Deck 1: Introduction to Financial Management

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?

A) $300,000
B) $400,000
C) $450,000
D) $500,000
E) $540,000

Answer 1

E

Question 2

A key activity in Capital Market operations involves

A) Assessing the profitability of a proposed investment
B) Balancing short-term and long-term financing
C) Determining how much funding can be generated internally
D) Providing cash flow information to operations managers
E) Determining market reaction to proposed investment plans

Answer 2

E

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

A) Risk Management
B) Financial Control
C) Investment Project Appraisal
D) Capital Market Assessment
E) Asset Management

Answer 3

B

Question 4

A mission statement reflects a company's

A) Short-term objectives
B) Ultimate purpose
C) Fundamental strategies
D) Operational tactics
E) Promises to customers

Question 5

Today, Financial Management can be appropriately described as

A) The economics of time and risk
B) A direct offshoot of accounting
C) The quantitative side of strategic management
D) A practice based on informal procedures
E) The implementation of capital market theories

Question 6

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

A) This objective is always consistent with those of other stakeholders
B) Government will put pressure on a business to do so
C) Other stakeholders do not have an impact on the success of the business
D) Shareholders will always ensure that the needs of other stakeholders will be met
E) If the management team does not pursue this goal, they will be replaced

Question 7

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

A) Profit maximization
B) Minimization of costs
C) Minimization of government regulation
D) Shareholder wealth maximization
E) Marketshare maximization

Question 8

The company is performing the function of financial control when it

A) Raises funds from capital markets
B) Takes corrective action to achieve business goals
C) Assesses the riskiness of investment projects
D) Identifies possible sources of funds
E) Reinvests profits from operations

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

A) $.12
B) $.35
C) $2.88
D) $8.33
E) $24

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

A) Profit distribution
B) Good corporate citizenship
C) Satisficing
D) Stakeholder cooperation
E) Economic egalitarianism

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

A) Contributed to betterment of the arts community in the city
B) Provided income tax relief equal to 25% of the contribution
C) Provided shareholders with the opportunity to enjoy fine living arts
D) Increased visitors to the community who may spend money at McDonald's
E) Enhanced the corporate image of McDonald's with leading citizens

Question 12

The over-the-counter market is

A) An Internet based securities exchange for public trading
B) A central location where dealers trade
C) A network of dealers linked by computers and telephones
D) Local public security exchanges similar to bank branches
E) A central physical location where the general public trades

Question 13

Capital markets play an important role in

A) Curbing inflation
B) Setting fiscal policy in Canada
C) Setting interest rates
D) Evaluating business performance through share price
E) Reducing risks and increasing 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?

A) Increase short-term return over sustained growth
B) Reduce spending on research and development
C) Distribute all after-tax net income as dividends
D) Offer only established products for sale
E) Close a retail location in a declining market

Question 15

A group that is a stakeholder in a business is

A) Any group having an interest in that business
B) Any group having a financial interest in that business
C) Comprised of only its common shareholders and lenders
D) Comprised of only its common shareholders and managers
E) Any group external to a business with a financial interest in it

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?

A) 550,000
B) 38,181
C) 2,100,000
D) 309,375
E) 1,181,250

Question 17

Pressure to increase returns to shareholders has

A) Grown in response to fewer global investment opportunities
B) Grown due to the relative ease of moving funds to any opportunity in the world
C) Not changed in the past decade
D) Decreased because of the stability of the North American economy
E) Decreased in response to availability of better information through technology

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?

A) $22,500
B) $103,500
C) $112,500
D) $120,000
E) $199,500

Question 19

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

A) Tactical Planning
B) Goalsetting
C) Operations Management
D) Strategic Management
E) Mission Identification

Question 20

A mission statement often includes

A) Commitment to shareholders
B) Target values for return on investment
C) Plans for new product/service offerings
D) Names of corporate directors
E) Declaration of future earnings

Question 21

Shareholder activism can be most often seen at work by

A) Shareholders voting by proxy for annual meeting resolutions
B) Shareholders attending annual meeting and voting on resolutions
C) Insurance companies voting on resolutions at annual meetings
D) Executive directors voting for a pay raise at annual meetings
E) Head office protests and sit-ins by anti-poverty groups

Question 22

Last year, the EPS, for 250,000 shares outstanding was $4, for a company with invested capital of $21 million. What was the Company's net income that year?

A) $84,000,000
B) $5,250,000
C) $1,000,000
D) $336,000
E) $62,500

Question 23

Wealth maximization is consistent with ethical behavior because

A) Managers tend to focus on long-term results not immediate performance
B) All unethical behavior by managers is known and ethical shareholders will not hold shares in their companies
C) Any unethical behavior always results in legal proceedings against the company
D) Low wages and poor working conditions do not produce quality, innovative products
E) In the short term, ethical behavior is always more cost-effective than unethical behavior

Question 24

Orbit Ltd. has 30,000 shares outstanding and earned $30,000 on capital invested of $90,000 last year. What is the likely impact of an investment opportunity to issue 10,000 more shares for $30,000 to earn an additional $14,000?

