Chapter 1—THE ROLE AND OBJECTIVE OF FINANCIAL MANAGEMENT
MULTIPLE CHOICE
1. The primary objective of the firm is:
a.
Shareholder wealth maximization
b.
Social responsibility
c.
Long run survival
d.
Profit maximization
2. 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
3. Shareholder wealth is measured by the ____ of the shareholders’ common stock holdings.
a.
Book value
b.
Market value
c.
Historic value
d.
Compound value
4. 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.
a and b only
5. 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
6. 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
7. 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.
none of the above
8. 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
9. 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
10. Giving top management ____ is one method that ensures managers will act in the interest of
shareholders in merger decisions.
a.
stock options
b.
excellent pay
c.
executive perks
d.
job security
11. ____ arise from the divergent objectives between owners and managers.
a.
Shareholder relationships
b.
Stakeholder problems
c.
Creditor problems
d.
Agency problems
12. 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
13. 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
14. 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
15. 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
16. 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
17. 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
18. 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.
a and b
19. 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.
none of the above
20. 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.
none of the above
21. The activities of the treasurer include all of the following except:
a.
financial planning
b.
tax preparation
c.
credit analysis
d.
pension fund management
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
23. Corporate officers normally include all the following except:
a.
Secretary
b.
Chief operating officer
c.
Treasurer
d.
Financial analyst
24. ____ 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
25. 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
26. Which of the following is not an advantage that the corporate form of business has over either the sole
proprietorship or partnership?
a.
ability to raise capital
b.
ease of changing ownership
c.
limited liability
d.
elimination of double taxes
27. 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
28. 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
29. The advantages of the corporate form of organization over both sole proprietorships and partnerships
include ____.
a.
limited liability
b.
permanency
c.
a and b
d.
none of the above
30. Which of the following is not an advantage of the corporate form of business organization:
a.
unlimited life
b.
unlimited liability
c.
flexibility in ownership change
d.
ability to raise capital
31. Methods of controlling the agency problem are all of the following EXCEPT:
a.
Give management an ownership stake in the success of the firm.
b.
The Board of Directors should be composed of former officers of the company.
c.
Market conditions, such as a takeover threat, can serve as a deterrent.
d.
Use stock options in executive compensation packages.
32. Which of the following statements is/are correct?
I. The treasurer handles the financial functions of the firm.
II. The treasurer is normally concerned with the local, state and federal taxes of the firm along with
the data processing requirements.
a.
I only
b.
II only
c.
Both I and II
d.
Neither I nor II
ESSAY
1. What is the problem with profit maximization as a primary goal of the firm?
2. List some advantages that a sole proprietorship would have that a corporation would not.