CHAPTER 1: THE ROLE AND OBJECTIVE OF FINANCIAL
MANAGEMENT
1. The primary objective of the firm is:
a. Shareholder wealth maximization
b. Social responsibility
c. Long run survival
d. Profit maximization
2. The shareholder wealth maximization goal states that management should seek to maximize the of the
expected future returns to the owners of the firm.
a. Future value
b. Compound value
c. Percentage value
d. Present value
3. Financial managers can take a variety of actions to influence the market value of a company’s stock. All of the
following are classifications of actions taken EXCEPT:
a. investing decisions
b. financing decisions
c. dividend decisions
d. tax implication decisions
4. Shareholder wealth is measured by the of the shareholders‘ common stock holdings.
a. Book value
b. Market value
c. Historic value
d. Compound value
5. 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
Chapter 1: The Role and Objective of Financial Management
6. 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. neither considers the timing of the benefits received nor benefits only certain stockholders
7. 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
8. 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
9. When considering the risk of receiving cash flows, financial managers must be aware that:
a. investors want higher returns for perceived greater risk.
b. investors want a lower valued firm to discourage future investors which might dilute their existing control.
c. investors expect dividends and capital gains regardless of the risks associated with achieving them.
d. investors always want lower returns so that the risk is minimized.
10. 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
Chapter 1: The Role and Objective of Financial Management
11. 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
12. Giving top management is one method that ensures managers will act in the interest of shareholders in
merger decisions.
a. “golden parachute” contracts
b. excellent pay
c. executive perks
d. job security
13. arise from the divergent objectives between owners and managers.
a. Shareholder relationships
b. Stakeholder problems
c. Creditor problems
d. Agency problems
14. Agency costs include all of the following except:
a. expenditures to monitor management’s actions
b. providing stock as part of management’s compensation
c. flotation costs
d. bonding expenditures
15. A potential agency conflict can arise between stockholders and creditors because owners may
a. increase the risk of a firm’s investments
b. decrease the amount of debt outstanding
c. decrease the risk of a firm’s investments
d. increase the firm’s net worth
Chapter 1: The Role and Objective of Financial Management
16. Creditors have a fixed financial claim on a company’s resources through all of the following EXCEPT:
a. long term debt
b. bank loans
c. preferred stock
d. commercial paper
17. Agency problems may give rise to costs that the market value of firms.
a. increase
b. decrease
c. do not affect
d. are not important to
18. 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
19. are largely outside of the direct control of managers.
a. investment strategies
b. economic environment factors
c. major policy decisions
d. dividend policies
20. The success of a firm is linked to its stakeholders. This group includes:
a. community neighbors
b. suppliers
c. employees
d. all of these
Chapter 1: The Role and Objective of Financial Management
21. Techniques identified by John Casey that managers could keep in mind when addressing the ethical dimensions of
a business problem include all of the following except:
a. collect all the facts bearing on the problem
b. clarify the parameters of the problem
c. involve all parties with a financial interest in the outcome
d. seek equity for those who may be affected
22. Many small business owners are diversified with respect to their personal wealth.
a. poorly
b. highly
c. well
d. 90%
23. deals with economic decisions of individuals, households, and firms.
a. Economic accounting
b. Microeconomics
c. Blue Chip econometrics
d. Macroeconomics
24. Financial management draws heavily on the following related disciplines:
a. accounting
b. macroeconomics
c. microeconomics
d. all of these
25. 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
Chapter 1: The Role and Objective of Financial Management
26. 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
27. According to the shareholder wealth maximization goal, management should seek to maximize the of the
to_______owners.
