Chapter 1 Corporate Finance

Chapter 1

1.A business created as a distinct legal entity composed of one or more individuals or entities is called a: 
A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.
E. unlimited liability company. 

2. A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a: 
A. limited liability company.
B. general partnership.
C. limited proprietorship.
D. sole proprietorship.
E. corporation.

 3. A conflict of interest between the stockholders and management of a firm is called: 
A. stockholders’ liability.
B. corporate breakdown.
C. the agency problem.
D. corporate activism.
E. legal liability.

4. The treasurer and the controller of a corporation generally report to the: 
A. board of directors.
B. chairman of the board.
C. chief executive officer.
D. president.
E. chief financial officer.

5. Which one of the following is a capital budgeting decision? 
A. determining how much debt should be borrowed from a particular lender
B. deciding whether or not to open a new store
C. deciding when to repay a long-term debt
D. determining how much inventory to keep on hand
E. determining how much money should be kept in the checking account

 6. Which one of the following statements concerning a sole proprietorship is correct? 
A. A sole proprietorship is the least common form of business ownership.
B. The profits of a sole proprietorship are taxed twice.
C. The owners of a sole proprietorship share profits as established by the partnership agreement.
D. The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.
E. A sole proprietorship is often structured as a limited liability company.

7. 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. greater management responsibility
E. liability for firm debts limited to the capital invested

8. Which one of the following statements is correct? 
A. Both partnerships and corporations incur double taxation.
B. Both sole proprietorships and partnerships are taxed in a similar fashion.
C. Partnerships are the most complicated type of business to form.
D. Both partnerships and corporations have limited liability for general partners and shareholders.
E. All types of business formations have limited lives.

9. Financial managers should strive to maximize the current value per share of the existing stock because: 
A. doing so guarantees the company will grow in size at the maximum possible rate.
B. doing so increases the salaries of all the employees.
C. the current stockholders are the owners of the corporation.
D. doing so means the firm is growing in size faster than its competitors.
E. the managers often receive shares of stock as part of their compensation.

10. Which one of the following actions by a financial manager creates an agency problem? 
A. refusing to borrow money when doing so will create losses for the firm
B. refusing to lower selling prices if doing so will reduce the net profits
C. agreeing to expand the company at the expense of stockholders’ value
D. agreeing to pay bonuses based on the book value of the company stock
E. increasing current costs in order to increase the market value of the stockholders’ equity

Chapter 4

1. Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,000, $9,000, and $15,000 over the next three years, respectively. After that time, Marko feels ABC will be worthless. Marko has determined that a 14% rate of return is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.? 
A. $19,201.76
B. $21,435.74
C. $23,457.96
D. $27,808.17

E. $29,808.17

2. You are considering a job offer. The job offers an annual salary of $52,000, $55,000, and $60,000 a year for the next three years, respectively. The offer also includes a starting bonus of $2,000 payable immediately. What is this offer worth to you today at a discount rate of 6%? 
A. $148,283.56
B. $148,383.56
C. $150,283.56
D. $150,383.56
E. $152,983.56

3. Your local travel agent is advertising an extravagant global vacation. The package deal requires that you pay $5,000 today, $15,000 one year from today, and a final payment of $25,000 on the day you leave two years from today. What is the cost of this vacation in today’s dollars if the discount rate is 6%? 
A. $39,057.41
B. $41,400.85
C. $43,082.39
D. $44,414.14
E. $46,518.00

4. Suzette is going to receive $10,000 today as the result of an insurance settlement. In addition, she will receive $15,000 one year from today and $25,000 two years from today. She plans on saving all of this money and investing it for her retirement. If Suzette can earn an average of 11% on her investments, how much will she have in her account if she retires 25 years from today? 
A. $536,124.93
B. $541,414.14
C. $546,072.91
D. $570,008.77
E. $595,098.67

5. George Jefferson established a trust fund that provides $150,000 in scholarships each year for worthy students. The trust fund earns a 4.25% rate of return. How much money did Mr. Jefferson contribute to the fund assuming that only the interest income is distributed? 
A. $3,291,613.13
B. $3,529,411.77
C. $3,750,000.00
D. $4,328,970.44
E. $6,375,000.00

6. Your rich uncle establishes a trust in your name and deposits $150,000 in it. The trust pays a guaranteed 4% rate of return. How much will you receive each year if the trust is required to pay you all of the interest earnings on an annual basis? 
A. $3,750
B. $4,000
C. $4,500
D. $5,400
E. $6,000

7. You are paying an effective annual rate of 13.8% on your credit card. The interest is compounded monthly. What is the annual percentage rate on your account? 
A. 11.50%
B. 12.00%
C. 13.00%
D. 13.80%
E. 14.71%

8. You have $2,500 that you want to use to open a savings account. You have found five different accounts that are acceptable to you. All you have to do now is determine which account you want to use such that you can earn the highest rate of interest possible. Which account should you use based upon the annual percentage rates quoted by each bank?

    A. Account A B. Account B C. Account C D. Account D E. Account E

9. Your grandmother invested one lump sum 17 years ago at 4.25% interest. Today, she gave you the proceeds of that investment which totaled $5,539.92. How much did your grandmother originally invest? 
A. $2,700.00 B. $2,730.30 C. $2,750.00 D. $2,768.40 E. $2,774.90

10. Which of the following amounts is closest to the end value of investing $10,000 for 18 months at a stated annual interest rate of 12% compounded quarterly? 
A. $11,800 B. $11,852 C. $11,940 D. $11,961 E. None of the above is within $100 of the correct answer.