Financial Management: Theory and Practice

Multiple-Choice Questions

for use with

Financial Management: Theory and Practice

Third Canadian Edition,

by Brigham/Ehrhardt/Gessaroli/Nason

Chapter 1: An Overview of Financial Management and the Financial Environment

1.Which business organization is most appropriate for businesses with cash-producing assets and no need of large capital expenditures?

a.sole proprietorship

b.limited partnership

c.corporation

d.income trust

2.Which business organization is most appropriate for businesses with cash-producing assets and a need of large capital expenditures?

a.sole proprietorship

b.limited partnership

c.corporation

d.income trust

3.What is the primary financial disadvantage of forming business as a corporation?

a.uneasy transfer of ownership

b.complicated incorporation process

c.limited access to financial markets

d.earnings may be subject to double taxation

4.What is the main perceived attraction of sole proprietorships?

a.higher start-up costs

b.unregulated business environment

c.fewer layers in the organizational structure

d.continuity of business

5.Which of the following is least likely to be found in the articles of incorporation and bylaws?

a.employees’ salary structure

b.board member election

c.business life span

d.corporate social responsibility

6.What should a company do to maximize its fundamental value?

a.lower the free cash flows of the business

b.reduce the risk level of the organization

c.slow down the cash receipts from various sources

d.go for 100% debt financing

7.What is the commonly accepted objective of management when operating a business in the real world?

a.ensuring all employees are well paid

b.minimizing the tax bill

c.maximizing shareholder wealth

d.maximizing profit

8.You deposit money to your CIBC savings account, and then the bank lends your money to a home buyer as a mortgage loan. Which of the following best describes such a financial transaction?

a.an exchange of physical assets

b.a primary market transaction

c.an indirect finance

d.a private placement offer

9.Which of the following is most likely to result in a decrease in the interest rates in the economy?

a.The Bank of Canada increases growth in the money supply.

b.There is an increase in expected inflation.

c.The government has budget surpluses.

d.The economy is growing.

10.Purchases of Treasury bills by the central bank raises security prices. How will interest rates be affected?

a.They will fall.

b.They will remain unchanged.

c.They will rise.

d.They will be inflated.

11. Which of the following is NOT considered to be a financial institution?

a.RBC Capital Markets

b.Bank of Montreal

c.Treasury Department of Sears Canada

d.Windsor Family Credit Union

12.Which of the following financial instruments are traded in the money markets?

a.corporate bonds

b.common shares

c.Government of Canada Treasury bills

d.3-year Canada Savings Bonds

13.Which of the following best defines a sole proprietorship?

a.a company that has one owner, is inexpensive to start, and has few regulations

b.a company that has one owner, is expensive to start, and is highly regulated

c.a company that has multiple owners, is inexpensive to start, and has few regulations

d.a company that has multiple owners, is inexpensive to start, and is highly regulated

14.Which of the following best defines a partnership?

a.a company that has one owner, is inexpensive to start, and has few regulations

b.a company that has one owner, is expensive to start, and is highly regulated

c.a company that has multiple owners, is inexpensive to start, and has few regulations

d.a company that has multiple owners, is inexpensive to start, and is highly regulated

15.Which of the following best defines a corporation?

a.a company that has a single owner that is involved in the day-to-day operations of the company

b.a company that has multiple owners that may or may not be involved in the day-to-day operations of the company

c.a company that has very few regulations

d.a company that has unlimited liability for its owners

16.Which of the following best defines an income trust?

a.a fund that is set up for the purchase of debt for the company

b.a fund that is set up to receive the after-tax dividends of the corporation

c.a fund that is set up to receive the before-tax cash payments of the corporation

d.a fund that holds assets for the corporation

17. The maximization of which of the following is the primary goal of a company’s management?

a.reported profit

b.fundamental share price

c.market share

d.personal wealth