Deck 1: The Role and Objective of Financial Management

Question 1

The two most important disciplines on which financial management relies are _____.

A) accounting and production
B) accounting and marketing
C) economics and marketing
D) accounting and economics

Answer 1

D

Question 2

____ are largely outside of the direct control of managers.

A) Investment strategies
B) Economic environment factors
C) Major policy decisions
D) Dividend policies

Answer 2

B

Question 3

The shareholder wealth maximization goal states that management should seek to maximize the ____ of the expected future returns to the owners of the firm.

A) future value
B) compound value
C) percentage value
D) present value

Answer 3

D

Question 4

Which of the following is NOT a professional certification for careers in the field of finance?

A) Certified Financial Manager (CFM)
B) Certified Financial Planner (CFP)
C) Certified Financial Analyst (CFA)
D) Certified Treasury Professional (CTP)

Question 5

The primary reason for the divergence between the shareholder wealth maximization goal and the actual goals pursued by management has been attributed to _____.

A) separation of social responsibility and stakeholders' concerns
B) separation of ownership and control
C) separation of personal welfare and long-run profit goals
D) the granting of "golden parachute" contracts

Question 6

Creditors have a fixed financial claim on a company's resources through all of the following EXCEPT _____.

A) long term debt
B) bank loans
C) preferred stock
D) commercial paper

Question 7

____ arise from the divergent objectives between owners and managers.

A) Shareholder relationships
B) Stakeholder problems
C) Creditor problems
D) Agency problems

Question 8

The primary objective of the firm is _______.

A) shareholder wealth maximization
B) social responsibility
C) long-run survival
D) profit maximization

Question 9

The limitations of the profit maximization goal include which of the following?

A) It lacks a time dimension (i.e., it is static).
B) It fails to consider risk with alternative decisions.
C) The definition of profit is ambiguous.
D) All the above are limitations.

Question 10

Agency costs include all of the following, EXCEPT _____.

A) expenditures to monitor management's actions
B) providing stock as part of management's compensation expenditures to structure the organization
C) flotation costs
D) bonding expenditures

Question 11

Shareholder wealth is measured by the ____ value of the shareholders' common stock holdings.

A) book
B) market
C) historic
D) compound

Question 12

Financial managers can take a variety of actions to influence the market value of a company's stock. All of the following are classifications of actions taken EXCEPT _____ decisions.

A) investing
B) financing
C) dividend
D) tax implication

Question 13

When considering the risk of receiving cash flows, financial managers must be aware that investors _____.

A) want higher returns for perceived greater risk
B) want a lower valued firm to discourage future investors which might dilute their existing control
C) expect dividends and capital gains regardless of the risks associated with achieving them
D) always want lower returns so that the risk is minimized

Question 14

Giving top management ____ is one method that ensures managers will act in the interest of shareholders in merger decisions.

A) "golden parachute" contracts
B) excellent pay
C) executive perks
D) job security

Question 15

A major advantage of using the maximization of shareholder wealth as the primary goal of the firm is that this goal considers _____.

A) the timing and the risk of the expected benefits to be received
B) the investor's consumption utility
C) the value of closely held partnerships
D) All of these are correct

Question 16

Agency problems may give rise to constraints that ____ the market value of firms.

A) increase
B) decrease
C) do not affect
D) are not important to

Question 17

The success of a firm is linked to its stakeholders. This group includes _____.

A) communities in which they operate
B) suppliers
C) employees
D) All of these are correct

Question 18

The objective of maximizing shareholder wealth, as measured by the market value of the firm's stock, _____.

A) does not consider the timing of the benefits received
B) provides a way to consider the risk of the benefits expected
C) benefits only certain stockholders
D) does not provide a standard against which to judge actual decisions

Question 19

A potential agency conflict can arise between stockholders and creditors because owners may _____.

A) increase the risk of a firm's investments
B) decrease the amount of debt outstanding
C) decrease the risk of a firm's investments
D) increase the firm's net worth

Question 20

All of the following are problems with the microeconomic profit maximization model EXCEPT _____.

