Question 1

The corporate charter is a document filed with the secretary of the state in which the firm is incorporated that provides information about the company, including its name, address, directors, and amount of capital stock.

Accepted Answer

The corporate charter is indeed a document filed with the secretary of state in which the firm is incorporated that provides information about the company, including its name, address, directors, and amount of capital stock.

Question 2

Two key limitations of the proprietorship form of business involve potential difficulty in raising the necessary capital and the presence of unlimited personal liability for business debts.

Accepted Answer

Proprietorship form of business relies solely on the personal funds of the owner, making it difficult to raise a large amount of capital. Additionally, since the owner and the business are considered as the same entity, the owner is personally responsible for all business debts and liabilities, which can result in unlimited personal liability.

Question 3

The decision framework of the financial managers that seek that combination of assets, liabilities, and capital which will generate the largest expected projected income over the relevant time horizon is most useful for carrying out the firm's objective.

Accepted Answer

False

Question 4

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

Accepted Answer

When a firm raises its prices to unreasonable levels, customers are likely to shift to cheaper substitutes or alternative options. This will lead to a decline in the firm's market share as customers seek out better value for their money. Therefore, it is important for firms to price their products competitively to maintain their market share.

Question 5

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 6

The financial manager must execute his or her duties independent of the cash flow activities of the firm in order to properly maximize the value of the firm.

Accepted Answer

The financial manager must consider and analyze the cash flow activities of the firm in order to properly maximize the value of the firm. Managing and optimizing cash flow is an important part of financial management.

Question 7

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 shareholders' wealth, not just expected profit. This includes maximizing the value of the firm's stock, which considers both the timing and risk associated with the firm's future cash flows.

Question 8

In general, the role of the financial manager is to plan for the acquisition and use of funds so as to maximize the value of the firm.

Accepted Answer

The role of the financial manager is to make decisions regarding the financial resources of the company in order to maximize the value of the firm. This includes managing cash flow, making investment decisions, and determining the optimal mix of debt and equity financing. The ultimate goal is to increase shareholder value and achieve long-term financial stability.

Question 9

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

Accepted Answer

This statement is not entirely true. While it is true that socially responsible actions can increase costs for a firm, it is not necessarily true that the firm cannot continue to compete. In fact, many consumers are willing to pay a premium for products that are produced in an environmentally friendly or socially responsible manner. Additionally, socially responsible actions can enhance a firm's reputation and brand image, which can lead to increased sales and customer loyalty over the long term. Ultimately, the impact of cost-increasing actions on a firm's competitiveness will depend on a variety of factors, including market conditions, consumer preferences, and the specific actions taken by the firm.

Question 10

A hostile takeover involves an attempt by one group of stockholders to solicit votes from other stockholders in order to put a new management team into place and is usually motivated by low stock price.

Accepted Answer

A hostile takeover refers to the acquisition of one company by another without the consent of the target company's management. It often involves the acquiring company directly offering to buy shares from the target company's shareholders, bypassing the target company's management and board of directors.

Question 11

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 managers for achieving specific performance goals, and they are an effective tool for attracting and retaining top talent. Additionally, these plans help to align the interests of management with those of shareholders by linking executive pay to company performance. Thus, the statement is true.

Question 12

A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited liability for business, which limits his losses to what he has invested in the company.

Accepted Answer

A proprietorship does not provide limited liability for the owner, meaning that they are personally responsible for all losses and debts of the business, even beyond their initial investment.

Question 13

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

Maximizing stock price involves ensuring long-term success for the company, which involves efficient operations, product development, and positive relationships with stakeholders.

Question 14

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

The riskiness of a firm's EPS is influenced by the types of projects it undertakes and the way they are financed. The more risky the projects, the more uncertain the firm's earnings will be. Furthermore, the way a company finances its projects may have a significant effect on its riskiness. If a company relies heavily on debt to finance its projects, for example, its earnings will be more unstable due to the increased interest costs and the potential for default if the company encounters financial difficulties.

Question 15

Managers of firms using accounting manipulations to inflate current earnings are likely to generate long-term benefits to the shareholders of the firm.

Accepted Answer

Managers who manipulate accounting figures to inflate earnings may have short-term positive effects on stock prices, but in the long run, such practices can damage the reputation and financial stability of the firm, resulting in negative effects on shareholders. Moreover, if the manipulations are caught, the firm may face legal consequences and loss of investor trust, which can further harm the shareholders. Thus, accounting manipulations are not a sustainable or ethical approach to create shareholder value.

Question 16

The finance function is relatively independent of most other corporate functions. Marketing decisions, for example, might affect the firm's need for funds but are not affected by conditions in financial markets or other financing issues.

Accepted Answer

The finance function is not relatively independent of most other corporate functions. Marketing decisions, for example, can have significant financial implications, such as affecting sales revenue and cash flow, which in turn impact the need for funds and financing options. Financial markets and economic conditions also affect marketing decisions, as they can impact competition, customer demand, and pricing strategies. Therefore, the finance function is intertwined with other corporate functions and should be considered in decision-making processes.

Question 17

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 groups who are more aligned with stockholder interests.

Accepted Answer

In a competitive marketplace, managers who deviate from stockholder wealth maximization risk being disciplined by the market, including the threat of being taken over by groups who are more aligned with stockholder interests.

Question 18

The disadvantages associated with a proprietorship are similar to those under a partnership. One exception to this is the formal nature of the partnership agreement and the commitment of the partners' personal assets. As a result, partnerships do not have difficulty raising large amounts of capital.

Accepted Answer

The statement is incorrect. It incorrectly states that partnerships don't have difficulty raising large amounts of capital, when in fact, they may also face limitations in raising significant capital due to the personal liability of the partners.

Question 19

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 is an accurate statement of a financial manager's main responsibility.

Question 20

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

Accepted Answer

Maintaining good ethics in business is not only morally correct, but it also has many practical benefits. It helps to build a positive reputation, attracts loyal customers, improves employee morale and productivity, reduces legal and financial risks, and contributes to long-term success and sustainability. Therefore, it is not an impractical standard, but a crucial aspect of responsible and effective business management in a competitive marketplace.

Quiz 1: An Overview of Managerial Finance