Name:
Class:
Date:
Multiple Choice
1. The primary objective of the firm is _______.
a.
shareholder wealth maximization
b.
social responsibility
c.
long-run survival
d.
profit maximization
a
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
d
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 _____ decisions.
a.
investing
b.
financing
c.
dividend
d.
tax implication
d
4. Shareholder wealth is measured by the ____ value of the shareholders’ common stock holdings.
a.
book
b.
market
c.
historic
d.
compound
b
5. The limitations of the profit maximization goal include which of the following?
a.
It lacks a time dimension (i.e., it is static).
b.
It fails to consider risk with alternative decisions.
c.
The definition of profit is ambiguous.
d.
All the above are limitations.
d
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 benefits expected
c.
benefits only certain stockholders
d.
does not provide a standard against which to judge actual decisions
Name:
Class:
Date:
b
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
d
8. Which of the following is NOT a professional certification for careers in the field of finance?
a.
Certified Financial Manager (CFM)
b.
Certified Financial Planner (CFP)
c.
Certified Financial Analyst (CFA)
d.
Certified Treasury Professional (CTP)
9. When considering the risk of receiving cash flows, financial managers must be aware that investors _____.
a.
want higher returns for perceived greater risk
b.
want a lower valued firm to discourage future investors which might dilute their existing control
c.
expect dividends and capital gains regardless of the risks associated with achieving them
d.
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 of these are correct
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
b
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
Name:
Class:
Date:
d.
job security
a
13. ____ arise from the divergent objectives between owners and managers.
a.
Shareholder relationships
b.
Stakeholder problems
c.
Creditor problems
d.
Agency problems
d
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 expenditures to structure the organization
c.
flotation costs
d.
bonding expenditures
c
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
a
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
c
17. Agency problems may give rise to constraints that ____ the market value of firms.
a.
increase
b.
decrease
c.
do not affect
d.
are not important to
b
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
b
Name:
Class:
Date:
19. ____ are largely outside of the direct control of managers.
a.
Investment strategies
b.
Economic environment factors
c.
Major policy decisions
d.
Dividend policies
b
20. The success of a firm is linked to its stakeholders. This group includes _____.
a.
communities in which they operate
b.
suppliers
c.
employees
d.
All of these are correct
d
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.
collecting all the facts bearing on the problem
b.
clarifying the parameters of the problem
c.
involving all parties with a financial interest in the outcome
d.
seeking equity for those who may be affected
c
22. Many entrepreneurs are ____ diversified with respect to their personal wealth.
a.
poorly
b.
highly
c.
well
d.
90%
a
23. ____ deals with economic decisions of individuals, households, and firms.
a.
Economic accounting
b.
Microeconomics
c.
Blue Chip econometrics
d.
Macroeconomics
b
24. Financial management draws heavily on the following related disciplines:
a.
accounting
b.
macroeconomics
c.
microeconomics
d.
All of these disciplines are applicable
d
Name:
Class:
Date:
25. The chief financial officer (CFO) normally has responsibility for all of the following EXCEPT _____.
a.
advertising strategy
b.
managing interest rate risk
c.
trading foreign currencies
d.
accounting functions
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
d
27. Per 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
b
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
b
31. The chief financial officer (CFO) of a corporation normally reports to the ____ of the company.
Name:
Class:
Date:
a.
chairman of the board of directors
b.
chief operating officer
c.
controller
d.
chief executive officer
d
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
b
33. All of the following economic environment factors affect stock prices EXCEPT _____.
a.
investment strategies
b.
competition
c.
tax rates
d.
currency exchange rates
a
34. The major factors that determine the market value of a company’s shares of stock include all of the following
EXCEPT ____.
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
c
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
b
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
c
Name:
Class:
Date:
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
b
38. The most important objective of the firm is to _____.
a.
make MC=MR
b.
maximize profits
c.
minimize agency costs
d.
None of these are correct
d
39. Firms normally recognize responsibilities to various constituencies, such as each of the following EXCEPT _____.
a.
To sustain an optimum return on investment for stockholders
b.
To be perceived by customers as a provider of quality service
c.
To demonstrate that investors are the firm’s most valuable resource
d.
To provide corporate leadership in the communities it serves
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
41. Accounting is concerned primarily with matching _____.
a.
cost-based revenues and expenses
b.
tax liability and future cash flows
c.
revenue and long-term debt
d.
inventory and cost of sales
42. The bottom-line earnings figure from the accounting system is misleading 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 _____.
Name:
Class:
Date:
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
b
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
a
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
c
46. Corporate officers normally include all the following EXCEPT _____.
a.
