Question 1

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

Accepted Answer

Stock prices reflect the market's perception of a company's future earnings potential and the success of its management decisions, as they incorporate all publicly available information and expectations about the company's future.

Question 2

Preferred stock is considered priority stock. Explain this priority.

Accepted Answer

The answer of Preferred stock is considered priority stock. Explain...

Question 3

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

Accepted Answer

The three major factors that determine the market value of a company's share of stock are the amount of cash flows expected, the timing of cash flows, and the risk taken to generate cash flows. Sales generated are related to cash flows, but they are not a direct factor in determining the market value of a company's share of stock.

Question 4

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

Accepted Answer

Market value represents the true value of a corporation and takes into account the current market conditions and investor expectations. Maximizing shareholder wealth involves increasing market value by making strategic decisions that increase profitability and growth potential. Liquidation value is the value that would be received if all assets are sold and debt is paid off, which is not a practical basis to measure the long-term value of a corporation. Book value represents the value of a corporation's assets minus its liabilities as reported on the balance sheet, but it does not reflect the true market value of the company. Stock value is a result of market perception and changes in response to various factors, such as earnings reports, industry trends, and economic conditions.

Question 5

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

Accepted Answer

Effective communication with the investment community about the firm's performance is a key function of the CFO. The CFO is responsible for managing financial risks and opportunities for the company and is therefore the primary point of contact for investors and other stakeholders who need to understand the company's financial performance.

Question 6

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 _____.

Accepted Answer

Subchapter S and LLCs are considered hybrid business forms. They combine characteristics of both partnerships and corporations, providing limited liability for the owners while allowing for pass-through taxation. Choices A and D are not valid types of business organization, and choice B references two distinct types rather than a hybrid form.

Question 7

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?

Accepted Answer

The separation of ownership and control in corporations means that shareholders (owners) appoint managers to run the company on their behalf. The managers may have their own goals and priorities that do not necessarily align with those of shareholders. Therefore, management may make decisions that are not consistent with the goal of shareholder wealth maximization.

Question 8

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

Accepted Answer

According to the Small Business Administration, more than 95% of all businesses are considered small businesses.

Question 9

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

Accepted Answer

While the other options (B, C, D) are methods that have been developed to deal with issues of corporate governance after accounting scandals, the requirement that the Board must select only SEC approved consultants is not a commonly used or recommended method for dealing with these issues.

Question 10

A microeconomic concept used in financial management is _____.

Accepted Answer

Setting marginal costs equal to marginal revenues is a key microeconomic concept that is used in financial management. It helps businesses determine the optimal level of production or output by comparing the additional cost of producing one more unit (marginal cost) with the additional revenue earned from selling one more unit (marginal revenue). This analysis helps managers make pricing and production decisions that maximize profits. Options A, C, and D are not microeconomic concepts but rather specific methods or goals within financial management.

Question 11

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 _____.

Accepted Answer

Greater agency costs are not a benefit of operating ethically. Ethical behavior can lead to reduced litigation and damages expenses, as well as a more favorable impression by customers and investors. However, it may lead to higher agency costs in the short run as the company may need to invest in additional resources to ensure compliance with ethical standards.

Question 12

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

Accepted Answer

The responsibilities of a controller include financial accounting, taxes, and data processing. However, managing a company's pension fund is typically the responsibility of the HR department or an external pension fund manager.

Question 13

Explain the organization and governance in a corporation.

Accepted Answer

The answer of Explain the organization and governance in a...

Question 14

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

Accepted Answer

Only statement II is correct. General partnership is a form of business organization in which partners have unlimited personal liability for the debts and obligations of the partnership. Corporations have limited liability, meaning that shareholders' personal assets are typically not at risk for the debts and obligations of the corporation.

Question 15

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.

Accepted Answer

Shareholders typically elect the board of directors, not the Chairman directly. The board of directors does have control over dividend payments, as they decide whether to declare dividends.

Question 16

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

Accepted Answer

Monitoring management's actions is an agency cost incurred by shareholders to minimize agency problems.

Question 17

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.

Accepted Answer

Statement I is incorrect because macroeconomics deals with the economy as a whole, not individual or firm-level decisions. Statement II is incorrect because microeconomics, not macroeconomics, focuses on the decisions of individuals, households, and firms.

Question 18

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 _____.

Accepted Answer

The economic stimulus package scandal is not a specific or commonly known breach of financial ethics. Collateralized mortgage obligation scandals, treasury bond trading scandals, and insider stock trading scandals have all been major front-page stories focused on ethical issues within the financial industry.

Question 19

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

Accepted Answer

Debt securities, such as bonds, pay periodic interest to the investor and provide for the eventual return of principal. Preferred stock pays periodic dividends, but does not necessarily provide for the return of principal. Equity securities, such as common stock, do not offer periodic interest payments or a guarantee of the return of principal. Fixed asset loans are a type of debt financing but do not have the same characteristics as debt securities.

Question 20

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

Accepted Answer

The microeconomic profit maximization model posits that firms maximize profits where marginal costs (MC) equal marginal revenues (MR), as this is the point where any additional unit produced would not add to the overall profit.

Quiz 1: The Role and Objective of Financial Management