A) the absence of a time dimension
B) offers financial managers insights to a wide range of problems
C) does not consider the risk of alternative decisions
D) the problem of defining profits

Question 21

Among the most important agency relationships in the context of finance is (are) the relationship(s) between ____.

A) stockholders and creditors
B) management and workers
C) stockholders and creditors, and management and workers
D) management and creditors

Question 22

The controller normally has responsibility for all ____ related activities, while the treasurer is normally concerned with ____.

A) acquisition; data processing
B) tax; cost accounting
C) tax; financial accounting
D) accounting; expenditure of funds

Question 23

Per the shareholder wealth maximization goal, management should seek to maximize the ____ of the ____ to owners.

A) present value; expected pretax cash flows
B) future value; expected pretax cash flows
C) present value; expected future returns
D) future value; expected future returns

Question 24

The chief financial officer (CFO) normally has responsibility for all of the following EXCEPT _____.

A) advertising strategy
B) managing interest rate risk
C) trading foreign currencies
D) accounting functions

Question 25

Techniques identified by John Casey that managers could keep in mind when addressing the ethical dimensions of a business problem include all of the following EXCEPT _____.

A) collecting all the facts bearing on the problem
B) clarifying the parameters of the problem
C) involving all parties with a financial interest in the outcome
D) seeking equity for those who may be affected

Question 26

The most important objective of the firm is to _____.

A) make MC=MR
B) maximize profits
C) minimize agency costs
D) None of these are correct

Question 27

Protective covenants in a company's bond indentures are used in agency relationships involving ____.

A) stockholders and managers
B) stockholders and creditors
C) management and workers
D) management and creditors

Question 28

The existence of divergent objectives between owners and managers is one example of a class of problems arising from ____.

A) social responsibility concerns
B) age differences between managers and owners
C) agency relationships
D) union-management relations

Question 29

The activities of the treasurer include all of the following EXCEPT _____.

A) financial planning
B) tax preparation
C) credit analysis
D) pension fund management

Question 30

Many entrepreneurs are ____ diversified with respect to their personal wealth.

A) poorly
B) highly
C) well
D) 90%

Question 31

Financial management draws heavily on the following related disciplines:

A) accounting
B) macroeconomics
C) microeconomics
D) All of these disciplines are applicable

Question 32

Shareholder wealth is measured by the ____.

A) book value of the shareholders' common stock holdings
B) market value of the shareholders' common stock holdings
C) book value of the company's assets
D) market value of the company's assets

Question 33

____ deals with economic decisions of individuals, households, and firms.

A) Economic accounting
B) Microeconomics
C) Blue Chip econometrics
D) Macroeconomics

Question 34

The ____ has a goal of serving as a bridge between academic study of finance and the application of financial principles by financial managers.

A) Financial Executives Institute
B) Financial Management Association
C) American Finance Association
D) Institution of Financial Analysts

Question 35

There is often a divergence between the shareholder wealth maximization goal and the actual goals pursued by management. The primary reason for this is ____.

A) geographical dispersion of shareholders
B) separation of ownership and control
C) age differences between managers and shareholders
D) that both have their own agendas

Question 36

All of the following economic environment factors affect stock prices EXCEPT _____.

A) investment strategies
B) competition
C) tax rates
D) currency exchange rates

Question 37

The chief financial officer (CFO) of a corporation normally reports to the ____ of the company.

A) chairman of the board of directors
B) chief operating officer
C) controller
D) chief executive officer

Question 38

One method of decreasing the cash outflows of a firm is to _____.

A) decrease depreciation
B) increase capital expenditures
C) decrease dividends
D) increase debt repayment

Question 39

Firms normally recognize responsibilities to various constituencies, such as each of the following EXCEPT _____.

A) To sustain an optimum return on investment for stockholders
B) To be perceived by customers as a provider of quality service
C) To demonstrate that investors are the firm's most valuable resource
D) To provide corporate leadership in the communities it serves

Question 40

The major factors that determine the market value of a company's shares of stock include all of the following EXCEPT ____.

A) risk of its cash flows
B) timing of its cash flows
C) book value of its assets
D) risk of its cash flows and the timing of its cash flows

Question 41

____ is (are) referred to as a residual form of ownership in a corporation.

A) Common stock
B) Preferred stock
C) Bonds
D) Dividends

Question 42

A major disadvantage of a sole proprietorship is the fact that _____.

