Deck 1: The Role and Objective of Financial Management

Question 1

Agency costs include all of the following except:

A) expenditures to monitor management's actions
B) providing stock as part of management's compensation
C) flotation costs
D) bonding expenditures

Answer 1

C

Question 2

The most widely accepted objective of the firm is to

A) minimize risk
B) maximize profits
C) maximize shareholder wealth
D) maximize earnings per share

Answer 2

C

Question 3

Agency problems may give rise to costs that ____ the market value of firms.

A) increase
B) decrease
C) do not affect
D) are not important to

Answer 3

B

Question 4

The ____ the risk of receiving future cash flows, the ____ will be the present value of those cash flows.

A) greater, greater
B) greater, lower
C) lower, lower
D) lower, greater

Question 5

The success of a firm is linked to its stakeholders. This group includes:

A) community neighbors
B) suppliers
C) employees
D) all the above

Question 6

When KKR acquired RJR Nabisco, the ____ in the debt ratio, resulted in a(n) ____ in the value of the firm's outstanding bonds.

A) decrease, increase
B) increase, increase
C) decrease, decline
D) increase, decline

Question 7

The objective of maximizing shareholder wealth, as measured by the market value of the firm's stock

A) does not consider the timing of the benefits received
B) provides a way to consider the risk of the returns being offered
C) benefits only certain stockholders
D) neither considers the timing of the benefits received nor benefits only certain stockholders

Question 8

Shareholder wealth is measured by the ____ of the shareholders' common stock holdings.

A) Book value
B) Market value
C) Historic value
D) Compound value

Question 9

Giving top management ____ is one method that ensures managers will act in the interest of shareholders in merger decisions.

A) "golden parachute" contracts
B) excellent pay
C) executive perks
D) job security

Question 10

The limitations of the profit maximization goal include:

A) It lacks a time dimension (i.e., it is static)
B) It fails to consider risk
C) The definition of profit is ambiguous
D) All the above are limitations

Question 11

The shareholder wealth maximization goal states that management should seek to maximize the ____ of the expected future returns to the owners of the firm.

A) Future value
B) Compound value
C) Percentage value
D) Present value

Question 12

Shareholder returns can take the form of

A) Periodic dividend payments
B) Proceeds from the sale of the stock
C) Periodic interest payments
D) Periodic dividend payments and proceeds from the sale of the stock

Question 13

____ are largely outside of the direct control of managers.

A) investment strategies
B) economic environment factors
C) major policy decisions
D) dividend policies

Question 14

The two most important disciplines on which financial management relies are

A) accounting and production
B) accounting and marketing
C) economics and marketing
D) accounting and economics

Question 15

All of the following are problems with the microeconomic profit maximization model except:

A) the absence of a time dimension
B) offers financial managers insights to a wide range of problems
C) does not consider the risk of alternative decisions
D) the problem of defining profits

Question 16

A potential agency conflict can arise between stockholders and creditors because owners may

A) increase the risk of a firm's investments
B) decrease the amount of debt outstanding
C) decrease the risk of a firm's investments
D) increase the firm's net worth

Question 17

The primary objective of the firm is:

A) Shareholder wealth maximization
B) Social responsibility
C) Long run survival
D) Profit maximization

Question 18

____ arise from the divergent objectives between owners and managers.

A) Shareholder relationships
B) Stakeholder problems
C) Creditor problems
D) Agency problems

Question 19

A major advantage of using the maximization of shareholder wealth as the primary goal of the firm is that this goal considers

A) the timing and the risk of the expected benefits to be received
B) the investor's consumption utility
C) the value of closely held partnerships
D) all the above

Question 20

The primary reason for the divergence between the shareholder wealth maximization goal and the actual goals pursued by management has been attributed to

A) separation of social responsibility and stakeholders' concerns
B) separation of ownership and control
C) separation of personal welfare and long-run profit goals
D) the granting of "golden parachute" contracts

Question 21

The major factors that determine the market value of a company's shares of stock include the ____.

A) risk of its cash flows
B) timing of its cash flows
C) book value of its assets
D) risk of its cash flows and the timing of its cash flows

Question 22

____ are important because the financial health of a firm depends on the firm being able to generate sufficient cash to pay its creditors, employees, suppliers, and owners.

A) cash sales
B) cash flows
C) cash profits
D) net profits

Question 23

One method of decreasing the cash outflows of a firm is to

A) decrease depreciation
B) increase capital expenditures
C) decrease dividends
D) increase debt repayment

Question 24

____ deals with economic decisions of individuals, households, and firms.

A) Economic accounting
B) Microeconomics
C) Blue Chip econometrics
D) Macroeconomics

Question 25

All of the following economic environment factors affect stock prices except:

A) investment strategies
B) competition
C) tax rates
D) currency exchange rates

Question 26

The controller normally has responsibility for all ____ related activities, while the treasurer is normally concerned with ____.

A) acquisition, data processing
B) tax, cost accounting
C) tax, financial accounting
D) accounting, expenditure of funds

Question 27

The ____ has a goal of serving as a bridge between academic study of finance and the application of financial principles by financial managers.

