Applied Corporate Finance
Exam Questions
Course Introduction
Applied Corporate Finance focuses on the practical application of key financial theories and tools in real-world business scenarios. The course covers essential topics such as capital budgeting, cost of capital, capital structure decisions, dividend policy, corporate valuation, risk management, and financial planning. Emphasizing case studies, problem-solving, and current events, students learn how financial managers make strategic decisions to maximize firm value, manage financial risks, and navigate the complexities of global finance. By integrating concepts with hands-on analysis, this course prepares students to critically evaluate financial decisions in a corporate context.
Recommended Textbook
Financial Management Theory and Practice 14th Edition by Eugene F. Brigham
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT?
A) One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
B) It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
C) One of the advantages of the corporate form of organization is that it avoids double taxation.
D) One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote."
E) Corporations of all types are subject to the corporate income tax.
Answer: A
Q2) Two disadvantages of a proprietorship are (1)the relative difficulty of raising new capital and (2)the owner's unlimited personal liability for the business' debts.
A)True
B)False
Answer: True
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Chapter 2: Financial Statements, cash Flow, and Taxes
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Q1) Which of the following statements is CORRECT?
A) All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income.
B) The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses.
C) All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.
D) Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income.
E) Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the income and stockholders were taxed again on the income when it was paid to them as dividends.
Answer: D
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Chapter 3: Analysis of Financial Statements
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Q1) Harper Corp.'s sales last year were $395,000,and its year-end receivables were $42,500.Harper sells on terms that call for customers to pay 30 days after the purchase,but many delay payment beyond Day 30.On average,how many days late do customers pay? Base your answer on this equation: DSO-Allowed credit period = Average days late,and use a 365-day year when calculating the DSO.
A) 7.95
B) 8.37
C) 8.81
D) 9.27
E) 9.74
Answer: D
Q2) One problem with ratio analysis is that relationships can be manipulated.For example,if our current ratio is greater than 1.5,then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.
A)True
B)False
Answer: False
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Chapter 4: Time Value of Money
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Q1) You are considering two equally risky annuities,each of which pays $25,000 per year for 10 years.Investment ORD is an ordinary (or deferred)annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?
A) If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.
B) A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.
C) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
D) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
E) The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.
Q2) A time line is meaningful even if all cash flows do not occur annually. A)True B)False
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Chapter 5: Bonds, bond Valuation, and Interest Rates
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Q1) Which of the following statements is CORRECT?
A) The total yield on a bond is derived from dividends plus changes in the price of the bond.
B) Bonds are riskier than common stocks and therefore have higher required returns.
C) Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.
D) The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.
E) If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
Q2) For bonds,price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.
A)True B)False
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Chapter 6: Risk and Return
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Q1) A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.
A)True
B)False
Q2) Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?
A) The required return on a stock with beta > 1.0 will increase.
B) The return on "the market" will remain constant.
C) The return on "the market" will increase.
D) The required return on a stock with beta < 1.0 will decline.
E) The required return on a stock with beta = 1.0 will not change.
Q3) Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.
A)True
B)False
Q4) Diversification will normally reduce the riskiness of a portfolio of stocks.
A)True
B)False
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Chapter 7: Valuation of Stocks and Corporations
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Q1) The required returns of Stocks X and Y are r<sub>X</sub> = 10% and r<sub>Y</sub> = 12%.Which of the following statements is CORRECT?
A) If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X.
B) If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price.
C) The stocks must sell for the same price.
D) Stock Y must have a higher dividend yield than Stock X.
E) If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.
Q2) Preferred stock is a hybrid-a sort of cross between a common stock and a bond-in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.
A)True
B)False
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Chapter 8: Financial Options and Applications in Corporate Finance
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Q1) Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%,to $22 a share?
A) The price of the call option will increase by more than $2.
B) The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
C) The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
D) The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.
E) The price of the call option will increase by $2.
