Deck 1: The Goals and Activities of Financial Management

Question 1

There is unlimited liability in a general partnership.

Answer 1

True

Question 2

A limited partnership limits the profits partners may receive.

Answer 2

False

Question 3

As finance emerged as an analytical, decision oriented discipline, the initial emphasis was placed on capital acquisitions.

Answer 3

True

Question 4

Because socially desirable goals can impede profitability in many instances, managers should not try to operate under the assumption of wealth maximization.

Question 5

Institutional investors have had increasing influence over corporations with their ability to vote large blocks of stock and replace poor performing boards of directors.

Question 6

In terms of revenues and profits, the corporation is by far the most important form of business organization in Canada.

Question 7

Inflation is assumed to be a temporary problem that does not affect financial decisions.

Question 8

There are some serious problems with the financial goal of maximizing the earnings of the firm.

Question 9

During the 1930s, the provincial government assumed a much greater role in regulating the securities industry.

Question 10

Insider trading involves the use of information not available to the general public to make profits from trading in a company's shares.

Question 11

The primary market includes the sale of securities by way of initial public offerings.

Question 12

The most common partnership arrangement carries limited liability to the partners.

Question 13

Timing is not a particularly important consideration in financial decisions.

Question 14

In the mid 1950s, finance began to change to a more analytical, decision oriented approach.

Question 15

Maximizing the earnings of the firm is the goal of financial management.

Question 16

Social responsibility and profit maximization are synonymous.

Question 17

Profits of sole proprietorships are taxed at corporate tax rates.

Question 18

The sole proprietorship represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs.

Question 19

The higher the profit of a firm, the higher the value the firm is assured of receiving in the market.

Question 20

Agency theory assumes that corporate managers act to increase the wealth of corporate shareholders.

Question 21

Capital markets refer to those markets dealing with short-term securities having a life of one year or less.

Question 22

Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide.

Question 23

New issues are sold in the secondary market.

Question 24

Inflation has led to phantom profits and undervalued assets.

Question 25

Existing securities are traded in the secondary market.

Question 26

The first Nobel Prizes given to finance professors was for their contributions to capital structure theory and portfolio theories of risk and return.

Question 27

The Internet is largely responsible for the internationalization of the financial markets.

Question 28

The TSX Composite Index is representative of equity market value of the top listed Canadian companies.

Question 29

Agency theory examines the relationship between companies and their customers.

Question 30

The formation of a corporation is a way to circumvent personal liability.

Question 31

The secondary market characteristically has had stable prices over the past 20 years.

Question 32

A corporation must have at least 35 shareholders.

Question 33

Money markets refer to those markets dealing with short-term securities having a life of one year or less.

Question 34

Recently, the emphasis of financial management has been on the relationships between risk and return.

Question 35

The financial markets value assets based on the most productive current use.

Question 36

One advantage of the corporate form of organization is that income received by shareholders is not taxable since the corporation already paid taxes on the income distributed.

Question 37

Dividends paid to corporate shareholders have already been taxed once as corporate income.

Question 38

Profits of a manufacturing corporation are taxed at the same rates as all other corporations.

Question 39

The largest financial intermediaries after the banks are insurance companies.

Question 40

The 1990s demonstrated that the old valuation models were no longer effective.

Question 41

The effect of the high rates of inflation experienced during the 1970s and early 1980s was to make

A) financial forecasting more difficult.
B) cost of capital calculations more uncertain.
C) capital budgeting decisions less reliable.
D) all of the other answers are correct

Question 42

Issues over corporate governance are often agency problems.

Question 43

Which of the following is not a major area of concern and emphasis in modern financial management and in this text?

A) Marginal analysis
B) Risk-return trade-off
C) Commodity trading
D) Changing financial institutions

Question 44

Corporations can reduce portfolio risk by

A) narrowing their focus on one successful product.
B) merging with companies in unrelated industries.
C) repurchasing their own stock.
D) all of the other answers are correct

Question 45

Which of the following is not a major area of concern and emphasis in modern financial management and in this text?

