Deck 1: The Goals and Activities of Financial Management

Question 1

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) It is a long-run point of view which takes risk into account.

Answer 1

B

Question 2

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) selling their own stock.

Answer 2

B

Question 3

In the past,the study of finance has included:

A) operational efficiency.
B) employee relationships.
C) legal cases.
D) mergers and acquisitions.

Answer 3

D

Question 4

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 5

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 6

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) creates stability for investors.

Question 7

The largest Canadian corporations are mainly:

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

Question 8

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 9

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 10

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 11

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

A) narrow focus on production.
B) stock splits.
C) there has been a decrease in the use of advanced technology in the production process.
D) there has been an increase in international competition.

Question 12

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

A) it considers the timing of the benefits.
B) increased earnings may be accompanied by acceptably higher levels of risk.
C) share ownership is widely dispersed.
D) earnings are subjective; they can be defined in various ways such as accounting or economic earnings.

Question 13

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 14

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

A) Loss from disposal of assets
B) Over-valued liabilities
C) Lower stock price
D) Under-valued assets

Question 15

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 16

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

A) the gold standard was eliminated.
B) purchasing power increased.
C) interest rates fell.
D) capital budgeting decisions less reliable.

Question 17

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) invest in a new risky project.

Question 18

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) shown as revenue on the income statement.

Question 19

A corporation is not:

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) a separate legal entity with limited life.

Question 20

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 21

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 22

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 23

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

A) to pay a lower interest rate than its competitors.
B) a higher relative stock price than its competitors.
C) a lower cost of funds than its competitors.
D) to pay a higher interest rate than its competitors.

Question 24

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 25

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 26

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) Government bonds.

Question 27

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 28

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 29

The increase in the internationalization of financial markets has led:

A) to companies searching the global financial markets for high cost funds.
B) to a decrease in Canadian companies listing on the New York Stock Exchange.
C) to a decrease in debt obligations denominated in foreign currency on Canadian corporate balance sheets.
D) to the tasks of the financial manager being reshaped.

Question 30

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 31

In the 1930s,financial practices didn't focus on:

A) maintenance of liquidity.
B) reorganization of financially distressed companies.
C) the bankruptcy process.
D) international exchange costs.

Question 32

The internationalization of the financial markets has:

A) allowed firms such as Bombardier to raise capital around the world.
B) raised the cost of capital.
C) forced companies to value everything in U.S.dollars.
D) created ASPE.

Question 33

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 34

Increased use of technology has increased corporate efficiency by:

A) increasing the firm's reliance on debt.
B) creating larger asset values on the firm's balance sheet.
C) made it cheaper (in terms of interest costs)for firms to borrow money.
D) creating electronic communication networks.

Question 35

Future financial managers will need to understand:

A) employment standards.
B) production engineering.
C) actuarial calculations.
D) international currency hedging strategies.

Question 36

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

A) stability in the asset and liabilities of the firm.
B) the purchase of low-profit margin divisions.
C) the promotion of current management and/or large increases in the workforce.
D) changes in the asset and liabilities of the firm.

Question 37

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 38

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) addition of senior management.

Question 39

A corporate restructuring can result in:

A) increased revenue.
B) buying of low-profit margin divisions.
C) selling of high-profit margin divisions.
D) reductions in the work force.

Question 40

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 41

Agency theory examines the relationship between:

A) shareholders of the firm and its investment dealers.
B) shareholders of the firm and its managers.
C) the board of directors and large institutional investors.
D) shareholders of the firm and its transfer agent.

Question 42

Historically the field of finance as a discipline described capital preservation,liquidity,reorganization,and bankruptcy through the 1930s depression.

Question 43

Capital structure is:

A) the relative mix of capital and intangible assets held by the firm.
B) the relative importance of debt and equity in the firm's financing.
C) the relative importance of long-term investment decisions.
D) the terms required to borrow money.

Question 44

Social responsibility and profit maximization are synonymous.

Question 45

Financial markets allocate capital based on:

A) the pricing mechanism.
B) the efforts of financial intermediaries.
C) intervention by the Bank of Canada.
D) the number of treasury bills outstanding.

Question 46

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

Question 47

Agency theory would imply that conflicts are more likely to occur between management and shareholders when:

A) the company is owned and operated by the same person.
B) management acts in the best interests of maximizing shareholder wealth.
C) the chairman of the board is also the chief executive officer (CEO).
D) the board of directors exerts strong and involved oversight of managers.

Question 48

The internationalization of the financial markets has:

A) lowered the cost of capital.
B) raised the cost of capital.
C) forced companies to value everything in U.S.dollars.
D) had no effect on the cost of capital.

Question 49

In analysis of a firm's market share value,an investor should not consider:

A) the risk inherent in the firm.
B) the time pattern of the firm's earnings and cash flow.
C) the quality and reliability of reported earnings.
D) book value of assets.

Question 50

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 51

Timing is not a particularly important consideration in financial decisions.

Question 52

Corporate governance is the:

A) relationship and exercise of oversight by the board of directors of the company.
B) relationship between the chief financial officer and institutional investors.
C) operation of the firm by the chief executive officer (CEO)and other senior executives on the management team.
D) strategically directing the company through the board of directors with a focus on social responsibility.

Question 53

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

Question 54

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

Question 55

The increased percentage of 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 less pressure on public companies to manage their firms more efficiently.
D) increased the ethical standards of management.

Question 56

Maximization of shareholder wealth is a concept in which:

A) increased earnings are of primary importance.
B) increased cash flows are of primary importance.
C) increased dividends are of primary importance.
D) increased share price is of primary importance.

Question 57

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

Question 58

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

Question 59

In the mid1950s,finance began to change to a more analytical,decision oriented approach.

Question 60

There is unlimited liability in a general partnership.

Question 61

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

Question 62

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 63

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

Question 64

Inflation has led to phantom profits and undervalued assets.

Question 65

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

Question 66

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

Question 67

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

Question 68

A limited partnership limits the profits partners may receive.

Question 69

Profits of a manufacturing corporation are taxed at the same rate as dividends.

Question 70

Profits of sole proprietorships are taxed at corporate tax rates.

Question 71

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

Question 72

A corporation must have at least 35 shareholders.

Question 73

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 74

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

Question 75

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

Question 76

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

Question 77

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

Question 78

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

Question 79

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

Question 80

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