,TESTBANK FOR Financial Management Theory and
Practice , 4th Canadian Edition Eugene F. Brigham
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
1. The form of organization of a business is an important issue that reflects in some typical stages
in the corporate life cycle.
a. True
b. False
ANSWER: True
2. 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.
a. True
b. False
ANSWER: False
3. Limited partners who are too involved in the business operation can keep their limited liability
status.
a. True
b. False
ANSWER: False
4. 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.
a. True
b. False
ANSWER: True
5. 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.
a. True
b. False
ANSWER: True
6. Today, banks can never provide trustee services and the difference between trusts and banks
has become clear over time.
a. True
b. False
ANSWER: False
7. If an individual investor trades currently outstanding common shares through a broker, this is a
primary market transaction.
a. True
b. False
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,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
ANSWER: False
8. 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.
a. True
b. False
ANSWER: False
9. 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.
a. True
b. False
ANSWER: False
10. Equity instruments are a claim upon a residual value, but preferred shares have some features
like debt and some like equity.
a. True
b. False
ANSWER: True
11. Which of the following statements best describes firm organization?
a. 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.
b. 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.
c. Sole proprietorships and partnerships generally have a tax advantage over
corporations, especially large ones.
d. In both regular and limited partnerships, all partners are liable for the debts of the
partnership.
ANSWER: c
12. Which of the following statements best describes firm organization?
a. 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.
b. It is generally more difficult to transfer one’s ownership interest in a corporation than
in a partnership.
c. 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.
d. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to
unlimited liability.
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,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
ANSWER: d
13. Which of the following statements best describes firm organization?
a. One advantage of forming a corporation is that equity investors are usually exposed to
less liability than in a regular partnership and sole proprietorship.
b. One disadvantage of operating a business as a sole proprietorship is that the firm is
subject to double taxation, at both the firm level and the owner level.
c. It is generally more expensive to form a partnership than a corporation because a
partnership requires extensive legal documents.
d. In a limited partnership, the limited partners and general partners are liable only for
the amount of their investment in the partnership.
ANSWER: a
14. Cheers Canada operates as a partnership. What will be the effect if the partners decide to
convert the business into a regular corporation?
a. The transfer of ownership interests of Cheers Canada will be more difficult.
b. Cheers Canada will be subject to more regulations.
c. Cheers Canada will find it more difficult to obtain the capital needed for growth.
d. Cheers Canada shareholders (the ex-partners) will be exposed to more liability.
ANSWER: b
15. Which of the following statements best describes firm organization?
a. Corporate shareholders are exposed to unlimited liability, and the losses may be
amplified by the double taxation of incorporation.
b. A corporation will stop operating if its original owners and managers are deceased.
c. Partnerships generally face more regulations than corporations.
d. It is usually easier to transfer ownership in a corporation than it is to transfer
ownership in a partnership.
ANSWER: d
16. Why might a business choose to operate as a corporation rather than as a sole proprietorship
or a partnership?
a. Less of a corporation’s income is generally subjected to taxes than would be true if the
firm were a sole proprietorship.
b. It is difficult for a corporation to obtain the capital needed for growth.
c. Corporate shareholders escape unlimited liability for the firm’s debts, but this factor
may be offset by the double taxation of the corporation.
d. Corporations can be easily formed and generally face relatively few regulations.
ANSWER: c
17. What should be done to maximize shareholder wealth and thus the value of the firm?
a. Reduce the size of expected cash flows of the company.
b. Increase the free cash flows of the business.
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,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
c. Increase the risk level of the firm.
d. Arrange for cash to be received later.
ANSWER: b
18. You recently sold 200 shares of your new company, ABC Corporation, to your brother at a
family reunion. At the reunion your brother gave you a cheque for the shares and you gave your
brother the share certificates. Which of the following best describes this transaction?
a. a direct transfer of capital
b. an indirect transfer of capital through investment bankers
c. an indirect transfer through a financial intermediary
d. an exchange of physical assets
ANSWER: a
19. Which of the following statements best describes interest rates?
a. If an investment opportunity’s future cash flows are very uncertain and might be much
lower than expected, providers require a lower expected return.
b. The cost of money to fund users is basically determined by the rate of return required
by fund providers.
c. If companies have more good investment opportunities, interest rates are likely to
decrease.
d. If expected inflation decreases, interest rates are likely to increase.
