to
borrow. 13) Working capital management addresses the firm's appropriate level of inventory.
⊚ true ⊚ true
⊚ false ⊚ false
5) Optimal capital structure determines how much debt the firm should have in relation to its 14) Common stockholders or limited partners can lose, at most, what they have invested in a
level of equity. firm.
⊚ true ⊚ true
⊚ false ⊚ false
6) Capital structure determines the level of current assets that is required to maintain the firm's 15) Partnership income is treated as personal income of the partners.
operations. ⊚ true
⊚ true ⊚ false
⊚ false
,16) A limited partner can lose his or her investment in the partnership. 25) IBEC Inc. of Toronto spends approximately $2 million annually to hire auditors to go over
⊚ true the firm's financial statements. This is an example of an indirect agency cost.
⊚ false ⊚ true
⊚ false
17) Maximization of the current earnings of the firm is the main goal of the financial manager.
⊚ true 26) Control of the firm ultimately rests with shareholders. They elect the board of directors, who
⊚ false then hire and fire management.
⊚ true
18) The primary goal of a financial manager should be to maximize the value of shares issued to ⊚ false
new investors in the corporation.
⊚ true 27) Stakeholder theory suggests that employees, customers, suppliers, and various levels of
⊚ false government all have financial interests in the firm.
⊚ true
19) The primary goal of financial management is to minimize the corporate tax liability. ⊚ false
⊚ true
⊚ false 28) Corporate social responsibility (CSR) is also referred to as corporate sustainability.
⊚ true
20) Control of the firm ultimately rests with board of directors. They elect the management, who, ⊚ false
in turn, lead the company.
⊚ true 29) Corporate social responsibility (CSR) is also referred to as the triple bottom line.
⊚ false ⊚ true
⊚ false
21) The goal of financial managers does not imply that illegal or unethical actions should be
taken in the hope of increasing the value of the firm. 30) The triple bottom line is defined as a company's commitment to operate in an economically,
⊚ true socially and environmentally sustainable manner.
⊚ false ⊚ true
⊚ false
22) Unethical behaviour does not impact volatility of the stock markets.
⊚ true 31) There is a significant relationship between CSR activity and corporate performance.
⊚ false ⊚ true
⊚ false
23) The board of directors has the power to act on behalf of the shareholders to hire and fire the
operating management of the firm. In a legal sense, the directors are "principals" and the 32) Research results on CSR activity and corporate performance has been mixed.
shareholders are "agents". ⊚ true
⊚ true ⊚ false
⊚ false
24) When owners are managers (such as in a sole proprietorship), a firm will have agency costs.
⊚ true
⊚ false
,MULTIPLE CHOICE - Choose the one alternative that best completes the statement or 38) Which one of the following statements concerning a proprietorship is true?
answers the question. A) A proprietorship can be a business jointly owned by two family members.
33) A proprietorship is: B) Income from a proprietorship is taxed as a separate entity.
A) A business formed by two or more individuals. C) A proprietor is personally responsible for 100% of the firm's liabilities.
B) A separate legal body formed by an individual who has limited personal liability. D) A partial transfer of ownership is easier with a proprietorship than with a corporation.
C) A business owned by an individual who has unlimited personal liability. E) Income from a proprietorship is taxed at a lower rate than other personal income.
D) A business managed by a single general partner.
E) A limited liability form of business ownership. 39) You are interested in purchasing 100 shares of stock in one of the largest corporations in
Canada. You would most likely purchase the shares in ___________.
34) Which of the following would be considered a primary market transaction? A) A secondary market operated as an auction market.
A) A buy order to an investment banker for a new public stock offering. B) A primary market operated as an auction market.
B) A buy order to a broker for shares of a company on the TSX. C) A secondary market operated as a dealer market.
C) A buy order to a broker for shares of a company on the Venture Exchange. D) A primary market operated as a dealer market.
D) A buy order to a dealer for shares of a company OTC. E) A secondary market operated as a money market.
E) A sell order to a broker for a stock listed on the TSX.
40) Which one of the following is a correct statement concerning a sole proprietorship?
35) In a limited partnership: A) A sole proprietorship is relatively difficult to form.
A) Only the limited partners are involved in the daily management of the firm. B) The profits earned by a sole proprietorship are subject to double taxation.
B) Both general and limited partners are involved in the daily management of the firm. C) A sole proprietorship is more highly regulated than a corporation.
C) A limited partner is liable only for the amount he/she contributed to the partnership. D) The losses incurred by a sole proprietor are limited to the amount invested in the firm.
D) A general partner is liable only for the amount he/she contributed to the partnership. E) It may be difficult to transfer the ownership of a sole proprietorship.
