Question 1

The proper goal of the financial manager should be to maximize the firm's expected profit, because this will add the most wealth to each of the individual shareholders (owners) of the firm.

Accepted Answer

The proper goal of the financial manager should be to maximize the value of the firm, not just expected profit, because this takes into account the timing and risk of the expected cash flows. Maximizing value adds the most long-term wealth to the shareholders.

Question 2

Having the manager's compensation tied to the company's performance increases the agency problem that corporations face.

Accepted Answer

Tying a manager's compensation to the company's performance is actually a strategy to align the interests of the managers with those of the shareholders, thereby reducing the agency problem.

Question 3

Incentive compensation plans are used to attract and retain top managerial talent as well as to align the interests of management with shareholders.

Accepted Answer

Incentive compensation plans are designed to motivate and reward employees for achieving specific goals or objectives. These plans can be used to attract and retain top managerial talent by offering competitive compensation packages that align with the interests of shareholders. Additionally, incentive plans can help to promote a culture of performance and accountability within an organization.

Question 4

A financial manager's task is to make decisions concerning the acquisition and use of funds for the greatest benefit of the firm.

Accepted Answer

This statement is true. The main responsibility of a financial manager is to manage the firm's financial resources in a way that maximizes value for shareholders or stakeholders. This involves decisions about financing, investing, and managing assets and liabilities effectively.

Question 5

Financial managers should seek the combination of assets, liabilities, and capital that generate the largest expected projected income in the current accounting period.

Accepted Answer

Financial managers should aim for a balance that maximizes the firm's value and shareholder wealth over the long term, not just the largest expected income in the current period. This involves considering risk, liquidity, and the timing of cash flows, among other factors.

Question 6

Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash flows denominated in the parent company's home currency.

Accepted Answer

This is a correct definition of exchange rate risk. It is the risk of loss due to a change in the value of one currency against another. This risk can affect the profits, costs, and cash flows of a business operating in a foreign market.

Question 7

If a firm raises its product prices beyond reasonable levels, it will generally lose some of its market share.

Accepted Answer

When a firm raises its product prices beyond reasonable levels, the demand for its products or services decreases as some customers are likely to switch to less expensive alternatives, and it may lead to a decrease in the firm's market share.

Question 8

If a firm's managers want to maximize stock price, it is in their best interests to operate efficient, low-cost plants, develop new and safe products that consumers want, and maintain good relationships with customers, suppliers, creditors, and the communities in which they operate.

Accepted Answer

This statement is true as operating efficient, low-cost plants, developing new and safe products that consumers want, and maintaining good relationships with stakeholders can contribute to increasing the firm's profitability and ultimately its stock price.

Question 9

No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to effectively compete, even if those cost-increasing actions yield significant benefits to the firm.

Accepted Answer

It is possible for a firm to take cost-increasing, socially responsible actions and still effectively compete in a marketplace. In fact, consumers are increasingly valuing companies that prioritize social responsibility and sustainability. While there may be some short-term costs, the long-term benefits to the company's reputation and customer loyalty can outweigh these. Additionally, there are ways to implement socially responsible practices that can actually lead to cost savings in the long run, such as reducing waste and improving efficiency.

Question 10

Cultural differences do not impact the multinational corporations as they expand into different geographic regions.

Accepted Answer

Cultural differences can have a significant impact on multinational corporations as they expand into different geographic regions. Failing to understand these cultural differences can lead to miscommunication, misunderstandings, and other challenges that can interfere with the success of the company's expansion efforts. Multinational corporations need to be aware of, embrace, and adapt to cultural differences in order to thrive in new geographic regions.

Question 11

As hostile takeovers are most likely to occur when a firm's stock is overvalued, the managers have a strong incentive to undervalue the firm's stock relative to its potential.

Accepted Answer

Hostile takeovers are most likely to occur when a firm's stock is undervalued, not overvalued. Therefore, managers have an incentive to overvalue the firm's stock, not undervalue it.

Question 12

Managers of firms that use alternative accounting techniques to inflate current earnings are likely to generate long-term benefits to the shareholders of the firm.

Accepted Answer

Managers who use alternative accounting techniques to inflate current earnings may generate short-term benefits, such as increased stock prices and higher bonuses, but this comes at the expense of long-term shareholder value. By manipulating earnings, the company may be seen as less stable and less attractive to investors in the long term, leading to lower stock prices and decreased shareholder value. Additionally, such practices may lead to regulatory scrutiny and potential legal consequences, which can also harm long-term shareholder value.

Question 13

Nations do not have the sovereignty to takeover (expropriate) the assets of a firm without compensation.

Accepted Answer

Nations do have the sovereignty to expropriate the assets of a firm, but international law generally requires that such actions be for a public purpose, be non-discriminatory, and come with prompt, adequate, and effective compensation.

Question 14

The term multinational corporation is used to describe a firm that operates in two or more countries.

Accepted Answer

The term multinational corporation (MNC) specifically refers to a company that has operations in multiple countries.

Question 15

The riskiness inherent in a firm's earnings per share (EPS) depends on both, the types of projects the firm takes on and the manner in which the projects are financed.

Accepted Answer

This statement is true because the riskiness of a firm's EPS is influenced by both the nature of the projects undertaken by the company (e.g. risky or conservative investments) and the way those projects are financed (e.g. debt vs equity financing).

Question 16

In a competitive marketplace, "good ethics" is a wonderful idea but an impractical standard, because there are simply too few benefits to be gained from maintaining high business ethics.

Accepted Answer

This statement is false. Maintaining high business ethics can actually have numerous benefits, including building a positive reputation, attracting loyal customers and investors, fostering employee loyalty and productivity, and avoiding legal and financial penalties from unethical practices. Furthermore, unethical behavior can lead to negative publicity and ultimately harm a company's profitability and long-term success.

Question 17

To properly maximize the value of the firm, the financial manager should execute his or her duties independent of the cash flow decisions made by other senior managers.

Accepted Answer

The financial manager should work closely with other senior managers to ensure that cash flow decisions are aligned with the firm's overall strategy and objectives, thereby maximizing the firm's value. Coordination and integration of decisions are crucial for optimal financial management.

Question 18

Industrial groups are organizations comprised of companies in different industries with common ownership interests, which include firms necessary to sell and manufacture products.

Accepted Answer

This is the definition of industrial groups.

Question 19

In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken over by companies with policies that are more aligned with stockholder interests.

Accepted Answer

The statement accurately describes the potential consequences for managers who prioritize decisions that do not align with stockholder wealth maximization in a competitive marketplace. The threat of takeover by companies with more stockholder-friendly policies is a disciplinary mechanism of the stock market.

Quiz 1: An Overview of Managerial Finance