Question 1

Which of the following statements best describes partnerships?
A) In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
B) Partnerships have trouble attracting large capital due to such facts as unlimited liability, and the illiquidity of partnership interests.
C) A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster-growing company.
D) A major disadvantage of all partnerships relative to all corporations is the fact that taxes must be paid by the partners rather than by the firm itself.

Accepted Answer

Partnerships have unlimited liability, meaning that all partners are liable for the debts and obligations of the partnership, not just their individual investment. This can make partnerships less attractive to investors who are looking for limited liability. Additionally, partnership interests are not as liquid as stocks in a corporation, making it harder to attract large amounts of capital.

Question 2

One drawback of switching from a partnership to the corporate form of organization is the following:
A) It subjects the firm to additional regulations.
B) It makes it more difficult for the firm to raise additional capital.
C) It makes the firm's investors subject to greater potential personal liabilities.
D) It makes it more difficult for the firm's investors to transfer their ownership interests.

Accepted Answer

Switching from a partnership to a corporation means that the corporation is now subject to additional regulations, such as corporate tax laws and filing requirements. Partnerships have fewer formalities and regulations to follow than corporations.

Question 3

Which of the following statements best describes financial markets?
A) Rates of return on T-bill are the highest among all major financial securities.
B) Money market mutual funds are illiquid.
C) Money markets are markets for long-term debt and common stocks.
D) EuroCanadian market time deposits are instruments issued by banks outside Canada.

Accepted Answer

The answer of Which of the following statements best describes...

Question 4

Which of the following statements best describes articles of incorporation and bylaws?
A) The corporate bylaws are a standard set of rules established by the state of incorporation. These rules are identical for all corporations, and their purpose is to ensure that the firm's managers run the firm in accordance with government laws.
B) Companies must establish a home office in a particular province, and that province must be the one in which most of their business is conducted.
C) Attorney fees are generally involved when a company develops its articles of incorporation and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have any.
D) The articles of incorporation are concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors.

Accepted Answer

Articles of incorporation typically establish essential information about the corporation, such as its name, purpose, and structure, whereas bylaws define how the corporation will be governed and managed on an ongoing basis, including provisions for the board of directors, officers, and shareholders.

Question 5

Which of the following statements best describes financial markets?
A) Capital market instruments include both long-term debt and common stocks.
B) Banker's acceptance has no default risk.
C) Foreign banks are more restricted from operating in Canada.
D) The original maturity of a commercial loan can go up to ten years.

Accepted Answer

Financial markets generally refer to markets where investors can buy and sell financial instruments, which include both long-term debt (such as bonds) and common stocks (equity).

Option B is incorrect because banker's acceptance, like any other financial instrument, carries some level of default risk.

Option C is incorrect because foreign banks are not necessarily more restricted in Canada compared to other countries.

Option D is incorrect because commercial loans generally have a shorter maturity period (often less than five years), and ten years would be considered a relatively long-term loan.

Question 6

Which of the following statements best describes partnerships?
A) Corporations are at a disadvantage relative to partnerships because they have to file more reports to regulatory agencies, even if they are not publicly owned.
B) In a regular partnership, liability for the firm's debts is limited to the amount a particular partner has invested in the business.
C) A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.
D) There must be at least one person acting as a general partner in a limited partnership.

Accepted Answer

A limited partnership must have at least one general partner who is liable for the debts and obligations of the business, while limited partners have limited liability and are not involved in management decisions. The other options do not accurately describe partnerships.

Question 7

Which of the following statements best describes interest rates?
A) The cost of money to fund users is basically determined by the rate of return required by fund providers.
B) If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
C) If companies have fewer good investment opportunities, interest rates are likely to increase.
D) If expected inflation increases, interest rates are likely to decrease.

Accepted Answer

Interest rates are usually determined by the market based on the supply and demand for funds. The rate of return required by fund providers, such as investors and lenders, determines the cost of money to fund users, such as borrowers and companies.