Q2) The exercise value is the positive difference between the current price of the stock and the strike price.The exercise value is zero if the stock's price is below the strike price.
A)True B)False
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Chapter 9: The Cost of Capital
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Q1) The cost of equity raised by retaining earnings can be less than,equal to,or greater than the cost of external equity raised by selling new issues of common stock,depending on tax rates,flotation costs,the attitude of investors,and other factors.
A)True
B)False
Q2) You have been hired by the CFO of Lugones Industries to help estimate its cost of common equity.You have obtained the following data: (1)r<sub>d</sub> = yield on the firm's bonds = 7.00% and the risk premium over its own debt cost = 4.00%.(2)r<sub>RF</sub> = 5.00%,RP<sub>M</sub> = 6.00%,and b = 1.25.(3)D<sub>1</sub> = $1.20,P<sub>0</sub> = $35.00,and g = 8.00% (constant).You were asked to estimate the cost of common based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates.What is that difference?
A) 1.13%
B) 1.50%
C) 1.88%
D) 2.34%
E) 2.58%
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Q1) Which of the following statements is CORRECT?
A) One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate.
B) One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project's full life whereas MIRR does not.
C) One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.
D) Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC), these two methods always rank mutually exclusive projects in the same order.
E) One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project's full life whereas IRR does not.
Q2) Other things held constant,an increase in the cost of capital will result in a decrease in a project's IRR.
A)True B)False
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate,projects' initial outlays and subsequent costs can be forecasted with great accuracy.This is especially true for large product development projects.
A)True
B)False
Q2) If an investment project would make use of land which the firm currently owns,the project should be charged with the opportunity cost of the land.
A)True
B)False
Q3) If debt is to be used to finance a project,then when cash flows for a project are estimated,interest payments should be included in the analysis.
A)True
B)False
Q4) Changes in net working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets,not working capital.
A)True
B)False
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Chapter 12: Corporate Valuation and Financial Planning
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Q1) F.Marston,Inc.has developed a forecasting model to estimate its AFN for the upcoming year.All else being equal,which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?
A) A switch to a just-in-time inventory system and outsourcing production.
B) The company reduces its dividend payout ratio.
C) The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.
D) The company discovers that it has excess capacity in its fixed assets.
E) A sharp increase in its forecasted sales.
Q2) Last year Baron Enterprises had $350 million of sales,and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions,by how much could Baron's sales increase before it is required to increase its fixed assets?
A) $170.09
B) $179.04
C) $188.46
D) $197.88
E) $207.78
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Chapter 13: Agency Conflicts and Corporate Governance
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Q1) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market,these options will necessarily be worthless.
A)True
B)False
Q2) ESOPs were originally designed to help improve worker productivity,but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q3) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
Q4) A poison pill is also known as a corporate restructuring.
A)True
B)False
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Q1) MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value,it can affect the cost of capital.
A)True
B)False
Q2) A reverse split reduces the number of shares outstanding.
A)True
B)False
Q3) Reynolds Paper Products Corporation follows a strict residual dividend policy.All else equal,which of the following factors would be most likely to lead to an increase in the firm's dividend per share?
A) The company increases the percentage of equity in its target capital structure.
B) The number of profitable potential projects increases.
C) Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed.
D) Earnings are unchanged, but the firm issues new shares of common stock.
E) The firm's net income increases.
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Chapter 15: Capital Structure Decisions
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Q1) Which of the following statements is CORRECT?
A) The factors that affect a firm's business risk are affected by industry characteristics and economic conditions. Unfortunately, these factors are generally beyond the control of the firm's management.
B) One of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.
C) A firm's financial risk can be minimized by diversification.
D) The amount of debt in its capital structure can under no circumstances affect a company's business risk.
E) A firm's business risk is determined solely by the financial characteristics of its industry.
