Deck 1: The Role of Managerial Finance

Question 1

Investors who are risk averse will make risky investments as long as they expect compensation for doing so.

Answer 1

True

Question 2

Wealth maximization as the goal of a firm implies enhancing the wealth of ________.

A)the auditors
B)the creditors
C)the Federal Reserve
D)the firm's stockholders

Answer 2

the firm's stockholders

Question 3

The primary goal of a financial manager is ________.

A)minimizing risk
B)maximizing profit
C)maximizing wealth
D)minimizing return

Answer 3

maximizing wealth

Question 4

In the most recent year,two different companies generated the same earnings per share.The stocks of these two companies should trade at the same price.

Question 5

The amount earned during the accounting period on each outstanding share of common stock is called ________.

A)dividend per share
B)earnings per share
C)net profits after taxes
D)book value per share

Question 6

The wealth of the owners of a corporation is represented by ________.

A)profits
B)earnings per share
C)share value
D)cash flow

Question 7

Which of the following is TRUE of stakeholders?

A)They are the owners of a firm.
B)They are groups to whom a firm has financial obligations.
C)They are groups having a direct economic link to a firm.
D)They include only the bondholders,common stockholders,and preferred stockholders.

Question 8

Which of the following is TRUE regarding cash flow?

A)Profits do not necessarily result in cash flows available to the stockholders.
B)It is guaranteed that the board of directors will increase dividends when net cash flows increase.
C)A firm's income statement will never show a positive profit when its cash outflows exceed its cash inflows.
D)An increase in revenue will always result in an increase in cash flow.

Question 9

If a firm earns a profit,it will necessarily also generate a positive cash flow.

Question 10

A firm is a business organization that sells goods and services.

Question 11

Financial managers evaluating decision alternatives or potential actions must consider ________.

A)only risk
B)only return
C)either risk or return
D)risk,return,and the impact on share price

Question 12

If a firm's stockholders are risk averse,the firm can make its stockholders better off by earning the highest possible returns on its investments.

Question 13

One reason that firms exist is that most investors are risk averse,so they are not willing to make the kinds of risky investments that firms typically undertake.

Question 14

A financial manager must choose between four alternative Assets: 1,2,3,and 4.Each asset costs $35,000 and is expected to provide earnings over a three-year period as described below. Based on the wealth maximization goal,the financial manager would choose ________.

A)Asset 1
B)Asset 2
C)Asset 3
D)Asset 4

Question 15

Other things being equal,it is better to receive money sooner rather than later.

Question 16

In finance we say that the goal of the firm ought to be to maximize profits.

Question 17

Which of the following is an example of a firm's stakeholder?

A)suppliers
B)Federal Reserve
C)media
D)competitors

Question 18

Corporate owners earn a return ________.

A)by realizing gains through increases in share price and interest earnings
B)by realizing gains through increases in share price and cash dividends
C)through capital appreciation and retained earnings
D)through interest earnings and earnings per share

Question 19

The goal of business ethics is to motivate business and market participants to adhere to both the letter and the spirit of laws and regulations in all aspects of business and professional practice.

Question 20

Which of the following is TRUE of cash flows and risk?

A)Lower cash flow and lower risk result in an increase in share price.
B)Higher cash flow and lower risk result in an increase in share price.
C)Higher cash flow and higher risk result in an increase in share price.
D)Lower cash flow and higher risk result in an increase in share price.

Question 21

________ are the standards of conduct or moral judgment that apply to persons engaged in commerce.

A)Government regulations
B)The Uniform Commercial Codes
C)The rules of fair play
D)Business ethics

Question 22

________ decisions focus on how a company will spend its financial resources on long-term projects that ultimately determine whether the firm successfully creates value for its owners.

A)Investment
B)Financing
C)Working capital
D)Risk management

Question 23

________ pool investment capital,make risky investment decisions,and manage risky investments on behalf of investors who would otherwise not be able to do so own their own.

