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Chapter 01: An Overview of Financial Management and the Financial Environment
LOCAL STANDARDS:
United States - OH - Default City - TBA
TOPICS:
Value maximization
22. With which of the following statements would most people in business agree?
a.
The short-run profits of a corporation will almost always increase if the firm takes actions the government has
determined are in the nation's best interests.
b.
Government agencies and firms almost always agree with one another regarding the restrictions that should be
placed on hiring and firing employees.
c.
Although people's moral characters are probably developed before they get into a business school, it is still
useful for business schools to cover ethics, including giving students an idea about the adverse consequences
of unethical behavior to themselves, their firms, and the nation.
d.
Developing a formal set of rules defining ethical and unethical behavior is not useful for a large corporation.
Such rules generally can't be applied in many specific instances, so it is better to deal with ethical issues on a
case-by-case basis.
e.
Because of the courage it takes to blow the whistle, "whistle blowers" are generally promoted more rapidly
than other employees.
ANSWER:
c
23. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
a.
Maximize the stock price per share over the long run, which is the stock's intrinsic value.
b.
Maximize the firm's expected EPS.
c.
Minimize the chances of losses.
d.
Maximize the firm's expected total income.
e.
Maximize the stock price on a specific target date.
ANSWER:
a
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24. Which of the following statements is CORRECT?
a.
The financial manager's proper goal should be to attempt to maximize the firm's expected cash flows, since
that will add the most to the individual shareholders' wealth.
b.
The financial manager should seek that combination of assets, liabilities, and capital that will generate the
largest expected projected after-tax income over the relevant time horizon, generally the coming year.
c.
The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the
firm selects, and thus on the firm's assets. However, EPS is not affected by the manner in which those assets
are financed.
d.
Potential agency problems can arise between managers and stockholders, because managers hired as agents to
act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders.
e.
Large, publicly owned firms like IBM and GE are controlled by their management teams. Ownership is
generally widely dispersed; hence managers have great freedom in how they run the firm. Managers may
operate in stockholders' best interests, but they also may operate in their own personal best interests. As long
as they stay within the law, there is no way to either force or motivate managers to act in the stockholders' best
interests.
ANSWER:
d
25. Which of the following statements is CORRECT?
Chapter 01: An Overview of Financial Management and the Financial Environment
a.
Corporations generally are subject to more favorable tax treatment and fewer regulations than partnerships and
sole proprietorships, which is why corporations do most of the business in the United States.
b.
Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder
value than are managers who do not face the threat of hostile takeovers.
c.
One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their
investment in the firm.
d.
Because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large
amounts of outside capital than it is for corporations.
e.
Bond covenants are an effective way to resolve conflicts between shareholders and managers.
ANSWER:
c
26. Which of the following statements is CORRECT?
a.
A good goal for a firm's management is maximization of expected EPS.
b.
Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from
their favorable tax treatment.
c.
Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms'
actions to maximize their stock prices have little benefit to society.
d.
Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to
unlimited liability, but the liability of all investors in the other types of businesses is more limited.
e.
The potential exists for agency conflicts between stockholders and managers.
ANSWER:
e
27. Which of the following statements is CORRECT?
a.
One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are
exposed to more personal liability than partners.
b.
There is no good reason to expect a firm's bondholders and stockholders to react differently to the types of
new asset investments a firm makes.
c.
Bondholders are generally more willing than stockholders to have managers invest in risky projects with high
potential returns as opposed to safer projects with lower expected returns.
d.
Stockholders are generally more willing than bondholders to have managers invest in risky projects with high
potential returns as opposed to safer projects with lower expected returns.
e.
Relative to sole proprietorships, corporations generally face fewer regulations, which makes raising capital
easier for corporations.
ANSWER:
d
28. If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms
or individuals, Firm A is a financial intermediary.
a.
True
b.
False
ANSWER:
True
29. You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the
reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the
following statements best describes this transaction?
a.
This is an example of an exchange of physical assets.
b.
This is an example of a primary market transaction.
c.
This is an example of a direct transfer of capital.
d.
This is an example of a money market transaction.
e.