Q2) Provided a firm does not use an extreme amount of debt,financial leverage typically affects both EPS and EBIT,while operating leverage only affects EBIT. A)True B)False
Q3) Whenever a firm borrows money,it is using financial leverage. A)True B)False
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Chapter 16: Supply Chains and Working Capital Management
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Q1) Mark's Manufacturing's average age of accounts receivable is 45 days,the average age of accounts payable is 40 days,and the average age of inventory is 69 days.Assuming a 365-day year,what is the length of its cash conversion cycle?
A) 63 days
B) 67 days
C) 70 days
D) 74 days
E) 78 days
Q2) Brothers Breads has the following data.What is the firm's cash conversion cycle?
Inventory conversion period = \( \quad \) \( \quad \) \( \quad \) 50 days
Average collection period \( = \) \( \quad \) \( \quad \) \( \quad \) 17 days
Payables deferral period = \( \quad \) \( \quad \) \( \quad \) \( \quad \) 25 days
A) 31 days
B) 34 days
C) 38 days
D) 42 days
E) 46 days
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18
Chapter 17: Multinational Financial Management
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Q1) The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.
A)True
B)False
Q2) Suppose 1 U.S.dollar equals 1.60 Canadian dollars in the spot market.6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%).6-month U.S.securities have an annualized return of 6.5% and a periodic return of 3.25%.If interest rate parity holds,what is the U.S.dollar-Canadian dollar exchange rate in the 180-day forward market?
A) 1 U.S. dollar = 0.6235 Canadian dollars
B) 1 U.S. dollar = 0.6265 Canadian dollars
C) 1 U.S. dollar = 1.0000 Canadian dollars
D) 1 U.S. dollar = 1.5961 Canadian dollars
E) 1 U.S. dollar = 1.6039 Canadian dollars
Q3) LIBOR is an acronym for London Interbank Offer Rate,which is an average of interest rates offered by London banks to smaller U.S.corporations.
A)True
B)False
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Q1) When a firm refunds a debt issue,the firm's stockholders gain and its bondholders lose.This points out the risk of a call provision to bondholders and explains why a non-callable bond will typically command a higher price than an otherwise similar callable bond.
A)True
B)False
Q2) Whereas commercial banks take deposits from some customers and make loans to other customers,the principal activities of investment banks are (1)to help firms issue new stock and bonds and (2)to give firms advice with regard to mergers and other financial matters.However,financial corporations often own and operate subsidiaries that operate as commercial banks and others that are investment banks.This was not true some years ago,when the two types of banks were required by law to be completely independent of one another.
A)True
B)False
Q3) If its managers make a tender offer and buy all shares that were not held by the management team,this is called a private placement.
A)True
B)False
Page 20
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Chapter 18: Extension 18 A: Rights Offerings
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Q1) Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock in order to finance the construction of a new plant.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.The firm will offer new shares to its current stockholders at $40 per share.Find (1)the number of new shares to be issued, (2)the ex-rights price of the stock (assuming that the new market value of the stock will simply be the proceeds of the new issue plus the current value of equity,divided by new shares outstanding),and (3)the value of one right. \(\begin{array}{lll}
& \text { Sub Price } & \text { Ex-rights } \\
\text { a. } & \$ 39.65 & \$ 42.50 \\
\text { b. } & \$ 40.25 & \$ 43.50 \\
\text { c. } & \$ 42.65 & \$ 47.50 \\
\text { d. } & \$ 44.55 & \$ 49.00 \\
\text { e. } & \$ 46.65 & \$ 50.00 \end{array}\)
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21
Chapter 19: Lease Financing
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Q1) Delamont Transport Company (DTC)is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class.If the firm borrows and buys the truck,the loan rate would be 10%,and the loan would be amortized over the truck's 4-year life,so the interest expense for taxes would decline over time.The loan payments would be made at the end of each year.The truck will be used for 4 years,at the end of which time it will be sold at an estimated residual value of $10,000.If DTC buys the truck,it would purchase a maintenance contract that costs $1,000 per year,payable at the end of each year.The lease terms,which include maintenance,call for a $10,000 lease payment (4 payments total)at the beginning of each year.DTC's tax rate is 40%.What is the net advantage to leasing? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333,0.4445,0.15,and 0.07.)
