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4) Why in general do inancial managers make inancial decisions in a corporation, rather
than the owners making these decisions themselves?
A) It is best for the control of the inances of a corporation to be in the hands of a
disinterested third party.
B) The interests of the various owners may conlict with each other.
C) The owners may not be U.S. citizens or residents.
D) There are often many owners, and they can often change as they buy and sell stock.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
5) What is the most important duty of a irm's inancial oicer?
A) to ensure that the irm has enough cash on hand to meet its commitments at any given
time
B) to decide how to pay for investments
C) to manage working capital
D) to make investment decisions
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
11
6) The inancial manager of a well-regarded book publishing irm wishes to buy a small
Internet publishing company to provide an avenue for sale of its materials online. In order
to raise the funds to make this purchase, the inancial manager decides to sell more stock
in the company. How is the inancial manager raising funds in this case?
A) by increasing the debt burden carried by the company
B) by raising the company's equity by encouraging new owners to take a stake in the
company
C) by decreasing the ratio of equity to debt held by the company
D) by increasing the value of shares held by the existing owners of the company
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
7) Which of the following is NOT a reason why a irm's inancial managers must take great
care when making investment decisions?
A) These investment decisions determine whether the irm will add value for its owners.
B) These investments determine the long-term directions in which the company may move.
C) These investment decisions determine the corporation's mix of debt and equity.
D) These investment decisions typically involve substantial costs which must be carefully
weighed against their potential beneits.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
8) A company that produces racing motorbikes has several models that sell well within the
motorcycle racing community and which are very proitable for the company. Despite
having a proitable product, why must this company take care to ensure that it has
suicient cash on hand to meet its obligations?
A) Proits from the sales of popular models will be lost when returned to the shareholders
in the form of dividends.
B) New models will require a lot of money to develop and bring to market before they
generate any revenue.
C) The company will have built up debts which must be repaid in order to bring the current
models to market.
D) Equity must be raised to inance the development of new models to replace the existing
models.
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
12
9) A typical company has many types of shareholders, from individuals holding a few
shares, to large institutions that hold very large numbers of shares. How does a inancial
manager ensure that the priorities and concerns of such disparate stockholders are met?
A) The inancial manager should seek to make investments that do not harm the interests
of the stockholders.
B) The decisions taken by the inancial manager should be solely inluenced by the beneit
to the company since, by maximizing its itness, he or she will also maximize the beneits of
that company to the shareholders.
C) The inancial manager should consider the interests and concerns of large shareholders
a priority so the needs of those who hold a controlling interest in the company are met.
D) In general, all shareholders will agree that they are better of if the inancial manager
works to maximize the value of their investment.
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
10) Whose interests should a inancial manager consider paramount when making a
decision?
A) the stockholders who have risked their money to become owners of the company
B) the employees and associated stakeholders who are employed by the company
C) the public who consume the company's goods and services
D) the senior management and associated colleagues at the executive level within the
company
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
11) What is the principal guiding factor for the inancial manager of a irm?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
1.4 The Financial Manager's Place in the Corporation
1) In most corporations, the owners exercise direct control of a corporation.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2) The fact that corporations' shares are easily traded within the market has a net efect of
acting as a disincentive for managers to favor the interests of shareholders over their own
interests.
Dif: 1 Var: 1
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) How do the shareholders of most corporations exercise their control of that corporation?
A) by voting on issues that concern them
B) by electing members of a board of directors
C) by vetting the decisions of the board of directors
D) by providing oversight of the day-to-day running of the corporation
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4) Which of the following is NOT a function of the board of directors?
A) determining how top executives should be compensated
B) monitoring the performance of the company
C) answering to shareholders of the company
D) day-to-day running of the company
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
5) In most corporations, to whom does the chief inancial oicer report?
A) shareholders
B) the board of directors
C) the chief executive oicer
D) the controller
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
14
6) Which of the following would be more typically the responsibility of a controller rather
than a treasurer?
A) overseeing accounting and tax functions
B) capital budgeting
C) managing credit
D) making investment decisions
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7) Which of the following would be best considered to be an agency conlict problem in the
behavior of the following inancial managers?
A) Bill chooses to pursue a risky investment for the company's funds because his
compensation will substantially rise if it succeeds.
B) Sue instructs her staf to skip safety inspections in one of the company's factories,
knowing that it will likely fail the inspection and incur signiicant costs to ix.
C) James ignores an opportunity for his company to invest in a new drug to ight
Alzheimer's disease, judging the drug's chances of succeeding as low.
D) Michael chooses to enhance his irm's reputation at some cost to its shareholders by
sponsoring a team of athletes for the Olympics.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Revised
8) A factory owner wants his workers to produce as many widgets as they can so he pays
his workers based on how many widgets they produce. However, in order to make sure that
the workers do not rush and produce a large number of poorly made widgets, he checks the
widgets at random at various stages of their manufacture. If a defect is found in a widget,
the pay of the entire section of the factory responsible for that defect is docked. How is this
factory owner seeking to solve the agency conlict problem in this case?
