ANS: A PTS: 1 DIF: E

Copyright © 2017 Cengage Learning Australia Pty Limited

MULTIPLE CHOICE

• When identifying projects that increase company value, one of the tasks for financial managers is to

identify those projects where:

• benefits are likely to exceed the project’s costs
• taking the project will increase the book value of the company’s common share
• taking the project will decrease the book value of the company’s debt outstanding
• the project’s cost are worthwhile for investors

ANS: A PTS: 1 DIF: E

REF: 1.1 The Role of Corporate Finance in Business NAT: Reflective thinking LOC: create a finance application in a computer spreadsheet and as an analyst using public information

• Which finance career classification involves analysing a company’s business processes and strategies

as well as recommending a change in practice in order to make a company more competitive?

• Corporate finance
• Commercial banking
• Investment banking
• Consulting

ANS: D PTS: 1 DIF: M

REF: 1.1 The Role of Corporate Finance in Business NAT: Reflective thinking

LOC: understand the role of the finance function in the enterprise

• If you would like to trade debt and equity securities for customers, which finance career classification

should you target?

• Corporate finance
• Commercial banking
• Investment banking
• Money management

ANS: C PTS: 1 DIF: M

REF: 1.1 The Role of Corporate Finance in Business NAT: Reflective thinking

LOC: understand the role of the finance function in the enterprise

• Which form of invested capital is subject to most of a company’s business and financial risk?
• Debt capital
• Equity capital
• Borrowed capital
• Intellectual capital

ANS: B PTS: 1 DIF: E

REF: 1.2 Corporate Finance Essentials NAT: Reflective thinking

LOC: understand shares and bonds

• Which of the following is not a true capital-raising event for a company?
• Primary market transaction
• Secondary market transaction
• Initial public offering
• A corporate loan from a bank

(Introduction to Corporate Finance Asia-Pacific Edition, 2e Chris Adam, Brindha Gunasingham, John Graham, Scott Smart) (Test Bank all Chapters) 1 / 4

Introduction to corporate finance 2e – test bank Copyright © 2017 Cengage Learning Australia Pty Limited

ANS: B PTS: 1 DIF: E

REF: 1.2 Corporate Finance Essentials NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

• Which of the following is not one of the five basic corporate finance functions?
• External financing function
• Capital budgeting function
• Risk management
• Auditing

ANS: D PTS: 1 DIF: M

REF: 1.2 Corporate Finance Essentials NAT: Reflective thinking

LOC: understand the role of the finance function in the enterprise

• Which of the following defines corporate finance?
• The activities involved in managing cash (money) that flows through the business
• The process of producing statements that disclose an organisation’s financial status to management,

investors and the government

• The provision of financial data and advice to a company for use in the organisation and development

of its business

• The function that coordinates the efforts of people to accomplish goals and objectives by using

available resources efficiently

ANS: A

REF: 1.2 Corporate Finance Essentials

• What is the key responsibility of the financial management function?
• To ensure that the company has enough funds on hand to support day-to-day operations
• To support competitive decision making that helps management to plan, control and evaluate

business processes

• To provide independent assurance that an organisation’s risk management, governance and internal

control processes are operating effectively

• To address accounting and treasury functions and to handle risk-related planning activities

ANS: A

REF: 1.2 Corporate Finance Essentials

• What is the objective of the capital budgeting function?
• To select the best projects in which to invest the company’s funds based on expected risk and return
• To provide useful information for financial decision making
• To provide the necessary information to managers and supervisors to help them to discharge their

functions of organising, planning, control and decision making

• To measure performance, assess risk and to allocate scarce resources

ANS: A

REF: 1.2 Corporate Finance Essentials

• What are the key objectives of the risk management function?
• To identify, measure and manage the company’s exposure to all types of risk
• To maintain an optimal risk-return trade-off
• To maximise share value 2 / 4

Introduction to corporate finance 2e – test bank Copyright © 2017 Cengage Learning Australia Pty Limited

• All of the above

ANS: A

REF: 1.2 Corporate Finance Essentials

• The risk management function involves identifying, measuring and managing the company’s exposure

to all types of risk. Which of the following describes risks that businesses commonly face?

• Losses that can result from adverse interest rate movements
• Changes in commodity prices and fluctuations in currency values
• Hardware or network connection failure and/or the death or injury of an employee
• Options A and B are both correct.

ANS: A

REF: 1.2 Corporate Finance Essentials

• By which two methods could risk be managed through the risk management function?
• Risk shifting, and risk spreading (diversification)
• Planning, and risk control
• Risk avoidance, and risk mitigation
• Risk prediction, and risk acceptance

ANS: A

REF: 1.2 Corporate Finance Essentials

13. Shifting the risk of your organisation is an example of:

• corporate governance
• risk management
• financial management
• external financing

ANS: B

REF: 1.2 Corporate Finance Essentials

• Which of the following statements best describes diversification?
• Diversification involves combining activities that give rise to risks in such a way that the overall risk

of the combination is less than the risk of each item in the combination.

• Diversification involves one organisation paying another entity to take on risk and to compensate

the organisation in case of a negative outcome.

• Diversification involves identifying, measuring and managing the company’s exposure to all types

of risk in order to maintain an optimal risk–return trade-off.

• Diversification involves selecting the best projects in which to invest the company’s funds.

ANS: A

REF: 1.2 Corporate Finance Essentials

• William and Theodore have decided to start a travel business called Excellent Adventures. Because

their business primarily involves time-travel, their clients may be harmed during a small but significant portion of the travels. Consequently, William and Theodore would like a business form that will shield their personal wealth from any legal claims that the company might be subject to after a travel mishaps. If William and Theodore are the only investors in this Australian domiciled company, which legal form of organisation would be best for Excellent Adventures to protect both William and Theodore? 3 / 4

Introduction to corporate finance 2e – test bank Copyright © 2017 Cengage Learning Australia Pty Limited

• sole proprietorship
• partnership
• limited partnership
• corporation

ANS: D

A sole proprietorship is not possible with two owners.A partnership has joint and several liability, which will not help the owners.In a limited partnership, one partner must be the general partner, so this type of entity could not protect both owners.A corporation has limited liability.

PTS: 1 DIF: H

REF: 1.3 Legal Forms of Business Organisation NAT: Reflective thinking

LOC: understand the role of the finance function in the enterprise

• Which of the following is the main responsibility of the Australian Securities and Investments

Commission (ASIC)?

• To be the corporate, markets and financial services regulator
• To formulate accounting standards according to corporation’s act
• To oversee the effectiveness of financial reporting framework in Australia
• To advise political parties on their economic policy

ANS: A

REF: 1.2 Corporate Finance Essentials

• Which of the following indicates the two basic sources of equity capital?
• Ordinary shares and preference shares
• Ordinary shares and convertible securities
• Convertible securities and notes receivable
• Convertible securities and preference shares

ANS: A

REF: 1.2 Corporate Finance Essentials

• Which of the following is an example of a financial intermediary institution?
• Insurance companies
• Credit unions
• Mutual funds
• All of the above

ANS: D

REF: 1.2 Corporate Finance Essentials

• Which of the following organisations is disadvantaged by unlimited personal liability?
• Sole proprietorship
• Partnership
• Propriety limited company
• Options A and B are both correct.

• Within a limited partnership context, what are the conditions on a limited partner?
• There is a limit to the amount of capital that a limited partner can contribute, as mandated
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