Chapter 01 – The Goals and Functions of Financial Management
1. As finance emerged as a new field, much emphasis was placed on mergers and
acquisitions.
Chapter 01 – The Goals and Functions of Financial Management
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, reorganization of financially troubled corporations and
bankruptcy.
Chapter 01 – The Goals and Functions of Financial Management
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. The Internet impacts e-commerce by creating a mechanism for improved communications
between a business, its customers, and its suppliers.
Chapter 01 – The Goals and Functions of Financial Management
10. The Internet has accounted for an acceleration of productivity for “old economy” firms.
11. The Internet is responsible for many new business models.
12. Businesses will increasingly rely on B2B Internet applications to speed up the cash flows
through their firms.
13. The sole proprietorship represents single-person ownership and offers the advantages of
simplicity of decision making and low organizational and operating costs.
14. Profits of sole proprietorships are taxed at corporate tax rates.
Chapter 01 – The Goals and Functions of Financial Management
15. There is unlimited liability in a general partnership.
16. The most common partnership arrangement carries limited liability to the partners.
17. A limited partnership limits the profits partners may receive.
18. In terms of revenues and profits, the corporation is by far the most important form of
business organization in the United States.
19. Dividends paid to corporate stockholders have already been taxed once as corporate
income.
Chapter 01 – The Goals and Functions of Financial Management
20. One advantage of the corporate form of organization is that income received by
stockholders is not taxable since the corporation already paid taxes on the income distributed.
21. A corporation must have more than 75 stockholders to qualify for Subchapter S
designation.
22. Profits of a Subchapter S corporation are taxed at corporate tax rates.
23. The formation of a Subchapter S corporation is a way to circumvent the double taxation of
a small corporation.
Chapter 01 – The Goals and Functions of Financial Management
24. Corporate governance issues have become less important to the financial community
during the first decade of the new millennium.
25. The issues of corporate governance are really agency problems.
26. Agency Theory examines the relationship between companies and their customers.
27. Institutional investors have had increasing influence over corporations with their ability to
vote large blocks of stock and replace poor performing boards of directors.
Chapter 01 – The Goals and Functions of Financial Management
28. Agency theory assumes that corporate managers act to increase the wealth of corporate
shareholders.
29. The Sarbanes Oxley Act reduced agency conflicts by giving corporate managers greater
flexibility to select their preferred candidates to the Board of Directors.
30. 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.
31. The Sarbanes Oxley Act is primarily intended to increase public scrutiny of private
companies that had previously been exempt from many public disclosure requirements.
Chapter 01 – The Goals and Functions of Financial Management
32. Timing is not a particularly important consideration in financial decisions.
33. The higher the profit of a firm, the higher the value the firm is assured of receiving in the
market.
34. There are some serious problems with the financial goal of maximizing the earnings of the
firm.
35. Maximizing the earnings of the firm is the goal of financial management.
Chapter 01 – The Goals and Functions of Financial Management
36. Because socially desirable goals can impede profitability in many instances, managers
should not try to operate under the assumption of wealth maximization.
37. Insider trading involves the use of information not available to the general public to make
profits from trading in a company’s stock.
38. Social responsibility and profit maximization are synonymous.
39. Financial markets exist as a vast global network of individuals and financial institutions
that may be lenders, borrowers, or owners of public companies worldwide.
Chapter 01 – The Goals and Functions of Financial Management
40. Money markets refer to those markets dealing with short-term securities having a life of
one year or less.
41. Money markets refer to markets where excess corporate cash is exchanged for foreign
currencies that can earn a higher return than domestic money.
42. Capital markets refer to those markets dealing with short-term securities having a life of
one year or less.
43. The primary market includes the sale of securities by way of initial public offerings.
Chapter 01 – The Goals and Functions of Financial Management
44. 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.
45. 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.
46. The secondary market characteristically has had stable prices over the past 20 years.
47. In the United States, stocks sold on either the New York Stock Exchange or NASDAQ are
considered sold in the primary market.
Chapter 01 – The Goals and Functions of Financial Management
48. New issues are sold in the secondary market.
49. Existing securities are traded in the secondary market.
50. 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.
51. Higher return always induces stockholders to invest in a company.
Chapter 01 – The Goals and Functions of Financial Management
52. Social responsibility is an expense and thus should be avoided by financial managers
because it will lead to loss of income.
53. Financial management requires both short-term activities as well as long-term planning
such as raising funds.
54. One of the primary disadvantages of maximizing shareholder value is that it only provides
a short-term perspective.
55. If a company has a written code of ethics, they will generally avoid ethical problems.
Chapter 01 – The Goals and Functions of Financial Management
56. Risk management will be an important factor over the next decade.
57. Which of the following did not contribute to the financial crisis?
58. Credit swaps are:
Chapter 01 – The Goals and Functions of Financial Management
59. What is the primary goal of financial management?
60. In the past, the study of finance has included
61. Professor Merton Miller received the Nobel prize in economics for his work on