Question 8

Which of the following statements best describes income trusts?
A) Income trust investors do not need to pay personal taxes on cash distribution received.
B) Income trusts face the same issue of double taxation as corporations.
C) Up to 2011, existing income trusts are allowed to treat their equity as debt for tax purposes.
D) Income trusts usually require significant capital reinvestment in the businesses.

Accepted Answer

Up to 2011, existing income trusts in Canada were allowed to treat their equity as debt for tax purposes, which provided tax advantages.

Question 9

What is the main perceived attraction of income trusts?
A) reducing double taxation
B) unregulated business environment
C) fewer layers in the organizational structure
D) maintenance-free business assets

Accepted Answer

The main perceived attraction of income trusts is reducing double taxation. Income trusts are investments that allow investors to receive a portion of the company's profits without the profits being taxed at both the corporate and individual level. As a result, income trusts can provide higher yields compared to other investments.

Question 10

You recently sold 100 shares of your new company, XYZ 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 statements best describes this transaction?
A) This is an example of an exchange of physical assets.
B) This is an example of a primary market transaction.
C) This is an example of a direct transfer of capital.
D) This is an example of a money market transaction.

Accepted Answer

This is an example of a direct transfer of capital, as the shares were sold directly from one individual to another without involving any intermediaries or financial institutions. It is not an exchange of physical assets as there was no exchange of physical property, and it is not a primary market transaction as the shares were not sold to the public for the first time. It is also not a money market transaction as it does not involve short-term debt securities.

Question 11

Which of the following statements best describes financial markets?
A) If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
B) The IPO market is a major part of the secondary market.
C) Only institutions, not individuals, can participate in derivatives market transactions.
D) Money market transactions involve debt securities with maturities of less than one year.

Accepted Answer

Financial markets refer to the marketplace where securities and other financial instruments are bought and sold. Money market transactions typically involve debt securities that have a maturity of less than one year. Option A is incorrect as issuing additional shares of common stock through an investment banker is a primary market transaction. Option B is incorrect as IPOs (initial public offerings) are part of the primary market. Option C is incorrect as both institutions and individuals can participate in derivatives market transactions.

Question 12

Which of the following statements best describes hedge funds?
A) Hedge funds are risky, although they may be market-neutral.
B) Hedge funds open to everyone.
C) Hedge funds have low risk because they hedge their investments.
D) Hedge funds are legal only in Canada, but they are not permitted to operate in Europe or Asia.

Accepted Answer

Hedge funds are typically known for taking on risky investments, although some may attempt to offset the risk by being market-neutral. Hedge funds are not open to everyone, as they typically require high minimum investments and are only available to accredited investors. While hedge funds may use hedging techniques, this does not necessarily mean that they have low risk. Lastly, the legality of hedge funds varies by country and region, and they are not exclusively limited to Canada.

Question 13

You recently sold to your brother 200 shares of Disney stock; the transfer was made through a broker, and the trade occurred on the TSX. This is an example of which of the following?
A) a futures market transaction
B) a primary market transaction
C) a secondary market transaction
D) a money market transaction

Accepted Answer

The transfer of shares through a broker on the TSX is an example of a secondary market transaction, where the shares are bought and sold between investors rather than directly from the issuing company. This differs from a primary market transaction (choice B) where securities are issued to the public for the first time, and a money market transaction (choice D) which involves short-term borrowing and lending of funds. A futures market transaction (choice A) involves the buying or selling of contracts for future delivery of commodities or financial instruments.

Question 14

Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needs?
A) proprietorship, because of ease of entry
B) income trust, to gain some tax advantages and also to obtain limited liability
C) partnership, but only if she needs additional capital
D) regular corporation, because of the limited liability

Accepted Answer

The answer of Jane Doe, who has substantial personal wealth...

Question 15

What should be done to maximize shareholder wealth and thus the value of the firm?
A) Decrease the size of expected cash flow of the company.
B) Slow down the cash receipt of the organization.
C) Increase the risk level of the firm.
D) Raise the free cash flows of the business.

Accepted Answer

Maximizing shareholder wealth and the value of the firm requires increasing the free cash flows of the company. This can be achieved through strategies such as improving operational efficiencies, increasing revenue streams, reducing costs, and investing in projects with high returns. Decreasing the size of expected cash flow, slowing down cash receipts, or increasing the risk level of the firm would not be beneficial for maximizing shareholder wealth in the long run.