A)Firms
B)Stockholders
C)Stakeholders
D)Regulators

Question 24

The principle of the time value of money basically says that ________.

A)because firms pay managers a great deal,managers need to use their time very effectively
B)money received today is more valuable than money received in the future because money in the future is more risky
C)money received today is more valuable than money received in the future because firms and individuals can invest money they have today and earn a return on that money
D)because of the principal-agent problem,investors cannot trust that money firms promise to pay in the future will ever arrive

Question 25

A treasurer is responsible for the firm's accounting activities,such as corporate accounting,tax management,financial accounting,and cost accounting.

Question 26

Firm A generates more cash flow while taking less risk than Firm B.The stock price of Firm A should be higher than the stock price of Firm B.

Question 27

Cash flows and risk are the key determinants in share price.Increased cash flow results in ________,other things remaining the same.

A)a lower share price
B)a higher share price
C)an unchanged share price
D)an undetermined share price

Question 28

Which of the following is NOT a reason that a firm that maximizes profits may fail to maximize shareholder wealth.

A)The timing of profits matters.Shareholders might prefer lower profits that arrive sooner.
B)Risk matters.Shareholders are risk averse,so they prefer less risky investments that generate lower profits.
C)Shareholder wealth depends on cash flow which is not the same as profit.
D)If a firm maximizes profits by engaging in unethical business practices,it's stock price may be adversely affected.

Question 29

Cash flows and risk are the key determinants in share price.Increased risk,other things remaining the same,results in ________.

A)a lower share price
B)a higher share price
C)an unchanged share price
D)an undetermined share price

Question 30

When considering a firm's financial decision alternative,financial managers should accept only those actions that are expected to maximize shareholder value.

Question 31

Finance is ________.

A)the system of verifying,analyzing,and recording business transactions
B)the science of the production,distribution,and consumption of goods and services
C)the science and art of how individuals and businesses raise,allocate,and invest money
D)the art of merchandising products and services

Question 32

A higher earnings per share (EPS)does not necessarily translate into a higher stock price.

Question 33

When considering a firm's financial decision alternative,financial managers should accept only those actions that are expected to increase the firm's profitability.

Question 34

An increase in a firm's risk will always result in a higher share price since the stockholder must be compensated for the greater risk.

Question 35

An objection to managing a firm on behalf of stakeholders rather than shareholders is that ________.

A)stakeholders have no economic interest in the firm
B)stakeholders have an interest only in short-term outcomes
C)there is no clear way to satisfy all stakeholders whose economic interests may be at odds with each other
D)the goal of managing on behalf of stakeholders is too narrow

Question 36

The profit maximization goal ignores the timing of returns,does not directly consider cash flows,and ignores risk.

Question 37

Risk,the magnitude and timing of cash flows are the key determinants of share price,which represent the wealth of the owners in the firm.

Question 38

An effective ethics program ________.

A)can weaken corporate value
B)has no effect on a corporation's value
C)can enhance a corporation's value
D)will result in high employee attrition rate

Question 39

The wealth of corporate owners is measured by the share price of the stock.

Question 40

In March 2017,Amazon and Clorox reported nearly identical earnings per share,but the stock price of Amazon was more than six times higher than the Clorox stock price.The most likely explanation for that difference is that ________.

A)Clorox is bad for the environment
B)Amazon is a riskier company
C)investors see better long-term prospects for Amazon
D)Amazon has more shares of stock outstanding

Question 41

You own a building supply store.Today you sold construction materials to a contractor for $10,000 that you acquired a week ago for $8,000.You paid for the materials in cash,but you sold them to the contractor on credit,and you expect him to pay his bill in a few months.Based on this information during the week you earned a positive profit but experienced a negative cash flow.

Question 42

Marginal cost-benefit analysis states that financial decisions should be made and actions should be taken only when the added benefits exceed the added costs.

Question 43

As the risk of a stock investment increases,investors' ________.

