Foundations of Finance Exam 1 Practice Questions & Answers – Full
Exam Prep
Determining the best way to raise money to fund a firm's
long-term investments is called - ANS ✔✔the capital structure decision
The five basic principles of finance include all of the following EXCEPT
A. Money has a time value.
B. Risk requires a reward.
C. Incremental profits determine value.
D. Cash flow is what matters. - ANS ✔✔C. Incremental profits determine value
Which of the following statements about the corporate form of business organization is true?
A. The corporate form is preferred over the sole proprietorship because a corporation is easier
to form and faces less regulation.
B. Sole proprietorships are the most common form of business organization because liability is
limited to the amount invested in the business by the sole proprietor.
C. The corporate form has the advantage of unlimited liability.
,D. The corporate form has the disadvantage of double taxation relative to a sole proprietorship.
- ANS ✔✔D. The corporate form has the disadvantage of double taxation relative to a sole
proprietorship.
The principle of risk-return trade-off means that - ANS ✔✔a rational investor will only take on
higher risk if he expects a higher return.
Advantages of the corporation include - ANS ✔✔transferability of ownership and the ability of
the corporation to raise capital
In the search for profits, U.S. corporations have been forced to look beyond our country's
borders. All of the following contributed to the movement EXCEPT
A. information technology revolution.
B. trade protectionism.
C. acceptance of the free market system in Third World countries.
D. collapse of communism. - ANS ✔✔B. trade protectionism.
In terms of the costs to organize each, which of the following sequences is correct, moving from
highest to lowest cost?
A. sole proprietorship, general partnership, limited partnership, corporation
B. sole proprietorship, general partnership, corporation, limited partnership
, C. general partnership, sole proprietorship, limited partnership, corporation
D. corporation, limited partnership, general partnership, sole proprietorship - ANS ✔✔D.
corporation, limited partnership, general partnership, sole proprietorship
Disadvantages of the partnership are - ANS ✔✔lack of permanence and unlimited liability
A corporate manager decides to build a new store on a lot owned by the corporation that could
be sold to a local developer for $250,000. The lot was purchased for $50,000 twenty years ago.
When determining the value of the new store project, - ANS ✔✔the opportunity cost of the lot
is $250,000 and should be included in calculating the value of the project.
Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against
it. If Joe invests and the business loses the lawsuits, the most Joe can lose is - ANS ✔✔$10,000
if Joe is a limited partner.
The long-run goal of the firm is to - ANS ✔✔maximize shareholder wealth
Working capital management is concerned with - ANS ✔✔How a firm can best manage its cash
flows as they arise in its day-to-day operations
Capital budgeting is concerned with - ANS ✔✔what long-term investments a firm should
undertake
According to Principle 3, how should investors decide where to invest their money? - ANS
✔✔By determining if the return is more than expected given the level of risk.
Why is it so hard to find extremely profitable projects? - ANS ✔✔If an industry is generating
large profits, then new entrants are attracted, driving down profits.
Exam Prep
Determining the best way to raise money to fund a firm's
long-term investments is called - ANS ✔✔the capital structure decision
The five basic principles of finance include all of the following EXCEPT
A. Money has a time value.
B. Risk requires a reward.
C. Incremental profits determine value.
D. Cash flow is what matters. - ANS ✔✔C. Incremental profits determine value
Which of the following statements about the corporate form of business organization is true?
A. The corporate form is preferred over the sole proprietorship because a corporation is easier
to form and faces less regulation.
B. Sole proprietorships are the most common form of business organization because liability is
limited to the amount invested in the business by the sole proprietor.
C. The corporate form has the advantage of unlimited liability.
,D. The corporate form has the disadvantage of double taxation relative to a sole proprietorship.
- ANS ✔✔D. The corporate form has the disadvantage of double taxation relative to a sole
proprietorship.
The principle of risk-return trade-off means that - ANS ✔✔a rational investor will only take on
higher risk if he expects a higher return.
Advantages of the corporation include - ANS ✔✔transferability of ownership and the ability of
the corporation to raise capital
In the search for profits, U.S. corporations have been forced to look beyond our country's
borders. All of the following contributed to the movement EXCEPT
A. information technology revolution.
B. trade protectionism.
C. acceptance of the free market system in Third World countries.
D. collapse of communism. - ANS ✔✔B. trade protectionism.
In terms of the costs to organize each, which of the following sequences is correct, moving from
highest to lowest cost?
A. sole proprietorship, general partnership, limited partnership, corporation
B. sole proprietorship, general partnership, corporation, limited partnership
, C. general partnership, sole proprietorship, limited partnership, corporation
D. corporation, limited partnership, general partnership, sole proprietorship - ANS ✔✔D.
corporation, limited partnership, general partnership, sole proprietorship
Disadvantages of the partnership are - ANS ✔✔lack of permanence and unlimited liability
A corporate manager decides to build a new store on a lot owned by the corporation that could
be sold to a local developer for $250,000. The lot was purchased for $50,000 twenty years ago.
When determining the value of the new store project, - ANS ✔✔the opportunity cost of the lot
is $250,000 and should be included in calculating the value of the project.
Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against
it. If Joe invests and the business loses the lawsuits, the most Joe can lose is - ANS ✔✔$10,000
if Joe is a limited partner.
The long-run goal of the firm is to - ANS ✔✔maximize shareholder wealth
Working capital management is concerned with - ANS ✔✔How a firm can best manage its cash
flows as they arise in its day-to-day operations
Capital budgeting is concerned with - ANS ✔✔what long-term investments a firm should
undertake
According to Principle 3, how should investors decide where to invest their money? - ANS
✔✔By determining if the return is more than expected given the level of risk.
Why is it so hard to find extremely profitable projects? - ANS ✔✔If an industry is generating
large profits, then new entrants are attracted, driving down profits.
