Question 1

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

Accepted Answer

The primary goal of financial management is to maximize shareholder wealth, also known as maximizing the value of the firm. This is achieved by increasing the firm's stock price and paying out dividends to shareholders. While earning profits, maximizing cash flow, and minimizing risk are important considerations in financial management, they ultimately serve the overarching goal of maximizing shareholder wealth.

Question 2

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

Accepted Answer

The answer of If a company has a written code...

Question 3

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

Accepted Answer

Financial management involves managing and budgeting for both short-term and long-term financial goals, including the need to raise funds for future projects or investments.

Question 4

Credit 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 1 year.
C) the result of a leveling off or slowing down of price increases.
D) market trades in previously issued securities.
E) none of the above.

Accepted Answer

Credit swaps are a type of insurance product that allows financial institutions to transfer credit risk to another party in exchange for a premium. This helps protect the financial institution from losses if a borrower defaults on their loan.

Question 5

In the past, the study of finance has included
A) mergers and acquisitions.
B) raising capital.
C) bankruptcy.
D) all of these.

Accepted Answer

The study of finance has included all of the choices mentioned, including mergers and acquisitions, raising capital, and bankruptcy. These are all important topics in finance, and understanding them is essential for making informed financial decisions.

Question 6

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

Accepted Answer

Social responsibility is not just about doing the right thing, it also has financial benefits in the long run. Companies that are socially responsible are viewed favorably by stakeholders, which can lead to increased customer loyalty, improved brand reputation, and a positive impact on the bottom line. Therefore, ignoring social responsibility can actually lead to potential loss of income.

Question 7

New issues are sold in the secondary market.

Accepted Answer

New issues are sold in the primary market, while the secondary market is where previously issued securities are traded.

Question 8

Existing securities are traded in the secondary market.

Accepted Answer

Existing securities, such as stocks and bonds, are traded in the secondary market where they are bought and sold by investors, as opposed to the primary market where new securities are issued.

Question 9

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.

Accepted Answer

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

Question 10

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

Accepted Answer

With the increasing frequency and severity of natural disasters, cyber threats, and geopolitical risks, risk management will be crucial for organizations to safeguard their operations, revenues, and reputation in the coming decade.

Question 11

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

Accepted Answer

The primary market is where new securities are issued for the first time, which includes initial public offerings (IPOs).

Question 12

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

Accepted Answer

Money markets primarily deal with short-term borrowing, lending, and trading of financial instruments such as treasury bills, commercial papers, and certificates of deposit. They do not necessarily involve foreign currency exchange.

Question 13

Which of the following did not contribute to the financial crisis?
A) The change from mark-to-market accounting to
B) Solid credit ratings from the ratings agencies
C) The extension of credit to high-risk borrowers
D) The takeover of JPMorgan Chase by Bear Sterns
E) Mark this response if all of the above contributed to the financial crisis

Accepted Answer

Bear Stearns was taken over by JPMorgan Chase, not the other way around. This event was a result of the financial crisis, not a contributing factor.

Question 14

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.

Accepted Answer

This statement is false. Both high-quality and low-quality stocks can be sold in both primary and secondary markets. The quality of a stock is not directly linked to which market it is sold in.

Question 15

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

Accepted Answer

The answer of One of the primary disadvantages of maximizing...

Question 16

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

Accepted Answer

Stocks sold on the New York Stock Exchange or NASDAQ are traded in the secondary market, where existing shares are bought and sold among investors. The primary market refers to the issuance of new shares directly from companies to investors.

Question 17

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

Accepted Answer

The statement is false. The secondary market prices have not been stable over the past 20 years, and there have been fluctuations due to various factors such as economic conditions, market demand, and supply.

Question 18

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

Accepted Answer

Capital markets refer to those markets dealing with long-term securities having a life of more than one year. Short-term securities are typically traded in money markets.

Question 19

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.

Accepted Answer

The primary market is where securities are created (i.e., a company issues new shares to the public for the first time through an IPO), while the secondary market, such as NASDAQ, is where investors buy and sell securities they already own. The size of a company like Microsoft does not determine its ability to "move" between these markets, as they serve different purposes.

Question 20

Higher return always induces stockholders to invest in a company.

Accepted Answer

The answer of Higher return always induces stockholders to invest...

Quiz 1: The Goals and Functions of Financial Management

What is the primary goal of financial management?