This is an example of a derivatives market transaction
ANSWER:
c
30. Debt is a less risky than equity because a debtholder's claim has priority to an equity holder's claim.
a.
True
b.
False
ANSWER:
True
31. Which of the following statements is CORRECT?
a.
If expected inflation increases, interest rates are likely to increase.
b.
If individuals in general increase the percentage of their income that they save, interest rates are likely to
increase.
c.
If companies have fewer good investment opportunities, interest rates are likely to increase.
d.
Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of
bankruptcy, hence the riskiness of all debt securities.
e.
Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.
ANSWER:
a
32. Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not
expected, what effect, other things held constant, would that have on bond prices and interest rates?
a.
Prices and interest rates would both rise.
b.
Prices would rise and interest rates would decline.
c.
Prices and interest rates would both decline.
d.
There would be no changes in either prices or interest rates.
e.
Prices would decline and interest rates would rise.
ANSWER:
e
33. Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?
a.
Households start saving a larger percentage of their income.
b.
The economy moves from a boom to a recession.
c.
The level of inflation begins to decline.
d.
Corporations step up their expansion plans and thus increase their demand for capital.
e.
The Federal Reserve uses monetary policy in an attempt to stimulate the economy.
ANSWER:
d
34. Which of the following factors would be most likely to lead to an increase in interest rates in the economy?
a.
Households reduce their consumption and increase their savings.
b.
The Federal Reserve decides to try to stimulate the economy.
c.
There is a decrease in expected inflation.
d.
The economy falls into a recession.
e.
Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment
to reduce labor costs.
ANSWER:
e
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35.
If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.
a.
True
b.
False
ANSWER:
False
36. Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per
share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a
primary market transaction.
a.
True
b.
False
ANSWER:
True
37. Which of the following is a primary market transaction?
a.
You sell 200 shares of Johnson & Johnson stock on the NYSE through your broker.
Chapter 01: An Overview of Financial Management and the Financial Environment
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b.
Johnson & Johnson issues 2,000,000 shares of new stock and sells them to the public through an investment
banker.
c.
You buy 200 shares of Johnson & Johnson stock from your younger brother. You just give him cash and he
gives you the stock⎯the trade is not made through a broker.
d.
One financial institution buys 200,000 shares of Johnson & Johnson stock from another institution. An
investment banker arranges the transaction.
e.
You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of Johnson & Johnson shares
on the NYSE.
ANSWER:
b
38. Which of the following statements is CORRECT?
a.
If Apple issues additional shares of common stock through an investment banker, this would be a secondary
market transaction.
b.
If you purchased 100 shares of Apple stock from your sister-in-law, this would be an example of a primary
market transaction.
c.
The IPO market is a subset of the secondary market.
d.
Only institutions, and not individuals, can participate in derivatives market transactions.
e.
As they are generally defined, money market transactions involve debt securities with maturities of less than
one year.
ANSWER:
a
39. You recently sold 200 shares of Apple stock to your brother. The transfer was made through a broker, and the trade
occurred on the NYSE. This is an example of:
a.
A futures market transaction.
Chapter 01: An Overview of Financial Management and the Financial Environment
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b.
A primary market transaction.
c.
A secondary market transaction.
d.
A money market transaction.
e.
An over-the-counter market transaction.
ANSWER:
c
40. Which of the following statements is NOT CORRECT?
a.
When a corporation's shares are owned by a few individuals and are not traded on public markets, we say that
the firm is "closely, or privately, held."
b.
"Going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will
always exist for the firm's shares.
c.
When stock in a closely held corporation is offered to the public for the first time, the transaction is called
"going public," and the market for such stock is called the new issue market.
d.
Publicly owned companies have shares owned by investors who are not associated with management, and
public companies must register with and report to a regulatory agency such as the SEC.
e.
It is possible for a firm to go public and yet not raise any additional new capital at the time.
ANSWER:
b
41. Money markets are markets for
a.
Foreign stocks.
b.
Consumer automobile loans.
c.
U.S. stocks.
Chapter 01: An Overview of Financial Management and the Financial Environment
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d.
Short-term debt securities.
e.
Long-term bonds.
ANSWER:
d