A) Financial Executives Institute
B) Financial Management Association
C) American Finance Association
D) Institution of Financial Analysts

Question 28

The most important managerial objective is to:

A) make MC=MR
B) maximize profits
C) minimize agency costs
D) none of the above

Question 29

Techniques identified by John Casey that managers could keep in mind when addressing the ethical dimensions of a business problem include all of the following except:

A) collect all the facts bearing on the problem
B) clarify the parameters of the problem
C) involve all parties with a financial interest in the outcome
D) seek equity for those who may be affected

Question 30

The chief financial officer (CFO) of a corporation normally reports to the ____ of the company.

A) chairman of the board of directors
B) chief operating officer
C) controller
D) chief executive officer

Question 31

The existence of divergent objectives between owners and managers is one example of a class of problems arising from ____.

A) social responsibility concerns
B) age differences between managers and owners
C) agency relationships
D) union-management relations

Question 32

Shareholder wealth is measured by the ____.

A) book value of the shareholders' common stock holdings
B) market value of the shareholders' common stock holdings
C) book value of the company's assets
D) market value of the company's assets

Question 33

Protective covenants in a company's bond indentures are used in agency relationships involving ____.

A) stockholders and managers
B) stockholders and creditors
C) management and workers
D) management and creditors

Question 34

Financial management draws heavily on the following related disciplines:

A) accounting
B) macroeconomics
C) microeconomics
D) all of the above

Question 35

According to the shareholder wealth maximization goal, management should seek to maximize the ____ of the ____ to owners.

A) present value; expected pretax cash flows
B) future value; expected pretax cash flows
C) present value; expected future returns
D) future value; expected future returns

Question 36

Among the most important agency relationships in the context of finance is (are) the relationship(s) between ____.

A) stockholders and creditors
B) management and workers
C) stockholders and creditors, and management and workers
D) management and creditors

Question 37

There is often a divergence between the shareholder wealth maximization goal and the actual goals pursued by management. The primary reason for this is ____.

A) geographical dispersion of shareholders
B) separation of ownership and control
C) age differences between managers and shareholders
D) that both have their own agendas

Question 38

The activities of the treasurer include all of the following except:

A) financial planning
B) tax preparation
C) credit analysis
D) pension fund management

Question 39

Many small business owners are ____ diversified with respect to their personal wealth.

A) poorly
B) highly
C) well
D) 90%

Question 40

The chief financial officer (CFO) normally has responsibility for all the following except:

A) advertising strategy
B) managing interest rate risk
C) trading foreign currencies
D) accounting functions

Question 41

All of the following are advantages of the corporate form of business organization EXCEPT:

A) unlimited life
B) unlimited liability
C) flexibility in ownership change
D) ability to raise capital

Question 42

Accounting-based measures of performance ____ subject to short-term manipulation by managers; cash flows ____ subject to short-term manipulation.

A) are, are not
B) are not, are
C) are, are also
D) are not, also are not

Question 43

Cash flow concepts are ____ but generally accepted accounting principles are ____ in the determination of a firm's net income.

A) unambiguous, ambiguous
B) ambiguous, unambiguous
C) ambiguous, also ambiguous
D) unambiguous, straightforward

Question 44

An advantage that the corporate form of business has over either the sole proprietorship or partnership is the:

A) ability to raise capital
B) ease of changing ownership
C) limited liability
D) elimination of double taxes

Question 45

If a firm shows an accounting net income, then

A) it will not have a cash flow problem
B) it will not have a problem obtaining a bank loan
C) it will be able to repay all current liabilities on time
D) none of the above

Question 46

____ equals the number of shares outstanding times the market price per share.

A) Book value
B) Stakeholders wealth
C) Total shareholder wealth
D) Economic value

Question 47

Although this type of business generates less than 6% of the total U.S. business revenue, ____ make up approximately 75% of all businesses.

A) general partnerships
B) corporations
C) limited partnerships
D) sole-proprietorships

Question 48

A company that requires that its top officers own common stock in the company that is at least equal to their annual salary is:

A) Ford Motor Company
B) Tucson Electric Power Company
C) Panhandle Eastern
D) Anheuser-Busch

Question 49

Accounting-based measures of performance include all the following except

A) return on equity
B) cash flow
C) return on assets
D) market share

Question 50

The net present value of an investment made by a firm represents the contribution of that investment to the ____ of the firm.

A) book value
B) profit
C) value
D) cash flow

Question 51

The difference between a firm's annual after-tax operating profit and its total annual cost of capital is known as:

A) earned income
B) Economic Value Added
C) Managerial Value Added
D) operating income

Question 52

The advantages of the corporate form of organization over both sole proprietorships and partnerships include ____.