ANSWER: b
20. Which of the following statements best describes hedge funds?
a. Hedge funds always have low risk because they hedge their investments.
b. Like mutual funds, hedge funds can have thousands of investors.
c. Hedge funds are risky, although they may be market-neutral.
d. Hedge funds are more regulated than mutual funds since they use derivatives to form
portfolios.
ANSWER: c
21. What is traded on money markets?
a. corporate shares
b. short-term, highly liquid debt securities
c. intermediate-term debt securities
d. long-term bonds
ANSWER: b
22. Which of the following is an example of a primary market transaction?
a. Apple issues 10,000,000 new shares and sells them to the public through an
investment banker.
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,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
b. You invest $20,000 in a mutual fund, which then uses the money to buy $20,000 of
Apple shares on the TSX.
c. One financial institution sells 300,000 Apple shares to another institution with the
help of an investment banker.
d. You sell 500 Apple shares on the TSX through your broker.
ANSWER: a
23. Which of the following statements best describes financial markets?
a. If Apple issues an additional 1,000,000 shares through an investment banker, this
would be a secondary market transaction.
b. Capital market transactions involve highly liquid debt securities with maturities of less
than one year.
c. The IPO market is a major part of the primary market.
d. Bank loans and private placements of debt with insurance companies are examples of
private public market transactions.
ANSWER: c
24. You recently sold 500 shares of Alphabet stock; the transfer was made through a broker, and
the trade occurred on the TSX. Which type of transaction is this?
a. a futures market transaction
b. an IPO market transaction
c. a primary market transaction
d. a secondary market transaction
ANSWER: d
25. Which of the following statements best describes financial markets?
a. If an investor buys shares through a broker, then this would be an indirect finance
transaction.
b. Commercial paper is issued by firms to larger investors and guaranteed by a bank.
c. Bankers’ acceptances have a high degree of default risk.
d. Money market mutual funds have maturities longer than one year.
ANSWER: a
26. Which of the following statements best describes financial markets?
a. Financial asset markets include only long-term debt and common shares.
b. Money market mutual funds have no default risk.
c. Foreign banks are now less restricted from operating in Canada than in the past.
d. The original maturity of a mortgage can go up to 40 years.
ANSWER: c
27. Which of the following statements best describes financial markets?
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,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
a. Rates of return on Government of Canada Treasury bills are the highest among all
major financial securities.
b. Corporate bonds are riskier than Canadian government debt and their risk depends on
the strength of the issuer.
c. Capital markets are markets for short-term, highly liquid debt securities.
d. Commercial paper is illiquid.
ANSWER: b
28. What is one of the drawbacks of switching from a partnership to the corporate form of
organization?
a. It makes the firm’s investors subject to unlimited potential personal liabilities.
b. It makes its income taxable only as a part of the proprietor’s personal income.
c. It makes it more difficult for the firm’s investors to transfer their ownership interests.
d. It subjects the firm to additional regulations.
ANSWER: d
29. Which of the following statements best describes partnerships and/or corporations?
a. Corporations can attract large capital more easily due to factors such as limited
liability, and the liquidity of the owners’ interests.
b. In a regular partnership, liability for other partners’ misdeeds is limited to the amount
of a particular partner’s investment in the partnership.
c. A fast-growth business, with great need for new capital, would be less likely to
organize as a corporation than would a slow-growth business.
d. A major disadvantage of partnerships relative to corporations is the fact that taxes
must be paid by the partners and the firm itself.
ANSWER: a
30. Which of the following statements best describes partnerships and/or corporations?
a. In a regular partnership, a partner’s liability for the firm’s debts is limited to the
amount they have invested in the business.
b. Corporations are at a disadvantage relative to partnerships because the earnings of the
corporation are taxed at the firm level, not at the individual level.
c. There must be at least one general partner in a limited partnership.
d. A slow-growth business would be more likely to set up as a corporation for its
business organization than would a fast-growth business.
