Question 1

Which of the following statements is most correct?

Accepted Answer

A)  Compensating managers with stock can reduce the agency problem between stockholders and managers. 
B)  Restrictions are included in credit agreements to protect bondholders from the agency problem that exists between bondholders and stockholders. 
C)  The threat of a takeover can reduce the agency problem between bondholders and stockholders. 
D)  Statements a and b are correct. 
E)  All of the statements above are correct. 
A)  Compensating managers with stock can reduce the agency problem between stockholders and managers. 
B)  Restrictions are included in credit agreements to protect bondholders from the agency problem that exists between bondholders and stockholders. 
C)  The threat of a takeover can reduce the agency problem between bondholders and stockholders. 
D)  Statements a and b are correct. 
E)  All of the statements above are correct. D

Question 2

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

A) True 
 B)False  True

Question 3

Which of the following statements is most correct?

Accepted Answer

A)  Firms that try to maximize their stock values will tend to lay off employees to cut costs. 
B)  Firms that try to maximize their stock values will raise the prices of their products, gouging customers and driving them away. 
C)  Anti-pollution laws are unnecessary because firms will choose not to pollute because that is in their best interests. 
D)  The government should allow monopolies to operate without regulation so that they may maximize their shareholders' wealth. 
E)  Newly-privatized firms generally hire more employees. 
A)  Firms that try to maximize their stock values will tend to lay off employees to cut costs. 
B)  Firms that try to maximize their stock values will raise the prices of their products, gouging customers and driving them away. 
C)  Anti-pollution laws are unnecessary because firms will choose not to pollute because that is in their best interests. 
D)  The government should allow monopolies to operate without regulation so that they may maximize their shareholders' wealth. 
E)  Newly-privatized firms generally hire more employees. E

Question 4

An agency problem exists between stockholders and managers. A second agency problem arises between stockholders and creditors.

Accepted Answer

A) True 
 B)False

Question 5

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

A) True 
 B)False

Question 6

Which of the following statements is most correct?

Accepted Answer

A)  Sarbanes-Oxley requires the Securities Exchange Commission to audit public companies' financial statements. 
B)  Sarbanes-Oxley made it illegal for company executives to trade on insider information. 
C)  Sarbanes-Oxley requires the Chairman of the Board of Directors to sign and certify the company's financial statements. 
D)  Sarbanes-Oxley requires the CEO sign and certify the company's financial statements. 
E)  Sarbanes-Oxley requires company executives to disclose their fraudulent activities "in a timely and accurate manner." 
A)  Sarbanes-Oxley requires the Securities Exchange Commission to audit public companies' financial statements. 
B)  Sarbanes-Oxley made it illegal for company executives to trade on insider information. 
C)  Sarbanes-Oxley requires the Chairman of the Board of Directors to sign and certify the company's financial statements. 
D)  Sarbanes-Oxley requires the CEO sign and certify the company's financial statements. 
E)  Sarbanes-Oxley requires company executives to disclose their fraudulent activities "in a timely and accurate manner."

Question 7

Which of the following work to reduce agency conflicts between stockholders and bondholders?

Accepted Answer

A)  Including restrictive covenants in the company's bond contract. 
B)  Providing managers with a large number of stock options. 
C)  The passage of laws which make it easier for companies to resist hostile takeovers. 
D)  Statements b and c are correct. 
E)  All of the statements above are correct. 
A)  Including restrictive covenants in the company's bond contract. 
B)  Providing managers with a large number of stock options. 
C)  The passage of laws which make it easier for companies to resist hostile takeovers. 
D)  Statements b and c are correct. 
E)  All of the statements above are correct.

Question 8

An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?

Accepted Answer

A)  Households start saving a larger percentage of their income. 
B)  The economy moves from a boom to a recession. 
C)  The level of inflation begins to decline. 
D)  Corporations step up their expansion plans and thus increase their demand for capital. 
E)  The Federal Reserve uses monetary policy in an attempt to stimulate the economy. 
A)  Households start saving a larger percentage of their income. 
B)  The economy moves from a boom to a recession. 
C)  The level of inflation begins to decline. 
D)  Corporations step up their expansion plans and thus increase their demand for capital. 
E)  The Federal Reserve uses monetary policy in an attempt to stimulate the economy.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

The primary goal of a publicly-owned firm interested in serving its stockholders should be to

Accepted Answer

A)  Maximize expected total corporate profit. 
B)  Maximize expected EPS. 
C)  Minimize the chances of losses. 
D)  Maximize the stock price per share. 
E)  Maximize expected net income. 
A)  Maximize expected total corporate profit. 
B)  Maximize expected EPS. 
C)  Minimize the chances of losses. 
D)  Maximize the stock price per share. 
E)  Maximize expected net income.

Question 12

Which of the following statements is most correct?

Accepted Answer

A)  A firm's fundamental value is its market value. 
B)  A firm's fundamental value is the present value of its future free cash flows. 
C)  A firm's market price is usually greater than its fundamental value. 
D)  A firm's fundamental value is usually greater than its market price. 
E)  A firm's fundamental value is its book value. 
A)  A firm's fundamental value is its market value. 
B)  A firm's fundamental value is the present value of its future free cash flows. 
C)  A firm's market price is usually greater than its fundamental value. 
D)  A firm's fundamental value is usually greater than its market price. 
E)  A firm's fundamental value is its book value.

Question 13

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?

