SCHOOL OF MANAGEMENT AND LANGUAGES 1

Tutorial 1: Introduction

Corporate Financial Theory

C38FN

Author: M. Sherif

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Section A: Choose the one alternative that best completes the statement or
answers the question.
1. The process of planning and managing a firm’s long-term investments is called:
a) Working capital management.
b) Financial depreciation.
c) Agency cost analysis.
d) Capital budgeting.
e) Capital structure.
2. The mixture of debt and equity used by a firm to finance operations is called:
a) Working capital management.
b) financial depreciation.
c) Cost analysis.
d) Capital budgeting.
e) Capital structure.
3. The management of a firm’s short-term assets and liabilities is called:
a) Working capital management.
b) Debt management.
c) Equity management.
d) Capital budgeting.
e) Capital structure.
4. The primary goal of financial management is to:
a) Maximise current dividends per share of the existing stock.
b) Maximise the current value per share of the existing stock.
c) Avoid financial distress.
d) Minimise operational costs and maximize firm efficiency.
e) Maintain steady growth in both sales and net earnings.
5. A conflict of interest between the stockholders and management of a firm is called:
a) Stockholders’ liability.
b) Corporate breakdown.
c) The agency problem.
d) Corporate activism.
e) Legal liability.

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6. A stakeholder is:
a) Any person or entity that owns shares of stock of a corporation.
b) Any person or entity that has voting rights based on stock ownership of a
corporation.
c) A person who initially started a firm and currently has management control over
the cash flows of the firm due to his/her current ownership of company stock.
d) A creditor to whom the firm currently owes money and who consequently has a
claim on the cash flows of the firm.
e) Any person or entity other than a stockholder or creditor who potentially has a
claim on the cash flows of the firm.
7. Agency costs refer to:
a) The total dividends paid to stockholders over the lifetime of a firm.
b) The costs that result from default and bankruptcy of a firm.
c) Corporate income subject to double taxation.
d) The costs of any conflicts of interest between stockholders and management.
e) The total interest paid to creditors over the lifetime of the firm.
8. The original sale of securities by governments and corporations to the general public
occurs in the:
a) Primary market.
b) Secondary market.
c) Private placement market.
d) Proprietary market.
e) Liquidation market.
9. When one shareholder sells stock directly to another the transaction is said to occur in
the:
a) Dealer market.
b) Primary market.
c) Secondary market.
d) OTC market.
e) NASDAQ market.

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10. Which one of the following is a capital budgeting decision?

a) determining how much debt should be borrowed from a particular lender
b) deciding whether or not to open a new store
c) deciding when to repay a long-term debt
d) determining how much inventory to keep on hand
e) determining how much money should be kept in the checking account
11. Financial markets are composed of:
a) Capital markets and equity markets.
b) Capital markets and debt markets.
c) Capital markets and money markets.
d) Equity markets and money markets.
e) equity markets and debt markets
12. A firm has a total debt ratio of .47. This means that that firm has 47 cents in debt for
every:
a) £1 in equity.
b) £1 in total sales.
c) £1 in current assets.
d) £.53 in equity.
e) £.53 in total assets.
13. A total asset turnover measure of 1.03 means that a firm has £1.03 in:
a) Total assets for every £1 in cash.
b) Total assets for every £1 in total debt.
c) Total assets for every £1 in equity.
d) Sales for every £1 in total assets.
e) Long-term assets for every £1 in short-term assets.
14. Jessica’s Boutique has cash of £50, accounts receivable of £60, accounts payable of
£200, and inventory of £150. What is the value of the quick ratio?
a) .30
b) .55
c) .77
d) 1.30

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e) 1.82
15. A firm has a debt-equity ratio of .40. What is the total debt ratio?
a) 29
b) 33
c) 67
d) 40
e) 1.50
16. Lee Sun’s has sales of £3,000, total assets of £2,500, and a profit margin of 5%. The
firm has a total debt ratio of 40%. What is the return on equity?
a) 6%
b) 8%
c) 10%
d) 12%
e) 15%

Section B: answer the following questions

1) List and briefly describe the three basic questions addressed by a financial
manager.
2) What should be the goal of the financial manager of a corporation? Why?
3) Do you think agency problems arise in sole proprietorships and/or partnerships?
4) What advantages does the corporate form of organization have over sole
proprietorships or partnerships?
5) Assume for a moment that the stockholders in a corporation have unlimited
liability for corporate debts. If so, what impact would this have on the functioning
of primary and secondary markets for common stock?
6) Suppose you own 100 shares of IBM stock which you intend to sell today. Since
you will sell it in the secondary market, IBM will receive no direct cash flows as a
consequence of your sale. Why, then, should IBM’s management care about the
price you get for your shares?
7) A firm has days’ sales in inventory of 105 days, an average collection period of 35
days, and takes 42 days, on average, to pay its accounts payable. Taken together,
what do these three figures imply about the firm’s operations and its cash flows?