Multiple Choice Questions

1-1 Chapter 01 Introduction to Corporate Finance

Multiple Choice Questions

• Which one of the following terms is defined as the management of a firm's long-term

investments?

• working capital management
• financial allocation
• agency cost analysis
• capital budgeting
• capital structure

• Which one of the following terms is defined as the mixture of a firm's debt and equity

financing?

• working capital management
• cash management
• cost analysis
• capital budgeting
• capital structure

• Which one of the following is defined as a firm's short-term assets and its short-term

liabilities?

• working capital
• debt
• investment capital
• net capital
• capital structure

• A business owned by a solitary individual who has unlimited liability for its debt is called

a:

• corporation.
• sole proprietorship.
• general partnership.
• limited partnership.
• limited liability company.

(Fundamentals of Corporate Finance 2e (Asia Global Edition) Stephen Ross, Randolph Westerfield, Bradford Jordan, Joseph Lim, Ruth Tan) (Test Bank, Answer at the end of each Chapter) 1 / 4

Chapter 01 - Introduction to Corporate Finance 1-2

• A business formed by two or more individuals who each have unlimited liability for all of

the firm's business debts is called a:

• corporation.
• sole proprietorship.
• general partnership.
• limited partnership.
• limited liability company.

• A business partner whose potential financial loss in the partnership will not exceed his or

her investment in that partnership is called a:

• generally partner.
• sole proprietor.
• limited partner.
• corporate shareholder.
• zero partner.

• A business created as a distinct legal entity and treated as a legal "person" is called a:
• corporation.
• sole proprietorship.
• general partnership.
• limited partnership.
• unlimited liability company.

• Which one of the following terms is defined as a conflict of interest between the corporate

shareholders and the corporate managers?

• articles of incorporation
• corporate breakdown
• agency problem
• bylaws
• legal liability
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Chapter 01 - Introduction to Corporate Finance 1-3

9. A stakeholder is:

• a person who owns shares of stock.
• any person who has voting rights based on stock ownership of a corporation.
• a person who initially founded a firm and currently has management control over that firm.
• a creditor to whom a firm currently owes money.
• any person or entity other than a stockholder or creditor who potentially has a claim on the

cash flows of a firm.

• Which of the following questions are addressed by financial managers?
• How should a product be marketed?

II. Should customers be given 30 or 45 days to pay for their credit purchases?III. Should the firm borrow more money?IV. Should the firm acquire new equipment?

• I and IV only
• II and III only
• I, II, and III only
• II, III, and IV only
• I, II, III, and IV

• Which one of the following functions should be the responsibility of the controller rather

than the treasurer?

• daily cash deposit
• income tax returns
• equipment purchase analysis
• customer credit approval
• payment to a vendor

12. The controller of a corporation generally reports directly to the:

• board of directors.
• chairman of the board.
• chief executive officer.
• president.
• vice president of finance.
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Chapter 01 - Introduction to Corporate Finance 1-4

• Which one of the following correctly defines the upward chain of command in a typical

corporate organizational structure?

• The vice president of finance reports to the chairman of the board.
• The chief executive officer reports to president.
• The controller reports to the president.
• The treasurer reports to the vice president of finance.
• The chief operations officer reports to the vice president of production.

• Which one of the following is a capital budgeting decision?
• determining how many shares of stock to issue
• deciding whether or not to purchase a new machine for the production line
• deciding how to refinance a debt issue that is maturing
• determining how much inventory to keep on hand
• determining how much money should be kept in the checking account

• Which of the following should a financial manager consider when analyzing a capital

budgeting project?

• project start up costs

II. timing of all projected cash flows III. dependability of future cash flows IV. dollar amount of each projected cash flow

• I and IV only
• I, II, and IV only
• I, II, and III only
• II, III, and IV only
• I, II, III, and IV

• Which one of the following is a capital structure decision?
• determining which one of two projects to accept
• determining how to allocate investment funds to multiple projects
• determining the amount of funds needed to finance customer purchases of a new product
• determining how much debt should be assumed to fund a project
• determining how much inventory will be needed to support a project
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