30) In a limited partnership, at least one general partner must remain in the association;
the privilege of limited liability still applies to this partner.
Question Status: Previous edition
Objective: 1.2 Identify the diferences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeof
31) In a general partnership, each partner is liable for the partnership’s obligations only up
to a percentage of the obligation equal to that partner’s percentage of ownership of the
partnership.
Question Status: Previous edition
Objective: 1.2 Identify the diferences between the three major legal forms of business.
Keywords: partnerships
Principles: Principle 2: There Is a Risk-Return Tradeof
1.3 The Goal of the Financial Manager
1) Maximization of shareholder wealth as a goal is superior to accounting proit
maximization because
A) it considers the time value of the money.
B) following the shareholder wealth maximization goal will ensure high stock prices.
C) accounting proits are not the same as cash lows.
D) A and C.
Question Status: Revised
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: geometric average return
Principles: Principle 3: Cash Flows Are the Source of Value
2) Which of the following best describes the goal of the irm?
A) The maximization of the total market value of the irm’s common stock
B) Proit maximization
C) Risk minimization
D) None of the above
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 3: Cash Flows Are the Source of Value
11
3) Proit maximization does not adequately describe the goal of the irm because
A) proit maximization does not require the consideration of risk.
B) proit maximization ignores the timing of a project’s return.
C) maximization of dividend payout ratio is a better description of the goal of the irm.
D) A and B.
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 3: Cash Flows Are the Source of Value
4) Which of the following goals of the irm is equivalent to the maximization of shareholder
wealth?
A) Proit maximization
B) Risk minimization
C) Maximization of the total market value of the irm’s common stock
D) None of the above
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 3: Cash Flows Are the Source of Value
5) If managers are making decisions to maximize shareholder wealth, then they are
primarily concerned with making decisions that should
A) positively afect proits.
B) increase the market value of the irm’s common stock.
C) either increase or have no efect on the value of the irm’s common stock.
D) accomplish all of the above.
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 3: Cash Flows Are the Source of Value
12
6) Proit maximization is not an adequate goal of the irm when making inancial decisions
because
A) it does not necessarily relect shareholder wealth maximization.
B) it ignores the risk inherent in diferent projects that will generate the proits.
C) it ignores the timing of a project’s returns.
D) all of the above are correct.
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 3: Cash Flows Are the Source of Value
7) Which of the following goals is in the best long-term interest of stockholders?
A) Proit maximization
B) Risk minimization
C) Maximizing of the market value of the existing shareholders’ common stock
D) Maximizing sales revenues
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 3: Cash Flows Are the Source of Value
8) If managers do not pursue the goal of maximizing shareholder wealth
A) they concentrate on more important matters like growing market share.
B) they can focus more on social responsibilities.
C) they are likely to lose their jobs.
D) they can focus more on long-term proitability.
Question Status: New question
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 5: Individuals respond to incentives.
13
9) What does the agency problem refer to?
A) The conlict that exists between the board of directors and the employees of the irm.
B) The problem associated with inancial managers and Internal Revenue agents.
C) The conlict that exists between stockbrokers and investors.
D) The problem that results from potential conlicts of interest between the manager of a
business and the stockholders.
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: agency
Principles: Principle 5: Individuals respond to incentives.
10) Managers of corporations need to act in an ethical manner
A) because ethics violations will be punished by the law.
B) because a business must be trusted by investors, customer and the public if it is to
succeed.
C) because business managers must answer to a higher authority.
D) because ethical behavior is its own justiication.
Question Status: New question
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: ethics
Principles: Principle 5: Individuals respond to incentives.
11) In regard to the agency problem, ________ are the principal owners of a corporation.
A) shareholders
B) managers
C) employees
D) suppliers
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 5: Individuals respond to incentives.
14
12) Serious ethical violations by corporations such as Enron led to the passage of
A) the Dodd-Frank Act.
B) the Insider Trading Act of 1988.
C) the Sarbanes-Oxley Act.
D) All of the above.
Question Status: New question
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 5: Individuals respond to incentives.
13) The goal of the irm should be the maximization of proit.
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 3: Cash Flows Are the Source of Value
14) One of the problems associated with proit maximization is that it ignores the timing of
a project’s return.
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 3: Cash Flows Are the Source of Value
15) The goal of proit maximization is equivalent to the goal of maximization of share value.
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 3: Cash Flows Are the Source of Value
15
16) The goal of proit maximization ignores the timing of proit.
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 3: Cash Flows Are the Source of Value
17) The goal of maximize shareholder wealth inevitably conlicts with socially responsible
behavior on the part of corporation.
Question Status: New question
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: ethics
Principles: Principle 4: Market Prices Relect Information
18) The Sarbane-Oxley Act addresses insider trading by members of Congress.
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: ethics
Principles: Principle 5: Individuals respond to incentives.
19) A reputation for unethical behavior can negatively afect the value of a company’s
stock.
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: ethics
Principles: Principle 5: Individuals respond to incentives.
20) The agency problem arises due to the separation of ownership and control in a
corporation.
Question Status: Previous edition
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: goal of the irm
Principles: Principle 5: Individuals respond to incentives.
16
21) Briely discuss the incentives for inancial managers to conduct their business in an
ethical manner.
Question Status: New question
Objective: 1.3 Understand the role of the inancial manager within the irm and the goal for making
inancial choices.
Keywords: ethics
Principles: Principle 5: Individuals respond to incentives.
17
1.4 The Four Basic Principles of Finance
1) Consider the following equally likely project outcomes:
Proit
X Y
Pessimistic prediction $ 0 $500
Expected outcome $ 500 $500
Optimistic prediction $1000 $500
A) Investors will prefer project X because it potentially ofers a higher proit.
B) Investors will reject both projects because the proit is too low.
C) Investors will prefer project Y because the expected return is the same as for project X
but the outcome is certain.
D) Since Projects X and Y have the same expected outcomes of $500, investors will view
them as identical in value.
Question Status: Revised
Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for
both businesses and individuals.
Keywords: risk, return
Principles: Principle 2: There Is a Risk-Return Tradeof
2) Consider the timing of the proits of the following certain investment projects:
Proit
L S
Year 1 $ 0 $ 3000
Year 2 $ 3000 $ 0
A) Project S is preferred to Project L.
B) Project L is preferred to Project S.
C) Projects S and L are equally desirable.
D) A goal of proit maximization would favor Project S only.
Question Status: Previous edition
Objective: 1.4 Explain the ive principles of inance that form the basis of inancial management for
both businesses and individuals.
Keywords: time value of money
Principles: Principle 1: Money Has a Time Value
18