A) by supplying incentives so the agents act in the way principal desires
B) by ensuring that all workers co-operate to maximize the gains of their section
C) by making the agents into principals themselves
D) by maximizing the information that the principal obtains about the behavior of the
agents
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
15
9) In which of the following relationships is an agency conlict problem LEAST likely to
arise?
A) the relationship between a hire-car company and the persons who hire that company's
cars regarding the treatment of those cars
B) the relationship between high-level military oicers and the soldiers who serve under
them regarding the willingness of the soldiery to take risks
C) the relationship between a restaurateur and the suppliers of produce to that restaurant
regarding the freshness of the produce supplied
D) the relationship between a driver and the passengers in a car regarding the safe driving
of that car
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Revised
10) What is the most common way that agency conlict problems are addressed in most
corporations?
A) by minimizing the number of decisions that a manager makes where there is a conlict
between the managers interests and those of the shareholders
B) by terminating the employment of employees who are found to have put their own
interests above those of the company
C) by using disinterested outside bodies to adjudicate between managers and shareholders
when such conlicts arise
D) by prosecuting managers who have been found to have illegally used company moneys
for their own beneit
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
16
11) A company's board of directors chooses to provide a comprehensive health care plan
for the families of all employees, despite the large cost. They argue that this will not only
increase the number of employees who stay with the irm, and thus reduce some costs
involved in employee turnover, but also increase the employees' diligence and industry.
What general principle is being argued by the board of directors?
A) In a conlict between stakeholders in a company, the most important stakeholder is not
always the stockholders.
B) Some activities that decrease shareholders' wealth may have intangible beneits which
increase the strength of the company overall.
C) When a conlict of interest arises between shareholders and other stakeholders, in
general, the correct solution is the one that creates the greatest good for the greatest
number of stakeholders.
D) Ethical decisions should be assessed on their moral value, not on their value in dollars
and cents.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
12) Why is the stock price of a company an indication of the performance of the company's
senior managers?
A) Well-run companies are invariably highly proitable, which leads to a higher share price.
B) In general, people want to invest in a well-managed corporation, which will drive up the
price of shares.
C) Investors who can see that a company is well-run will hold on to their shares, even if the
company faces setbacks, since they know that the stock price will likely rise again.
D) Larger companies tend to be better run and so have higher stock prices.
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Revised
13) A corporate raider gains a controlling fraction of the shares of a poorly managed
company and replaces the board of directors. How does the corporate raider hope to make
a proit in this case?
A) by the sale of the assets held by the company that hold most of its value
B) by the rise in the value of the stock held by the raider when the new board of directors is
judged to be superior to the ousted board of directors
C) by motivating the board of directors and other stakeholders in the company to make
diicult short-term decisions that will increase the long-term viability of the company
D) by removing the employees expectations of the continued poor performance of the
company
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
14) A ________ is when a rich individual or organization purchases a large fraction of the
stock of a poorly performing irm and in doing so gets enough votes to replace the board of
directors and the CEO.
17
A) shareholder proposal
B) leveraged buyout
C) shareholder action
D) hostile takeover
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
15) Briely discuss the issues in the agency conlict problem.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: SS
Question Status: Revised
16) Explain some of the measures taken to reduce the agency conlict problem.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: SS
Question Status: Revised
1.5 The Stock Market
1) The shares of private corporations are traded on a stock market.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
18
2) Stock markets provide liquidity for a irm's shares.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask
price would be $3.85.
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
4) Which of the following should be true for an asset to be considered liquid?
A) It pays regular dividends.
B) It can be bought and sold at an organized stock market or bourse.
C) It is ofered for sale on both primary and secondary markets.
D) It can be easily bought and sold and the selling price is very close to the buying price at
a given point in time.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
5) Why is it diicult to determine the market price of a private corporation's shares at any
point in time?
A) It is diicult to obtain enough information to accurately value such a company.
B) The price of its shares is ixed by the owners.
C) It has a limited number of owners.
D) There is no organized market for its shares.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
19
6) Which of the stock markets listed below is the smallest, as judged by trading volume?
A) Deutsche Börse
B) London Stock Exchange
C) NASDAQ
D) NYSE Euronext (US)
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7) Why is a stock exchange like NASDAQ considered a secondary market?
A) It trades the second largest volume of shares in the world.
B) Shares sold on it are exchanged between investors without any involvement of the
issuing corporation.
C) The exchange has rules that attempt to ensure that bid and ask prices do not get too far
apart.
D) NASDAQ is called a secondary market because NYSE is considered a primary market.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8) On August 19, 2004 Google IPO ofered 19,605,052 shares at a price of U.S. $85 per
share, which were sold in an online auction in a bid to make the shares more widely
available. Which of the following statements best describes why these are considered a
primary market transaction?
A) The transaction was between the corporation and investors.
B) Shares of Google from this time onward could be traded between investors on a stock
exchange.
C) The shares were the irst to be privately issued by Google.
D) Google was at the time a recently founded company seeking capital with which to
expand.
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Revised
20