Question 16

Which of the following statements best describes financial markets?
A) Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.
B) If an investor sells shares of stock through a broker, then this would be an indirect finance transaction.
C) Money market mutual funds have high degree of default risk.
D) Commercial papers have maturities longer than one year.

Accepted Answer

Financial markets refer to the mechanisms through which funds are transferred from those who have excess funds to those who need them. Capital market transactions involve buying and selling of long-term securities such as stocks and bonds, while money market transactions involve buying and selling of short-term securities such as treasury bills and commercial paper. In direct finance, borrowers borrow funds directly from lenders, while in indirect finance, funds are borrowed through financial intermediaries such as banks or brokers. Selling shares of stock through a broker is an example of an indirect finance transaction. Therefore, option B is the best choice. Options A, C, and D are incorrect because A is not true, C is incorrect as money market mutual funds have low default risk, and D is incorrect as commercial papers are short-term securities with maturities of less than a year.

Question 17

For businesses with cash-producing assets and no need of large capital expenditures, which of the following forms of organization is the best?
A) sole proprietorship
B) limited partnership
C) corporation
D) income trust

Accepted Answer

Income trusts are suitable for businesses with steady cash flows and low capital expenditure needs, as they distribute most of their income to investors.

Question 18

Money markets are markets for which of the following?
A) foreign stocks
B) consumer automobile loans
C) short-term debt securities
D) long-term bonds

Accepted Answer

Money markets are specifically for short-term debt securities, which include Treasury bills, certificates of deposit, commercial paper, and municipal notes. Foreign stocks and long-term bonds are not typically traded in money markets, and while consumer automobile loans are a form of debt, they are not usually traded in money markets.

Question 19

Which of the following is a primary market transaction?
A) You sell 200 shares of IBM stock on the TSX through your broker.
B) IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
C) One financial institution buys 200,000 shares of IBM share from another institution with help of an investment banker.
D) You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares on the TSX.

Accepted Answer

A primary market transaction involves the issuance of new securities, and option B describes IBM issuing new shares and selling them to the public through an investment banker. The other options describe secondary market transactions.

Question 20

Which of the following statements is most accurate in regarding corporations?
A) Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of businesses are organized as corporations.
B) 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.
C) Large corporations are taxed more favourably than sole proprietorships.
D) Corporate stockholders are exposed to unlimited liability.

Accepted Answer

The statement acknowledges that corporations are favored due to their limited liability, but also indicates that legal considerations related to ownership transfers play a major role in why businesses are conducted as corporations. It also alludes to the fact that large corporations may not always have the most favorable tax treatment. Option A is inaccurate because while corporations are common, they do not make up the vast majority of businesses. Option C is incorrect, as large corporations are typically subject to higher taxes than smaller businesses, and Option D is false because stockholders in corporations are not personally liable for the company's debts.

Quiz 1: Overview of Financial Management and the Financial Environment

Which of the following statements best describes partnerships?

One drawback of switching from a partnership to the corporate form of organization is the following:

Which of the following statements best describes financial markets?

Which of the following statements best describes articles of incorporation and bylaws?

Which of the following statements best describes financial markets?

Which of the following statements best describes partnerships?

Which of the following statements best describes interest rates?

Which of the following statements best describes income trusts?

What is the main perceived attraction of income trusts?

You recently sold 100 shares of your new company, XYZ 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 statements best describes this transaction?

Which of the following statements best describes financial markets?

Which of the following statements best describes hedge funds?

You recently sold to your brother 200 shares of Disney stock; the transfer was made through a broker, and the trade occurred on the TSX. This is an example of which of the following?

What should be done to maximize shareholder wealth and thus the value of the firm?

Which of the following statements best describes financial markets?

For businesses with cash-producing assets and no need of large capital expenditures, which of the following forms of organization is the best?

Money markets are markets for which of the following?

Which of the following is a primary market transaction?

Which of the following statements is most accurate in regarding corporations?