Secretary
b.
Chief operating officer
c.
Treasurer
d.
Financial analyst
d
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
b
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
c
49. Concern for the interests of the stakeholders can be viewed as the means to the end of _____.
a.
maximizing long-term shareholder wealth
Name:
Class:
Date:
b.
diminishing marginal return
c.
maximizing risk
d.
continuing legal litigation
a
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
c
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
a
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.
All of these are correct
d
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
b
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
b
55. Corporate securities represent claims against the _____.
a.
corporate officers of the firm
b.
agents of the corporation
Name:
Class:
Date:
c.
liabilities and net worth of the firm
d.
assets and future earnings of the firm
d
56. ____ is (are) referred to as a residual form of ownership in a corporation.
a.
Common stock
b.
Preferred stock
c.
Bonds
d.
Dividends
a
57. The advantages of the corporate form of organization over both sole proprietorships and partnerships include ____.
a.
limited liability and lower tax rates
b.
permanency and lower tax rates
c.
limited liability and permanency
d.
lower tax rates and permanency
c
58. Although this type of business generates 4.1% of the total U.S. business revenue, ____ make up approximately 72% of
all businesses.
a.
general partnerships
b.
corporations
c.
limited partnerships
d.
sole-proprietorships
d
59. All of the following are advantages of the corporate form of business organization EXCEPT _____.
a.
permanent legal existence
b.
unlimited liability
c.
flexibility in ownership change
d.
ability to raise capital
b
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 the risks associated with alternative decisions.
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
c
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 dividends will be paid.
Name:
Class:
Date:
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
d
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.
amount of cash flows expected
b.
sales generated
c.
timing of cash flows
d.
risk taken to generate cash flows
b
63. A microeconomic concept used in financial management is _____.
a.
full utilization of data processing
b.
setting marginal costs equal to marginal revenues
c.
accrual basis of recognizing revenues and expenses
d.
target capital structure
b
64. All of the following are responsibilities of a controller EXCEPT _____.
a.
financial accounting
b.
taxes
c.
data processing
d.
pension fund management
d
65. Which of the following forms of business organization have 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
b
66. The managerial decision rule 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
d
Name:
Class:
Date:
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
c
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
b
69. What one of the following is a function of the CFO?
a.
Control of the marketing functions of the firm
b.
Effective communication with the investment community about the firm’s performance
c.
Oversight of engineering
d.
Determination of effective manufacturing strategies
b
70. Per the Small Business Administration, what percent of all businesses are considered small businesses?
a.
>20%
b.
>75%
c.
>95%
d.
>50%
c
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
which of the following?
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.
d
72. Because of accounting scandals, several methods have been developed to deal with the issues of corporate governance
and include all 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.
The majority of members on the Board of Directors should be independent directors
d.
The Board of Directors must disclose whether it has adopted a code of ethics for the CEO and senior financial
Name:
Class:
Date:
officers
a
73. Maximization of shareholder wealth is not an accounting concept. A corporation’s value should be based on _____
value.
a.
liquidation
b.
book
c.
market
d.
stock
c
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.
reduced litigation expense
b.
greater agency costs
c.
reduced damages expenses
d.
a more favorable impression by customers and investors
b
75. Examples of agency costs incurred by shareholders to minimize agency problems are expenditures associated with
_____.
a.
independent auditing
b.
SEC approval
c.
monitoring management’s actions
d.
inventory control
c
76. Choose the correct option below.
I. Macroeconomics deals with the economic decisions of individuals, households, and firms.
II. Microeconomics looks at the economy as a whole.
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.
d
77. In recent years, front-page stories of ethical issues have exploded and focused attention on ethical practices. 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
d
Name:
Class:
Date:
78. ____ 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
b
Essay
79. Explain the organization and governance in a corporation.
officer, president, vice-president(s), treasurer, and secretary.
80. Identify the five competitive forces that influence an industry’s structure.
5. The rivalry among current competitors
81. What are the shortcomings in the profit maximization objective as a managerial strategy?
1.
Profit maximization lacks a time dimension.
permitted in recognizing and accounting for costs and revenues.
profit, or EPS.
4.
There is no direct way to consider the risk associated with alternative decisions.
82. Preferred stock is considered priority stock. Explain this priority.
stockholders in the distribution of the corporation’s assets.
83. What is the advantage of an LLC over an LLP business form?
1.
2.
3.
84. List examples of agency costs that are incurred by shareholders in trying to minimize agency problems.
4. The opportunity cost of lost profits arising from complex organizational structures that prevent