Finance Exam 1- Practice Exam Questions

Which of the following are advantages of the corporate form of business ownership? I. Limited liability for firm debt. II. Double taxation. III. Ability to raise capital. IV. Unlimited firm life. A. I and II only. B. III and IV only. C. I, III, and IV only. D. II, III, and IV only. E. I, II, III, and IV.

C

Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. ability to raise capital IV. unlimited firm life A. I and II only B. III and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

C

Which of the following parties are considered stakeholders of a firm? I. Employee II. Long-term creditor III. Government IV. Common stockholder A. I only. B. IV only. C. I and III only. D. II and IV only. E. II, III, and IV only.

C

Which one of the following characteristics applies to a limited liability company? A. Available only to firms having a single owner. B. Limited liability for limited partners only. C. Taxed similar to a partnership. D. Taxed similar to a C corporation. E. All income generated is totally tax-free.

C

Which one of the following statements concerning interest rates is correct? a. Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. b. The effective annual rate decreases as the number of compounding periods per year increases. c. The effective annual rate equals the annual percentage rate when interest is compounded annually. d. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. e. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

C

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? A. Articles of incorporation. B. Corporate breakdown. C. Agency problem. D. Bylaws. E. Legal liability

C

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? A. Articles of incorporation. B. Corporate breakdown. C. Agency problem. D. Bylaws. E. Legal liability.

C

Which one of the following terms is defined as the management of a firm's long-term investments? Working capital management. A. Financial allocation. B. Agency cost analysis. C. Capital budgeting. D. Capital structure.

C

Why should financial managers strive to maximize the current value per share of the existing stock? A. Doing so guarantees the company will grow in size at the maximum possible rate. B. Doing so increases employee salaries. C. Because they have been hired to represent the interests of the current shareholders. D. Because this will increase the current dividends per share. E. Because managers often receive shares of stock as part of their compensation.

C

Public offerings of debt and equity must be registered with which one of the following? A. New York Board of Governors. B. Federal Reserve. C. NYSE Registration Office. D. Securities and Exchange Commission. E. Market Dealers Exchange.

D

Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Which form of business entity should they consider to replace their general partnership assuming they wish to remain the only two owners of their business? Whichever organization they select, they wish to be treated equally. A. Sole proprietorship. B. Joint stock company. C. Limited partnership. D. Limited liability company. E. Corporation.

D

The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the: a. Operating cash flow. b. Net capital spending. c. Net working capital. d. Cash flow from assets. e. Cash flow to stockholders.

D

What is the relationship between present value and future value interest factors? a. The present value and future value factors are equal to each other. b. The present value factor is the exponent of the future value factor. c. The future value factor is the exponent of the present value factor. d. The factors are reciprocals of each other. e. There is no relationship between these two factors.

D

Which of the following accounts are included in working capital management? I. Accounts Payable II. Accounts Receivable III. Fixed Assets IV. Inventory A. I and II only. B. I and III only. C. II and IV only. D. I, II, and IV only. E. II, III, and IV only.

D

Which of the following best defines an annuity ____ A. It has less value than a comparable perpetuity. B. It is either an equal or an unequal stream of payments that occur in equal time periods for a finite period. C. It is a stream of payments that fluctuate with current market interest rates. D. It is a stream of equal payments that occur in equal periods of time for a finite period. E. It has a longer life span than a perpetuity.

D

Which of these will increase the present value of an amount to be received sometime in the future? a. Increase in the time until the amount is received. b. Increase in the discount rate. c. Decrease in the future value. d. Decrease in the interest rate. e. Decrease in both the future value and the number of time periods.

D

Which type of business organization has all the respective rights and privileges of a legal person? A. Sole proprietorship. B. General partnership. C. Limited partnership. D. Corporation. E. Limited liability company.

D

Depreciation for a tax‐paying firm: a. Increases expenses and lowers taxes. b. Increases the net fixed assets as shown on the balance sheet. c. Reduces both the net fixed assets and the costs of a firm. d. Is a noncash expense that increases the net income. e. Decreases net fixed assets, net income, and operating cash flows.

A

The articles of incorporation: I. Describe the purpose of the firm. II. Are amended periodically. III. Set forth the number of shares of stock that can be issued. IV. Detail the method that will be used to elect corporate directors. A. I and III only. B. I and IV only. C. II and III only. D. II and IV only. E. I, III, and IV only.

A

The interest rate that is most commonly quoted by a lender is referred to as which one of the following? a. Annual percentage rate. b. Compound rate. c. Effective annual rate. d. Simple rate. e. Common rate.

A

Which term relates to the cash flow that results from a firm's ongoing, normal business activities? a. Operating cash flow. b. Capital spending. c. Net working capital. d. Cash flow from assets. e. Cash flow to creditors.

A

A business owned by a solitary individual who has unlimited liability for its debt is called a: A. Corporation. B. Sole proprietorship. C. General partnership. D. Limited partnership. E. Limited liability company.

B

The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the ____________ A. Operating cash flow. B. Cash flow from assets. C. Net capital spending. D. Net working capital. E. Cash flow to stockholders.

B

Which of the following are current assets? I. Cash II. Trademark III. Accounts receivable IV. Notes payable a. II and III only. b. I and III only. c. I, II, and IV only. d. I, III, and IV only. e. II, III, and IV only.