a. present value; expected pretax cash flows
b. future value; expected pretax cash flows
c. present value; expected future returns
d. future value; expected future returns
28. 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
29. Among the most important agency relationships in the context of finance is (are) the relationship(s) between .
a. stockholders and creditors
b. management and workers
c. stockholders and creditors, and management and workers
d. management and creditors
30. Protective covenants in a company’s bond indentures are used in agency relationships involving .
a. stockholders and managers
b. stockholders and creditors
c. management and workers
d. management and creditors
Chapter 1: The Role and Objective of Financial Management
31. 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
32. 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
33. All of the following economic environment factors affect stock prices except:
a. investment strategies
b. competition
c. tax rates
d. currency exchange rates
34. 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. risk of its cash flows and the timing of its cash flows
35. 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. that both have their own agendas
Chapter 1: The Role and Objective of Financial Management
36. 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. union-management relations
37. The activities of the treasurer include all of the following except:
a. financial planning
b. tax preparation
c. credit analysis
d. pension fund management
38. The most important managerial objective is to:
a. make MC=MR
b. maximize profits
c. minimize agency costs
d. none of these
39. 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
40. One method of decreasing the cash outflows of a firm is to
a. decrease depreciation
b. increase capital expenditures
c. decrease dividends
d. increase debt repayment
Chapter 1: The Role and Objective of Financial Management
41. Accounting is concerned primarily with matching:
a. cost-based revenue and expenses
b. tax liability and future cash flows
c. revenue and long term debt
d. inventory and cost of sales
42. Generally accepted accounting principles are ambiguous in the determination of a firm’s net income because:
a. it does not reflect actual cash inflows and outflows of the firm
b. stock dividends are difficult to forecast
c. depreciation is a cash outlay but is not reflected as such
d. tax laws change regularly which cause the firm to misjudge its true tax obligation
43. The accountant’s role in the firm is to do all of the following except:
a. prepare financial statements
b. determine the feasibility of certain investment decisions
c. determine the tax liability of the firm
d. keep records of the firm’s performance
44. The financial manager uses when determining the firm’s most appropriate capital structure.
a. accounting data
b. employment benefit data
c. federal regulations
d. computer software design
45. The net present value rule provides appropriate guidance for financial decision makers when costs are incurred
immediately but
a. future cash flows are not known with certainty
b. marginal costs are equal to marginal revenue
c. result in a stream of benefits over several future time periods
d. marginal costs are greater than marginal revenue
46. Corporate officers normally include all the following except:
a. Secretary
b. Chief operating officer
c. Treasurer
d. Financial analyst
Chapter 1: The Role and Objective of Financial Management
47. The difference between a firm’s annual after-tax operating profit and its total annual cost of capital is known as:
a. earned income
b. Economic Value Added
c. Managerial Value Added
d. operating income
48. 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
49. Concern for the interests of the shareholder can be viewed as the means to the end of:
a. maximizing long-term shareholder wealth
b. diminishing marginal return
c. maximizing risk
d. continuing legal litigation
50. The net present value of an investment made by a firm represents the contribution of that investment to the of
the firm.
a. book value
b. profit
c. value
d. cash flow
51. 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
52. An advantage that the corporate form of business has over either the sole proprietorship or partnership is the:
a. ability to raise capital
b. ease of changing ownership
c. limited liability
d. elimination of double taxes
Chapter 1: The Role and Objective of Financial Management
53. 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
54. 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
55. Corporate securities represent claims against the
a. corporate officers of the firm
b. agents of the corporation
c. liabilities and net worth of the firm
d. assets and future earnings of the firm
56. is (are) referred to as a residual form of ownership in a corporation.
a. Common stock
b. Preferred stock
c. Bonds
d. Dividends
57. The advantages of the corporate form of organization over both sole proprietorships and partnerships include .
a. limited liability
b. permanency
c. limited liability and permanency
d. lower tax rates
58. Although this type of business generates less than 6% of the total U.S. business revenue, make up
approximately 75% of all businesses.
a. general partnerships
b. corporations
c. limited partnerships
d. sole-proprietorships
Chapter 1: The Role and Objective of Financial Management
59. All of the following are advantages of the corporate form of business organization EXCEPT:
a. unlimited life
b. unlimited liability
c. flexibility in ownership change
d. ability to raise capital
60. There are problems with using the “profit maximization” criterion. Which of the following is/are correct?
I. Profit maximization has an ambiguous definition of “maximizing profits”.
II. Profit maximization fails to consider risk.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
61. Which of the following statements is/are correct?
I. Shareholders elect the Chairman of the Board
II. The board of directors has no control over whether or not dividends will be paid.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
62. There are three major factors that determine the market value of a company’s share of stock. All of the following
are factors EXCEPT:
a. Cash flows
b. Sales generated
c. Timing of cash flows
d. Risk taken to generate cash flows
63. An economic principle used in finance is:
a. Full utilization of data processing
b. Marginal analysis where marginal costs are set equal to marginal revenues.
c. Accrual basis of recognizing revenues and expenses
d. Target capital structure
Chapter 1: The Role and Objective of Financial Management
64. The definition of the marginal analysis principle is that financial decisions are made and actions are taken
a. within the global economic viewpoint.
b. with regard to governmental laws and cultural effectiveness.
c. when the added benefits exceed the added costs.
d. based on the impact of public opinion.
