Question 1

Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money.

Accepted Answer

Corporate managers should not only consider short-term profits but also the long-term impact of investment projects on the company's financial health and sustainability. This includes the potential risks and benefits of the project in the long run, as well as the impact on stakeholders such as employees, customers, and the environment. The time value of money does play a role in investment decisions but it should not be the sole determining factor.

Question 2

Which of the following is the most important goal that a corporation should strive for?
A) maximize current profits
B) maximize market share
C) maximize revenue
D) maximize shareholder wealth

Accepted Answer

Maximizing shareholder wealth is the most important goal that a corporation should strive for because it ensures the long-term sustainability of the company. When shareholders' wealth is maximized, it positively impacts the company's financial performance and its ability to attract investment, innovate, and grow. Maximizing current profits, market share, or revenue may lead to short-term gains, but it does not necessarily guarantee the long-term profitability of the company.

Question 3

A financial manager is considering two projects,A and B.A is expected to add $2 million to profits this year while B is expected to add $1 million to profits this year.Which of the following statements is MOST correct?
A) The manager should select project A because it maximizes profits.
B) The manager should select the project that maximizes long-term profits, not just one year of profits.
C) The manager should select project A or he is irrational.
D) The manager should select the project that causes the stock price to increase the most, which could be A or B.

Accepted Answer

D

Question 4

The goal of the firm should be
A) maximization of profits (net income per share).
B) maximization of shareholder wealth.
C) maximization of market share.
D) maximization of sales.

Accepted Answer

Maximizing shareholder wealth takes into account not only short-term profits, but also long-term growth and sustainability of the company. It aligns the interests of the firm with those of its owners, the shareholders, who have a stake in the company's success. Maximizing market share or sales may come at the expense of profitability and it may not be in the best interest of the company in the long term.

Question 5

The goal of profit maximization ignores the risk of financial decisions.

Accepted Answer

The goal of profit maximization focuses solely on increasing profits without taking into consideration the potential risks involved in financial decisions. As a result, it can lead to situations where the pursuit of short-term gains eventually results in long-term losses or failures.

Question 6

Maximization of shareholder wealth
A) represents a zero sum game in which one corporation gains at the expense of others.
B) provides benefits to society as scarce resources are directed to their most productive use.
C) is not a practical goal since it cannot be measured effectively.
D) is achieved only if cash flows exceed accounting profits.

Accepted Answer

The answer of Maximization of shareholder wealth
A) represents a zero...

Question 7

The fundamental goal of a business is to maximize the retained earnings available to the corporation's shareholders.

Accepted Answer

The fundamental goal of a business is to maximize shareholder value, which is broader than just maximizing retained earnings. It involves increasing the overall value of the company through various means, including profitability, growth, and strategic decisions that may not always result in increased retained earnings.

Question 8

Which of the following goals of the firm are synonymous (equivalent)to the maximization of shareholder wealth?
A) profit maximization
B) risk minimization
C) maximization of the total market value of the firm's common stock
D) none of the above

Accepted Answer

Maximization of the total market value of the firm's common stock is equivalent to maximizing shareholder wealth as it directly benefits the shareholders by increasing the value of their investments. Profit maximization may not necessarily result in an increase in stock value and risk minimization may not always result in maximizing shareholder wealth.

Question 9

The goal of the firm's financial managers should be the maximization of the total value of the firm's stock.

Accepted Answer

This is known as the shareholder wealth maximization principle, which states that financial managers should make decisions that increase the value of the firm's stock, thereby maximizing the wealth of shareholders.

Question 10

The primary goal of a publicly owned corporation is to ________.
A) maximize dividends per share
B) maximize shareholder wealth
C) maximize earnings per share after taxes
D) minimize shareholder risk

Accepted Answer

The primary goal of a publicly owned corporation is to maximize shareholder wealth, which is achieved by maximizing the value of the company's stock. This can be accomplished by increasing profits, expanding market share, and making strategic investments that generate a return for shareholders. While dividends and earnings per share are important indicators of financial performance, they are not the primary goal of the corporation. Likewise, while minimizing risk is important for shareholders, it is not the primary goal of the corporation.

