Chapter 01: An Overview of Financial Management
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Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in
multiple-choice questions.
Multiple Choice: True/False
1. In most corporations, the CFO ranks under the CEO.
a. True
b. False
2. The Chairman of the Board must also be the CEO.
a. True
b. False
3. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking
individual. The CEO generally works under the board and its chairman, and the board generally has the authority to
remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to
have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously
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serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in
the same person.
a. True
b. False
4. Partnerships and proprietorships generally have a tax advantage over corporations.
a. True
b. False
5. A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal
liabilities in the event of bankruptcy than are investors in a typical partnership.
a. True
b. False
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8. One advantage of the corporate form of organization is that it avoids double taxation.
a. True
b. False
9. It is generally harder to transfer one’s ownership interest in a partnership than in a corporation.
a. True
b. False
10. One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt.
This problem would be avoided if you formed a corporation to operate the business.
a. True
b. False
Chapter 01: An Overview of Financial Management
Chapter 01: An Overview of Financial Management
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13. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive
legal documents are required.
a. True
b. False
14. The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.
a. True
b. False
15. One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm’s
investors to transfer their ownership interests.
a. True
b. False
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18. If management operates in a manner designed to maximize the firm’s expected profits for the current year, this will
also maximize the stockholders’ wealth as of the current year.
a. True
b. False
19. In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the expected EPS.
a. True
b. False
20. In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price on a
specific target date.
a. True
b. False
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28. Managers always attempt to maximize the long-run value of their firms’ stocks, or the stocks’ intrinsic values. This is
exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.
a. True
b. False
29. A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and
replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers can improve
the economy. However, hostile takeovers are controversial, and legislative actions have been taken to make them more
difficult to undertake.
a. True
b. False
30. If a lower level person in a firm does something illegal, like “cooking the books” to understate costs and thereby
increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot
be prosecuted but the superior can be prosecuted.
a. True
b. False
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37. Which of the following statements is CORRECT?
a. Corporations generally face fewer regulations than proprietorships.
b. Corporate shareholders are exposed to unlimited liability.
c. It is usually easier to transfer ownership in a corporation than in a partnership.
d. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of
incorporation.
e. There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage,
even if it is very small.
38. Which of the following could explain why a business might choose to operate as a corporation rather than as a
proprietorship or a partnership?
a. Corporations generally face fewer regulations.
b. Less of a corporation’s income is generally subject to federal taxes.
c. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of
incorporation.
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d. Corporate investors are exposed to unlimited liability.
e. Corporations generally find it easier to raise large amounts of capital.
39. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.
e. Maximize the stock price on a specific target date.
40. Which of the following statements is CORRECT?
a. In most corporations, the CFO ranks above the CEO.
b. By law in most states, the chairman of the board must also be the CEO.