Principles of Managerial Finance, Brief, 7e (Gitman)
Chapter 1 The Role of Managerial Finance
1.1 Define finance and the managerial finance function.
1) A financial analyst is responsible for maintaining and controlling a firm’s daily cash balances.
2) Finance is concerned with the process institutions, markets, and instruments involved in the
transfer of money among and between individuals, businesses, and government.
3) Financial managers administer the financial affairs of all types of businesses such as private
and public, large and small, and profit seeking and not for profit.
4) Financial managers perform different tasks developing a financial plan or budget, extending
credit to customers, evaluating proposed large expenditures, and raising money to fund a firm’s
operations.
5) A capital expenditures analyst/manager is responsible for the evaluation and recommendation
of proposed asset investments.
6) A controller administers a firm’s credit policy by analyzing or managing the evaluation of
credit applications, extending credit, and monitoring and collecting accounts receivable.
7) In large companies, CEOs are legally responsible for coordinating the assets and liabilities of
employees’ pension fund.
8) A controller typically handles the accounting activities, such as tax management, data
processing, financial accounting, and cost accounting.
9) Managerial finance is concerned with design and delivery of advice and financial products to
individuals, businesses, and governments.
10) ________ is concerned with design and delivery of advice and financial products to
individuals, businesses, and governments.
A) Managerial finance
B) Auditing services
C) Financial services
D) Cost accounting
11) Managerial finance ________.
A) involves tasks such as budgeting, financial forecasting, cash management, and funds
procurement
B) involves the design and delivery of advice and financial products
C) recognizes funds on an accrual basis
D) devotes the majority of its attention to the collection and presentation of financial data
12) Finance is ________.
A) the system of verifying, analyzing, and recording business transactions
B) the science of production, distribution, and consumption of goods and services
C) the art and science of managing money
D) the art of merchandising products and services
13) Which of the following is an area of career opportunities in financial services?
A) supply chain management
B) personal financial planning
C) auditing of financial statements
D) production planning
14) Which of the following is an area of career opportunities in managerial finance?
A) investment
B) real estate and insurance
C) capital expenditures management
D) personal financial planning
15) Which of the following is a duty of a financial manager in a business firm?
A) developing marketing plans
B) controlling the stock price
C) raising financial resources
D) auditing financial records
16) A ________ is responsible for evaluating and recommending proposed long-term
investments.
A) financial analyst
B) credit manager
C) pension fund manager
D) capital expenditures manager
1.2 Describe the legal forms of business organization.
1) In partnerships, owners have unlimited liability and may have to cover debts of other less
financially sound partners.
2) In partnerships, partners can readily transfer their wealth to other partners.
3) A sole proprietor has unlimited liability; his or her total investment in a business, but not his
or her personal assets, can be taken to satisfy creditors.
4) In a limited partnership, all partners’ liabilities are limited to their investment in the
partnership.
5) A treasurer is responsible for a firm’s accounting activities, such as corporate accounting, tax
management, financial accounting, and cost accounting.
6) Which of the following legal forms of organization is most expensive to organize?
A) sole proprietorships
B) partnerships
C) corporations
D) limited partnership
7) Which of the following legal forms of organization has the ease of dissolution?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
8) Under which of the following legal forms of organization is ownership readily transferable?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
9) Which of the following forms of organizations is the easiest to form?
A) sole proprietorships
B) limited liability corporation
C) limited partnership
D) S-corporations
10) A major weakness of a partnership is ________.
A) the difficulty in maintaining owners’ control
B) the difficulty in liquidating or transferring ownership
C) the double taxation of income
D) its high organizational costs
11) Which of the following is a strength of a corporation?
A) low taxes
B) limited liability
C) low organization costs
D) less government regulation
12) Which of the following legal forms of organizations is characterized by unlimited liability?
A) sole proprietorship
B) limited partnership
C) corporation
D) C-corporation
13) Which of the following is the purest and most basic form of corporate ownership?
A) bond
B) notes
C) common stock
D) preferred stock
14) Which of the following is true of a partnership and a corporation?
A) In a corporation, income is taxed at the corporate level; whereas, in a partnership, income is
taxed twice.
B) In a partnership, income is taxed at the corporate level; whereas, in a corporation, income is
taxed twice.
C) Income from both forms of organizations are double-taxed.
D) In a partnership, income is exempted from tax up to $10 million; whereas, in a corporation,
income is taxed twice.
15) Which of the following is true of sole proprietorships and corporations?
A) It is difficult to transfer ownership of corporations compared to that of sole proprietorships.
B) Income from both forms of organizations are taxed only at the corporate level.
C) Both sole proprietorships and corporations are equally scrutinized and regulated by
government bodies.
D) In sole proprietorships, owners have unlimited liability; whereas, in corporations, owners
have limited liability.
1.3 Describe the goal of the firm, and explain why maximizing the value of the firm is an
appropriate goal for a business.
1) High net cash flow with fixed risk is generally associated with a higher share price.
2) When considering a firm’s financial decision alternative, financial managers should accept
only those actions that are expected to increase the firm’s profitability.
3) To achieve the goal of profit maximization for each alternative being considered, a financial
manager would select the one that is expected to result in the highest return.
4) Dividend payments change directly with changes in earnings per share.
5) The wealth of corporate owners is measured by the share price of a stock.