Question 11

One of the causes of the recent financial crisis in the United States has been excessive risk taking due to underestimation of risk.How does this relate to shareholder wealth maximization and financial leverage? Can overestimation of risk also be detrimental?

Accepted Answer

The answer of One of the causes of the recent...

Question 12

It is important to evaluate a corporate manager's financial decision by measuring the effect the decision should have on the corporation's stock price if everything else were held constant.

Accepted Answer

Evaluating a corporate manager's financial decision by measuring the effect on the corporation's stock price can help assess whether the decision is likely to create or destroy shareholder value. However, it is important to note that other factors, such as market conditions and investor sentiment, can also influence a company's stock price.

Question 13

Each financial decision made by a corporate manager can be evaluated by its direct impact on the corporation's stock price.

Accepted Answer

While a financial decision may have an influence on the stock price, it may not be the only factor affecting it. Factors such as market trends, economic conditions, industry competition, and investor sentiment can also have an impact on the stock price. Therefore, looking only at the stock price may not provide a complete evaluation of a financial decision.

Question 14

Financial management deals with the maintenance and creation of economic value or wealth.

Accepted Answer

Financial management involves managing financial resources in a way that creates economic value and generates wealth for the organization. This includes activities such as financial planning, budgeting, investment management, and risk management, all of which aim to maximize the value of the organization's financial resources. Therefore, financial management is directly concerned with the creation and maintenance of economic value or wealth.

Question 15

Only a firm's financial decisions affect its stock prices.

Accepted Answer

A firm's stock prices are influenced by a variety of factors, including market trends, industry news, economic indicators, and competition. Financial decisions, such as investment and dividend policies, may have an impact on stock prices, but they are not the only determinant.

Question 16

Shareholder wealth maximization means
A) maximizing earnings per share.
B) maximizing dividends per share.
C) maximizing the price of existing common stock.
D) maximizing stockholders equity.

Accepted Answer

Shareholder wealth maximization means maximizing the price of existing common stock, which benefits the shareholders. Maximizing earnings per share or dividends per share may not necessarily lead to an increase in share price, and maximizing stockholders equity is not directly related to increasing shareholder wealth.

Question 17

The payment of a dividend to current shareholders will have no impact on a corporation's share price because the cash paid is not available to future potential shareholders who may want to buy the corporation's stock.

Accepted Answer

The payment of a dividend to current shareholders can actually impact a corporation's share price. If the dividend is higher than expected, it can attract more investors and increase demand for the stock, driving up the share price. Conversely, if the dividend is lower than expected, it can cause current shareholders to sell their shares, decreasing demand and driving down the share price.

Question 18

Shareholder wealth maximization means maximizing the price of the existing common stock.

Accepted Answer

Shareholder wealth maximization aims to increase the long-term value of a company for its shareholders. This is often measured by the price of the company's common stock, so maximizing the price of the existing common stock is indeed a goal of shareholder wealth maximization.

Question 19

Shareholders react to poor investment or dividend decisions by causing the total value of the firm's stock to fall,and they react to good decisions by bidding the price of the stock up.

Accepted Answer

Shareholders tend to react based on the investment or dividend decisions made by the company, leading to a rise or fall in the stock's value.

Question 20

One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the firm's financial decisions.

Accepted Answer

Maximization of shareholder wealth as a goal does consider risk, as the value of a firm's stock reflects both the expected returns and the risk associated with achieving those returns. Financial decisions that increase risk without adequate expected returns can decrease stock value, contrary to the goal of maximizing shareholder wealth.

Quiz 1: An Introduction to the Foundations of Financial Management

Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money.

Which of the following is the most important goal that a corporation should strive for?

A financial manager is considering two projects,A and B.A is expected to add $2 million to profits this year while B is expected to add $1 million to profits this year.Which of the following statements is MOST correct?

The goal of the firm should be