A)return will increase
B)return will decrease
C)required rate of return will decrease
D)required rate of return will increase

Question 44

The accrual method recognizes revenue at the point of sale and recognizes expenses when incurred.

Question 45

Financing decisions deal with the left-hand side of the firm's balance sheet.

Question 46

________ decisions refer to how a firm manages its short-term resources on a day-to-day basis.

A)Financing
B)Investment
C)Working capital
D)Managerial finance

Question 47

The primary principle that finance borrows from economics is ________.

A)generally accepted accounting principles
B)cash is king
C)marginal cost-benefit analysis
D)shareholder value maximization

Question 48

Which of the following works as a conduit of information between the firm and its investors?

A)the treasurer
B)the controller
C)the director of internal audit
D)the director of investor relations

Question 49

Johnson,Inc.has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000.Although the firm paid in full for the merchandise during the year,it is yet to collect at year end from the customer.The net profit and cash flow from this sale for the year are ________.

A)$3,000 and $10,000,respectively
B)$3,000 and -$7,000,respectively
C)$7,000 and -$3,000,respectively
D)$3,000 and $7,000,respectively

Question 50

Which of the following is TRUE of accrual basis accounting?

A)Expenses are recognized either when they are incurred or cash is paid.
B)Revenue is recognized when a customer pays cash.
C)Expenses are recognized when they are incurred.
D)Revenue is recognized when a customer pays cash or shows interest to purchase the product or service.

Question 51

A corporate treasurer's focus tends to be more external,while the controller's focus is more internal.

Question 52

A treasurer is commonly responsible for handling ________.

A)tax management
B)corporate accounting
C)investing surplus funds
D)cost accounting

Question 53

The money that firms raise to finance their activities is called ________.

A)the capital budget
B)working capital
C)capital
D)accruals

Question 54

The treasurer typically manages a firm's cash,investing surplus funds when available and securing outside financing when needed.

Question 55

A corporation's stockholders elect its CEO.

Question 56

There is a tendency for CEOs of larger companies to earn more money than CEOs of smaller companies.Suppose a CEO decides to acquire another company,thus increasing the size of the CEO's firm.Suppose also that the price of the stock of the acquiring firm falls when it learns of the upcoming acquisition.This appears to be an example of ________.

A)a CEO pursuing profit maximization rather than wealth maximization
B)the principal-agent problem
C)a CEO behaving unethically
D)the general principal that acquisitions are generally not good investments

Question 57

The principal-agent problem arises when ________.

A)the owners of the firm are not the people managing the firm
B)the owners of the firm also manage the firm
C)managers serve on a firm's board of directors
D)a firm is organized as a sole proprietorship

Question 58

Which of the following activities of a finance manager determines the types of assets the firm holds?

A)budget allocation
B)investment decisions
C)financing decisions
D)analyzing and planning cash flows

Question 59

A firm has just ended its calendar year making a sale in the amount of $150,000 of merchandise purchased during the year at a total cost of $112,500.Although the firm paid in full for the merchandise during the year,it is yet to collect at year end from the customer.The net profit and cash flow from this sale for the year are ________.

A)$0 and $150,000,respectively
B)$37,500 and -$150,000,respectively
C)$37,500 and -$112,500,respectively
D)$150,000 and $112,500,respectively

Question 60

Stockholders expect to earn higher rates of return on investments with lower risk and lower rates of return on investments with higher risk.

Question 61

Which of the following legal forms of organization has the ease of dissolution?

A)sole proprietorships
B)partnerships
C)limited partnerships
D)corporations

Question 62

Which of the following legal forms of organization is most expensive to organize?

A)sole proprietorships
B)partnerships
C)corporations
D)limited partnership

Question 63

Which of the following is TRUE of a partnership and a corporation?

