Question 1

Last year, Benton Manufacturing, Inc. had capital invested of $2,500,000 on 50,000 shares outstanding and net income of $450,000. Benton recently issued another 10,000 shares at $50 each. What net income must the company achieve to maintain the previous year's earnings per share?

Accepted Answer

The previous year's earnings per share (EPS) was $450,000 / 50,000 = $9. With the issuance of 10,000 more shares, the total shares outstanding become 60,000. To maintain an EPS of $9, the company must achieve a net income of $9 * 60,000 = $540,000.

Question 2

A key activity in Capital Market operations involves

Accepted Answer

Capital Market operations focus on activities related to the buying and selling of securities, and determining market reaction to proposed investment plans is a key activity as it involves understanding how the market perceives and values these investments.

Question 3

When finance department staff provide information to ensure that business plans are achieving expected profit levels and cash flow, they are performing the function of

Accepted Answer

Financial control involves monitoring and measuring business performance to ensure that plans are achieving expected profit levels and cash flow. This function is typically carried out by the finance department staff. Therefore, the best choice is B, Financial Control.

Question 4

A mission statement reflects a company's

Accepted Answer

A mission statement defines the core purpose and overarching goal of a company, indicating its ultimate purpose and reason for existence.

Question 5

Today, Financial Management can be appropriately described as

Accepted Answer

Financial Management involves making decisions that consider the time value of money and risk, which aligns with the economics of time and risk.

Question 6

Satisfying the needs of shareholders, instead of other stakeholders, must be paramount to a business because

Accepted Answer

Pursuing the goal of satisfying the needs of shareholders is paramount to a business because if the management team fails to do so, they will be replaced. This is because shareholders are the owners of the company and therefore have the power to replace the management team if they are not satisfied with the company's performance. While satisfying other stakeholders is also important, it is ultimately the shareholders who have the most significant impact on a company's success.

Question 7

A key principle underlying modern financial management is that the primary objective of a business is

Accepted Answer

The goal of maximizing shareholder wealth is a fundamental principle underlying modern financial management. It means that the firm's primary objective is to increase the value of its stock through generating profits and cash flows that will provide a return to shareholders. This objective focuses on increasing long-term shareholder value, rather than just maximizing short-term profits or minimizing costs.

Question 8

The company is performing the function of financial control when it

Accepted Answer

Financial control involves taking corrective action to achieve business goals by monitoring and adjusting financial performance. The other options listed involve financial management activities such as fundraising, risk assessment, identifying sources of funds, and reinvesting profits, which are important but not necessarily part of financial control.

Question 9

Prendle-Robinson Inc., has capital invested of $1,200,000 on 50,000 common shares outstanding. If the Company's net income for the year was $144,000, the company's EPS, Earnings Per Share, rounded to two decimal places is

Accepted Answer

Earnings Per Share (EPS) is calculated by dividing the net income by the number of common shares outstanding. So, $144,000 / 50,000 = $2.88.

Question 10

When a business seeks to provide each stakeholder group with a satisfactory return, it is said to be achieving a business objective of

Accepted Answer

The concept of satisficing involves a business seeking to provide each stakeholder group with a satisfactory return, rather than maximizing profits or prioritizing one stakeholder group over another. This approach takes into account the interests and needs of all stakeholders and strives for a balanced outcome. Options A, B, D, and E do not accurately describe this objective.

Question 11

If maximizing shareholder wealth is a prime objective for the McDonald's hamburger chain, donating $500,000 to build an opera house in Winnipeg would be most consistent with the goal if it

Accepted Answer

The answer of If maximizing shareholder wealth is a prime...

Question 12

The over-the-counter market is

Accepted Answer

The over-the-counter market is a network of dealers linked by computers and telephones. It is not a central physical location where the general public trades, as in option E. It is also not an internet-based securities exchange for public trading, as in option A. Option B, a central location where dealers trade, is not accurate because the over-the-counter market is decentralized and does not have a central physical location. Finally, option D, local public security exchanges, is incorrect because there is no direct relationship between the over-the-counter market and local public security exchanges.

Question 13

Capital markets play an important role in

Accepted Answer

Capital markets evaluate business performance through share price.

Answer: E
 Capital markets reduce risks and increase returns to investors.

Question 14

For a company wishing to pursue a strategy of increasing shareholder wealth as opposed to profit maximization, which of the following would be the most appropriate action?

Accepted Answer

Closing a retail location in a declining market can help a company increase shareholder wealth by reducing costs and reallocating resources to more profitable areas, thus potentially increasing the company's overall value and attractiveness to investors. This action aligns with a strategy focused on long-term value rather than short-term profit maximization.

Question 15

A group that is a stakeholder in a business is

Accepted Answer

A stakeholder is any group or individual that has an interest in or is affected by the operations of a business, including shareholders, employees, customers, suppliers, communities, and even the environment. Therefore, option A is the best choice as it encompasses all of these groups.

Question 16

The EPS (Earnings Per Share) for Disco Documents Ltd. this year is $0.75. If the company has $1,575,000 capital invested and earned net income for the year of $412,500, how many common shares does the Company have outstanding?

Accepted Answer

The number of common shares outstanding is calculated by dividing the net income by the EPS. $412,500 / $0.75 = 550,000 shares.

Question 17

Pressure to increase returns to shareholders has

Accepted Answer

The pressure to increase returns to shareholders has grown due to the globalization of financial markets, which has made it easier for investors to move funds across borders in search of the best investment opportunities. This ease of moving funds globally increases the pressure on companies to deliver competitive returns to attract and retain investors.

Question 18

Penrod Autoservice Ltd. has 200,000 common shares at a market value of $10 per share, and a net income after tax of $90,000. The company would like to issue 30,000 more shares at $10 per share. How much income after tax will the company have to earn to maintain current shareholders' wealth?

Accepted Answer

To maintain the current shareholders' wealth, the company must maintain the same earnings per share (EPS) after issuing new shares. Initially, the EPS is $90,000 / 200,000 shares = $0.45 per share. After issuing 30,000 more shares, the total shares will be 230,000. To maintain an EPS of $0.45 with 230,000 shares, the company must earn $0.45 * 230,000 = $103,500.

Question 19

The objectives and long-term plans of a business are part of

Accepted Answer

The objectives and long-term plans of a business fall under strategic management, which involves setting goals and developing strategies to achieve them. Tactical planning is more focused on short-term actions, operations management deals with day-to-day activities, mission identification establishes the purpose of the business, and goal setting is a component of strategic management but is not comprehensive enough to encompass all the objectives and long-term plans of a business.

Question 20

A mission statement often includes

Accepted Answer

A mission statement often includes a commitment to shareholders as it outlines the organization's purpose, values, and primary objectives, which often involve serving the interests of shareholders.

Quiz 1: Introduction to Financial Management