ANSWER: c
31. Which of the following is an example of providers of cash?
a. entrepreneurs with ideas
b. individuals who are saving for retirement
c. corporations with growth plans
d. students wishing to borrow money for tuition
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CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
ANSWER: b
32. Which statement regarding corporations is most accurate?
a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast
majority of businesses begin as corporations.
b. Large corporations have more tax advantages than partnerships.
c. Due to legal considerations related to ownership transfers and limited liability, most
business is conducted by corporations in spite of large corporations’ often less
favourable tax treatment.
d. Corporate shareholders have unlimited liability when the corporation becomes
bankrupt.
ANSWER: c
33. Which of the following statements best describes articles of incorporation and bylaws?
a. The articles of incorporation are concerned with things like the share class description,
whereas the bylaws are concerned with things like procedures for electing the board of
directors.
b. An initial registered office address and first board of directors form can be omitted
when filed with Corporations Canada.
c. A professional corporation formed by professionals such as doctors or lawyers can
relieve the participation of professional (malpractice) liability.
d. The corporate bylaws are a standard set of rules established by the state of
incorporation, so these rules are identical for all corporations.
ANSWER: a
34. Which of the following statements would most people in business agree with?
a. A firm’s commitment to business ethics can only be measured by the tendency of its
employees to adhere to laws and regulations.
b. Legal and ethical considerations make firms’ profits and ethics always consistent.
c. Canada’s federal government passed the Sarbanes-Oxley Act, with a provision
designed to protect “whistleblowers.”
d. Although moral character is developed differently, it is useful to educate people about
the adverse consequences of unethical behaviour to themselves, their firms, and the
nation.
ANSWER: d
35. What should be the primary operating goal of a publicly owned firm interested in serving its
shareholders?
a. maximize the firm’s expected sales revenue
b. maximize the stock price during a specific period
c. maximize the stock price per share, which is the stock’s fundamental value, over the
long run
d. maximize the firm’s expected EPS
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CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
ANSWER: c
36. Which of the following statements best describes corporate goals and issues?
a. The proper goal of the financial manager should be to attempt to maximize the firm’s
expected cash flows, because this will add the most to the wealth of the individual
shareholders.
b. Potential agency problems can arise between shareholders and managers, because
managers hired as agents to act on behalf of the owners may instead make decisions
favourable to themselves rather than the shareholders.
c. Large, publicly owned firms like Tesla and Apple are controlled by their management
teams. Ownership is generally widely dispersed; hence, managers have great freedom
in how they run the firm. Managers may operate in the shareholders’ best interests, but
they also may operate in their own personal best interests. As long as they stay within
the law, there is no way to either force or motivate managers to act in the
shareholders’ best interests.
d. The primary goal of the corporation should be to maximize shareholder wealth, which
means the managers should be unmindful of employee welfare or community
concerns.
ANSWER: b
37. Suppose the Bank of Canada announces plans to issue $100 billion of new bonds. Assuming
the announcement was not expected, what effect, other things held constant, would that have on
bond prices and interest rates?
a. Prices would decrease and interest rates would increase.
b. Prices and interest rates would both increase.
c. Prices would increase and interest rates would decrease.
d. Prices and interest rates would both decrease.
ANSWER: a
38. Which of the following statements best describes financial instruments?
a. Investors will exchange cash for a financial instrument even if they expect to receive
an unacceptable rate of return.
b. Debt instruments usually do not have specified payments and a specified maturity.
c. Equity instruments typically have specified payments and a specified maturity.
d. Shareholders are entitled to cash flows after bondholders, creditors, and other
claimants have been satisfied.
ANSWER: d
39. Which circumstance would most likely lead to an increase in interest rates in the economy?
a. The economy is experiencing a deflation.
b. The economy falls into a recession.
c. There is an increase in expected inflation.
d. The federal government decides to promote economic activity.
