CFIN4
Chapter 1 – An Overview of Managerial Finance
1. In general, the role of the financial manager is to plan for the acquisition and use of funds so as to maximize the
value of the firm.
a. True
b. False
2. The financial manager must execute his or her duties independent of the other activities of the firm in order to
properly maximize the value of the firm.
a. True
b. False
3. Two key limitations of the proprietorship form of business involve potential difficulty in raising needed capital and the
presence of unlimited personal liability for business debts.
a. True
b. False
4. A hostile takeover involves an attempt by one group of stockholders to solicit votes from other stockholders in order
to put a new management team into place and is usually motivated by low stock price.
a. True
b. False
CFIN4
Chapter 1 – An Overview of Managerial Finance
5. No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to
compete, even if those cost-increasing actions yield significant benefits to the firm.
a. True
b. False
6. The proper goal of the financial manager should be to maximize the firm’s expected profit, because this will add the
most wealth to each of the individual shareholders (owners) of the firm.
a. True
b. False
7. One way to state the decision framework most useful for carrying out the firm’s objective is that the financial
managers should seek that combination of assets, liabilities, and capital which will generate the largest expected
projected income over the relevant time horizon.
a. True
b. False
8. The riskiness inherent in a firm’s earnings per share (EPS) depends on both the types of projects the firm takes on
and the manner in which the projects are financed.
a. True
b. False
CFIN4
Chapter 1 – An Overview of Managerial Finance
9. Cultural differences do not impact the multinational corporations as they expand into different geographic regions.
a. True
b. False
10. Normal profits are those that result in rates of return that are just sufficient to attract new capital in financial
markets.
a. True
b. False
11. If a firm’s managers want to maximize stock price it is in their best interests to operate efficient, low-cost plants,
develop new and safe products that consumers want, and maintain good relationships with customers, suppliers,
creditors, and the communities in which they operate.
a. True
b. False
12. In a competitive marketplace “good ethics” is a wonderful idea but an impractical standard. There are simply too few
benefits to be gained from maintaining high business ethics.
a. True
b. False
CFIN4
Chapter 1 – An Overview of Managerial Finance
13. Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash
flows denominated in the parent company’s home currency.
a. True
b. False
14. A financial manager’s task is to make decisions concerning the acquisition and use of funds for the greatest benefit
of the firm.
a. True
b. False
15. Incentive compensation plans are used to attract and retain top managerial talent as well as to align the interests of
management with shareholders.
a. True
b. False
16. The finance function is relatively independent of most other corporate functions. Marketing decisions, for example,
might affect the firm’s need for funds but are not affected by conditions in financial markets or other financing
issues.
a. True
b. False
17. In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder
wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken
over by groups who are more aligned with stockholder interests.
a. True
b. False
18. The disadvantages associated with a proprietorship are similar to those under a partnership. One exception to this is
due to the formal nature of the partnership agreement and the commitment of the partners’ personal assets. As a
result, partnerships do not have difficulty raising large amounts of capital.
a. True
b. False
19. The term multinational corporation is used to describe a firm that operates in two more countries.
a. True
b. False
20. Nations do not have the sovereignty to expropriate the assets of a firm without compensation.
a. True
b. False
21. Having the manager’s compensation tied to the company‘s performance increases the agency problem that
corporations face.
a. True
b. False
22. Managers of firms using accounting manipulations to inflate current earnings are likely to generate long-term benefits
to the shareholders of the firm.
a. True
b. False
23. A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited
liability for business which limits his losses to what he has invested in the company.
a. True
b. False
24. The corporate charter is a document filed with the secretary of the state in which the firm is incorporated that
provides information about the company, including its name, address, directors, and amount of capital stock.
a. True
b. False
CFIN4
Chapter 1 – An Overview of Managerial Finance
25. Industrial groups are organizations comprised of companies in different industries with common ownership interests,
which include firms necessary to sell and manufacture products.
a. True
b. False
26. The primary goal of a publicly-owned firm interested in serving its stockholders should be to
a. Minimize the debt used by a firm.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.
