Test Bank for Financial Management Theory and Practice 3rd Canadian Edition by Brigham A+

Description

1. Theformoforganizinga business is an unimportant issue, as this decision has very little effect on the income and wealth of the firm’s owners.
2. True
3. False

ANSWER: False

1. Twodisadvantagesofa proprietorship are (1) the relative difficulty of raising new capital and (2) the owner’s unlimited personal liability for the business’s debts.
2. True
3. False

ANSWER: True

1. Bybeingtooinvolvedinthebusinessoperation,limitedpartnerscanlosetheirlimitedliabilitystatus.
2. True
3. False

ANSWER: True

1. Thebestwaytomaximizetheintrinsicvalueofa company and thus shareholders’ wealth is to maximize its earnings per share.
2. True
3. False

ANSWER: False

1. IfFirmA’sbusinessistoobtainsavingsfromindividualsandtheninvesttheminfinancialassetsissuedbyother firmsorindividuals,FirmA is a financial intermediary.
2. True
3. False

ANSWER: True

1. Today,trusteeservicescanbearrangedonlywithtrustcompanies.
2. True
3. False

ANSWER: False

1. Ifanindividualinvestortradescurrentlyoutstandingcommonsharesthrougha broker, this is a secondary market transaction.
2. True
3. False

ANSWER: True

1. Withthemoreformalnatureofthepartnershipagreementandthecommitmentofallpartners’personalassets, partnershipshavenodifficultyraisinglargeamountsofcapitalasdoproprietorships.
2. True
3. False

ANSWER: False

1. Twokeyadvantagestoproprietorshiparethat,asa business, it pays no corporate income tax and is easily and inexpensively formed.
2. True
3. False

ANSWER: True

10.Fightingrecessionwithlowinterestratesistechnicallyimpossiblewhena country has large trade deficits and huge national debt.

1. True
2. False

ANSWER: True

11.Whichofthefollowingstatementsbestdescribesfirmorganization?

1. Oneofthedisadvantagesofincorporatinga business is that the owners have personal liabilities when firm goes bankrupt.
2. Soleproprietorshipsaresubjecttomoreregulationsthancorporations.
3. Inanytypeofpartnership,everypartnerhasthesamerights,privileges,andliabilityexposureaseveryother partner.
   1. Sole proprietorships and partnerships generally have a tax advantage over corporations, especially large ones.

ANSWER: d

12.Whichofthefollowingstatementsbestdescribesfirmorganization?

1. Oneofthedisadvantagesofa sole proprietorship is that the proprietor is exposed to unlimited liability.
2. Itisgenerallyeasiertotransferone’sownershipinterestina partnership than in a corporation.
3. Oneoftheadvantagesofthecorporateformoforganizationisthatitavoidsdoubletaxation.
4. Oneoftheadvantagesofa corporation from a social standpoint is that every shareholder has equal voting rights, i.e., “one person, one vote.”

ANSWER: a

13.Whichofthefollowingstatementsbestdescribesfirmorganization?

1. Itisgenerallymoreexpensivetoforma proprietorship than a corporation because a proprietorship requires extensive legal documents.
2. Onedisadvantageofoperatinga business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level.
3. Oneadvantageofforminga corporation is that equity investors are usually exposed to less liability than in a regular partnership.
4. Ifa regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

ANSWER: c

14.Cheers Canada Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. What will be the effect?

1. AssumingCheersCanadaInc.isprofitable,lessofitsincomewillbesubjecttotaxes.
2. CheersCanadaInc.willnowbesubjecttofewerregulations.
3. Cheers’CanadaInc.shareholders(theex-partners)willnowbeexposedtolessliability.
4. CheersCanadaInc.willfinditmoredifficulttoraiseadditionalcapital.

ANSWER: c

15.Whichofthefollowingstatementsbestdescribesfirmorganization?

