Deck 1: The Goals and Activities of Financial Management

Question 1

The Internet impacts e-commerce by creating a mechanism for improved communications between a business, its customers, and its suppliers.

Answer 1

True

Question 2

As finance emerged as a new field, much emphasis was placed on mergers and acquisitions.

Answer 2

True

Question 3

Financial capital is composed of long-term plant and equipment, as well as other tangible investments.

Answer 3

False

Question 4

The Dodd-Frank Act's oversight allowing regulation of banking fees and available products has been considered as not being in the best interests of a free market.

Question 5

Recently, the emphasis of financial management has been on the relationship between risk and return.

Question 6

How investors handle risk is an important topic that usually only economists observe.
Behavioral finance is something that the finance industry puts heavy emphasis on.

Question 7

"Credit default swaps" are one of several tools that Congress and the President of the United States have jointly developed to ease the financial crisis that began in 2008.

Question 8

The Dodd-Frank Act was created by Congress along with its goals and regulatory responsibility, but it is facilitated by various agencies.

Question 9

During the 1930s, financial practice revolved around such topics as the preservation of capital, maintenance of liquidity, the reorganization of financially troubled corporations, and bankruptcy.

Question 10

Mortgage-backed securities were devalued by accounting standards because of the high credit ratings (AAA).
These securities were devalued because borrowers defaulted on their loans and didn't have the financial means to back up their loans in other ways.

Question 11

The Internet is responsible for many new business models.

Question 12

Inflation is assumed to be a temporary problem that does not affect financial decisions.

Question 13

Profits of sole proprietorships are taxed at corporate tax rates.

Question 14

The first Nobel Prizes given to finance professors were for their contributions to capital structure theory and portfolio theories of risk and return.

Question 15

Real capital is composed of long-term plant and equipment.

Question 16

Businesses will increasingly rely on B2B Internet applications to speed up the cash flows through their firms.

Question 17

There is unlimited liability in a general partnership.

Question 18

In the mid 1950s, finance began to change to a more analytical, decision-oriented approach.

Question 19

The Dodd-Frank Act contains the Volcker Rule, which encourages financial institutions to allow for more speculative investments for average investors.

Question 20

Sole proprietorship means single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs.

Question 21

The higher the profit of a firm, the higher the value the firm is in the market.

Question 22

The Sarbanes-Oxley Act reduced agency conflicts by giving corporate managers greater flexibility to select their preferred candidates to the board of directors.

Question 23

In terms of revenues and profits, the corporation is by far the most important form of business organization in the United States.

Question 24

A limited partnership limits the profits partners may receive.

Question 25

Agency theory examines the relationship between companies and their customers.

Question 26

A corporation must have more than 100 stockholders to qualify for Subchapter S designation.

Question 27

The formation of a Limited Liability Company (LLC) is a way to circumvent the double taxation of a small corporation.

Question 28

As noted in Finance in Action initial public offerings have now increased because long-term results are favored by shareholders and institutional investors.

Question 29

The Sarbanes-Oxley Act is primarily intended to increase public scrutiny of private companies that had previously been exempt from many public disclosure requirements.

Question 30

Agency theory assumes that corporate managers act to increase the wealth of corporate shareholders.

Question 31

One advantage of the corporate form of organization is that income received by stockholders is not taxable since the corporation already paid taxes on the income distributed.

Question 32

Institutional investors have had increasing influence over corporations with their ability to vote with large blocks of stock and replace poorly performing boards of directors.

Question 33

Profits of a Subchapter S corporation are taxed at corporate tax rates.

Question 34

Maximizing the earnings of the firm is the main goal of financial management.

Question 35

Corporate governance issues have become less important to the financial community during the first decade of the new millennium.

Question 36

Timing is not a particularly important consideration in financial decisions.

Question 37

There are some serious problems with the financial goal of maximizing the earnings of the firm.

Question 38

The formation of a Subchapter S corporation is a way to circumvent the double taxation of a small corporation.

Question 39

Dividends paid to corporate stockholders have already been taxed once as corporate income.

Question 40

A major focus of the Sarbanes-Oxley Act is to make sure that publicly traded companies accurately present their assets, liabilities, and income in their financial statements.

Question 41

Money markets refer to markets where excess corporate cash is exchanged for foreign currencies that can earn a higher return than domestic money.

Question 42

When a company is looking to raise money through issuing more shares of stock, that is considered in the secondary market.

Question 43

The secondary market characteristically has had stable prices over the past 20 years.

Question 44

The ultimate measure of performance is not what the firm profits, but how the profits are valued by the investor.

Question 45

In the United States, stocks sold on either the New York Stock Exchange or NASDAQ are considered sold in the primary market.