27. Which of the following mechanisms is not used by shareholders to get managers to act in shareholder’s best
interests?
a. Threat of firing
b. Managerial compensation.
c. Golden parachute.
d. Threat of takeover.
e. Answers b and c above.
CFIN4
Chapter 1 – An Overview of Managerial Finance
28. Which of the following is a reason why companies move into international operations?
a. To take advantage of lower production costs in regions of inexpensive labor.
b. To develop new markets for their finished products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the above.
29. Which of the following should be the primary goal pursued by the financial manager of a firm?
a. Maximize net income (profits).
b. Maximize the firm’s net worth, or book value.
c. Maximize dividends paid to common stockholders.
d. Minimize variable operating expenses.
e. Maximize the market value of the firm’s stock.
30. Everything else equal, including firm size, dollar sales, type of product sold, and so forth, the primary difference
between the proprietorship and partnership business forms is that
a. a partnership has more owners than a proprietorship.
b. the combined personal liability associated with a partnership is significantly less than the combined personal
liability associated with a proprietorship.
c. a partnership generally is easier to form than a proprietorship.
d. the annual growth rate of a proprietorship is limited by law, whereas the growth rate of a partnership is
always potentially unlimited.
e. there are many more businesses that are formed as partnerships than proprietorships.
CFIN4
Chapter 1 – An Overview of Managerial Finance
31. The primary goal of a financial manager should be to .
a. minimize operating costs
b. minimize interest payments
c. minimize tax payments
d. maximize operating income each year
e. maximize the value of the firm’s stock
32. Which of the following statements is correct?
a. Given the multi-owner nature of most large corporations, agency costs associated with perquisite consumption
are not really a problem.
b. Managers may operate in the stockholders’ best interests, but they may also operate in their own personal best
interests. As long as managers stay within the law, there simply are not any effective controls that
stockholders can implement to control managerial decision making.
c. Shareholder agency costs include the opportunity costs associated with constraining managerial freedom but
do not include managerial salaries.
d. An agency relationship exists when one or more persons hire another person to perform some service but
withhold decision–making authority from that person.
e. All of the above statements are false.
33. Which of the following is an example of an area of business where use of “questionable” ethics is considered a
necessity?
a. Attracting and sustaining new customers.
b. Hiring and keeping skilled employees.
c. Keeping up with competition.
d. Dealing with firms who use “questionable” ethics.
e. None of the above.
CFIN4
Chapter 1 – An Overview of Managerial Finance
34. Which of the following actions is consistent with social responsibility but is necessarily inconsistent with stockholder
wealth maximization?
a. Investing in a smokestack “scrubber” to reduce the firm’s air pollution as mandated by law.
b. Voluntarily installing expensive machinery to treat effluent discharge which currently is being dumped into a
river where it is ruining the drinking water of the community where the plant is located.
c. Investing in a smokestack filter to reduce sulphur-dioxide emissions in order to reduce the current tax being
levied on the firm by the state for its pollution.
d. Making a large corporate donation to the local community in order to fund a recreation complex that will be
used by the community and the firm’s employees.
e. Each of the above actions is consistent with social responsibility and none are necessarily inconsistent with
stockholder wealth maximization.
35. Which of the following statements is correct?
a. The corporate bylaws are the set of rules drawn up by the state to enable managers to run the firm in
accordance with state laws.
b. Procedures for electing corporate directors are contained in bylaws while the declaration of the activities that
the firm will pursue and the number of directors are included in the corporate charter.
c. Procedures which govern changes in the bylaws of the corporation are contained in the corporate charter.
d. Although most companies design a charter, only the bylaws are legally required to be filed with the secretary
of state in order for a corporation to be in official existence.
CFIN4
Chapter 1 – An Overview of Managerial Finance
36. Which of the following statements is correct?
a. A hostile takeover is a primary method of transferring ownership interest in a corporation.
b. The corporation is a legal entity created by the state and is a direct extension of the legal status of its owners
and managers, that is, the owners and managers are the corporation.
c. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business
organization.
d. In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in
financial markets than other organizational forms.
e. Although stockholders of the corporation are insulated by limited legal liability, the legal status of the
corporation does not protect the firm’s managers in the same way.