1. Itisusuallyeasiertotransferownershipina corporation than it is to transfer ownership in a sole proprietorship.
2. Corporateshareholdersareexposedtounlimitedliability.
3. Corporationsgenerallyfacefewerregulationsthansoleproprietorships.
4. Corporateshareholdersareexposedtounlimitedliability,andthisfactormaybecompoundedbythetax disadvantages ofincorporation.

ANSWER: a

16.Whymighta business choose to operate as a corporation rather than as a sole proprietorship or a partnership?

1. Lessofa corporation’s income is generally subjected to taxes than would be true if the firm were a partnership.
2. Corporateshareholdersescapeliabilityforthefirm’sdebts,butthisfactormaybeoffsetbythetax disadvantagesofthecorporateformoforganization.
3. Corporateinvestorsareexposedtolimitedgrowthpotential.
4. Corporationsgenerallyfacerelativelyfewregulations.

ANSWER: b

17.Whatshouldbedonetomaximizeshareholderwealthandthusthevalueofthefirm?

1. Decreasethesizeofexpectedcashflowofthecompany.
2. Slowdownthecashreceiptoftheorganization.
3. Increasetherisklevelofthefirm.
4. Raisethefreecashflowsofthebusiness.

ANSWER: d

18.Yourecentlysold100sharesofyournewcompany,XYZCorporation,toyourbrotherata family reunion. At the reunion your brother gave you a cheque for the shares and you gave your brother the share certificates. Which statement best describes this transaction?

1. Thisisanexampleofanexchangeofphysicalassets.
2. Thisisanexampleofa primary market transaction.
3. Thisisanexampleofa direct transfer of capital.
4. Thisisanexampleofa money market transaction.

ANSWER: c

19.Whichofthefollowingstatementsbestdescribesinterestrates?

1. Thecostofmoneytofundusersisbasicallydeterminedbytherateofreturnrequiredbyfundproviders.
2. Ifindividualsingeneralincreasethepercentageoftheirincomethattheysave,interestratesarelikelyto increase.
3. Ifcompanieshavefewergoodinvestmentopportunities,interestratesarelikelytoincrease.
4. Ifexpectedinflationincreases,interestratesarelikelytodecrease.

ANSWER: a

20.Which of the following statements best describes hedgefunds?

1. Hedgefundsarerisky,althoughtheymaybemarket-neutral.
2. Hedge funds are open toeveryone.
3. Hedgefundshavelowriskbecausetheyhedgetheirinvestments.
4. HedgefundsarelegalonlyinCanada,andtheyarenotpermittedtooperateinEuropeorAsia.

ANSWER: a

21.What is traded on moneymarkets?

1. foreignstocks
2. consumer automobileloans
3. short-term debtsecurities
4. long-termbonds

ANSWER: c

22.Whichofthefollowingisanexampleofa primary market transaction?

1. Yousell200sharesofIBMstockontheTSXthroughyourbroker.
2. IBMissues2,000,000sharesofnewstockandsellsthemtothepublicthroughaninvestmentbanker.
3. Onefinancialinstitutionbuys200,000sharesofIBMsharefromanotherinstitutionwithhelpofan investmentbanker.
4. Youinvest$10,000ina mutual fund, which then uses the money to buy $10,000 of IBM shares on the TSX.

ANSWER: b

23.Whichofthefollowingstatementsbestdescribesfinancialmarkets?

1. IfDisneyissuesadditionalsharesofcommonstockthroughaninvestmentbanker,thiswouldbea secondary market transaction.
2. TheIPOmarketisa major part of the secondary market.
3. Onlyinstitutions,notindividuals,canparticipateinderivativesmarkettransactions.
4. Moneymarkettransactionsinvolvedebtsecuritieswithmaturitiesoflessthanoneyear.

ANSWER: d

24.Yourecentlysoldtoyourbrother200sharesofDisneystock;thetransferwasmadethrougha broker, and the trade occurred on the TSX. Which type of transaction is this?