65. There are three forms of business organization. Which of the following has unlimited liability?
I. Corporation
II. General partnership
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
66. The managerial decision that emerges from the microeconomic profit maximization model is:
a. Marginal Costs < Marginal Revenues
b. Marginal Costs = Profits
c. Marginal Revenues > Marginal Costs
d. Marginal Costs = Marginal Revenue
67. Sole proprietorships, partnerships and corporations are the three main forms of business organization. There are
other types which are referred to as hybrids. Examples of hybrid business forms are:
a. 10K & 14B Corporations
b. Section 8 and Subchapter S Corporations
c. Subchapter S and LLCs
d. 10K Corporations and LLCs
68. The type of corporate security that pays periodic interest as well as the eventual return of principal is:
a. Preferred stock
b. Debt Securities
c. Equity Securities
d. Fixed asset loans
Chapter 1: The Role and Objective of Financial Management
69. What is the function of the CFO?
a. Control of the accounting functions of the firm.
b. Effective communication with the investment community about the firm’s performance.
c. Oversight of the financial statements.
d. Determination of effective tax reduction strategies.
70. According to the Small Business Administration, what percent of all businesses are considered small businesses?
a. >20%
b. >75%
c. >95%
d. >50%
71. Financial decisions should be consistent with the goal of shareholder wealth maximization. However, there may be
a divergence between shareholder wealth maximization and the actual goals of management. The primary reason
for this is:
a. Management wants to ensure good public relations.
b. The Board of Directors is becoming increasingly uninvolved within the corporation.
c. Shareholders do not feel that wealth maximization is relevant.
d. There is a separation of ownership and control in corporations.
72. As a result of accounting scandals, several methods have been developed to deal with the issues of corporate
governance. They are all of the following EXCEPT:
a. The Board must select only SEC approved consultants.
b. Chairman of the Board position should be split from the CEO position.
c. Board of Directors should have a majority of independent directors.
d. The Board of Directors must explain its approach for adopting a code of ethics for the CEO and senior financial
officers.
73. Maximization of shareholder wealth is not an accounting concept. A corporation’s value should be based on
a. liquidation value
b. book value
c. market value
d. stock value
Chapter 1: The Role and Objective of Financial Management
74. A corporation that operates ethically will notice certain benefits as it applies to shareholder wealth
maximization. With shareholder wealth maximization in mind, all of the following could be experienced by an
ethical corporation EXCEPT:
a. The corporation can expect to have reduced litigation expense.
b. The cooperation can expect to have greater agency costs.
c. The corporation can expect to have reduced damages expenses.
d. The corporation can expect to have a more favorable impression by customers and investors.
75. Examples of agency costs incurred by shareholders to minimize agency problems are:
a. Expenditures associated with independent auditing.
b. Expenditures associated with SEC approval.
c. Expenditures associated with monitoring management’s actions
d. Expenditures associated with inventory control.
76. Explain the chain of command in a corporation.
77. There are five competitive forces that influence an industry’s structure.
78. What are the shortcomings in the profit maximization objective as a managerial strategy?
4. There is no direct way to consider the risk associated with alternative decisions.
79. Preferred stock is considered priority stock. Explain this priority.
Chapter 1: The Role and Objective of Financial Management
80. What is the advantage of an LLC over an LLP business form?
81. List examples of agency costs which are incurred by shareholders in trying to minimize agency problems.
82. Since small business owners have much of their own money tied up in their business, small business owners are
most concerned with:
a. avoiding risk
b. making a profit
c. expanding
d. inventory control
83. Between 2008–2009 there were several ethical issues that caused the financial collapse. All of the following are a
breach of financial ethics except:
a. collateralized mortgage obligation scandal
b. Treasury bond trading scandal
c. insider stock trading scandal
d. economic stimulus package scandal
84. provide a direct measure of the success of decisions made by a firm’s managers.
a. profits
b. stock prices
c. sales
d. dividends per share