A) limited liability
B) permanency
C) limited liability and permanency
D) lower tax rates

Question 53

The net present value rule provides appropriate guidance for financial decision makers when costs are incurred immediately but

A) future cash flows are not known with certainty
B) marginal costs are equal to marginal revenue
C) result in a stream of benefits over several future time periods
D) marginal costs are greater then marginal revenue

Question 54

____ is (are) referred to as a residual form of ownership in a corporation.

A) Common stock
B) Preferred stock
C) Bonds
D) Dividends

Question 55

A major advantage of the corporate form of business over both sole proprietorships and partnerships is the

A) limited liability
B) reduction in taxes
C) ease of formation
D) ability to maintain ownership

Question 56

In a limited partnership, the limited partners may limit their:

A) tax liability
B) liability
C) tax write-off
D) ability to attract new products

Question 57

A major disadvantage of a sole proprietorship is the fact that

A) it is expensive to establish
B) the owner has unlimited personal liability
C) it is easy to finance growth
D) the owner pays taxes on all the income

Question 58

There are problems with using the "profit maximization" criterion. Which of the following is/are correct? I. Profit maximization has an ambiguous definition of "maximizing profits".
II) Profit maximization fails to consider risk.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 59

Corporate officers normally include all the following except:

A) Secretary
B) Chief operating officer
C) Treasurer
D) Financial analyst

Question 60

Corporate securities represent claims against the

A) corporate officers of the firm
B) agents of the corporation
C) liabilities and net worth of the firm
D) assets and future earnings of the firm

Question 61

What is the advantage of an LLC over an LLP business form?

Question 62

What is the function of the CFO?

A) Control of the accounting functions of the firm.
B) Effective communication with the investment community about the firm's performance.
C) Oversight of the financial statements.
D) Determination of effective tax reduction strategies.

Question 63

There are five competitive forces that influence an industry's structure.

Question 64

What are the shortcomings in the profit maximization objective as a managerial strategy?

Question 65

Preferred stock is considered priority stock. Explain this priority.

Question 66

Sole proprietorships, partnerships and corporations are the three main forms of business organization. There are other types which are referred to as hybrids. Examples of hybrid business forms are:

A) 10K & 14B Corporations
B) Section 8 and Subchapter S Corporations
C) Subchapter S and LLCs
D) 10K Corporations and LLCs

Question 67

The definition of the marginal analysis principle is that financial decisions are made and actions are taken

A) within the global economic viewpoint.
B) with regard to governmental laws and cultural effectiveness.
C) when the added benefits exceed the added costs.
D) based on the impact of public opinion.

Question 68

An economic principle used in finance is:

A) Full utilization of data processing
B) Marginal analysis where marginal costs are set equal to marginal revenues.
C) Accrual basis of recognizing revenues and expenses
D) Target capital structure

Question 69

There are three major factors that determine the market value of a company's share of stock. All of the following are factors EXCEPT:

A) Cash flows
B) Sales generated
C) Timing of cash flows
D) Risk taken to generate cash flows

Question 70

Maximization of shareholder wealth is not an accounting concept. A corporation's value should be based on

A) liquidation value
B) book value
C) market value
D) stock value

Question 71

Examples of agency costs incurred by shareholders to minimize agency problems are:

A) Expenditures associated with independent auditing.
B) Expenditures associated with SEC approval.
C) Expenditures associated with monitoring management's actions
D) Expenditures associated with inventory control.

Question 72

According to the Small Business Administration, what percent of all businesses are considered small businesses?

A) >20%
B) >75%
C) >95%
D) >50%

Question 73

There are three forms of business organization. Which of the following has unlimited liability?
I) Corporation
II) General partnership

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 74

A corporation that operates ethically will notice certain benefits as it applies to shareholder wealth maximization. With shareholder wealth maximization in mind, all of the following could be experienced by an ethical corporation EXCEPT:

A) The corporation can expect to have reduced litigation expense.
B) The cooperation can expect to have greater agency costs.
C) The corporation can expect to have reduced damages expenses.
D) The corporation can expect to have a more favorable impression by customers and investors.

Question 75

Financial decisions should be consistent with the goal of shareholder wealth maximization. However, there may be a divergence between shareholder wealth maximization and the actual goals of management. The primary reason for this is:

A) Management wants to ensure good public relations.
B) The Board of Directors is becoming increasingly uninvolved within the corporation.
C) Shareholders do not feel that wealth maximization is relevant.
D) There is a separation of ownership and control in corporations.

Question 76

The type of corporate security that pays periodic interest as well as the eventual return of principal is:

A) Preferred stock
B) Debt Securities
C) Equity Securities
D) Fixed asset loans

Question 77

The managerial decision that emerges from the microeconomic profit maximization model is:

A) Marginal Costs < Marginal Revenues
B) Marginal Costs = Profits
C) Marginal Revenues > Marginal Costs
D) Marginal Costs = Marginal Revenue

Question 78

Which of the following statements is/are correct? I. Shareholders elect the Chairman of the Board
II) The board of directors has no control over whether or not dividends will be paid.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 79

Explain the chain of command in a corporation.

Question 80

As a result of accounting scandals, several methods have been developed to deal with the issues of corporate governance. They are all of the following EXCEPT:

A) The Board must select only SEC approved consultants.
B) Chairman of the Board position should be split from the CEO position.
C) Board of Directors should have a majority of independent directors.
D) The Board of Directors must explain its approach for adopting a code of ethics for the CEO and senior financial officers.