1. a futures market transaction
2. a primary market transaction
3. a secondary market transaction
4. a money market transaction

ANSWER: c

25.Whichofthefollowingstatementsbestdescribesfinancialmarkets?

1. Capitalmarkettransactionsinvolveonlythepurchaseandsaleofequitysecurities,i.e.,commonstocks.
2. Ifaninvestorsellssharesofstockthrougha broker, then this would be an indirect finance transaction.
3. Moneymarketmutualfundshavea high degree of default risk.
4. Commercialpapershavematuritieslongerthanoneyear.

ANSWER: b

26.Whichofthefollowingstatementsbestdescribesfinancialmarkets?

1. Capitalmarketinstrumentsincludebothlong-termdebtandcommonstocks.
2. Banker’s acceptance has no defaultrisk.
3. ForeignbanksaremorerestrictedfromoperatinginCanada.
4. Theoriginalmaturityofa commercial loan can go up to 10 years.

ANSWER: a

27.Whichofthefollowingstatementsbestdescribesfinancialmarkets?

1. RatesofreturnonT-billsarethehighestamongallmajorfinancialsecurities.
2. Moneymarketmutualfundsareilliquid.
3. Moneymarketsaremarketsforlong-termdebtandcommonstocks.
4. Euro-CanadianmarkettimedepositsareinstrumentsissuedbybanksoutsideCanada.

ANSWER: d

28.Whatisoneofthedrawbacksofswitchingfroma partnership to the corporate form of organization?

1. Itsubjectsthefirmtoadditionalregulations.
2. Itmakesitmoredifficultforthefirmtoraiseadditionalcapital.
3. Itmakesthefirm’sinvestorssubjecttogreaterpotentialpersonalliabilities.
4. Itmakesitmoredifficultforthefirm’sinvestorstotransfertheirownershipinterests.

ANSWER: a

29.Whichofthefollowingstatementsbestdescribespartnerships?

1. Ina regular partnership, liability for other partners’ misdeeds is limited to the amount of a particular partner’s investment in the business.
2. Partnershipshavetroubleattractinglargecapitalduetofactorssuchasunlimitedliability,andtheilliquidityof partnershipinterests.
3. A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster-growing company.
4. A major disadvantage of all partnerships relative to all corporations is the fact that taxes must be paid by the partners rather than by the firm itself.

ANSWER: b

30.Which of the following statements best describespartnerships?

1. Corporationsareata disadvantage relative to partnerships because they have to file more reports to regulatory agencies, even if they are not publicly owned.
2. Ina regular partnership, liability for the firm’s debts is limited to the amount a particular partner has invested in the business.
3. A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.
4. Theremustbeatleastonepersonactingasa general partner in a limited partnership.

ANSWER: d

31.Priortochangesin2011,whatwasthemainperceivedattractionofincometrusts?

1. reducing doubletaxation
2. unregulated businessenvironment
3. fewerlayersintheorganizationalstructure
4. maintenance-free businessassets

ANSWER: a

32.Which statement regarding corporations is mostaccurate?

1. Duetolimitedliability,unlimitedlives,andeaseofownershiptransfer,thevastmajorityofbusinessesare organized ascorporations.
2. Duetolegalconsiderationsrelatedtoownershiptransfersandlimitedliability,mostbusinessisconductedby corporationsinspiteoflargecorporations’oftenlessfavourabletaxtreatment.
3. Largecorporationsaretaxedmorefavourablythansoleproprietorships.
4. Corporatestockholdersareexposedtounlimitedliability.

ANSWER: b

33.Whichofthefollowingstatementsbestdescribesarticlesofincorporationandbylaws?

1. Thecorporatebylawsarea standard set of rules established by the state of incorporation. These rules are identical for all corporations, and their purpose is to ensure that the firm’s managers run the firm in accordance with government laws.
2. Companiesmustestablisha home office in a particular province, and that province must be the one in which most of their business is conducted.
3. Attorneyfeesaregenerallyinvolvedwhena company develops its articles of incorporation and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have any.
4. Thearticlesofincorporationareconcernedwiththingslikewhatbusinessthecompanywillengagein, whereasthebylawsareconcernedwiththingslikeproceduresforelectingtheboardofdirectors.