E) The income earned is taxed like a corporation.
41) What is the difference between third and fourth markets?
36) A stakeholder is: A) A third market involves trading exchange-listed securities in OTC markets, while a
A) Any person or entity that owns shares of stock of a corporation. fourth market trading involves institution-to-institution trading without using the
B) Any person or entity that has voting rights based on stock ownership of a corporation. services of brokers or dealers.
C) A person who initially started a firm and currently has management control over the B) A third market involves trading institution-to-institution trading without using the
cash flows of the firm due to his/her current ownership of company stock. services of brokers or dealers, while a fourth market involves trading exchange-listed
D) A creditor to whom the firm currently owes money and who consequently has a claim securities in OTC markets.
on the cash flows of the firm. C) A third market involves trading in corporate equities, while a fourth market involves
E) Any person or entity who potentially has a claim on the cash flows of the firm. trading in corporate debt.
D) A third market involves trading in corporate debt, while a fourth market involves
37) An agency problem is said to exist when there is a conflict of interest between _____ and trading in corporate equities.
_____. E) A third market involves trading in call options, while a fourth market involves trading
A) An agent; his or her representative. in warrants.
B) A broker; a dealer.
C) A principal; his or her agent.
D) A manager; his/her superior.
E) A shareholder; his/her heir.
, 42) The best definition of capital structure is: 47) The management of the firm's short-term assets and liabilities is called:
A) The possibility of conflicts between shareholders and management in a large A) Working capital management.
corporation. B) Financial depreciation.
B) The process of planning and managing a firm's long-term investments. C) Agency cost analysis.
C) A venue where long-term debt and equity securities are bought and sold. D) Capital budgeting.
D) How a firm is financed through different proportions of debt and equity. E) Capital structure.
E) A venue where buyers and sellers of capital equipment come together to trade such
assets. 48) In corporate agency theory, managers are _______, and owners are _______.
A) Bondholders, shareholder.
43) The best definition of capital markets is: B) Shareholder, bondholders.
A) The possibility of conflicts between shareholders and management in a large C) Agents, principals.
corporation. D) Principals, agents.
B) The process of planning and managing a firm's long-term investments. E) Agents, contractors.
C) A venue where long-term debt and equity securities are bought and sold.
D) The purchase or sale of securities whose value derives from the price of another, 49) Which one of the following actions by a financial manager creates an agency problem?
underlying, asset. A) Refusing to borrow money when doing so will create losses for the firm.
E) A venue where buyers and sellers of capital equipment come together to trade such B) Refusing to lower selling prices if doing so will reduce the net profits.
assets. C) Agreeing to expand the company at the expense of stockholders' value.
D) Agreeing to pay bonuses based on the market value of the company stock.
44) Which of the following accounts does not relate to working capital management decisions? E) Increasing current costs to increase the market value of the stockholders' equity.
A) Accounts payable.
B) Issuing long-term debt. 50) Which one of the following statements is correct concerning the listing of stock on an
C) Accounts receivable. exchange?
D) Inventory. A) The TSX has the most stringent listing requirements of any Canadian stock exchange.
E) Short-term debt. B) Any firm can list their stock on any exchange they desire.
C) All exchanges have the same listing requirements.
45) The decision related to choosing the mixture of debt and equity used by the firm to finance D) Listing requirements are established by the Ontario Securities Commission.
its operations is called: E) The number of shareholders is NOT a listing consideration for a stock.
A) Working capital management.
B) Financial depreciation. 51) Which of the following statements concerning auction markets is correct?
C) Agency cost analysis. A) The TSX is an auction market.
D) Capital budgeting. B) NASDAQ is an auction market.
E) Capital structure. C) All trades involve a dealer in an auction market.
D) An auction market is called an over-the-counter market.
46) The process of planning and managing a firm's long-term investments is called: E) A market where buyers specify the lowest price they are willing to pay and sellers
A) Working capital management. indicate the highest price they are willing to accept.
B) Financial depreciation.
C) Agency cost analysis.
D) Capital budgeting.
E) Capital structure.
Test Bank for project.
Fundamentals Of Corporate Finance 11ce Stephen A. Ross, Randolph W. Westerfield, Bradford ⊚ true
D. Jordan, J. Ari Pandes, Thomas Holloway ⊚ false
Chapter 1-26 Answers are at the Eand of Each Chapter
8) Determining when a supplier should be paid is a capital structure decision.
⊚ true
Chapter 1
⊚ false
Student name:__________ 9) Establishing the accounts receivable policies is a capital structure decision.
TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. ⊚ true
1) The size, timing and risk of cash flows are important when evaluating a capital budgeting ⊚ false
decision.
