6) The primary activity of a financial manager is ________.
A) analyzing accrued earnings
B) making an investment decision
C) preparing organization charts
D) auditing financial statements
7) Which of the following activities of a finance manager determines the types of assets the firm
holds?
A) budget allocation
B) investment decisions
C) financing decisions
D) analyzing and planning cash flows
8) While making financing decisions, a financial manager should ________.
A) determine the appropriate mix of short-term and long-term financing
B) decide on which individual securities to select for investment
C) analyze quarterly budget and performance reports
D) improve the productivity of manufacturing products
9) An investment decision taken by a financial manager will consider ________.
A) tax payable at the end of a year
B) working capital generated during an operating cycle
C) funds used to purchase land
D) issue of long-term notes
10) While managing a firm’s assets, a financial manager should include ________.
A) ending balance of retained earnings
B) earnings before tax
C) cash
D) accounts payable
11) Which of the following activities of a finance manager determines how the firm raises
money to pay for the assets in which it invests?
A) financial analysis and planning
B) investment decisions
C) financing decisions
D) analyzing and planning cash flows
12) A financial manager’s investment decisions determine ________.
A) both the mix and the type of assets found on the firm’s balance sheet
B) both the mix and the type of liabilities found on the firm’s balance sheet
C) both the mix and the type of assets and liabilities found on the firm’s balance sheet
D) both the mix and the type of short-term and long-term financing
13) In planning and managing the requirements of a firm, the financial manager is concerned
with ________.
A) the mix and type of assets, but not the type of financing utilized
B) the type of financing utilized, but not the mix and type of assets
C) the acquisition of fixed assets, allowing someone else to plan the level of current assets
required, and the market value of the share
D) the mix and type of assets, the type of financing utilized, and analysis in order to monitor the
financial condition
14) A financial manager’s financing decisions determine ________.
A) both the mix and the type of assets found on the firm’s balance sheet
B) the most appropriate mix of short-term and long-term financing
C) both the mix and the type of assets and liabilities found on the firm’s balance sheet
D) the proportion of the firm’s earnings to be paid as dividend
1.6 Describe the nature of the principle-agent relationship between owners and managers of a
corporation, and explain how various corporate governance mechanisms attempt to manage
agency problems.
1) Institutional investors are professional investors who work on behalf of individuals, business,
and government.
2) The board of directors is responsible for managing day-to-day operations and carrying out the
policies established by the chief executive officer.
3) The major purpose of the Sarbanes-Oxley Act of 2002 was to place caps on the compensation
that could be paid to corporate executives.
4) Agents of corporate owners are themselves owners of the firm and have been elected by all
the corporate owners to represent them in decision-making and management of the firm.
5) An agency problem occurs when a firm selects an ineffective marketing, advertising, and PR
firm to represent them.
6) Performance plans are plans that tie management compensation to measures such as EPS or
growth in EPS.
7) The president or chief executive officer is elected by a firm’s stockholders and has ultimate
authority to guide corporate affairs and make general policy.
8) The board of directors is typically responsible for ________.
A) approving strategic goals and plans
B) managing day-to-day operations
C) arranging finance for approved long-term investments
D) maintaining and controlling the firm’s daily cash balances
9) The Sarbanes-Oxley Act of 2002 was passed in response to ________.
A) insider trading activities
B) false disclosures in financial reporting
C) the decline in technology stocks
D) the agency issue
10) The Sarbanes-Oxley Act of 2002 resulted in ________.
A) tightened audit regulations and controls
B) toughened penalties against overcompensated executives
C) lenient penalties against executives who commit corporate fraud
D) delayed disclosure of stock sales by corporate executives
11) The true owner(s) of the corporation is (are) the ________.
A) board of directors
B) chief executive officer
C) stockholders
D) creditors
12) The ________ has/have the ultimate responsibility in guiding corporate affairs and carrying
out policies.
A) board of directors
B) chief financial officer
C) stockholders
D) creditors
13) The responsibility for managing day-to-day operations and carrying out corporate policies
belongs to the ________.
A) board of directors
B) chief executive officer
C) stockholders
D) creditors
14) In a corporation, the board of directors are elected by the ________.
A) chief executive officer
B) creditors
C) stockholders
D) employees
15) Agency problem arises when managers deviate from the goal of maximisation of shareholder
wealth by placing their personal goals ahead of the goals of shareholders.
16) Which of the following is an example of agency cost?
A) costs incurred for setting up an agency
B) failure of making the best investment decision
C) payment of income tax
D) payment of interest
17) Which of the following is the best measure to ensure that management decisions are in the
best interest of the stockholders?
A) fire managers who are inefficient
B) remove management’s perquisites
C) tie management compensation to the performance of the company’s common stock price
D) tie management compensation to the level of dividend per share
18) ________ is one of the solution to the agency problem in publicly-held corporations.
A) Stock options
B) Stock split
C) Demotion of employee designation
D) Distribution of dividends
19) Incentive plans usually tie management compensation to ________.
A) share price
B) dividends
C) coupon payments
D) inventory turnover
20) If managers are not owners of their company, then they are ________.
A) dealers
B) agents
C) bondholders
D) brokers
21) The conflict between the goals of a firm’s owners and the goals of its non-owner managers is
________.
A) the agency problem
B) incompatibility
C) serious only when profits decline
D) the window-dressing
22) The agency problem may result from a manager’s concerns about ________.
A) job security
B) maximizing shareholder value
C) corporate goals
D) increasing creditworthiness
23) Which of the following is an example of agency costs?
A) cost of labor
B) raw material cost
C) monitoring expenditures cost
D) factory rent