Accepted Answer

A)  Prices and interest rates would both rise. 
B)  Prices would rise and interest rates would decline. 
C)  Prices and interest rates would both decline. 
D)  There would be no changes in either prices or interest rates. 
E)  Prices would decline and interest rates would rise. 
A)  Prices and interest rates would both rise. 
B)  Prices would rise and interest rates would decline. 
C)  Prices and interest rates would both decline. 
D)  There would be no changes in either prices or interest rates. 
E)  Prices would decline and interest rates would rise.

Question 14

Executive stock options are shares of stock awarded to managers on the basis of corporate performance.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  If expected inflation increases, interest rates are likely to increase. 
B)  If individuals in general increase the percentage of their income that they save, interest rates are likely to increase. 
C)  If companies have fewer good investment opportunities, interest rates are likely to increase. 
D)  Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities. 
E)  Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills. 
A)  If expected inflation increases, interest rates are likely to increase. 
B)  If individuals in general increase the percentage of their income that they save, interest rates are likely to increase. 
C)  If companies have fewer good investment opportunities, interest rates are likely to increase. 
D)  Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities. 
E)  Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

Question 16

Which of the following statements is most correct?

Accepted Answer

A)  Sarbanes-Oxley established a new Federal agency, the Public Company Auditing Board, to audit public companies' financial statements. 
B)  Sarbanes-Oxley prohibited investment banks from allowing their analysts to make recommendations on stocks the investment banks do business with. 
C)  Sarbanes-Oxley requires that either the CEO or CFO hand-deliver the annual and quarterly financial statements to the SEC. 
D)  Sarbanes-Oxley requires that auditors maintain extensive records to document that their consulting and auditing services for a given company are not conflicting. 
E)  Sarbanes-Oxley prohibits auditors from providing consulting services to the companies they audit. 
A)  Sarbanes-Oxley established a new Federal agency, the Public Company Auditing Board, to audit public companies' financial statements. 
B)  Sarbanes-Oxley prohibited investment banks from allowing their analysts to make recommendations on stocks the investment banks do business with. 
C)  Sarbanes-Oxley requires that either the CEO or CFO hand-deliver the annual and quarterly financial statements to the SEC. 
D)  Sarbanes-Oxley requires that auditors maintain extensive records to document that their consulting and auditing services for a given company are not conflicting. 
E)  Sarbanes-Oxley prohibits auditors from providing consulting services to the companies they audit.

Question 17

Which of the following statements is most correct?

Accepted Answer

A)  EVA is a measure of the value added to customers. 
B)  EVA is a measure of the value added to management. 
C)  EVA is a measure of the firm's true profitability. 
D)  EVA is a measure of management compensation. 
E)  EVA is a measure of stock price. 
A)  EVA is a measure of the value added to customers. 
B)  EVA is a measure of the value added to management. 
C)  EVA is a measure of the firm's true profitability. 
D)  EVA is a measure of management compensation. 
E)  EVA is a measure of stock price.

Question 18

If a firm's stock price falls during the year, this indicates that the firm's managers are not acting in shareholders' best interests.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is most correct?

Accepted Answer

A)  One of the ways in which firms can mitigate or reduce agency problems between bondholders and stockholders is by increasing the amount of debt in the capital structure. 
B)  The threat of takeover is one way in which the agency problem between stockholders and managers can be alleviated. 
C)  Managerial compensation can be structured to reduce agency problems between stockholders and managers. 
D)  Statements b and c are correct. 
E)  All of the statements above are correct. 
A)  One of the ways in which firms can mitigate or reduce agency problems between bondholders and stockholders is by increasing the amount of debt in the capital structure. 
B)  The threat of takeover is one way in which the agency problem between stockholders and managers can be alleviated. 
C)  Managerial compensation can be structured to reduce agency problems between stockholders and managers. 
D)  Statements b and c are correct. 
E)  All of the statements above are correct.

Question 20

The proper goal of the financial manager should be to maximize the firm's expected profit, since this will add the most wealth to each of the individual shareholders (owners) of the firm.

Accepted Answer

A) True 
 B)False

Exam 1: An Overview of Financial Management

Which of the following statements is most correct?

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.

Which of the following statements is most correct?

An agency problem exists between stockholders and managers. A second agency problem arises between stockholders and creditors.

Which of the following statements is most correct?

Which of the following work to reduce agency conflicts between stockholders and bondholders?

An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person.

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?

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

The primary goal of a publicly-owned firm interested in serving its stockholders should be to

Which of the following statements is most correct?

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?

Executive stock options are shares of stock awarded to managers on the basis of corporate performance.

Which of the following statements is CORRECT?

Which of the following statements is most correct?

Which of the following statements is most correct?

If a firm's stock price falls during the year, this indicates that the firm's managers are not acting in shareholders' best interests.

Which of the following statements is most correct?

The proper goal of the financial manager should be to maximize the firm's expected profit, since this will add the most wealth to each of the individual shareholders (owners) of the firm.

Risk and Return: Part I

Risk and Return: Part II

Bond Valuation

Basic Stock Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Financial Planning and Forecasting Financial Statements

Determining the Cost of Capital

Corporate Valuation and Value-Based Management

Capital Budgeting: Decision Criteria

Capital Budgeting: Cash Flows and Risk

Real Options

Capital Structure Decisions: Part I

Capital Structure Decisions: Part II

Distributions to Shareholders

Ipos, Investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing

Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Derivatives and Risk Management

Bankruptcy, Reorganization, and Liquidation

Mergers, Lbos, Divestitures, and Holding Companies

Multinational Financial Management

Filters