Question 46

The primary market includes the sale of securities by way of initial public offerings.

Question 47

Because socially desirable goals can hinder profitability in many instances, managers should not try to operate under the assumption of wealth maximization.

Question 48

Insider trading involves the use of information not available to the general public to make profits from trading in a company's stock.

Question 49

Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide.

Question 50

Capital markets refer to those markets dealing with short-term securities that have a life of one year or less.

Question 51

High-quality initial public offerings are usually sold in a primary market, such as the New York Stock Exchange. However, low-quality stocks must usually be sold in secondary markets, such as NASDAQ.

Question 52

New issues are sold in the secondary market.

Question 53

Irrational exuberance is when companies have stock that is undervalued.

Question 54

Social responsibility and profit maximization are synonymous.

Question 55

Although NASDAQ is a secondary market, some of the firms traded there, such as Microsoft, are large enough to move to the primary market if they so desire.

Question 56

Existing securities are traded in the secondary market.

Question 57

Many companies have cross-listed their stock on multiple international stock exchanges and more than several hundred foreign companies have listed their shares on the New York Stock Exchange.

Question 58

If an investor hears of a large change that a company is going to make through a news article and reacts quicker than any other investor, it is considered insider trading.

Question 59

When an investor has the ability to control how the stock price changes, that is considered insider trading.

Question 60

Money markets refer to those markets dealing with short-term securities having a life of one year or less.

Question 61

Higher return means that the public company has lower risk.

Question 62

Higher returns always induce that stockholders should invest in a company.

Question 63

Behavioral finance is the study of

A) how investors react to accounting-based profit fluctuations.
B) how investors react to interest rates and foreign currency fluctuations
C) how investors react to certain ways to diversify a portfolio.
D) how investors react to the amount of risk versus the amount of return in securities.

Question 64

One of the major advantages of a sole proprietorship is

A) that the owner has limited liability.
B) that stock in the proprietorship can be easily transferred.
C) that it is exempt from many tax rules that would otherwise apply when employees are hired by the firm.
D) low operating costs.

Question 65

One of the primary disadvantages of maximizing shareholder value is that it only provides a short-term perspective.

Question 66

Which of the following is NOT addressed by the Dodd-Frank Act?

A) Liquidation of non-bank financial companies such as insurance companies.
B) Identifies systematic risk of U.S. financial system.
C) Written certifications of financial statements by the CEO and CFO.
D) Registration of hedge funds with the SEC.

Question 67

If a company has a written code of ethics, they will generally avoid ethical problems.

Question 68

One of the major disadvantages of a sole proprietorship is

A) that there is unlimited liability to the owner.
B) the simplicity of decision making.
C) high organizational costs.
D) high operating costs.

Question 69

Social responsibility is an expense and thus should be avoided by financial managers because it will lead to loss of income.

Question 70

In the past, the study of finance has included

A) mergers and acquisitions.
B) raising capital.
C) bankruptcy.
D) All of the options

Question 71

The partnership form of an organization

A) avoids the double taxation of earnings and dividends found in the corporate form of organization.
B) usually provides limited liability to the partners.
C) has unlimited life.
D) simplifies decision making.

Question 72

Professors Harry Markowitz and William Sharpe received their Nobel Prize in Economics for their contributions to the

A) options pricing model.
B) theories of working capital management.
C) theories of portfolio based management and the risk along with return on securities.
D) theories of international capital budgeting.

Question 73

Financial management requires both short-term activities as well as long-term planning such as raising funds.

Question 74

With the creation of Internet trading, trading through brokers became less profitable for investors mainly because of the higher fees.

Question 75

Which of the following did not contribute to the financial crisis?

A) Solid credit ratings from the ratings agencies
B) The extension of credit to high-risk borrowers
C) The merger of JPMorgan Chase and Bear Stearns
D) All of the options contributed to the financial crisis

Question 76

Professor Merton Miller received the Nobel Prize in Economics for his work on

A) dividend policy.
B) investment theory.
C) working capital management.
D) capital structure theory.

Question 77

What should be the primary goal of financial management?

A) Increased earnings
B) Maximizing cash flow
C) Maximizing shareholder wealth
D) Minimizing risk of the firm

Question 78

Proper risk-return management means that

A) the firm should take as few risks as possible.
B) the firm must determine an appropriate trade-off between risk and return.
C) the firm should earn the highest return possible.
D) the firm should value future profits more highly than current profits.

Question 79

Risk management will be an important factor over the next decade.

Question 80

Credit default swaps are

A) an insurance product designed to protect financial institutions from customers who default on their loans.
B) securities with a maturity of less than one year.
C) the result of a leveling off or slowing down of stock price increases.
D) market trades in previously issued securities.