Copyright Cengage Learning. Powered by Cognero. Page 8
Practice , 4th Canadian Edition Eugene F. Brigham
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
1. The form of organization of a business is an important issue that reflects in some typical stages
in the corporate life cycle.
a. True
b. False
ANSWER: True
2. 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.
a. True
b. False
ANSWER: False
3. Limited partners who are too involved in the business operation can keep their limited liability
status.
a. True
b. False
ANSWER: False
4. 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.
a. True
b. False
ANSWER: True
5. 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.
a. True
b. False
ANSWER: True
6. Today, banks can never provide trustee services and the difference between trusts and banks
has become clear over time.
a. True
b. False
ANSWER: False
7. If an individual investor trades currently outstanding common shares through a broker, this is a
primary market transaction.
a. True
b. False
Copyright Cengage Learning. Powered by Cognero. Page 1
,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
ANSWER: False
8. 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.
a. True
b. False
ANSWER: False
9. 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.
a. True
b. False
ANSWER: False
10. Equity instruments are a claim upon a residual value, but preferred shares have some features
like debt and some like equity.
a. True
b. False
ANSWER: True
11. Which of the following statements best describes firm organization?
a. 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.
b. 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.
c. Sole proprietorships and partnerships generally have a tax advantage over
corporations, especially large ones.
d. In both regular and limited partnerships, all partners are liable for the debts of the
partnership.
ANSWER: c
12. Which of the following statements best describes firm organization?
a. 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.
b. It is generally more difficult to transfer one’s ownership interest in a corporation than
in a partnership.
c. 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.
d. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to
unlimited liability.
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,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
ANSWER: d
13. Which of the following statements best describes firm organization?
a. One advantage of forming a corporation is that equity investors are usually exposed to
less liability than in a regular partnership and sole proprietorship.
b. One disadvantage of operating a business as a sole proprietorship is that the firm is
subject to double taxation, at both the firm level and the owner level.
c. It is generally more expensive to form a partnership than a corporation because a
partnership requires extensive legal documents.
d. In a limited partnership, the limited partners and general partners are liable only for
the amount of their investment in the partnership.
ANSWER: a
14. Cheers Canada operates as a partnership. What will be the effect if the partners decide to
convert the business into a regular corporation?
a. The transfer of ownership interests of Cheers Canada will be more difficult.
b. Cheers Canada will be subject to more regulations.
c. Cheers Canada will find it more difficult to obtain the capital needed for growth.
d. Cheers Canada shareholders (the ex-partners) will be exposed to more liability.
ANSWER: b
15. Which of the following statements best describes firm organization?
a. Corporate shareholders are exposed to unlimited liability, and the losses may be
amplified by the double taxation of incorporation.
b. A corporation will stop operating if its original owners and managers are deceased.
c. Partnerships generally face more regulations than corporations.
d. It is usually easier to transfer ownership in a corporation than it is to transfer
ownership in a partnership.
ANSWER: d
16. Why might a business choose to operate as a corporation rather than as a sole proprietorship
or a partnership?
a. Less of a corporation’s income is generally subjected to taxes than would be true if the
firm were a sole proprietorship.
b. It is difficult for a corporation to obtain the capital needed for growth.
c. Corporate shareholders escape unlimited liability for the firm’s debts, but this factor
may be offset by the double taxation of the corporation.
d. Corporations can be easily formed and generally face relatively few regulations.
ANSWER: c
17. What should be done to maximize shareholder wealth and thus the value of the firm?
a. Reduce the size of expected cash flows of the company.
b. Increase the free cash flows of the business.
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,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
c. Increase the risk level of the firm.
d. Arrange for cash to be received later.
ANSWER: b
18. You recently sold 200 shares of your new company, ABC Corporation, to your brother at a
family reunion. At the reunion your brother gave you a cheque for the shares and you gave your
brother the share certificates. Which of the following best describes this transaction?
a. a direct transfer of capital
b. an indirect transfer of capital through investment bankers
c. an indirect transfer through a financial intermediary
d. an exchange of physical assets
ANSWER: a
19. Which of the following statements best describes interest rates?
a. If an investment opportunity’s future cash flows are very uncertain and might be much
lower than expected, providers require a lower expected return.
b. The cost of money to fund users is basically determined by the rate of return required
by fund providers.
c. If companies have more good investment opportunities, interest rates are likely to
decrease.
d. If expected inflation decreases, interest rates are likely to increase.