⊚ true 10) Determining the amount of money to borrow to finance a 10-year project is a capital
⊚ false structure decision.
⊚ true
2) A capital expenditure project becomes desirable when the project is worth more to the firm ⊚ false
than the cost to acquire it.
⊚ true 11) Deciding if a new project should be accepted is a working capital decision.
⊚ false ⊚ true
⊚ false
3) A capital expenditure project becomes desirable when the present value of the cash flow
generated by the project exceeds the project's present value of cost. 12) When evaluating a project in which a firm might invest, the size but not the timing of the
⊚ true cash flows is important.
⊚ false ⊚ true
⊚ false
4) Optimal capital structure determines the least expensive sources of funds for the firm to
borrow. 13) Working capital management addresses the firm's appropriate level of inventory.
⊚ true ⊚ true
⊚ false ⊚ false
5) Optimal capital structure determines how much debt the firm should have in relation to its 14) Common stockholders or limited partners can lose, at most, what they have invested in a
level of equity. firm.
⊚ true ⊚ true
⊚ false ⊚ false
6) Capital structure determines the level of current assets that is required to maintain the firm's 15) Partnership income is treated as personal income of the partners.
operations. ⊚ true
⊚ true ⊚ false
⊚ false
,16) A limited partner can lose his or her investment in the partnership. 25) IBEC Inc. of Toronto spends approximately $2 million annually to hire auditors to go over
⊚ true the firm's financial statements. This is an example of an indirect agency cost.
⊚ false ⊚ true
⊚ false
17) Maximization of the current earnings of the firm is the main goal of the financial manager.
⊚ true 26) Control of the firm ultimately rests with shareholders. They elect the board of directors, who
⊚ false then hire and fire management.
⊚ true
18) The primary goal of a financial manager should be to maximize the value of shares issued to ⊚ false
new investors in the corporation.
⊚ true 27) Stakeholder theory suggests that employees, customers, suppliers, and various levels of
⊚ false government all have financial interests in the firm.
⊚ true
19) The primary goal of financial management is to minimize the corporate tax liability. ⊚ false
⊚ true
⊚ false 28) Corporate social responsibility (CSR) is also referred to as corporate sustainability.
⊚ true
20) Control of the firm ultimately rests with board of directors. They elect the management, who, ⊚ false
in turn, lead the company.
⊚ true 29) Corporate social responsibility (CSR) is also referred to as the triple bottom line.
⊚ false ⊚ true
⊚ false
21) The goal of financial managers does not imply that illegal or unethical actions should be
taken in the hope of increasing the value of the firm. 30) The triple bottom line is defined as a company's commitment to operate in an economically,
⊚ true socially and environmentally sustainable manner.
⊚ false ⊚ true
⊚ false
22) Unethical behaviour does not impact volatility of the stock markets.
⊚ true 31) There is a significant relationship between CSR activity and corporate performance.
⊚ false ⊚ true
⊚ false
23) The board of directors has the power to act on behalf of the shareholders to hire and fire the
operating management of the firm. In a legal sense, the directors are "principals" and the 32) Research results on CSR activity and corporate performance has been mixed.
shareholders are "agents". ⊚ true
⊚ true ⊚ false
⊚ false
24) When owners are managers (such as in a sole proprietorship), a firm will have agency costs.
⊚ true
⊚ false
,MULTIPLE CHOICE - Choose the one alternative that best completes the statement or 38) Which one of the following statements concerning a proprietorship is true?
answers the question. A) A proprietorship can be a business jointly owned by two family members.
33) A proprietorship is: B) Income from a proprietorship is taxed as a separate entity.
A) A business formed by two or more individuals. C) A proprietor is personally responsible for 100% of the firm's liabilities.
B) A separate legal body formed by an individual who has limited personal liability. D) A partial transfer of ownership is easier with a proprietorship than with a corporation.
C) A business owned by an individual who has unlimited personal liability. E) Income from a proprietorship is taxed at a lower rate than other personal income.
D) A business managed by a single general partner.
E) A limited liability form of business ownership. 39) You are interested in purchasing 100 shares of stock in one of the largest corporations in
Canada. You would most likely purchase the shares in ___________.
34) Which of the following would be considered a primary market transaction? A) A secondary market operated as an auction market.
A) A buy order to an investment banker for a new public stock offering. B) A primary market operated as an auction market.
B) A buy order to a broker for shares of a company on the TSX. C) A secondary market operated as a dealer market.
C) A buy order to a broker for shares of a company on the Venture Exchange. D) A primary market operated as a dealer market.
D) A buy order to a dealer for shares of a company OTC. E) A secondary market operated as a money market.
E) A sell order to a broker for a stock listed on the TSX.