ANSWER: d

34.Whichofthefollowingstatementswouldmostpeopleinbusinessagreewith?

1. Firmsshouldnotbepunishedbecausetheyhaveunintentionallybuiltincentiveschemesthatinduceunethical behaviour.
2. Firmsandgovernmentagenciesalmostalwaysagreewithoneanotherregardingtherestrictionsthatshould beplacedonhiringandfiringemployees.
3. Althoughmoralcharactersaredevelopeddifferently,itisusefultoeducatepeopleabouttheadverse consequencesofunethicalbehaviourtothemselves,theirfirms,andthenation.
4. Becauseofthecourageittakestoblowthewhistle,whistleblowersaregenerallypromotedmorerapidly than otheremployees.

ANSWER: c

35.Whatshouldbetheprimaryoperatinggoalofa publicly owned firm interested in serving its shareholders?

1. maximizethestockpricepershare,whichisthestock’sintrinsicvalue,overthelongrun
2. maximize the firm’sexpected EPS
3. maximizethefirm’sexpectedtotalincome
4. maximizethestockpriceona specific target date

ANSWER: a

36.Whichofthefollowingstatementsbestdescribescorporategoals?

1. Thepropergoalofthefinancialmanagershouldbetoattempttomaximizethefirm’sexpectedcashflows, becausethiswilladdthemosttothewealthoftheindividualshareholders.
2. Thefinancialmanagershouldseekthatcombinationofassets,liabilities,andcapitalthatwillgeneratethe largestexpectedprojectedafter-taxincomeovertherelevanttimehorizon,generallythecomingyear.
3. The riskiness inherent in a firm’s earnings per share (EPS) depends on the characteristics of the projects the firm selects, and thus on the firm’s assets. However, EPS is not affected by the manner in which those assets are financed.
4. Potential agency problems can arise between shareholders and managers, because managers hired as agents to act on behalf of the owners may instead make decisions favourable to themselves rather than the shareholders.

ANSWER: d

37.SupposetheBankofCanadaannouncesplanstoissue$50billionofnewbonds.Assumingtheannouncementwas notexpected,whateffect,otherthingsheldconstant,wouldthathaveonbondpricesandinterestrates?

1. Prices and interest rates would bothrise.
2. Priceswoulddeclineandinterestrateswouldrise.
3. Prices and interest rates would bothdecline.
4. Priceswouldriseandinterestrateswoulddecline.

ANSWER: b

38.Whichcircumstancewouldbemostlikelytoleadtohigherinterestratesonalldebtsecuritiesintheeconomy?

1. Householdsstartsavinga larger percentage of their income.
2. Theeconomymovesfroma boom to a recession.
3. Thelevelofinflationbeginstodecline.
4. Withexpansionplans,corporateincreasetheirdemandforcapital.

ANSWER: d

39.Whichcircumstancewouldbemostlikelytoleadtoanincreaseininterestratesintheeconomy?

1. Households reduce their consumption and increase theirsavings.
2. Thefederalgovernmentdecidestotrytostimulatetheeconomy.
3. Thereisanincreaseinexpectedinflation.
4. Theeconomyfallsintoa recession.

ANSWER: c

40.WhichofthefollowingfinancialintermediariesisNOTa depository institution?

1. commercialbank
2. investmentbank
3. trustcompany
4. creditunion

ANSWER: b

41.In2011,theCanadiangovernmentmadesignificantchangestoitstreatmentofincometrusts.Whatwasthe principal reason for thisaction?

1. Trustswerebecomingtoolargecomparedtocorporations.
2. Trustsofferedunfairtaxadvantagescomparedtocorporations.
3. Thegovernmentdidnothaveadequatelegislativepowertomanagetheactivitiesofincometrusts.
4. Corporationswereabletosuccessfullyinfluencegovernmentpolicymakerstobringaboutthesechanges.

