PART II. MULTIPLE-CHOICE TEST QUESTIONS. Mark the correct answer on the answer sheet.

1.Sole proprietorships are predominantly started because:

A. they are easily and cheaply setup. B. the proprietorship life is limited to the business owners life

C. all business taxes are paid as individual taxes. D. all of the above. E. none of the above.

2.Capital structure is defined as the major financing of the firm. The capital structure is divided:

A. between debt holders and creditors.

B. between creditors and equityholders.

C. between assets and liabilities. D. all of the above.

E. none of the above.

3.In the large corporation the separation of management and ownership provided the following advantage(s):

A. as separate legal entity has unlimited life.

B. ease of share ownership transfer. C. unlimited shareholder liability. D. A and B.

E. B and C.

4.Incentive compensation plans are designed to:

A. motivate managers to do what is in the best interest of shareholders.

B. overcome agency costs. C. tie management compensation to the stock price. D. typically give managers the right to purchase stock at a fixed price, usually the current market price at the time the right is granted.

E. all of the above.

5.Which of the following statements explains why maximizing profits fall short of maximizing shareholders wealth?

A. profits reflect the past instead of the future. B. profits ignore the time value of money. C. profits rely on accounting principles and do not measure the cash flows with which a company pay its bills. D. all of the above. E. none of the above.

6.In which of the following organizations would the existence of agency problems be least likely?

A. A partnership. B. A proprietorship. C. A corporation. D. A professional corporation. E. Only (C) and (D) of the above.

7.Which of the following are real assets?

A. a share of stock. B. a trade mark. C. a bank loan agreement. D. the balance in the firms chequing account.

E. All of the above.

8.Which of the following are financing decisions?

A. should we stock up with inventory ahead of the holiday seasons? B. should we develop a new software package to manage our inventory?

C. with the savings we make from our new inventory system it may be possible to increase our dividend. D. alternatively, we can use the savings to repay some of our long-term debt.

E. None of the above.

9.Which of the following statements regarding financial markets and se- curities is the most accurate?

A. debt represents an ownership interest in the firm. B. trades of securities in the secondary market raise additional funds for corporations. C. trades in the primary market are between issuing corporations and investors. D. more stock than bond transactions occur in the primary market. E. U.S. security issuers account for only a small portion of worldwide issues.

10.Which of the following factors influences a firms cost of capital?

A. The degree of risk in the projects it undertakes.

B. The types of funds it raises. C. Interest rates. D. Taxation policies.

E. All of the above.

11.Which of the following are correct regarding mutual funds and exchange- traded funds (ETFs)?

A. mutual funds and exchange-traded funds (ETFs) are actively man- aged. B. mutual funds and exchange traded funds (ETFs) beat the market, that is generate superior performance.

C. because they are well-diversified, mutual funds and exchange traded funds (ETFs) are safe investments. D. all of the above. E. none of the above.

12.In terms of the balance sheet model of the firm, the value of the firm in financial markets is equal to:

A. tangible fixed assets plus intangible fixed assets. B. sales minus costs. C. cash inflow minus cash outflow. D. the value of the debt plus the value of the equity.

E. the value of the debt minus the value of the equity.

13.Which one of the following would not be paid from cash flow?

A. cash dividends. B. repayment of principal on a long-term debt. C. repurchase of outstanding shares of common stock.

D. new equipment purchase. E. all of the above.

14.The higher the interest rate and the longer the period of time:

A. The higher the future value and the higher the present value. B. The lower the future value and the lower the present value. C. The higher the future value and the lower the present value. D. The lower the future value and the higher the present value. E. The less present values and future values will be considered by in- vestors.

15.The value of any asset equals:

A. The cost of maintaining an asset over its useful life.

B. The book value of the asset. C. The present value of all of its future benefits. D. The replacement cost of an asset.

E. None of the above.