36) Financial managers primarily create firm value by:
A) maximizing current dividends.
B) investing in assets that generate cash in excess of their cost.
C) lowering the earnings per share.
D) increasing the firm’s market share.
E) maximizing current sales.
37) Accounting profits and cash flows are generally:
A) the same since they reflect current laws and accounting standards.
B) the same since accounting profits reflect the timing of cash flows.
C) different because of GAAP rules regarding the recognition of income.
D) different because cash inflows must occur before revenue recognition.
E) the same due to the requirements of GAAP.
38) Which one of these is a cash outflow from a corporation?
A) Sale of an asset
B) Tax payment
C) Sale of common stock
D) Issuance of debt
E) Profit retained by the firm
39) A firm creates value by:
A) having a greater cash inflow from its stockholders than its outflow to them.
B) paying more cash to its creditors and stockholders than the amount it received from them.
C) borrowing long-term debt.
D) generating sales whether or not payment is received for all of those sales.
E) purchasing assets that create cash inflows equal to the cost of those assets.
40) If a firm is currently profitable, then:
A) its current cash inflows must exceed its current cash outflows.
B) its reported sales exceed its costs.
C) its cash flows are known with certainty.
D) it will always have sufficient cash to pay its bills in a timely manner.
E) the timing of the related cash flows is irrelevant.
41) Which one of these statements is correct?
A) Individuals tend to prefer later cash flows over current cash flows.
B) The value of an investment depends on the size, timing, and risk of the investment’s cash
flows.
C) When selecting one of two projects, managers should select the project with the higher total
expected cash flow.
D) Most investors prefer greater risk over less risk.
E) Accountants record sales and expenses after the related cash flows occur.
42) Closet Keeper is considering a new project. Which one of these estimated project values has
the greatest level of certainty?
A) The amount of the cash inflow in Year 3
B) The timing of the last cash inflow from the project
C) The initial project cost
D) The risk of a pessimistic scenario occurring
E) The amount of the cash inflow in Year 1
43) Financial managers should primarily strive to:
A) minimize costs while increasing current dividends.
B) maximize the current profits of the firm.
C) maximize the current value per share of existing stock.
D) maximize current dividends even if doing so adds financial distress costs to the firm.
E) maximize current market share in every market in which the firm participates.
44) The decisions made by financial managers should all be ones which increase the:
A) size of the firm.
B) growth rate of the firm.
C) marketability of the managers.
D) market value of the existing owners’ equity.
E) firm’s current sales.
45) Which one of the following actions by a financial manager creates an agency problem?
A) Borrowing money when doing so creates value for the firm
B) Lowering selling prices that will result in increased firm value
C) Agreeing to expand the company at the expense of stockholders’ value
D) Agreeing to pay management bonuses based on the market value of the firm’s stock
E) Refusing to spend current cash on an unprofitable project
46) The primary goal of financial management is to:
A) maximize current dividends per share of the existing stock.
B) maximize the current value per share of the existing stock.
C) avoid financial distress.
D) minimize operational costs and maximize firm efficiency.
E) maintain steady growth in both sales and net earnings.
47) Which one of these represents the best means of increasing current shareholder value?
A) Maximizing the capital rate of the firm
B) Increasing the current value of the overall firm
C) Forsaking all new projects
D) Minimizing the overall size of the firm
E) Decreasing the number of employees
48) A financial manager should make decisions based on:
A) the effects those decisions will have on current profits.
B) the best interests of the current employees.
C) the welfare of the current shareholders.
D) minimizing the firm’s tax liability.
E) their personal goals and ambitions.
49) A conflict of interest between the stockholders and managers of a firm is referred to as the:
A) stockholders’ liability.
B) corporate breakdown.
C) agency problem.
D) corporate activism.
E) legal liability.
50) Which one of these is most apt to be an agency problem?
A) Increasing the dividend payments to shareholders
B) Paying off debt in a timely manner
C) Increasing the sales of a profitable division
D) Forsaking a profitable project because it involves some risk
E) Selling an unprofitable division of the firm
51) Which one of the following is least apt to help convince managers to work in the best interest
of the stockholders?
A) Threat of a takeover of the firm by unsatisfied stockholders
B) Implementation of a stock option plan
C) Salary raises based on length of service
D) Management compensation tied to the market value of the firm’s stock
E) Threat of a proxy fight
52) Which form of business structure typically has the greatest potential for agency problems?