37. Which of the following statements is correct?
a. In a partnership, liability for other partners’ misdeeds includes but is limited to the amount a particular partner
has invested in the business.
b. Partnerships must be formed according to specific rules which include the filing of a formal written agreement
with state authorities where the partnership does business.
c. A fast growth company would be more likely to set up a partnership for its business organization than would a
slow-growth company.
d. Partnerships have difficulty attracting capital in part because of the other disadvantages of the partnership
form of business, including impermanence of the organization.
e. A major disadvantage of a partnership as a form of business organization is the high cost and practical
difficulty of its formation.
CFIN4
Chapter 1 – An Overview of Managerial Finance
38. Which of the following statements is correct?
a. A major disadvantage of a regular partnership or a corporation as a form of business is the fact that they do
not offer their owners limited liability, whereas proprietorships do.
b. An advantage of the corporate form for many businesses is the fact the corporate tax rate always exceeds
the personal tax rate, which is the rate at which proprietorships and partnerships are taxed.
c. There are more partnerships and sole proprietorships than corporations in the U.S., but corporations produce
more goods and services than do other forms of business.
d. Because corporations enjoy the benefits of limited liability, easy transferability of ownership interest, unlimited
life, and favorable tax status relative to the situation for partnerships and proprietorships, most large
businesses choose to incorporate.
e. Because lawyers have the incorporation process so automated (e.g., word processors for drawing up the
necessary papers), it is less expensive to form a corporation than to form a proprietorship or partnership.
39. Which of the following statements is correct?
a. The optimal dividend policy is the one that satisfies the shareholders because they supply the firm’s capital.
b. The use of debt financing has no effect on earnings per share (EPS) or stock price.
c. The riskiness of projected EPS depends upon how the firm is financed.
d. Stock price is dependent on the projected EPS and the use of debt but not on the timing of the earnings
stream.
e. Dividend policy is one aspect of the firm’s financial policy that is determined directly by the shareholders.
CFIN4
Chapter 1 – An Overview of Managerial Finance
40. Which of the following statements about the corporate form of business organization is incorrect?
a. The corporation is the easiest form of business organization to establish.
b. In the United States, corporations generate a significantly greater percentage of total annual sales than either
partnerships or proprietorships.
c. Corporations generally are larger than either partnerships or proprietorships.
d. One of the most important features of the corporate form of business organization is that stockholders have
limited liability.
e. None of the above.
41. Which of the following statements is incorrect?
a. Large European firms generally have many more individual owners than large U.S. firms.
b. One reason domestic firms “go global” is to sell products in new markets.
c. Often firms can avoid regulatory hurdles that apply to foreign manufacturers by establishing operations in the
country where the hurdles apply.
d. A difficulty associated with doing business in international markets is that not all countries have the same
currency.
e. Cultural differences among countries make it difficult for a multinational firm to use the same marketing
strategy that is, packaging, advertising, and so forth in every country in which it operates.
42. In the United States, the most common form of business is the
of the sales and profits is the ____.
a. corporation; corporation
b. corporation; proprietorship
c. proprietorship; partnership
d. proprietorship; corporation
e. corporation; partnership
, and the form of business that generates most
CFIN4
Chapter 1 – An Overview of Managerial Finance
43. Which of the following statements is correct?
a. Other things held constant, it is generally safer to invest money in a proprietorship than in a corporation.
b. There really is no difference between a general partnership and a corporation, because both have multiple
owners and both offer limited liability to the owners.
c. If you are planning to start a business, which you will run as the sole employee, and if you expect the business
to earn $1,000,000 per year before taxes, you always can minimize the total taxes you pay by setting up the
business as a corporation.
d. According to the text, “agency problems” tend to increase when managers own larger relative amounts of the
company’s stock.
e. Maximizing the income statement item “net income” might not be the best goal for a corporation if the
managers are interested in maximizing the economic welfare of the firm‘s stockholders (that is, the firm’s
stock price).