A) Inflation and its effect on profits
B) Stable short-term interest rates
C) Changing international environment
D) Increased reliance on debt

Question 46

Increased international competition can be seen as a motivator to emphasize

A) asset diversification strategies.
B) the risk side of the risk-return relationship.
C) the return side of the risk-return relationship.
D) None of the other answers are correct

Question 47

In the past, the study of finance has included

A) securities legislation.
B) raising capital.
C) mergers and acquisitions.
D) all of the other answers are correct

Question 48

One of the major disadvantages of a sole proprietorship is

A) that there is unlimited liability to the owner.
B) the simplicity of decision making.
C) low organizational costs.
D) low operating costs.

Question 49

Honesty in business requires timely and full disclosure of pertinent firm developments.

Question 50

Maximization of shareholder wealth is a concept in which

A) increased earnings is of primary importance.
B) profits are maximized on a quarterly basis.
C) virtually all earnings are paid as dividends to common shareholders.
D) optimally increasing the long-term value of the firm is emphasized.

Question 51

The partnership form of organization

A) avoids the double taxation of earnings and dividends found in the corporate form of organization.
B) usually provides limited liability to the partners.
C) has unlimited life.
D) simplifies decision making.

Question 52

A financial manager's goal of maximizing current or short-term earnings may not be appropriate because

A) it fails to consider the timing of the benefits.
B) increased earnings may be accompanied by unacceptably higher levels of risk.
C) earnings are subjective; they can be defined in various ways such as accounting or economic earnings.
D) all of the other answers are correct

Question 53

Businesses will increasingly rely on B2B Internet applications to speed up cash flows.

Question 54

Proper risk-return management means that

A) the firm should take as few risks as possible.
B) consistent with the objectives of the firm, an appropriate trade-off between risk and return should be determined.
C) the firm should earn the highest return possible.
D) the firm should value future profits more highly than current profits.

Question 55

What is the primary goal of financial management?

A) Increased earnings
B) Maximizing cash flow
C) Maximizing shareholder wealth
D) Minimizing risk of the firm

Question 56

A corporation is

A) owned by shareholders who enjoy the privilege of limited liability.
B) easily divisible between owners.
C) a separate legal entity with perpetual life.
D) all of the other answers are correct

Question 57

Which of the following securities is not included as part of the capital market?

A) common stock
B) commercial paper
C) government bonds
D) preferred stock

Question 58

Which of the following is not a true statement about the goal of maximizing shareholder wealth?

A) It takes into account the timing of cash-flows.
B) It is a short-run point of view which takes risk into account.
C) It considers risk as a factor.
D) None of the other answers are correct.

Question 59

Inflation

A) increases corporations' reliance on debt for capital expansion needs.
B) creates larger asset values on the firm's historical balance sheet.
C) makes it cheaper (in terms of interest costs) for firms to borrow money.
D) all of the other answers are correct

Question 60

The largest Canadian corporations are mainly

A) widely held.
B) family controlled.
C) U.S. controlled.
D) Japanese controlled.

Question 61

Money markets would include which of the following securities?

A) common stock and corporate bonds
B) treasury bills and commercial paper
C) certificates of deposit and preferred stock
D) all of the other answers are correct

Question 62

As mergers, acquisitions, and restructurings have increased in importance, agency theory has become more important in assessing whether

A) a stock repurchase should be undertaken.
B) shareholder goals are truly being achieved by managers in the long run.
C) managers are actually agents or only employees of the firm.
D) managers and owners are actually the same people with the same interests.

Question 63

A corporate buy-back, or the repurchasing of shares, is

A) an example of balance sheet restructuring.
B) an excellent source of profits when the firm's stock is over-priced.
C) a method of reducing the debt-to-equity ratio.
D) all of the other answers are correct

Question 64

Insider trading occurs when

A) someone has information not available to the public, which they use to profit from trading in stocks.
B) corporate officers buy stock in their company.
C) lawyers, investment dealers, and others buy common stock in companies represented by their firms
D) stock transactions occur with reduced brokerage fees.