ANSWER: b

42.InCanada,theCanadianDepositInsuranceCorporation(CDIC)insurespersonalbankaccountbalancesupto

$100,000. What is the primary reason for this provision?

1. Thiscanpreventa “bank run” in times of economic uncertainty.
2. Thiscanprovideadditionalsupporttotheshareholdersofbankinginstitutions.
3. Thisprovidesanopportunityforthegovernmenttoincreaseitsinfluenceoverthebankingsystem.
4. Thismirrorspracticesfollowedinallotherdevelopedeconomies.

ANSWER: a

43.Whichofthefollowingstatementsistrueregardinghedgefundsandprivateequityfunds?

1. Bothoperateprimarilybybuyingstock(equity)togaincontrollinginterestincompanies.
2. Bothhavea limited number of investors.
3. Hedgefundsarehighlyregulated,whiletherearefewcontrolsovertheactivitiesofprivateequityfunds.
4. Therisksinvolvedininvestinginprivateequityfundsaresignificantlylessthantherisksinvolvedininvesting in hedgefunds.

ANSWER: b

44.Whichofthefollowingserviceswill NOTbeofferedbyinsurancecompanies?

1. takingdeposits
2. sellingpolicieswithsavingfeatures
3. administrating pensionfunds
4. making payments tobeneficiaries

ANSWER: a

45.Whichofthefollowingstatementsiscorrect?

1. A good goal for a firm’s management is maximization of expected EPS.
2. Likecorporations,theboardofdirectorsforanincometrustsupervisestheoperatingentityonbehalfof unitholders.
3. Thereisa legal obligation to pay cash distributions for income trusts.
4. Agencyconflictseasilyarisebetweenshareholdersandmanagers.

ANSWER: d

46.WhichofthefollowingstatementsisNOT correct?

1. Whena corporation’s shares are owned by a few individuals and are not traded on public markets, we say that the firm is “closely, or privately, held.”
2. “Goingpublic”establishesa firm’s true intrinsic value, and it also ensures that a highly liquid market will always exist for the firm’s shares.
3. Whenstockina closely held corporation is offered to the public for the first time, the transaction is called “going public,” and the market for such stock is called the new issue market.
4. Publiclyownedcompanieshavesharesownedbyinvestorswhoarenotassociatedwithmanagement,and publiccompaniesmustregisterwithandreporttoa regulatory agency such as the SEC.

ANSWER: b

47.WhichofthefollowingrepresentsthemostsignificantreasonforthecollapseoftheU.S.bankingsystemin2008?

1. Inthe1990s,mostlargeU.S.investmentbankswerereorganizedintopublictradingcompanies.
2. Inthe2000s,mostinvestmentbanksstartedtogeneratemostoftheirincomefromfeeschargedfor underwriting, consulting, and brokerageactivities.
   1. Newregulationsintroducedinthe2000sresultedinrestrictionsthatrestrainedtheoperationsofinvestment banks.
   2. Newregulationsinthe2000sallowedinvestmentbankstoissueunprecedentedamountsofdebttofinance theiroperations.

ANSWER: d

48.Besidesskillfulworkers,whatelsesupportsgoodbusinesses?

1. adequatecapital
2. adequateregulation
3. adequateself-interest
4. adequate governmentintervention

ANSWER: a

49.Whichofthefollowingbestdescribesthepositionofthebondholdersofanincorporatedfirm?

1. They are owners of thecorporation.
2. Theyarecreditorsofthefirmandthusexpecttobepaidinterestontheirinvestmentaccordingtotheirbond indenture(contract).
3. Theyhavethesamerightsandprivilegesofpreferredshareholdersofthefirm.
4. Theyareequityownersofthefirmbuttheyreceiveinterestpayments,notdividends.

ANSWER: b

50.Whichofthefollowingbestdescribesthemarketpriceofa stock?