B

Which one of the following best states the primary goal of financial management? A. Maximize current dividends per share. B. Maximize the current value per share. C. Increase cash flow and avoid financial distress. D. Minimize operational costs while maximizing firm efficiency. E. Maintain steady growth while increasing current profits.

B

Which one of the following best states the primary goal of financial management? A. maximize current dividends per share B. maximize the current value per share C. increase cash flow and avoid financial distress D. minimize operational costs while maximizing firm efficiency E. maintain steady growth while increasing current profits

B

Which one of the following functions should be the responsibility of the controller rather than the treasurer? A. Daily cash deposit. B. Income tax returns. C. Equipment purchase analysis. D. Customer credit approval. E. Payment to a vendor.

B

Which one of the following is a capital budgeting decision? A. Determining how many shares of stock to issue. B. Deciding whether or not to purchase a new machine for the production line. C. Deciding how to refinance a debt issue that is maturing. D. Determining how much inventory to keep on hand. E. Determining how much money should be kept in the checking account.

B

Which one of the following is a primary market transaction? A. Sale of currently outstanding stock by a dealer to an individual investor. B. Sale of a new share of stock to an individual investor. C. Stock ownership transfer from one shareholder to another shareholder. D. Gift of stock from one shareholder to another shareholder. E. Gift of stock by a shareholder to a family member.

B

Which one of the following is a primary market transaction? A. sale of currently outstanding stock by a dealer to an individual investor B. sale of a new share of stock to an individual investor C. stock ownership transfer from one shareholder to another shareholder D. gift of stock from one shareholder to another shareholder E. gift of stock by a shareholder to a family member

B

Which one of the following statements is correct? A. A general partnership is legally the same as a corporation. B. Income from both sole proprietorships and partnerships is taxed as individual income. C. Partnerships are the most complicated type of business to form. D. All business organizations have bylaws. E. Only firms organized as sole proprietorships have limited lives.

B

Which one of the following statements related to annuities and perpetuities is correct? a. An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. b. A perpetuity composed of $100 monthly payments is worth more than an annuity of $100 monthly payments; given equal discount rates. c. Most loans are a form of a perpetuity. d. The present value of a perpetuity cannot be computed but the future value can. e. Perpetuities are finite but annuities are not.

B

Your grandmother has promised to give you $10,000 when you graduate from college. She is expecting you to graduate three years from now. What happens to the present value of this gift if you speed up your graduation by one year and graduate two years from now? a. Remains constant. b. Increases. c. Decreases. d. Becomes negative. e. Cannot be determined from the information provided.

B

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a: A. Corporation. B. Sole proprietorship. C. General partnership. D. Limited partnership. E. Limited liability company.

C

Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt? A. Sole proprietorship. B. Joint stock company. C. Limited partnership. D. General partnership. E. Corporation.

C

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction: A. Took place in the primary market. B. Occurred in a dealer market. C. Was facilitated in the secondary market. D. Involved a proxy. E. Was a private placement.

C

A limited partnership: A. Has an unlimited life. B. Can opt to be taxed as a corporation. C. Terminates at the death of any limited partner. D. Has a greater ability to raise capital than a sole proprietorship. E. Consists solely of limited partners.

D

A stakeholder is: A. A person who owns shares of stock. B. Any person who has voting rights based on stock ownership of a corporation. C. A person who initially founded a firm and currently has management control over that firm. D. A creditor to whom a firm currently owes money. E. Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

E

Corporate bylaws: A. must be amended should a firm decide to increase the number of shares authorized. B. cannot be amended once adopted. C. define the name by which the firm will operate. D. describe the intended life and purpose of the organization. E. determine how a corporation regulates itself.

E

Discounting cash flows involves____ A. taking the cash discount offered on trade merchandise. B. estimating only the cash flows that occur in the first four years of a project. C. discounting only those cash flows that occur at least ten years in the future. D. multiplying expected future cash flows by the cost of capital. E. adjusting all expected future cash flows to their current (i.e., present) value.

E

Net working capital is defined as: a. Total liabilities minus shareholders' equity. b. Current liabilities minus shareholders' equity. c. Fixed assets minus long‐term liabilities. d. Total assets minus total liabilities. e. Current assets minus current liabilities.

E

The decision to issue additional shares of stock is an example of which one of the following? A. Working capital management. B. Net working capital decision. C. Capital budgeting. D. Controller's duties. E. Capital structure decision.

E

The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate. a. Mean. b. Residual. c. Total. d. Average. e. Marginal.

E

Which of the following are correct assumptions and conditions of the growing perpetuity present value formula? I. The first periodic cash flow (or payment) occurs today. II. g can be higher or lower than r. III. g needs to be less than r IV. The number of time periods is finite. A. I and II only B. I and III only C. I, II, and IV only D. I, III, and IV only E. III only

E

Which one of the following parties has ultimate control of a corporation? A. Chairman of the board. B. Board of directors. C. Chief executive officer. D. Chief operating office. E. Shareholders.

E

Which one of the following will produce the lowest present value interest factor? a. 6 percent interest for 5 years. b. 6 percent interest for 8 years. c. 6 percent interest for 10 years. d. 8 percent interest for 5 years. e. 8 percent interest for 10 years.

E

Which one of these statements related to growing annuities and perpetuities is correct? a. You can compute the present value of a growing annuity but not a growing perpetuity. b. In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. c. The future value of an annuity will decrease if the growth rate is increased. d. An increase in the rate of growth will decrease the present value of an annuity. e. The present value of a growing perpetuity will decrease if the discount rate is increased.

E