Question 65

The financial markets allocate capital to corporations by

A) reflecting expectations of the market participants in the corporation's share price.
B) requiring higher returns from companies with lower risk than their competitors.
C) rewarding companies with expected high returns with lower relative stock prices.
D) relying on the opinion of investment dealers.

Question 66

The shift to the return side of the risk return relationship has occurred because

A) many conglomerates over diversified and held marginal and losing divisions.
B) there has been an increase in international competition.
C) there has been an increase in the use of advanced technology in the production process.
D) all of the other answers are correct

Question 67

Which of the following is (are) a result of high inflation?

A) phantom profits
B) under-valued assets
C) lower profitability
D) all of the other answers are correct

Question 68

When a corporation uses the financial markets to raise new funds, the sale of securities is made in the

A) primary market.
B) secondary market.
C) on-line market.
D) third market.

Question 69

A corporate restructuring can result in

A) changes in the capital structure.
B) selling of low-profit margin divisions.
C) reductions in the work force.
D) all of the other answers are correct

Question 70

The increasing percentage ownership of public corporations by institutional investors has

A) had no effect on corporate management.
B) created higher returns for the stock market in general.
C) created more pressure on public companies to manage their firms more efficiently.
D) taken away the voice of the individual investor.

Question 71

The major difficulty in most insider-trading cases has been

A) that lenient judges have simply released the guilty individuals.
B) that insider trading, even though illegal, actually serves a beneficial economic and financial purpose.
C) that inside trades have not been legally well defined.
D) inside trades actually have a beneficial effect on the wealth of all shareholders.

Question 72

In the 1930s, financial practices focused on

A) maintenance of liquidity.
B) reorganization of financially distressed companies.
C) the bankruptcy process.
D) all of the other answers are correct

Question 73

Future financial managers will need to understand

A) international cash flows.
B) computerized funds transfers.
C) international currency hedging strategies.
D) all of the other answers are correct

Question 74

Which of the following is not an example of restructuring as discussed in the text?

A) repurchase of common stock
B) creating a new organizational chart
C) merging with companies in related industries
D) divesting of an unprofitable division

Question 75

Agency theory deals with the issue of

A) when to hire an agent to represent the firm in negotiations.
B) the legal liabilities of a firm if an employee, acting as the firm's agent, injures someone.
C) the limitations placed on an employee acting as the firm's agent to obligate or bind the firm.
D) the conflicts that can arise between the viewpoints and motivations of a firm's owners and managers.

Question 76

Corporate restructuring has been one result of more institutional ownership. Restructuring can cause

A) changes in the asset and liabilities of the firm.
B) the sale of low-profit margin divisions.
C) the removal of current management and/or large reductions in the workforce.
D) all of the other answers are correct

Question 77

The 1990 Nobel Prize in economics was given to three finance professors. They are:

A) Harry Markowitz, Merton Miller, William Sharpe
B) Harry Markowitz, Franco Modigilani, Paul Samuelson
C) Merton Miller, Franco Modigliani, Robert Merton
D) William Sharpe, Richard Roll, Steve Ross

Question 78

Corporate restructuring in the late 1990s more often took the form of

A) leveraged buyouts.
B) mergers to refocus on core businesses.
C) a change in capital structure.
D) none of the other answers are correct

Question 79

Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the

A) options pricing model.
B) theories of working capital management.
C) theories of risk-return and portfolio theory.
D) theories of international capital budgeting.

Question 80

Companies that have higher risk than a competitor in the same industry will generally have

A) to pay a higher interest rate than its competitors.
B) a lower relative stock price than its competitors.
C) a higher cost of funds than its competitors.
D) all of the other answers are correct