Question 1

____ decisions are decisions as to how much of current earnings to pay out as dividends rather than to retain for reinvestment in the firm.

Accepted Answer

Dividend policy decisions are specifically related to the amount of current earnings to be paid out as dividends instead of reinvesting them in the firm.

Question 2

Most executives believe that there is a positive correlation between ethics and long-run profitability because ethical behavior does all of the following except

Accepted Answer

Ethical behavior can avoid fines and legal expenses, attract business from customers who appreciate and support ethical policies, and attract and keep employees of the highest caliber. However, it does not necessarily reduce corporate taxes.

Question 3

The key value of limited liability is that it lowers the firm's risk thereby enhancing its value.

Accepted Answer

Limited liability means that shareholders are only liable for the amount of their investment in the company. This means that their personal assets are not at risk in case the company incurs debts or lawsuits. By limiting the risk of the shareholders, the overall risk of the company is lowered, which can make it more valuable in the eyes of investors.

Question 4

Managers of a firm can increase the value of a firm by

Accepted Answer

Increasing the size of cash inflows through increased revenue, reducing the riskiness of cash flows through diversification or hedging, and speeding up the timing of cash flows through improved working capital management all have a positive impact on the value of the firm. Therefore, all of these options will increase the value of the firm.

Question 5

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

Accepted Answer

The primary objective of financial managers is to maximize shareholder wealth, which is often achieved by maximizing the firm's stock price rather than just focusing on generating the largest expected projected income. This involves a broader perspective, including risk management, strategic investment, and financing decisions, beyond just income projections.

Question 6

Four of the disadvantages of a partnership are (1)unlimited liability, (2)limited life of the organization, (3)difficulty of transferring ownership,and (4)difficulty in attracting large amounts of capital.

Accepted Answer

These are indeed four commonly recognized disadvantages of a partnership.

Question 7

If a firm has a single owner,we can say that the proper goal of a financial manager would be to maximize the firm's earnings per share.

Accepted Answer

The proper goal of a financial manager, even in a firm with a single owner, is to maximize the owner's wealth, not just the firm's earnings per share. This involves considering the timing, cash flows, and risk associated with earnings, not just the earnings themselves.

Question 8

Which of the following are important in determining the value of the firm?

Accepted Answer

The answer of Which of the following are important in...

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 necessarily true. While it may be challenging for a firm to compete if it takes cost-increasing socially responsible actions, it is not always the case. Some consumers prioritize socially responsible practices and are willing to pay extra for products or services that align with their values. Additionally, in the long run, socially responsible actions may actually benefit a company's reputation and customer loyalty, leading to increased profits. Therefore, it is possible for a firm to engage in socially responsible actions and still remain competitive.

Question 10

Profit maximization does not always lead to wealth maximization because

Accepted Answer

Profit maximization focuses solely on maximizing current profits, but it does not necessarily lead to wealth maximization in the long run. Wealth maximization takes into consideration the riskiness and timing of the cash flows as well as the size of the cash flows. Therefore, choices A and B are correct while C is not entirely accurate since the size of cash flows can be important, but it is not the only consideration for wealth maximization.

Question 11

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 12

All of the following are advantages of a corporation except

Accepted Answer

All of the above options (unlimited life, limited liability, and easy transfer of ownership) are advantages of a corporation.

Question 13

A financial decision which results in an increase in net income is necessarily consistent with the firm's objective of maximizing its stock price.

Accepted Answer

An increase in net income does not always lead to a maximization of the firm's stock price. Stock price maximization considers long-term growth, risk, and the timing of returns, not just short-term profit increases.

Question 14

Managers can increase the value of a firm by making decisions that

Accepted Answer

By making decisions that increase the future cash flows of the firm, managers are increasing the overall value of the firm. This is because a higher cash flow means more money available for the company to invest in growth opportunities or return to shareholders.

B, C, and D are not correct because solutions that increase the amount of time required to generate future cash flows, increase the riskiness of future cash flows, or decrease the liquidity of the firm's securities would not generally increase the overall value of the firm.

Question 15

The text makes the point that due to competitive pressures and the continuing need of firms to attract capital,most socially beneficial but cost increasing actions will have to be made mandatory by government.

Accepted Answer

The text suggests that despite their social benefits, actions that increase costs may not be undertaken by firms unless they are made mandatory by the government due to competitive pressures and the need to attract capital. Therefore, it is clear that the text implies that most socially beneficial but cost-increasing actions will have to be made mandatory by the government.

Question 16

Which of the following is not an advantage of a proprietorship?

Accepted Answer

Unlimited liability is a disadvantage of a proprietorship, not an advantage. It means that the owner is personally responsible for all the business's debts and obligations, which can put their personal assets at risk. The other options - A, B, and D - are advantages of a proprietorship, including low formation costs, minimal regulation, and being taxed like an individual.

Question 17

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

Maximizing expected profit is not always the proper goal of the financial manager. Other factors such as risk, timing, and liquidity also need to be considered. Additionally, there may be conflicting goals between shareholders and other stakeholders such as employees, customers, and the community. The goal of the financial manager should be to balance these competing interests and create long-term value for the firm.

Question 18

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

Accepted Answer

Proprietorships are limited to the personal resources of the owner for raising capital, making it difficult to secure large amounts of funding. Additionally, the owner of a proprietorship is personally responsible for all of the business's debts and liabilities, risking personal financial ruin if the business fails.

Question 19

Deciding upon the form of organization for a business is an important financial decision with potentially significant consequences for the future wealth of the owners.

Accepted Answer

The form of organization for a business can have a long-term impact on the financial success of the owners, making it an important financial decision.

Question 20

The major advantage of a regular partnership or a corporation as a form of business is the fact that both offer their owners limited liability,whereas proprietorships do not.

Accepted Answer

In a regular partnership, the partners have unlimited liability, similar to sole proprietorships, whereas corporations offer limited liability to their owners (shareholders).

Quiz 6: Business Organizations and the Tax Environment