MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) A corporation's board of directors: 1) _______

• has a lifetime appointment to the board.
• is selected by a vote of all corporate stakeholders.
• can be voted out of power by the shareholders.
• is selected by and can be removed by management.

2) The short-term decisions of financial managers are comprised of: 2) _______

• both investment and financing decisions.
• capital structure decisions.
• financing decisions.
• investment decisions.

3) Sole proprietorships resolve the issue of agency problems by: 3) _______

• avoiding excessive expense accounts.
• forcing owners to bear the full cost of their actions.
• discharging those who violate the rules.
• allowing owners to share the cost of their actions with others.

4) In which of the following organizations would the existence of agency problems be least likely?

4) _______

• a partnership B) a corporation
• a sole proprietorship D) a closely held corporation

5) A chief financial officer would typically: 5) _______

• report to the controller, but supervise the treasurer.
• report to the treasurer, but supervise the controller.
• supervise both the treasurer and controller.
• report to both the treasurer and controller.

6) When the management of a business is conducted by individuals other than the owners,

the business is more likely to be a:

6) _______

• partnership. B) general partner.
• sole proprietorship. D) corporation.

7) Ethical decision making in business: 7) _______

• requires adherence to implied rules as well as written rules.
• is not in the best interests of shareholders.
• is less important than good capital budgeting decisions.
• reduces the firm's profits.

8) Which of the following would not be considered a real asset? 8) _______

• a patent B) a corporate bond
• a factory D) a machine

9) In the case of a professional corporation, ________ has/have limited liability. 9) _______

• only the business
• Neither the professionals nor the business

Chapter 1 (Fundamentals of Corporate Finance, 6th Canadian Edition 6e Brealey Richard ,Myers Stewart, Marcus Alan, Maynes Elizabeth, Mitra Devashis) (Test Bank, Answer at the end of each Chapter, For Complete File, Download link at the end of this File) 1 / 3

• Both the professionals and the business
• only the professionals

10) Which of the following is not an advantage to incorporating a business? 10) ______

• limited liability.
• profits taxed at the corporate level and the shareholder level.
• easier access to financial markets.
• becoming a permanent legal entity.

11) A firm decides to pay for a small investment project through a $1 million increase in

short-term bank loans. This is best described as an example of a(n):

11) ______

• capital market decision. B) capital budgeting decision.
• investment decision. D) financing decision.

12) One corporate activity that is specifically reserved for the board of directors is the: 12) ______

• day-to-day operation of the firm. B) custody of records.
• declaration of dividends. D) preparation of budgets.

13) Which of the following appears to be the most appropriate goal for corporate management?

13) ______

• minimizing the company's liabilities.
• maximizing the company's market share.
• maximizing the current profits of the company.
• maximizing market value of the company's shares.

14) One continuing problem with managerial incentive-compensation plans is that: 14) ______

• effectiveness of the plans is difficult to evaluate.
• the plans increase agency problems.
• managers prefer guaranteed salaries.
• the plans do not reward shareholders.

15) A corporation is considered to be closely held when: 15) ______

• it operates in a small geographic area.
• only a few shareholders exist.
• management also serves as the board of directors.
• the market value of the shares is stable.

16) Which of the following is correct regarding board membership in a corporation? 16) ______

• in a public corporation, shareholders are not board members.
• all corporations have board of directors.
• in a private corporation, shareholders are also board members.
• All of the choices are correct.

17) Which of the following represents a financing decision? 17) ______

• a decision to borrow $10 million through a bank loan.
• a decision to buy a new mainframe computer.
• a decision to pay $1 million of accounts payable.
• a decision to invest in the common stock of another corporation.

18) "Double taxation" refers to: 18) ______

• all partners paying equal taxes on profits. 2 / 3

• paying taxes on profits at the corporate level and on dividends at the personal level.
• the fact that marginal tax rates are doubled for corporations.
• corporations paying taxes on both dividends and retained earnings.

19) Which of the following groups is least likely to be considered a stakeholder of the firm? 19) ______

• government B) competitors C) bondholders D) employees

20) When managers' compensation plans are tied in a meaningful manner to the profits of the

firm, agency problems:

20) ______

• are shifted to other stakeholders. B) can be reduced.
• are eliminated entirely from the firm. D) will be created.

21) Firms can alter their capital structure by: 21) ______

• becoming a limited liability company.
• investing in non-tangible assets.
• not accepting any capital budgeting projects.
• issuing stock to repay debt.

22) The financial manager has to determine a value to uncertain cash flows. The variables

involved in this determination are:

22) ______

• timing B) risk
• amount D) All of the choices are correct.

23) A board of directors is elected as a representative of the corporation's: 23) ______

• shareholders. B) top management.
• stakeholders. D) customers.

24) A managerial objective to increase market share is more likely to be successful in the

long run if the firm is:

24) ______

• selling shares in the secondary market.
• the low-cost producer in the industry.
• investing in capital budgeting projects.
• managed by the board of directors.

25) Which of the following statements best distinguishes the difference between real and financial assets?

25) ______

• financial assets appreciate in value; real assets depreciate in value.
• real assets have less value than financial assets.
• financial assets represent claims to income that are generated by real assets.
• real assets are tangible; financial assets are not.

26) A manager's compensation plan that offers financial incentives for increases in quarterly

profitability may create agency problems in that:

26) ______

• short-term, not long-term, profits become the focus.
• investors desire stable profits.
• the managers are not motivated by personal gain.
• the board of directors may claim the credit.

27) Corporations are referred to as public companies when their: 27) ______

• products or services are available to the public.
• shareholders have no tax liability.
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