1. thepriceobservedbyinvestorsinthefinancialmedia
2. thepriceobservedintheOTCmarketsonly
3. thepriceobservedinthebroadfinancialmarkets
4. thefirm’sbookvaluedasreportedinitsfinancialstatements

ANSWER: c

51.Ifthemarketpriceofa stock reflects all relevant information, what does its market price reflect?

1. the stock’s exogenousvalue
2. the stock’s extrinsicvalue
3. the stock’s parvalue
4. the stock’s intrinsicvalue

ANSWER: d

52.WhichofthefollowingistrueofstockownershipinCanada?

1. 61% of Canadian households directly ownstock.
2. 10% of Canadian households directly ownstock.
3. 90% of Canadian households directly ownstock.
4. MostCanadianhouseholdsdonotownorparticipate,directlyorindirectly,inthestockmarket.

ANSWER: b

53.Sharepricemaximizationisgoodforsocietybecauseconsumersbenefit.Whichofthefollowingbestdescribesthis idea?

1. Firmsthatmaximizesharepriceminimizecostsandproducelow-qualitygoods,whichonlybenefits producers.
2. Firmsthatmaximizesharepriceminimizecostsandproducehighqualitygoodsthatconsumersdemand.
3. Firmsthatmaximizesharepricemaximizecostsandproducelow-qualitygoods,whichbenefitssociety.
4. MostCanadianhouseholdsdonotownorparticipate,directlyorindirectly,inthestockmarketandassuch theydonotbenefitfromtheproductionofqualitygoodsproducedatlowcost.

ANSWER: b

54.What does the separation theoremdemonstrate?

1. Firms that separate share price and cost minimize costs and thus produce moregoods, which benefits society.
2. Firmsshouldseparatetheirmanagementdecisionsbetweenthosethatbenefitsocietyandthosethatbenefit shareholders.
3. Allinvestorsarebetteroffwhenfirmsseparatetheirinvestmentdecisionsfromthepreferencesoftheir owner/investors.
4. Investorsthatownsharesdirectlyshouldbeseparatedfrominvestorsthatownsharesindirectly.

ANSWER: c

55.WhichofthefollowingisNOTa variable used in the calculation of free cash flow (FCF)?

1. sales(revenues)
2. operating expenses andtaxes
3. expected (required) investments in operatingcapital
4. interest and other financingcosts

ANSWER: d

56.WhichofthefollowingisNOTa primary disadvantage of a regular partnership?

1. unlimitedliability
2. limitedlifeoftheorganization
3. difficulty intransferring ownership
4. unlimitedlifeoftheorganization

ANSWER: d

57.Recently,HaleCorporationannouncedthesaleof2.5millionnewlyissuedsharesofitsstockata price of $21 per share. Hale sold the stock to an investment banker, which in turn sold it to individual and institutional investors. Where did this stock sale take place?

1. over-the-countermarket
2. secondarymarket
3. forexmarket
4. primarymarket

ANSWER: b

58.Inwhichtypeoforganizationdoallpartnersenjoylimitedliabilityinregardstonegligenceandpotentiallosses limitedtotheiroriginalinvestment?

1. generalpartnership
2. REIT
3. soleproprietorship
4. limited liability partnership(LLP)

ANSWER: d

59.Whatistherateofreturnnormallyrequiredbyinvestorswheninvestingina firm?

1. capital requiredROI
2. capitalizationrate
3. weighted average cost of capital(WACC)_
4. currentyield

ANSWER: c

60.Whichofthefollowingbestdefinesanincometrust?

1. a fund that is set up for the purchase of debt for the company
2. a fund that is set up to receive the after-tax dividends of the corporation
3. a fund that is set up to receive the before-tax cash payments of the corporation
4. a fund that holds assets for the corporation

ANSWER: c

61.Theprimarygoalofa company’s management is the maximization of which of the following?

1. reportedprofit
2. fundamental shareprice
3. marketshare
4. personalwealth

ANSWER: b