44. Paying Payroll Service (PPS) recently declared bankruptcy. The price of PPS’s stock has dropped from
approximately $10 per share one year ago to $1 today. You can imagine that stockholders are not happy that the
value of their stock has dropped so significantly. At the same time the financial position of the firm was deteriorating,
PPS executives increased their salaries and perquisites substantially. Nothing they did violated any laws or was
considered an unethical act. We would most likely describe this situation as .
a. an agency problem.
b. an accounting glitch.
c. an appropriate use of the tax laws.
d. an appropriate action, because executive compensation should always be increased substantially each year.
e. acceptable, because it is obvious that the executives were trying to maximize the value of the firm, which is
what the shareholders want them to do.
CFIN4
Chapter 1 – An Overview of Managerial Finance
45. Compared to corporations, what is the primary disadvantage of partnerships as forms of business organizations?
a. The tax rates applied to partnership are higher than the tax rates applied to corporations.
b. Any dividends paid to the owners of a partnership business are taxed twice, once at the partnership level and
once at the personal, or individual level.
c. Partnerships generally are much easier to form (start up) than corporations.
d. Partnerships have unlimited lives whereas corporations do not.
e. The owners of a partnership, that is, the partners, have unlimited liability when it comes to business obligations
whereas the owners of a corporation have limited liability.
46. All else equal, in which of the following forms of business would the possibility of an agency problem be the
greatest?
a. An U.S. corporation that is publicly traded.
b. A proprietorship.
c. A partnership in which all the partners share management and decision-making responsibilities equally.
d. A foreign corporation with concentrated ownership that is, relatively few owners.
47. All of the following are external factors that influence the stock prices of the firm except
a. legal constraints
b. capital structure
c. tax laws
d. general level of economic activity
e. conditions in the stock market
CFIN4
Chapter 1 – An Overview of Managerial Finance
48. Management may expropriate wealth from bondholders to shareholders through which of the following actions:
a. take on new ventures with much greater risk than was anticipated by creditors.
b. take on more debt to increase the returns to shareholders.
c. issue more stock than was anticipated by creditors.
d. answers a and b are correct.
e. answers b and c are correct.
49. Which of the following statements concerning “agency problems“ is most correct?
a. Regardless of economic conditions, if a firm’s stock price falls during the year, this indicates that the firm’s
managers must not be acting in the best interests of the shareholders.
b. One method of controlling agency problems is to engage in the taking of “poison pills.”
c. One of the best means to control agency problems is to require the managers and other important decision
makers of the firm to also be owners of the firm.
d. Agency problems probably would not exist if the important decisions of a firm were made by persons who
have no vested interests, such as ownership, in the firm.
e. None of the above is a correct statement.
CFIN4
Chapter 1 – An Overview of Managerial Finance
50. Which of the following statements concerning a firm’s quest to maximize wealth is correct?
a. In extremely competitive industries, we would expect firms would voluntarily engage in many socially
beneficial projects to try to maximize their stocks’ values.
b. Actions that maximize a firm’s stock price are inconsistent with maximizing social welfare.
c. The concepts of social responsibility and ethical responsibility on the part of corporations are completely
different and neither is relevant in maximizing stock price.
d. In a competitive market, if a group of firms does not spend resources making social welfare improvements,
but another group does, in general, this will not affect the second group’s ability to attract funds.
e. If government did not mandate socially responsible corporate actions, such as those relating to product safety
and fair hiring practices, most firms in competitive markets probably would not pursue such policies
voluntarily.
51. The 11 “titles” in the Sarbanes-Oxley Act of 2002 establish standards for accountability and responsibility of financial
reporting information for major corporations. Which of the following activities does the act not provide rules that a
corporation must abide by?
a. The corporation must have a committee that consists of outside directors to oversee the firm’s audits.
b. The corporation must hire an external auditor that will render an unbiased (independent) opinion concerning
the firm’s financial statement.
c. The corporation must maximize social welfare through funding of environmentally friendly activities.
d. The corporation must provide additional information about the procedures used to construct and report
financial statements.
e. The firm’s CEO and CFO must certify financial reports submitted to the Securities Exchange Commission.