CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL ENVIRONMENT

Test Bank for Financial Management Theory and Practice, 4th Canadian Edition, 4e Brigham, Ehrhardt, Gessaroli Nason (All Chapters Download link at the end of this File)

CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL ENVIRONMENT

• The form of organization of a business is an important issue that reflects in some typical stages in the

corporate life cycle.

• True
• False

ANSWER: True

POINTS: 1

DIFFICULTY: EASY

REFERENCES: The Corporate Life Cycle

TOPICS: (1.3) Firm organization

• Three disadvantages of a proprietorship are (1) the relative difficulty of raising new capital, (2) the owner’s

unlimited personal liability for the business’s debts, and (3) that the proprietorship is easily but expensively formed.

• True
• False

ANSWER: False

POINTS: 1

DIFFICULTY: EASY

REFERENCES: The Corporate Life Cycle

TOPICS: (1.3) Proprietorship

• Limited partners who are too involved in the business operation can keep their limited liability status.
• True
• False

ANSWER: False

POINTS: 1

DIFFICULTY: EASY

REFERENCES: The Corporate Life Cycle

TOPICS: (1.3) Limited partnership

• Since a company’s value is determined by properties of its cash flows, managers could increase the size of the

expected cash flows or speed up their receipt to maximize the firm’s value.

• True
• False

ANSWER: True

POINTS: 1

DIFFICULTY: EASY

REFERENCES: The Primary Objective of the Corporation: Value Maximization 1 / 3

TOPICS: (1.4) Value maximization

• If Firm A’s business is to obtain funds from savers in exchange for its own securities and then to use the

money to invest in other businesses’ securities, Firm A is a financial intermediary.

• True
• False

ANSWER: True

POINTS: 1

DIFFICULTY: EASY

REFERENCES: An Overview of the Capital Allocation Process

TOPICS: (1.5) Financial intermediaries

• Today, banks can never provide trustee services and the difference between trusts and banks has become clear

over time.

• True
• False

ANSWER: False

POINTS: 1

DIFFICULTY: EASY

REFERENCES: Financial Institutions

TOPICS: (1.8) Financial institutions

• If an individual investor trades currently outstanding common shares through a broker, this is a primary

market transaction.

• True
• False

ANSWER: False

POINTS: 1

DIFFICULTY: EASY

REFERENCES: Types of Financial Markets

TOPICS: (1.9) Financial markets

• In a limited liability partnership (LLP), only some partners enjoy limited liability with regard to their business

partners’ professional negligence, and their potential losses are limited to their investment in the LLP.

• True
• False

ANSWER: False

POINTS: 1

DIFFICULTY: MEDIUM

REFERENCES: The Corporate Life Cycle

TOPICS: (1.3) Partnership

• Two key advantages to a proprietorship are that, as a business, it pays no corporate income tax and it is easy

for a proprietorship to obtain the capital needed for growth.

• True
• False

ANSWER: False

POINTS: 1 2 / 3

DIFFICULTY: MEDIUM

REFERENCES: The Corporate Life Cycle

TOPICS: (1.3) Proprietorship

• Equity instruments are a claim upon a residual value, but preferred shares have some features like debt and

some like equity.

• True
• False

ANSWER: True

POINTS: 1

DIFFICULTY: Easy

REFERENCES: Financial Securities

TOPICS: (1.6) Preferred shares

• Which of the following statements best describes firm organization?
• One of the disadvantages of a corporation is that the owners have unlimited liability when the firm

goes bankrupt, which means losses can exceed the actual funds invested.

• In a sole proprietorship, the proprietor has limited personal liability for the business’s debts and

losses are limited to the money the proprietor invested in the business.

• Sole proprietorships and partnerships generally have a tax advantage over corporations, especially

large ones.

• In both regular and limited partnerships, all partners are liable for the debts of the partnership.

ANSWER: c

RATIONALE: Sole proprietorships and partnerships pay personal income tax, but they avoid corporate income tax.

POINTS: 1

DIFFICULTY: EASY

REFERENCES: The Corporate Life Cycle

TOPICS: (1.3) Firm organization

KEYWORDS: Bloom's Remember

• Which of the following statements best describes firm organization?
• One of the advantages of a corporation is that managers are always acting in the best interests of the

owners, rather than their own best interests.

• It is generally more difficult to transfer one’s ownership interest in a corporation than in a

partnership.

• One of the advantages of the corporate form of organization is that its income is subject to only

corporate taxation, rather than being taxed as a part of the proprietor’s personal income.

• One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited

liability.

ANSWER: d

POINTS: 1

DIFFICULTY: EASY

REFERENCES: The Corporate Life Cycle

TOPICS: (1.3) Firm organization

KEYWORDS: Bloom's Remember

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