A) it is expensive to establish
B) the owner has unlimited personal liability
C) it is easy to finance growth
D) the owner pays taxes on all the income

Question 43

A major advantage of the corporate form of business over both sole proprietorships and partnerships is the _____.

A) limited liability
B) reduction in taxes
C) ease of formation
D) ability to maintain ownership

Question 44

The accountant's role in the firm is to do all of the following EXCEPT _____.

A) prepare financial statements
B) determine the feasibility of certain investment decisions
C) determine the tax liability of the firm
D) keep records of the firm's performance

Question 45

Although this type of business generates 4.1% of the total U.S. business revenue, ____ make up approximately 72% of all businesses.

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

Question 46

There are problems with using the "profit maximization" criterion. Which of the following is (are) correct?
I. Profit maximization has an ambiguous definition of "maximizing profits."
II. Profit maximization fails to consider the risks associated with alternative decisions.

A) Only statement I is correct
B) Only statement II is correct
C) Both statements I and II are correct
D) Neither statement I nor II is correct

Question 47

The bottom-line earnings figure from the accounting system is misleading because _____.

A) it does not reflect actual cash inflows and outflows of the firm
B) stock dividends are difficult to forecast
C) depreciation is a cash outlay but is not reflected as such
D) tax laws change regularly which cause the firm to misjudge its true tax obligation

Question 48

All of the following are advantages of the corporate form of business organization EXCEPT _____.

A) permanent legal existence
B) unlimited liability
C) flexibility in ownership change
D) ability to raise capital

Question 49

The financial manager uses ____ when determining the firm's most appropriate capital structure.

A) accounting data
B) employment benefit data
C) federal regulations
D) computer software design

Question 50

Concern for the interests of the stakeholders can be viewed as the means to the end of _____.

A) maximizing long-term shareholder wealth
B) diminishing marginal return
C) maximizing risk
D) continuing legal litigation

Question 51

Accounting is concerned primarily with matching _____.

A) cost-based revenues and expenses
B) tax liability and future cash flows
C) revenue and long-term debt
D) inventory and cost of sales

Question 52

Corporate securities represent claims against the _____.

A) corporate officers of the firm
B) agents of the corporation
C) liabilities and net worth of the firm
D) assets and future earnings of the firm

Question 53

The difference between a firm's annual after-tax operating profit and its total annual cost of capital is known as _____.

A) earned income
B) Economic Value Added
C) Managerial Value Added
D) operating income

Question 54

The net present value rule provides appropriate guidance for financial decision makers when costs are incurred immediately but _____.

A) future cash flows are not known with certainty
B) marginal costs are equal to marginal revenue
C) result in a stream of benefits over several future time periods
D) marginal costs are greater than marginal revenue

Question 55

____ equals the number of shares outstanding times the market price per share.

A) Book value
B) Stakeholders wealth
C) Total shareholder wealth
D) Economic value

Question 56

The advantages of the corporate form of organization over both sole proprietorships and partnerships include ____.

A) limited liability and lower tax rates
B) permanency and lower tax rates
C) limited liability and permanency
D) lower tax rates and permanency

Question 57

The net present value of an investment made by a firm represents the contribution of that investment to the ____ of the firm.

A) book value
B) profit
C) value
D) cash flow

Question 58

In a limited partnership, the limited partners may limit their _____.

A) tax liability
B) liability
C) tax write-off
D) ability to attract new products

Question 59

An advantage that the corporate form of business has over either the sole proprietorship or partnership is the _____.

A) ability to raise capital
B) ease of changing ownership
C) limited liability
D) All of these are correct

Question 60

Corporate officers normally include all the following EXCEPT _____.

A) Secretary
B) Chief operating officer
C) Treasurer
D) Financial analyst

Question 61

____ provide a direct measure of the success of decisions made by a firm's managers.

A) Profits
B) Stock prices
C) Sales
D) Dividends per share

Question 62

Preferred stock is considered priority stock. Explain this priority.

Question 63

There are three major factors that determine the market value of a company's share of stock. All of the following are factors EXCEPT _____.