ANSWER: b
20. Which of the following statements best describes hedge funds?
a. Hedge funds always have low risk because they hedge their investments.
b. Like mutual funds, hedge funds can have thousands of investors.
c. Hedge funds are risky, although they may be market-neutral.
d. Hedge funds are more regulated than mutual funds since they use derivatives to form
portfolios.
ANSWER: c
21. What is traded on money markets?
a. corporate shares
b. short-term, highly liquid debt securities
c. intermediate-term debt securities
d. long-term bonds
ANSWER: b
22. Which of the following is an example of a primary market transaction?
a. Apple issues 10,000,000 new shares and sells them to the public through an
investment banker.
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,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
b. You invest $20,000 in a mutual fund, which then uses the money to buy $20,000 of
Apple shares on the TSX.
c. One financial institution sells 300,000 Apple shares to another institution with the
help of an investment banker.
d. You sell 500 Apple shares on the TSX through your broker.
ANSWER: a
23. Which of the following statements best describes financial markets?
a. If Apple issues an additional 1,000,000 shares through an investment banker, this
would be a secondary market transaction.
b. Capital market transactions involve highly liquid debt securities with maturities of less
than one year.
c. The IPO market is a major part of the primary market.
d. Bank loans and private placements of debt with insurance companies are examples of
private public market transactions.
ANSWER: c
24. You recently sold 500 shares of Alphabet stock; the transfer was made through a broker, and
the trade occurred on the TSX. Which type of transaction is this?
a. a futures market transaction
b. an IPO market transaction
c. a primary market transaction
d. a secondary market transaction
ANSWER: d
25. Which of the following statements best describes financial markets?
a. If an investor buys shares through a broker, then this would be an indirect finance
transaction.
b. Commercial paper is issued by firms to larger investors and guaranteed by a bank.
c. Bankers’ acceptances have a high degree of default risk.
d. Money market mutual funds have maturities longer than one year.
ANSWER: a
26. Which of the following statements best describes financial markets?
a. Financial asset markets include only long-term debt and common shares.
b. Money market mutual funds have no default risk.
c. Foreign banks are now less restricted from operating in Canada than in the past.
d. The original maturity of a mortgage can go up to 40 years.
ANSWER: c
27. Which of the following statements best describes financial markets?
Copyright Cengage Learning. Powered by Cognero. Page 5
,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
a. Rates of return on Government of Canada Treasury bills are the highest among all
major financial securities.
b. Corporate bonds are riskier than Canadian government debt and their risk depends on
the strength of the issuer.
c. Capital markets are markets for short-term, highly liquid debt securities.
d. Commercial paper is illiquid.
ANSWER: b
28. What is one of the drawbacks of switching from a partnership to the corporate form of
organization?
a. It makes the firm’s investors subject to unlimited potential personal liabilities.
b. It makes its income taxable only as a part of the proprietor’s personal income.
c. It makes it more difficult for the firm’s investors to transfer their ownership interests.
d. It subjects the firm to additional regulations.
ANSWER: d
29. Which of the following statements best describes partnerships and/or corporations?
a. Corporations can attract large capital more easily due to factors such as limited
liability, and the liquidity of the owners’ interests.
b. In a regular partnership, liability for other partners’ misdeeds is limited to the amount
of a particular partner’s investment in the partnership.
c. A fast-growth business, with great need for new capital, would be less likely to
organize as a corporation than would a slow-growth business.
d. A major disadvantage of partnerships relative to corporations is the fact that taxes
must be paid by the partners and the firm itself.
ANSWER: a
30. Which of the following statements best describes partnerships and/or corporations?
a. In a regular partnership, a partner’s liability for the firm’s debts is limited to the
amount they have invested in the business.
b. Corporations are at a disadvantage relative to partnerships because the earnings of the
corporation are taxed at the firm level, not at the individual level.
c. There must be at least one general partner in a limited partnership.
d. A slow-growth business would be more likely to set up as a corporation for its
business organization than would a fast-growth business.