A) Sole proprietorship
B) General partnership
C) Limited partnership
D) Corporation
E) Limited liability company
53) A proxy fight occurs when:
A) the board of directors disagree on the members of the management team.
B) a group solicits voting rights to replace the board of directors.
C) a competitor offers to sell their ownership interest in the firm.
D) the firm files for bankruptcy.
E) the firm is declared insolvent.
54) The ultimate control of a corporation lies in the hands of the corporate:
A) board of directors.
B) stockholders.
C) president.
D) chief executive officer.
E) chairman of the board.
55) Members of the board of directors are selected by:
A) shareholder voting.
B) company management.
C) the firm’s Chief Executive Officer.
D) the largest five shareholders.
E) the firm’s managers and employees.
56) Stock options granted to a corporation’s managers are primarily designed to:
A) reduce agency costs.
B) increase current profits.
C) replace salary increases.
D) reward long-term employment.
E) replace promotions.
57) Which one of these best fits the description of an agency cost?
A) The costs of increasing the dividend payment per share
B) The benefits received from reducing production costs per unit
C) The payment of corporate income taxes
D) The payment required for an outside audit of the firm
E) The payment of interest on a firm’s debts
58) Which one of the following parties is considered a stakeholder of a firm?
A) Customer
B) Short-term creditor
C) Long-term creditor
D) Preferred stockholder
E) Common stockholder
59) A stakeholder is any person or entity:
A) owning shares of stock of a corporation.
B) owning bonds or other long-term debt issued by a corporation.
C) that initially started a firm and currently has management control over that firm.
D) to whom the firm currently owes money.
E) other than a stockholder or creditor who potentially has a financial interest in a firm.
60) One intent of the Sarbanes Oxley Act of 2002 is to:
A) prevent minority investors from making demands on corporations.
B) protect corporate directors from frivolous lawsuits.
C) guarantee the repayment of all future personal loans to corporate officers and directors.
D) protect investors from corporate abuses.
E) require all public corporations to “go dark” within the next twenty years.
61) The Sarbanes-Oxley Act requires public corporations to:
A) assess the company’s internal control structure at least quarterly.
B) distribute at least 90 percent of their profits in dividends on an annual basis.
C) list any deficiencies in internal controls.
D) file annual audit reports if the firm has “gone dark”.
E) disclose all personal loans to corporate officers or directors made after 2002.
62) Insider trading is:
A) prohibited by the Securities Act of 1933.
B) prohibited by the Securities Exchange Act of 1934.
C) impossible in today’s efficient markets.
D) highly discouraged, but still legal.
E) prohibited by the Sarbanes-Oxley Act of 2002.
63) The basic regulatory framework for the public trading of securities in the United States was
provided by the:
A) New York Stock Exchange when it was founded.
B) Securities Exchange Act of 1934.
C) Federal Reserve Bank.
D) Securities Act of 1933 and the Securities Exchange Act of 1934.
E) Sarbanes-Oxley Act in 2002.
64) The Securities Act of 1933 focuses on:
A) all stock transactions.
B) the sales of existing securities.
C) the issuance of new securities.
D) insider trading.
E) Federal Deposit Insurance Corporation (FDIC) insurance.
65) The intent of the registration statement required for all new securities by the Securities Act of
1933 is to:
A) provide a governmental evaluation of the risks associated with those new securities.
B) set the price at which the securities will be offered.
C) guarantee the profitability of the new securities.
D) prevent any insider trading.
E) provide all necessary information to allow a potential investor to make an informed decision.
66) Which of these have been cited as results from a corporation “going dark”?
A) Increased market liquidity and lower costs
B) Lower audit costs and lower interest rates on bank loans
C) Increased access to capital and lower costs associated with that capital
D) Increased audit costs and stock price increases
E) Limited access to capital markets and stock price declines
67) List and briefly describe the three basic areas addressed by a financial manager.
68) What advantages and disadvantages does the corporate form of organization have compared
to sole proprietorships and general partnerships?
69) Why might a professional group select the LLC form of business over a general partnership
or a corporate structure?
70) Why might a highly successful sole proprietor change the structure of his/her firm to the
corporate form of ownership if that change results in the sharing of profits with other investors?
71) What should be the primary goal of the financial manager of a corporation? Explain why this
is appropriate.