A)In a corporation,income is taxed at the corporate level; whereas,in a partnership,income is taxed twice.
B)In a partnership,income is taxed once at the individual level; whereas,in a corporation,income is taxed twice.
C)Income from both forms of organizations are double-taxed.
D)In a partnership,income is exempted from tax up to $10 million; whereas,in a corporation,income is taxed twice.

Question 64

The time value of money principle implies that all other things being equal,investments that produce profits faster are preferred over those that produce more distant profits.

Question 65

Under which of the following legal forms of organization is ownership readily transferable?

A)sole proprietorships
B)partnerships
C)limited partnerships
D)corporations

Question 66

The ________ has a role that focuses on budgeting,accounting,and tracking the performance of a single business unit.

A)controller
B)treasurer
C)chief financial officer
D)director of risk management

Question 67

Which of the following is TRUE of sole proprietorships and corporations?

A)It is difficult to transfer ownership of corporations compared to that of sole proprietorships.
B)Income from both forms of organizations are taxed only at the corporate level.
C)Both sole proprietorships and corporations are equally scrutinized and regulated by government bodies.
D)In sole proprietorships,owners have unlimited liability; whereas,in corporations,owners have limited liability.

Question 68

Which of the following is a strength of a corporation?

A)low taxes
B)limited liability
C)low organization costs
D)less government regulation

Question 69

Which of the following legal forms of organizations is characterized by unlimited liability?

A)sole proprietorship
B)limited partnership
C)corporation
D)C-corporation

Question 70

Under a progressive tax structure in which tax rates rise with income levels ________.

A)the marginal tax rate and the average tax rate are the same
B)the average tax rate is what really matters when an individual or business is making a financial decision
C)the marginal tax rate is usually less than the average tax rate
D)the marginal tax rate is usually greater than the average tax rate

Question 71

A sole proprietor has unlimited liability; his or her total investment in the business,but not his or her personal assets,can be taken to satisfy creditors.

Question 72

In a limited partnership,all partners' liabilities are limited to their investment in the partnership.

Question 73

Which of the following forms of organizations is the easiest to form?

A)sole proprietorships
B)limited liability corporation
C)limited partnership
D)S-corporations

Question 74

Corporate governance refers to ________.

A)the rules,processes,and laws by which companies are operated,controlled,and regulated
B)the fact that corporations heavily influence the actions of governments through their lobbying efforts
C)the notion that corporations act like a democracy in the sense that every shareholder has an equal vote on corporate decisions
D)the idea that a corporate CEO is really accountable to no one and must be constrained by government action

Question 75

The term "double taxation" means that ________.

A)partnerships and sole proprietorships pay tax on the income that they earn,and then income distributed from the business to the owner is taxed again at the individual level
B)the highest federal income tax rate faced by corporations is twice the highest tax rate faced by individuals
C)corporations pay tax on the income they earn and then shareholders pay tax on income that the corporation distributes to them
D)a corporation pays tax on the interest it pays to bondholders and then bondholders pay tax again on the interest payments they receive from firms

Question 76

Suppose a certain business pays 10% tax on its first $10,000 in come,12% tax on income above $10,000 but below $40,000,and 22% tax on income above $40,000.Suppose the business earns $50,000 in income this year.It's marginal tax rate is ________.

A)10%
B)12%
C)22%
D)greater than 22%

Question 77

In partnerships,partners can readily transfer their wealth to other partners.

Question 78

There is a tradeoff between risk and return (i.e.,to earn higher returns you generally have to take more risk)because ________.

A)investors like risk and return and want more of both
B)investors are risk averse,so they will not accept riskier investments unless they offer higher returns
C)to earn higher returns you have to make bigger investments and bigger investments are always riskier than smaller ones
D)investors care about returns but not about risks

Question 79

A major weakness of a partnership is ________.

A)the difficulty in maintaining owners' control
B)the difficulty in liquidating or transferring ownership
C)the double taxation of income
D)its high organizational costs

Question 80

When managers are trying to create value for shareholders,their primary focus should be on earnings rather than cash flow.