Chapter 01 Test Bank – Static Key
1. As finance emerged as a new field, much emphasis was placed on mergers and acquisitions.
2. Inflation is assumed to be a temporary problem that does not affect financial decisions.
3. Financial capital is composed of long-term plant and equipment, as well as other tangible investments.
4. Real capital is composed of long-term plant and equipment.
5. During the 1930s, financial practice revolved around such topics as the preservation of capital,
maintenance of liquidity, the reorganization of financially troubled corporations, and bankruptcy.
6. In the mid 1950s, finance began to change to a more analytical, decision-oriented approach.
7. Recently, the emphasis of financial management has been on the relationship between risk and return.
8. The first Nobel Prizes given to finance professors were for their contributions to capital structure theory
and portfolio theories of risk and return.
9. How investors handle risk is an important topic that usually only economists observe.
10. Mortgage-backed securities were devalued by accounting standards because of the high credit ratings
(AAA).
11. ”Credit default swaps” are one of several tools that Congress and the President of the United States
have jointly developed to ease the financial crisis that began in 2008.
12. The Dodd-Frank Act was created by Congress along with its goals and regulatory responsibility, but it is
facilitated by various agencies.
13. The Dodd-Frank Act contains the Volcker Rule, which encourages financial institutions to allow for
more speculative investments for average investors.
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14. The Dodd-Frank Act’s oversight allowing regulation of banking fees and available products has been
considered as not being in the best interests of a free market.
15. The Internet impacts e-commerce by creating a mechanism for improved communications between a
business, its customers, and its suppliers.
16. The Internet is responsible for many new business models.
17. Businesses will increasingly rely on B2B Internet applications to speed up the cash flows through their
firms.
18. Sole proprietorship means single-person ownership and offers the advantages of simplicity of decision
making and low organizational and operating costs.
19. Profits of sole proprietorships are taxed at corporate tax rates.
20. There is unlimited liability in a general partnership.
21. A limited partnership limits the profits partners may receive.
22. In terms of revenues and profits, the corporation is by far the most important form of business
organization in the United States.
23. As noted in Finance in Action initial public offerings have now increased because long-term results are
favored by shareholders and institutional investors.
24. Dividends paid to corporate stockholders have already been taxed once as corporate income.
25. One advantage of the corporate form of organization is that income received by stockholders is not
26. A corporation must have more than 100 stockholders to qualify for Subchapter S designation.
27. Profits of a Subchapter S corporation are taxed at corporate tax rates.
28. The formation of a Subchapter S corporation is a way to circumvent the double taxation of a small
corporation.
29. The formation of a Limited Liability Company (LLC) is a way to circumvent the double taxation of a
small corporation.
30. Corporate governance issues have become less important to the financial community during the first
decade of the new millennium.
31. Agency theory examines the relationship between companies and their customers.
32. Institutional investors have had increasing influence over corporations with their ability to vote with large
blocks of stock and replace poorly performing boards of directors.
33. Agency theory assumes that corporate managers act to increase the wealth of corporate shareholders.
34. The Sarbanes-Oxley Act reduced agency conflicts by giving corporate managers greater flexibility to
select their preferred candidates to the board of directors.
35. A major focus of the Sarbanes-Oxley Act is to make sure that publicly traded companies accurately
present their assets, liabilities, and income in their financial statements.
36. The Sarbanes-Oxley Act is primarily intended to increase public scrutiny of private companies that had
previously been exempt from many public disclosure requirements.
37. Timing is not a particularly important consideration in financial decisions.
38. The higher the profit of a firm, the higher the value the firm is in the market.
39. There are some serious problems with the financial goal of maximizing the earnings of the firm.
40. Maximizing the earnings of the firm is the main goal of financial management.
41. The ultimate measure of performance is not what the firm profits, but how the profits are valued by the
investor.
42. Because socially desirable goals can hinder profitability in many instances, managers should not try to
operate under the assumption of wealth maximization.
43. Insider trading involves the use of information not available to the general public to make profits from
trading in a company‘s stock.
44. If an investor hears of a large change that a company is going to make through a news article and
reacts quicker than any other investor, it is considered insider trading.
45. When an investor has the ability to control how the stock price changes, that is considered insider
trading.
46. Social responsibility and profit maximization are synonymous.
47. Irrational exuberance is when companies have stock that is undervalued.
48. Financial markets exist as a vast global network of individuals and financial institutions that may be
lenders, borrowers, or owners of public companies worldwide.
49. Money markets refer to those markets dealing with short-term securities having a life of one year or
less.
50. Money markets refer to markets where excess corporate cash is exchanged for foreign currencies that
can earn a higher return than domestic money.
51. Capital markets refer to those markets dealing with short-term securities that have a life of one year or
less.
52. The primary market includes the sale of securities by way of initial public offerings.
53. When a company is looking to raise money through issuing more shares of stock, that is considered in
54. High-quality initial public offerings are usually sold in a primary market, such as the New York Stock
Exchange. However, low-quality stocks must usually be sold in secondary markets, such as NASDAQ.
55. Although NASDAQ is a secondary market, some of the firms traded there, such as Microsoft, are large
enough to move to the primary market if they so desire.
56. The secondary market characteristically has had stable prices over the past 20 years.
57. In the United States, stocks sold on either the New York Stock Exchange or NASDAQ are considered
sold in the primary market.
58. New issues are sold in the secondary market.
59. Existing securities are traded in the secondary market.
60. Many companies have cross-listed their stock on multiple international stock exchanges and more than
several hundred foreign companies have listed their shares on the New York Stock Exchange.
61. Higher returns always induce that stockholders should invest in a company.
62. Higher return means that the public company has lower risk.
63. Social responsibility is an expense and thus should be avoided by financial managers because it will
lead to loss of income.
64. Financial management requires both short-term activities as well as long-term planning such as raising
funds.
65. One of the primary disadvantages of maximizing shareholder value is that it only provides a short-term
perspective.
66. If a company has a written code of ethics, they will generally avoid ethical problems.
67. Risk management will be an important factor over the next decade.
68. With the creation of Internet trading, trading through brokers became less profitable for investors mainly
because of the higher fees.
69. Which of the following did not contribute to the financial crisis?
70. Credit default swaps are
71. What should be the primary goal of financial management?