A) $849
B) $896
C) $945
D) $999
E) $1,047
Q2) A sale and leaseback arrangement is a type of financial,or capital,lease.
A)True
B)False
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Chapter 20: Hybrid Financing: Preferred Stock, warrants, and Convertibles
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Q1) The problem of dilution of stockholders' earnings never results from the sale of call options,but it can arise if warrants are used.
A)True
B)False
Q2) Mikkleson Mining stock is selling for $40 per share and has an expected dividend in the coming year of $2.00,and has an expected constant growth rate of 5.00%.The company is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value.The bonds would have an 8.00% annual coupon,and each bond could be converted into 20 shares of common stock.The required rate of return on an otherwise similar nonconvertible bond is 10.00%.What is the estimated floor price of the convertible at the end of Year 3?
A) $794.01
B) $835.81
C) $879.80
D) $926.10
E) $972.41
Q3) A warrant is an option,and as such it cannot be used as a "sweetener."
A)True
B)False
Page 23
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Chapter 21: Dynamic Capital Structures
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Q1) When a firm has risky debt,its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.
A)True
B)False
Q2) In a world with no taxes,MM show that a firm's capital structure does not affect the firm's value.However,when taxes are considered,MM show a positive relationship between debt and value,i.e.,its value rises as its debt is increased.
A)True
B)False
Q3) A local firm has debt worth $200,000,with a yield of 9%,and equity worth $300,000.It is growing at a 5% rate,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Under the MM extension with growth,what is the value of your firm's tax shield,i.e.,how much value does the use of debt add?
A) $92,571
B) $102,857
C) $113,143
D) $124,457
E) $136,903
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Chapter 22: Mergers and Corporate Control
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Q1) A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.
A)True
B)False
Q2) The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.
A)True
B)False
Q3) The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.
A)True
B)False
Q4) A spin-off is a type of divestiture in which the assets of a division are sold to another firm.
A)True
B)False
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Chapter 23: Enterprise Risk Management
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Q1) Which of the following are NOT ways risk management can be used to increase the value of a firm?
A) Risk management can help a firm maintain its optimal capital budget.
B) Risk management can reduce the expected costs of financial distress.
C) Risk management can help firms minimize taxes.
D) Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
E) Risk management can increase debt capacity.
Q2) Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss,while pure risks are those that can only lead to losses.
A)True
B)False
Q3) In theory,reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
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Chapter 24: Bankruptcy, reorganization, and Liquidation
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Q1) Bankruptcy laws have been used to help reach settlements in major product liability lawsuits.By using financial projections to show that contingent claims against the company jeopardize its existence,agreements are reached,partially satisfying claimants,and allowing the firm to continue operating.
A)True
B)False
Q2) A central question that must be addressed in bankruptcy proceedings is whether the firm's inability to meet scheduled interest payments results from a temporary cash flow problem or from a potentially permanent problem caused by falling asset values.
A)True
B)False
Q3) Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments,a bankruptcy case cannot begin until the firm actually defaults on a scheduled payment.
A)True
B)False
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Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) Which of the following statements is CORRECT?
A) The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.
B) The slope of the characteristic line is the stock's standard deviation.
C) The distance of the plot points from the characteristic line is a measure of the stock's market risk.
D) The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk.
E) "Characteristic line" is another name for the Security Market Line.
Q2) Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true about these securities? (Assume market equilibrium.)
A) Stock B must be a more desirable addition to a portfolio than Stock A.
B) Stock A must be a more desirable addition to a portfolio than Stock B.
C) The expected return on Stock A should be greater than that on Stock B.
D) The expected return on Stock B should be greater than that on Stock A.
E) When held in isolation, Stock A has greater risk than Stock B.