A) EPS will decrease and the stock price will fall
B) the new investment is relatively less profitable
C) the new investment is relatively more profitable
D) total profits will increase slightly but by not enough
E) the new capital invested will earn less per dollar

Question 25

TRW Corp. hired a new CEO and agreed to pay her $20,000 plus stock options for 1 million shares annually, hoping this would provide a huge incentive for the CEO to turn the company's fortunes around. Which of the following events might act as a disincentive for the new CEO?

A) the personal marginal tax rate decreased slightly
B) interest rates increased by 3% during the year
C) inflation rates fell a bit during the year
D) sales opportunities arose in a foreign country
E) a new company started to compete against TRW

Question 26

Profit maximization as a corporate objective does not take into account

A) debt
B) risk
C) shares
D) cash
E) EPS

Question 27

Directors dealing in shares of a business on the basis of information that is not available to shareholders is called

A) Limited disclosure
B) Restrictive practice
C) Insider-trading
D) Restricted exchange
E) Illegal transfer

Question 28

________ is the term used to describe a situation where the interests of the shareholders conflict with the senior managers who have been hired to run the company.

A) Agency Problem
B) Principal Problem
C) Delegation Problem
D) Arms length Attenuation
E) The Governance Gap

Question 29

The Principals of a corporation are its

A) Managers
B) Shareholders
C) Lenders
D) Executives
E) Customers

Question 30

Bonuses paid to banking executives whose corporate share prices declined significantly during the Great Recession of 2008 were an example of

A) Greed by bankers
B) The agency problem
C) The failure of capitalism
D) Poor government oversight
E) Stock market risk

Question 31

________ is used to describe that the ways in which companies are directed and controlled.

A) Agency Agreement
B) Mission Statement
C) Incorporation Resolutions
D) Corporate Governance
E) Annual Report

Question 32

The guiding principle that deals with adequate and timely information about corporate performance is called

A) Accountability
B) Fairness
C) DueProcess
D) Transparency
E) Disclosure

Question 33

Orbit Ltd. has 30,000 shares outstanded and earned $30,000 on capital invested of $90,000 last year. What is the new EPS after the investment succeeds?

A) 0.80
B) 1.00
C) 1.10
D) 1.47
E) 4.40

Question 34

According to a Robert Half International Inc. survey, the most likely impact of increased corporate governance will be

A) increased staff turnover
B) better ethical environment
C) more deadline pressure
D) better opportunities
E) accounting/IT collaboration

Question 35

The four main tasks of the financial function are to manage and plan

A) Finances, capital market operations, financial control, and investment appraisal
B) Accounting, marketing, human resources, operations management departments
C) Annual budgeting, cash flow management, purchasing timing, and payments timing
D) The balance sheet, income statement, and statements of retained earnings and cash flow
E) The accounting records for receivables, payables, outstanding loans and notes.

Question 36

Share options are used by shareholders to reward senior managers because managers will

A) Become shareholders and their interests will become more closely aligned with the shareholders who hired them
B) Value the reward as they can sell the shares immediately for cash
C) Try to increase the Company's short-term gain, to sell their shares for greater profit
D) Avoid taking risks, to ensure the price of their shares does not calling
E) Appreciate any potential tax benefits from owning Canadian shares

Question 37

The most important advantage to a business in hiring outside directors is that

A) In not being full-time employees, they are more independent than executive directors
B) In not being involved in day-to-day management, they can have a broad view of the Company
C) In being wholly paid in stock options, they are more likely to have the same interests as the shareholders
D) In being most often retired or semi-retired, they have more time to spend directing the business
E) In not being involved in day-to-day management, they are less likely to act in a fraudulent manner

Question 38

A disadvantage to further strengthening the framework of rules against fraud is that

A) Unscrupulous directors may continue to find ways to commit fraud
B) The entrepreneurial spirit of talented directors could be stifled
C) Shareholders will become overprotective and passive
D) Enforcement officials are more likely to become corrupt
E) Information to shareholders will become greatly restricted

Question 39

The Sarbanes-Oxley Act requires senior executives of companies to

A) Ensure the confidentiality and privacy of financial information
B) Provide a code of ethics for employees
C) Ensure all financial statements are audited
D) Provide full and fair disclosure of all financial agreements
E) Certify the effectiveness of internal controls against fraud

Question 40

Shareholders are most likely to discover a conflict with senior managers when

A) The information available to shareholders about management decisions is limited
B) There are few opportunities for shareholders to invest their money
C) Shares are spread over a very large number of shareholders
D) Shareholders closely track the use of resources by the Company
E) The availability of management talent is limited

Question 41

An example of putting the short term considerations ahead of the long term planning is

A) locking in a higher interest rate on debt when rates are expected to rise
B) using more expensive but higher quality parts to manufacture a product
C) reducing the warranty period from 1 year to six months to save money
D) manufacturing large vehicles when gas prices are expected to rise
E) increasing sales commissions for the sale of energy inefficent products

Question 42

Diversification of investments refer to

A) buying several investments
B) saving up for a rainy day
C) buying shares in a company
D) buying government backed bonds
E) keeping your money in the bank