40) Which one of the following is a correct statement concerning a sole proprietorship?
35) In a limited partnership: A) A sole proprietorship is relatively difficult to form.
A) Only the limited partners are involved in the daily management of the firm. B) The profits earned by a sole proprietorship are subject to double taxation.
B) Both general and limited partners are involved in the daily management of the firm. C) A sole proprietorship is more highly regulated than a corporation.
C) A limited partner is liable only for the amount he/she contributed to the partnership. D) The losses incurred by a sole proprietor are limited to the amount invested in the firm.
D) A general partner is liable only for the amount he/she contributed to the partnership. E) It may be difficult to transfer the ownership of a sole proprietorship.
E) The income earned is taxed like a corporation.
41) What is the difference between third and fourth markets?
36) A stakeholder is: A) A third market involves trading exchange-listed securities in OTC markets, while a
A) Any person or entity that owns shares of stock of a corporation. fourth market trading involves institution-to-institution trading without using the
B) Any person or entity that has voting rights based on stock ownership of a corporation. services of brokers or dealers.
C) A person who initially started a firm and currently has management control over the B) A third market involves trading institution-to-institution trading without using the
cash flows of the firm due to his/her current ownership of company stock. services of brokers or dealers, while a fourth market involves trading exchange-listed
D) A creditor to whom the firm currently owes money and who consequently has a claim securities in OTC markets.
on the cash flows of the firm. C) A third market involves trading in corporate equities, while a fourth market involves
E) Any person or entity who potentially has a claim on the cash flows of the firm. trading in corporate debt.
D) A third market involves trading in corporate debt, while a fourth market involves
37) An agency problem is said to exist when there is a conflict of interest between _____ and trading in corporate equities.
_____. E) A third market involves trading in call options, while a fourth market involves trading
A) An agent; his or her representative. in warrants.
B) A broker; a dealer.
C) A principal; his or her agent.
D) A manager; his/her superior.
E) A shareholder; his/her heir.
, 42) The best definition of capital structure is: 47) The management of the firm's short-term assets and liabilities is called:
A) The possibility of conflicts between shareholders and management in a large A) Working capital management.
corporation. B) Financial depreciation.
B) The process of planning and managing a firm's long-term investments. C) Agency cost analysis.
C) A venue where long-term debt and equity securities are bought and sold. D) Capital budgeting.
D) How a firm is financed through different proportions of debt and equity. E) Capital structure.
E) A venue where buyers and sellers of capital equipment come together to trade such
assets. 48) In corporate agency theory, managers are _______, and owners are _______.
A) Bondholders, shareholder.
43) The best definition of capital markets is: B) Shareholder, bondholders.
A) The possibility of conflicts between shareholders and management in a large C) Agents, principals.
corporation. D) Principals, agents.
B) The process of planning and managing a firm's long-term investments. E) Agents, contractors.
C) A venue where long-term debt and equity securities are bought and sold.
D) The purchase or sale of securities whose value derives from the price of another, 49) Which one of the following actions by a financial manager creates an agency problem?
underlying, asset. A) Refusing to borrow money when doing so will create losses for the firm.
E) A venue where buyers and sellers of capital equipment come together to trade such B) Refusing to lower selling prices if doing so will reduce the net profits.
assets. C) Agreeing to expand the company at the expense of stockholders' value.
D) Agreeing to pay bonuses based on the market value of the company stock.
44) Which of the following accounts does not relate to working capital management decisions? E) Increasing current costs to increase the market value of the stockholders' equity.
A) Accounts payable.
B) Issuing long-term debt. 50) Which one of the following statements is correct concerning the listing of stock on an
C) Accounts receivable. exchange?
D) Inventory. A) The TSX has the most stringent listing requirements of any Canadian stock exchange.
E) Short-term debt. B) Any firm can list their stock on any exchange they desire.
C) All exchanges have the same listing requirements.
45) The decision related to choosing the mixture of debt and equity used by the firm to finance D) Listing requirements are established by the Ontario Securities Commission.
its operations is called: E) The number of shareholders is NOT a listing consideration for a stock.
A) Working capital management.
B) Financial depreciation. 51) Which of the following statements concerning auction markets is correct?
C) Agency cost analysis. A) The TSX is an auction market.
D) Capital budgeting. B) NASDAQ is an auction market.
E) Capital structure. C) All trades involve a dealer in an auction market.
D) An auction market is called an over-the-counter market.
46) The process of planning and managing a firm's long-term investments is called: E) A market where buyers specify the lowest price they are willing to pay and sellers
A) Working capital management. indicate the highest price they are willing to accept.
B) Financial depreciation.
C) Agency cost analysis.
D) Capital budgeting.
E) Capital structure.
