- Basic Finance

1. FOUNDATION OF FINANCE (BWFF1013)
FIRST SEMESTER 2012/2013 (A121)
CHAPTER 1-INTRODUCTION TO FINANCIAL MANAGEMENT
Section A
Please circle TRUE or FALSE to the following statements.
1) The fundamental goal of a business is to maximize the retained earnings available to
the corporation’s shareholders.
Answer: TRUE/FALSE
2) The goal of the firm's financial managers should be the maximization of the total
value of the firm's stock.
Answer: TRUE/FALSE
3) The root cause of agency problems is conflicts of interest.
Answer: TRUE/FALSE
4) The sole proprietorship has no legal business structure separate from its owner.
Answer: TRUE/FALSE
5) Its ability to raise capital by selling stock makes the corporation the best form of
organization in terms of raising capital.
Answer: TRUE/FALSE
6) There is no legal distinction made between the assets of the business and the personal
assets of any of the owners in the limited partnership.
Answer: TRUE/FALSE
7) General Motors raises money by selling a new issue of common stock. This
transaction occurs in the futures market.
Answer: TRUE/FALSE
8) Johan calls his stockbroker and instructs him to purchase 100 existing shares of
Microsoft Corporation common stock. This transaction occurs in the secondary
market.
Answer: TRUE/FALSE
9) In August 2011, Gong Bhd. first sold its common stock to the public at RM85 per
share and raised RM1.76 billion. This is an example of a secondary market
transaction.
Answer: TRUE/FALSE
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2. Section B
Please circle the correct answer.
1) The three basic types of issues addressed by the study of finance are
A) capital budgeting, capital structure decisions, and working capital
management.
B) capital budgeting, working capital management, and investment analysis.
C) capital structure decisions, working capital management, and sustained
profitability.
D) capital budgeting, investment analysis, and cash management.
2) Cash and credit management are typically the responsibility of the
A) Controller.
B) Vice President of Production and Operations.
C) Chief Executive Officer, or CEO.
D) Treasurer.
3) Joyah is deciding whether or not to invest RM10,000 in a business that has pending
lawsuits against it. If Joyah invests and the business loses the lawsuits, the most she
can lose is
A) RM10,000 if Joyah is a general partner.
B) RM10,000 if Joyah is a sole proprietor.
C) RM10,000 if Joyah is a limited partner.
D) RM10,000 plus her share of the lawsuits if Joyah is a limited partner.
4) Which of the following is an advantage of the sole proprietorship?
A) limited liability for its owners
B) double taxation for its owners
C) no significant legal requirements for starting the business
D) owners enjoy the advantage of limited liabilities
5) Which of the following is not true for a limited partnership?
A) Limited liability for its owners
B) One general partner must exist who has unlimited liability.
C) Only the name of general partners can appear in the name of the firm.
D) Limited partners may sell their interest in the company.
6) Which of the following is an advantage of the general partnership form of business
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3. organization?
A) limited liability of business owners
B) low cost of formation
C) easy ability to raise capital
D) double taxation
7) ExxonMobil generates about RM50 billion in cash annually from its operations and
invests about half of that on new exploration. Therefore, ExxonMobil is an example
of a(n)
A) savings surplus unit.
B) savings deficit unit.
C) investment banker.
D) financial intermediary.
Section C
Answer the following questions.
1) What are five basic principles of finance?
2) Using the following criteria, specify the legal form of business (sole proprietorship,
general partnership, limited partnership or corporation) that is favored
(a) Organization requirements and costs
(b) Liability of the owners
(c) The continuity of the business
(d) The transferability of ownership
(e) Management control and regulation
(f) The ability to raise capital
3) Distinguish between the money and capital markets.
4) Define the primary market and the secondary market?
5) Why is Shareholder Maximization NOT Profit Maximization?
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