Deck 1: The Goals and Activities of Financial Management

Question 1

Financial capital is composed of long-term plant and equipment, as well as other tangible investments.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Under the 2017 Tax Cuts and Jobs Act, the most significant change is that the corporate tax rate goes from 35 percent to 21 percent, which puts U.S. Companies on competitive footing with many other countries.

Answer 3

True

Question 4

The Dodd-Frank Act's oversight allowing regulation of banking fees and available products has been considered as not being in the best interests of a free market.

Question 5

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

Question 6

Real capital is composed of long-term plant and equipment.

Question 7

Sole proprietorship means single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs.

Question 8

Profits of sole proprietorships are taxed at corporate tax rates.

Question 9

How investors handle risk is an important topic that usually only economists observe.

Question 10

"Credit default swaps" are one of several tools that Congress and the President of the United States have jointly developed to ease the financial crisis that began in 2008.

Question 11

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

Question 12

Mortgage-backed securities were devalued by accounting standards because of the high credit ratings (AAA).

Question 13

Businesses will increasingly rely on B2B Internet applications to speed up the cash flows through their firms.

Question 14

The Dodd-Frank Act was created by Congress along with its goals and regulatory responsibility, but it is facilitated by various agencies.

Question 15

The Internet is responsible for many new business models.

Question 16

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

Question 17

During the 1930s, financial practice revolved around such topics as the preservation of capital, maintenance of liquidity, the reorganization of financially troubled corporations, and bankruptcy.

Question 18

As finance emerged as a new field, much emphasis was placed on mergers and acquisitions.

Question 19

The Dodd-Frank Act contains the Volcker Rule, which encourages financial institutions to allow for more speculative investments for average investors.

Question 20

The Internet impacts e-commerce by creating a mechanism for improved communications between a business, its customers, and its suppliers.

Question 21

A corporation must have more than 100 stockholders to qualify for Subchapter S designation.

Question 22

Sole Proprietorships, partnerships and limited liability partnerships are considered pass through forms of organizations because the income passes through to the owners and is taxed at the owner's individual tax rate.

Question 23

A limited partnership limits the profits partners may receive.

Question 24

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

Question 25

Agency theory examines the relationship between companies and their customers.

Question 26

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

Question 27

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

Question 28

Profits of a Subchapter S corporation are taxed at corporate tax rates.

Question 29

A major focus of the Sarbanes-Oxley Act is to make sure that publicly traded companies accurately present their assets, liabilities, and income in their financial statements.

Question 30

There is unlimited liability in a general partnership.

Question 31

Corporate governance issues have become less important to the financial community during the first decade of the new millennium.

Question 32

The Sarbanes-Oxley Act reduced agency conflicts by giving corporate managers greater flexibility to select their preferred candidates to the board of directors.

Question 33

The Sarbanes-Oxley Act is primarily intended to increase public scrutiny of private companies that had previously been exempt from many public disclosure requirements.

Question 34

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

Question 35

To reduce the burden on small firms, the government established a 25 percent deduction of qualified business income from pass through businesses.

Question 36

As noted in Finance in Action, initial public offerings have now increased because long-term results are favored by shareholders and institutional investors.

Question 37

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

Question 38

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

Question 39

Timing is not a particularly important consideration in financial decisions.

Question 40

The formation of a Subchapter S corporation is a way to circumvent the double taxation of a small corporation.

Question 41

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

Question 42

The ultimate measure of performance is not what the firm profits, but how the profits are valued by the investor.

Question 43

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

Question 44

Irrational exuberance is when companies have stock that is undervalued.

Question 45

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

Question 46

In the United States, stocks sold on either the New York Stock Exchange or NASDAQ are considered sold in the primary market.

Question 47

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

Question 48

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 49

Social responsibility and profit maximization are synonymous.

Question 50

Money markets refer to markets where excess corporate cash is exchanged for foreign currencies that can earn a higher return than domestic money.

Question 51

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

Question 52

If an investor hears of a large change that a company is going to make through a news article and reacts quicker than any other investor, it is considered insider trading.

Question 53

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

Question 54

High-quality initial public offerings are usually sold in a primary market, such as the New York Stock Exchange. However, low-quality stocks must usually be sold in secondary markets, such as NASDAQ.

Question 55

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

Question 56

Although NASDAQ is a secondary market, some of the firms traded there, such as Microsoft, are large enough to move to the primary market if they so desire.

Question 57

When an investor has the ability to control how the stock price changes, that is considered insider trading.

Question 58

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

Question 59

When a company is looking to raise money through issuing more shares of stock, that is considered in the secondary market.

Question 60

Maximizing Shareholder wealth can be difficult due to daily fluctuations in stock value in combination with changing investor expectations.

Question 61

Social responsibility is an expense and thus should be avoided by financial managers because it will lead to loss of income.

Question 62

Which of the following is NOT addressed by the Dodd-Frank Act?

A) Liquidation of non-bank financial companies such as insurance companies.
B) Identifies systematic risk of U.S. financial system.
C) Written certifications of financial statements by the CEO and CFO.
D) Registration of hedge funds with the SEC.

Question 63

Higher return means that the public company has lower risk.

Question 64

Credit default swaps are

A) an insurance product designed to protect financial institutions from customers who default on their loans.
B) securities with a maturity of less than one year.
C) the result of a leveling off or slowing down of stock price increases.
D) market trades in previously issued securities.

Question 65

What should be the primary goal of financial management?

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

Question 66

With the creation of Internet trading, trading through brokers became less profitable for investors mainly because of the higher fees.

Question 67

In the past, the study of finance has included

A) mergers and acquisitions.
B) raising capital.
C) bankruptcy.
D) All of the options

Question 68

Financial management requires both short-term activities as well as long-term planning such as raising funds.

Question 69

If a company has a written code of ethics, they will generally avoid ethical problems.

Question 70

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 portfolio based management and the risk along with return on securities.
D) theories of international capital budgeting.

Question 71

Higher returns always induce that stockholders should invest in a company.

Question 72

Behavioral finance is the study of

A) how investors react to accounting-based profit fluctuations.
B) how investors react to interest rates and foreign currency fluctuations.
C) how investors react to certain ways to diversify a portfolio.
D) how investors react to the amount of risk versus the amount of return in securities.

Question 73

New issues are sold in the secondary market.

Question 74

Proper risk-return management means that

A) the firm should take as few risks as possible.
B) the firm must determine an appropriate trade-off between risk and return.
C) the firm should earn the highest return possible.
D) the firm should value future profits more highly than current profits.

Question 75

Risk management will be an important factor over the next decade.

Question 76

Professor Merton Miller received the Nobel Prize in Economics for his work on

A) dividend policy.
B) investment theory.
C) working capital management.
D) capital structure theory.

Question 77

Which of the following did not contribute to the financial crisis?

A) Solid credit ratings from the ratings agencies
B) The extension of credit to high-risk borrowers
C) The merger of JPMorgan Chase and Bear Stearns
D) All of the options contributed to the financial crisis.

Question 78

Many companies have cross-listed their stock on multiple international stock exchanges and more than several hundred foreign companies have listed their shares on the New York Stock Exchange.

Question 79

One of the primary disadvantages of maximizing shareholder value is that it only provides a short-term perspective.

Question 80

Existing securities are traded in the secondary market.