ANSWER: c
31. Which of the following is an example of providers of cash?
a. entrepreneurs with ideas
b. individuals who are saving for retirement
c. corporations with growth plans
d. students wishing to borrow money for tuition
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,Name: Class: Date:
CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
ANSWER: b
32. Which statement regarding corporations is most accurate?
a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast
majority of businesses begin as corporations.
b. Large corporations have more tax advantages than partnerships.
c. Due to legal considerations related to ownership transfers and limited liability, most
business is conducted by corporations in spite of large corporations’ often less
favourable tax treatment.
d. Corporate shareholders have unlimited liability when the corporation becomes
bankrupt.
ANSWER: c
33. Which of the following statements best describes articles of incorporation and bylaws?
a. The articles of incorporation are concerned with things like the share class description,
whereas the bylaws are concerned with things like procedures for electing the board of
directors.
b. An initial registered office address and first board of directors form can be omitted
when filed with Corporations Canada.
c. A professional corporation formed by professionals such as doctors or lawyers can
relieve the participation of professional (malpractice) liability.
d. The corporate bylaws are a standard set of rules established by the state of
incorporation, so these rules are identical for all corporations.
ANSWER: a
34. Which of the following statements would most people in business agree with?
a. A firm’s commitment to business ethics can only be measured by the tendency of its
employees to adhere to laws and regulations.
b. Legal and ethical considerations make firms’ profits and ethics always consistent.
c. Canada’s federal government passed the Sarbanes-Oxley Act, with a provision
designed to protect “whistleblowers.”
d. Although moral character is developed differently, it is useful to educate people about
the adverse consequences of unethical behaviour to themselves, their firms, and the
nation.
ANSWER: d
35. What should be the primary operating goal of a publicly owned firm interested in serving its
shareholders?
a. maximize the firm’s expected sales revenue
b. maximize the stock price during a specific period
c. maximize the stock price per share, which is the stock’s fundamental value, over the
long run
d. maximize the firm’s expected EPS
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CHAPTER 1 - AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE
FINANCIAL ENVIRONMENT
ANSWER: c
36. Which of the following statements best describes corporate goals and issues?
a. The proper goal of the financial manager should be to attempt to maximize the firm’s
expected cash flows, because this will add the most to the wealth of the individual
shareholders.
b. Potential agency problems can arise between shareholders and managers, because
managers hired as agents to act on behalf of the owners may instead make decisions
favourable to themselves rather than the shareholders.
c. Large, publicly owned firms like Tesla and Apple are controlled by their management
teams. Ownership is generally widely dispersed; hence, managers have great freedom
in how they run the firm. Managers may operate in the shareholders’ best interests, but
they also may operate in their own personal best interests. As long as they stay within
the law, there is no way to either force or motivate managers to act in the
shareholders’ best interests.
d. The primary goal of the corporation should be to maximize shareholder wealth, which
means the managers should be unmindful of employee welfare or community
concerns.
ANSWER: b
37. Suppose the Bank of Canada announces plans to issue $100 billion of new bonds. Assuming
the announcement was not expected, what effect, other things held constant, would that have on
bond prices and interest rates?
a. Prices would decrease and interest rates would increase.
b. Prices and interest rates would both increase.
c. Prices would increase and interest rates would decrease.
d. Prices and interest rates would both decrease.
ANSWER: a
38. Which of the following statements best describes financial instruments?
a. Investors will exchange cash for a financial instrument even if they expect to receive
an unacceptable rate of return.
b. Debt instruments usually do not have specified payments and a specified maturity.
c. Equity instruments typically have specified payments and a specified maturity.
d. Shareholders are entitled to cash flows after bondholders, creditors, and other
claimants have been satisfied.
ANSWER: d
39. Which circumstance would most likely lead to an increase in interest rates in the economy?
a. The economy is experiencing a deflation.
b. The economy falls into a recession.
c. There is an increase in expected inflation.
d. The federal government decides to promote economic activity.
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