A) amount of cash flows expected
B) sales generated
C) timing of cash flows
D) risk taken to generate cash flows

Question 64

Maximization of shareholder wealth is not an accounting concept. A corporation's value should be based on _____ value.

A) liquidation
B) book
C) market
D) stock

Question 65

What one of the following is a function of the CFO?

A) Control of the marketing functions of the firm
B) Effective communication with the investment community about the firm's performance
C) Oversight of engineering
D) Determination of effective manufacturing strategies

Question 66

Sole proprietorships, partnerships, and corporations are the three main forms of business organization. There are other types which are referred to as hybrids. Examples of hybrid business forms are _____.

A) 10K & 14B Corporations
B) section 8 and Subchapter S Corporations
C) subchapter S and LLCs
D) 10K Corporations and LLCs

Question 67

Financial decisions should be consistent with the goal of shareholder wealth maximization. However, there may be a divergence between shareholder wealth maximization and the actual goals of management. The primary reason for this is which of the following?

A) Management wants to ensure good public relations.
B) The Board of Directors is becoming increasingly uninvolved within the corporation.
C) Shareholders do not feel that wealth maximization is relevant.
D) There is a separation of ownership and control in corporations.

Question 68

Per the Small Business Administration, what percent of all businesses are considered small businesses?

A) >20%
B) >75%
C) >95%
D) >50%

Question 69

Because of accounting scandals, several methods have been developed to deal with the issues of corporate governance and include all the following EXCEPT _____.

A) The Board must select only SEC approved consultants
B) Chairman of the Board position should be split from the CEO position
C) The majority of members on the Board of Directors should be independent directors
D) The Board of Directors must disclose whether it has adopted a code of ethics for the CEO and senior financial officers

Question 70

A microeconomic concept used in financial management is _____.

A) full utilization of data processing
B) setting marginal costs equal to marginal revenues
C) accrual basis of recognizing revenues and expenses
D) target capital structure

Question 71

A corporation that operates ethically will notice certain benefits as it applies to shareholder wealth maximization. With shareholder wealth maximization in mind, all of the following could be experienced by an ethical corporation EXCEPT _____.

A) reduced litigation expense
B) greater agency costs
C) reduced damages expenses
D) a more favorable impression by customers and investors

Question 72

All of the following are responsibilities of a controller EXCEPT _____.

A) financial accounting
B) taxes
C) data processing
D) pension fund management

Question 73

Explain the organization and governance in a corporation.

Question 74

Which of the following forms of business organization have unlimited liability?
I. Corporation
II. General partnership

A) Only statement I is correct
B) Only statement II is correct
C) Both statements I and II are correct
D) Neither statement I nor II is correct

Question 75

Which of the following statements is (are) correct?
I. Shareholders elect the Chairman of the Board.
II. The board of directors has no control over whether dividends will be paid.

A) Only statement I is correct
B) Only statement II is correct
C) Both statements I and II are correct
D) Neither statement I nor II is correct

Question 76

Examples of agency costs incurred by shareholders to minimize agency problems are expenditures associated with _____.

A) independent auditing
B) SEC approval
C) monitoring management's actions
D) inventory control

Question 77

Choose the correct option below.
I. Macroeconomics deals with the economic decisions of individuals, households, and firms.
II. Microeconomics looks at the economy as a whole.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements I and II are correct.
D) Neither statement I nor II is correct.

Question 78

In recent years, front-page stories of ethical issues have exploded and focused attention on ethical practices. All of the following are a breach of financial ethics EXCEPT _____.

A) collateralized mortgage obligation scandal
B) treasury bond trading scandal
C) insider stock trading scandal
D) economic stimulus package scandal

Question 79

The type of corporate security that pays periodic interest as well as the eventual return of principal is _____.

A) preferred stock
B) debt securities
C) equity securities
D) fixed asset loans

Question 80

The managerial decision rule that emerges from the microeconomic profit maximization model is _____.

A) Marginal Costs < Marginal Revenues
B) Marginal Costs = Profits
C) Marginal Revenues > Marginal Costs
D) Marginal Costs = Marginal Revenue