6) Risk, the magnitude and timing of cash flows are the key determinants of share price, which
represent the wealth of owners in a firm.
7) A higher earnings per share (EPS) does not necessarily translate into a higher stock price.
8) The profit maximization goal ignores the timing of returns, does not directly consider cash
flows, and ignores risk.
9) When considering a firm’s financial decision alternative, financial managers should accept
only those actions that are expected to maximize shareholder value.
10) An increase in a firm’s risk will always result in a higher share price since a stockholder must
be compensated for the greater risk.
11) Stockholders expect to earn higher rates of return on investments with lower risk and lower
rates of return on investments with higher risk.
12) The goal of business ethics is to motivate business and market participants to adhere to both
the letter and the spirit of laws and regulations in all aspects of business and professional
practice.
13) The primary goal of a financial manager is ________.
A) minimizing risk
B) maximizing profit
C) maximizing wealth
D) minimizing return
14) Corporate owners receive return ________.
A) by realizing gains through increases in share price and interest earnings
B) by realizing gains through increases in share price and cash dividends
C) through capital appreciation and retained earnings
D) through interest earnings and earnings per share
15) The wealth of the owners of a corporation is represented by ________.
A) profits
B) earnings per share
C) share value
D) cash flow
16) Wealth maximization as the goal of a firm implies enhancing the wealth of ________.
A) the auditors
B) the creditors
C) the federal reserve
D) the firm’s stockholders
17) The amount earned during the accounting period on each outstanding share of common stock
is called ________.
A) dividend per share
B) earnings per share
C) net profits after taxes
D) book value per share
18) Which of the following is the best measure of profit maximization goal?
A) retained earnings
B) risk of the investment
C) earnings per share
D) timing of the returns
19) Profit maximization as a goal is ideal because it directly considers ________.
A) risk and book value of assets
B) timing and cash flow
C) timing and risk
D) EPS and stock price.
20) Profit maximization as the goal of the firm is not ideal because ________.
A) profits are only accounting measures
B) cash flows are more representative of financial strength
C) profit maximization does not consider risk
D) profits today are less desirable than profits earned in future years
21) Which of the following is a measure of profit maximization to shareholders?
A) the timing of returns
B) earnings per share
C) current assets
D) market risk premium
22) The key variables in the owner wealth maximization process are ________.
A) market risk premium and risk
B) cash flows and risk
C) risk-free rate and share price
D) total assets and risk
23) Cash flows and risk are the key determinants in share price. Increased cash flow results in
________, other things remaining the same.
A) a lower share price
B) a higher share price
C) an unchanged share price
D) an undetermined share price
24) Cash flows and risk are the key determinants in share price. Increased risk, other things
remaining the same, results in ________.
A) a lower share price
B) a higher share price
C) an unchanged share price
D) an undetermined share price
25) Financial managers evaluating decision alternatives or potential actions must consider
________.
A) only risk
B) only return
C) either risk or return
D) risk, return, and the impact on share price
26) An ethics program is expected to have ________ impact on a firm’s share price.
A) a positive
B) a negative
C) no impact
D) an unpredictable
27) Which of the following is true of cash flows and risk?
A) Low cash flow and low risk result in an increase in share price.
B) High cash flow and low risk result in an increase in share price.
C) High cash flow and high risk result in an increase in share price.
D) Lo cash flow and high risk result in an increase in share price.
28) As the risk of a stock investment increases, investors’ ________.
A) return will increase
B) return will decrease
C) required rate of return will decrease
D) required rate of return will increase
29) If the CEO of a company were to pass away, what do you think would happen to price of the
stock?
A) It would decrease because of the perceived increased risk due of lack of near-term leadership.
B) It would increase because of the perceived increased risk due of lack of near-term leadership.
C) It would decrease because of the perceived decreased risk due of lack of near-term leadership.
D) It would increase because of the perceived decreased risk due of lack of near-term leadership.
30) Which of the following is true of a cash flow?
A) Profits do not necessarily result in cash flows available to the stockholders.
B) It is guaranteed that the board of directors will increase dividends when net cashflows
increase.
C) A firm’s income statement will never show a positive profit when its cash outflows exceed its
cash inflows.
D) An increase in revenue will always result in an increase in cash flow.
31) A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset
costs $35,000 and is expected to provide earnings over a three-year period as described below.
Based on the wealth maximization goal, the financial manager would choose ________.
A) Asset 1
B) Asset 2
C) Asset 3
D) Asset 4
32) A financial manager must choose between three alternative investments. Each asset is
expected to provide earnings over a three-year period as described below. Based on the wealth
maximization goal, the financial manager would ________.
A) choose Asset 1
B) choose Asset 2
C) choose Asset 3
D) be indifferent between Asset 1 and Asset 2
33) Which of the following is true of stakeholders?
A) They are the owners of a firm.
B) They are groups to whom a firm has financial obligations.
C) They are groups having a direct economic link to a firm.
D) They include only the bondholders, common stockholders, and preferred stockholders
34) Which of the following is an example of a firm’s stakeholder?
A) suppliers
B) Federal reserve
C) media
D) competitors
35) Which of the following is considered as a violation of business ethics?
A) earnings management
B) repurchase of shares
C) using the call option on a callable bond when the interest rate is low
D) paying a high amount of dividends every year