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Chapter 26: Real Options
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Sample Questions
Q1) The option to abandon a project is a real option,but a call option on a stock is not a real option.
A)True
B)False
Q2) Real options exist when managers have the opportunity,after a project has been implemented,to make operating changes in response to changed conditions that modify the project's cash flows.
A)True
B)False
Q3) Real options affect the size,but not the risk,of a project's expected cash flows. A)True
B)False
Q4) Real options are most valuable when the underlying source of risk is very low. A)True
B)False
Q5) Real options are options to buy real assets,like stocks,rather than interest-bearing assets,like bonds. A)True
B)False
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Chapter 27: Providing and Obtaining Credit
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Q1) Danby Design Inc.has approached the bank with its plan to borrow $12,000.The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on,one-year installment loan,payable in 4 equal quarterly payments.What is the approximate (nominal)rate of interest on the 10.19 percent add-on loan?
A) 5.10%
B) 10.19%
C) 12.00%
D) 20.38%
E) 30.57%
Q2) Which of the following is not correct for a firm with seasonal sales and customers who all pay promptly at the end of 30 days?
A) The quarterly uncollected balances schedule will be the same in each quarter.
B) The level of accounts receivable will be constant from month to month.
C) The ratio of accounts receivable to sales will vary from month to month.
D) The level of accounts receivable at the end of each quarter will be the same.
E) DSO will vary from month to month.
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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Q1) The easier a firm's access to borrowed funds the higher its precautionary balances will be,in order to protect against sudden increases in interest rates.
A)True B)False
Q2) A just-in-time system is designed to stretch accounts payable as long as possible.
A)True
B)False
Q3) Each year,Holly's Best Salad Dressing,Inc.(HBSD)purchases 50,000 gallons of extra virgin olive oil.Ordering costs are $100 per order,and the carrying cost,as a percentage of inventory value,is 80 percent.The purchase price to HBSD is $0.50 per gallon.Management currently orders the EOQ each time an order is placed.No safety stock is carried.The supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time.Should HBSD take the discount?
A) From a cost standpoint, HBSD is indifferent.
B) No, the cost exceeds the benefit by $500.
C) No, the cost exceeds the benefit by $1,000.
D) Yes, the benefit exceeds the cost by $500.
E) Yes, the benefit exceeds the cost by $1,120.
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Chapter 29: Pension Plan Management
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Q1) From a pure cost standpoint,a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.
A)True
B)False
Q2) Kumar Consulting operates several stock investment portfolios that are used by firms for investment of pension plan assets.Last year,one portfolio had a realized return of 12.6 percent and a beta coefficient of 1.15.The average T-bond rate was 7 percent and the realized rate of return on the S&P 500 was 12 percent.What was the portfolio's alpha?
A) -0.75%
B)-0.15%
C) 0%
D) 0.15%
E) 0.75%
Q3) If employees have a right to receive pension benefits even if they leave the company prior to retirement,their pension rights are said to be vested.
A)True B)False
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32
Chapter 30: Financial Management in Not For Profit
Businesses
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Q1) Which of the following statements about a not-for-profit firm's fund capital is most correct?
A) The sole source of fund capital is the excess of revenues over expenses.
B) Fund capital has a zero opportunity cost.
C) Fund capital can only come from donations.
D) Fund capital does not change over time.
E) Fund capital is equivalent to equity capital in investor-owned firms.
Q2) Which of the following statements about a not-for-profit firm's ownership is most correct?
A) The residual earnings (profits) of not-for-profit firms can be distributed to the firm's top managers.
B) Not-for-profit firms are exempt from federal taxes, but they must pay state and local taxes, including property taxes.
C) Upon liquidation of a not-for-profit firm, the proceeds from the sale of its assets are distributed, on a pro rata basis, to the firm's employees.
D) None of the profits are used for private inurement.
E) Not-for-profit firms are governed by a board of trustees whose members are elected by the community at large.
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