Foundations of Financial Management, 17e (Block)
Chapter 1 The Goals and Activities of Financial Management
1) As finance emerged as a new field, much emphasis was placed on mergers and acquisitions.
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, the reorganization of financially troubled corporations, and bankruptcy.
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) How investors handle risk is an important topic that usually only economists observe.
10) Mortgage-backed securities were devalued by accounting standards because of the high
credit ratings (AAA).
11) “Credit default swaps” are one of several tools that Congress and the President of the United
States have jointly developed to ease the financial crisis that began in 2008.
12) The Dodd-Frank Act was created by Congress along with its goals and regulatory
responsibility, but it is facilitated by various agencies.
13) The Dodd-Frank Act contains the Volcker Rule, which encourages financial institutions to
allow for more speculative investments for average investors.
14) The Dodd-Frank Act’s oversight allowing regulation of banking fees and available products
has been considered as not being in the best interests of a free market.
15) The Internet impacts e-commerce by creating a mechanism for improved communications
between a business, its customers, and its suppliers.
16) The Internet is responsible for many new business models.
17) Businesses will increasingly rely on B2B Internet applications to speed up the cash flows
through their firms.
18) Sole proprietorship means single-person ownership and offers the advantages of simplicity of
decision making and low organizational and operating costs.
19) Under the 2017 Tax Cuts and Jobs Act, the most significant change is that the corporate tax
rate goes from 35 percent to 21 percent, which puts U.S. Companies on competitive footing with
many other countries.
20) Profits of sole proprietorships are taxed at corporate tax rates.
21) Sole Proprietorships, partnerships and limited liability partnerships are considered pass
through forms of organizations because the income passes through to the owners and is taxed at
the owner’s individual tax rate.
22) To reduce the burden on small firms, the government established a 25 percent deduction of
qualified business income from pass through businesses.
23) There is unlimited liability in a general partnership.
24) A limited partnership limits the profits partners may receive.
25) In terms of revenues and profits, the corporation is by far the most important form of
business organization in the United States.
26) As noted in Finance in Action, initial public offerings have now increased because long-term
results are favored by shareholders and institutional investors.
27) Dividends paid to corporate stockholders have already been taxed once as corporate income.
28) 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.
29) A corporation must have more than 100 stockholders to qualify for Subchapter S
designation.
30) Profits of a Subchapter S corporation are taxed at corporate tax rates.
31) The formation of a Subchapter S corporation is a way to circumvent the double taxation of a
small corporation.
32) Corporate governance issues have become less important to the financial community during
the first decade of the new millennium.
33) Agency theory examines the relationship between companies and their customers.
34) Institutional investors have had increasing influence over corporations with their ability to
vote with large blocks of stock and replace poorly performing boards of directors.
35) Agency theory assumes that corporate managers act to increase the wealth of corporate
shareholders.
36) The Sarbanes-Oxley Act reduced agency conflicts by giving corporate managers greater
flexibility to select their preferred candidates to the board of directors.
37) 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.
38) The Sarbanes-Oxley Act is primarily intended to increase public scrutiny of private
companies that had previously been exempt from many public disclosure requirements.
39) Timing is not a particularly important consideration in financial decisions.
40) The higher the profit of a firm, the higher the value the firm is in the market.
41) There are some serious problems with the financial goal of maximizing the earnings of the
firm.
42) Maximizing Shareholder wealth can be difficult due to daily fluctuations in stock value in
combination with changing investor expectations.
43) Maximizing the earnings of the firm is the main goal of financial management.
44) The ultimate measure of performance is not what the firm profits, but how the profits are
valued by the investor.
45) Because socially desirable goals can hinder profitability in many instances, managers should
not try to operate under the assumption of wealth maximization.
46) Insider trading involves the use of information not available to the general public to make
profits from trading in a company’s stock.
47) If an investor hears of a large change that a company is going to make through a news article
and reacts quicker than any other investor, it is considered insider trading.
48) When an investor has the ability to control how the stock price changes, that is considered
insider trading.
49) Social responsibility and profit maximization are synonymous.
50) Irrational exuberance is when companies have stock that is undervalued.
51) Financial markets exist as a vast global network of individuals and financial institutions that
may be lenders, borrowers, or owners of public companies worldwide.
52) Money markets refer to those markets dealing with short-term securities having a life of one
year or less.
53) Money markets refer to markets where excess corporate cash is exchanged for foreign
currencies that can earn a higher return than domestic money.
54) Capital markets refer to those markets dealing with short-term securities that have a life of
one year or less.
55) The primary market includes the sale of securities by way of initial public offerings.
56) When a company is looking to raise money through issuing more shares of stock, that is
considered in the secondary market.
57) 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.
58) 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.
59) The secondary market characteristically has had stable prices over the past 20 years.
60) In the United States, stocks sold on either the New York Stock Exchange or NASDAQ are
considered sold in the primary market.
61) New issues are sold in the secondary market.
62) Existing securities are traded in the secondary market.
63) 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.
64) Higher returns always induce that stockholders should invest in a company.
65) Higher return means that the public company has lower risk.
66) Social responsibility is an expense and thus should be avoided by financial managers because
it will lead to loss of income.
67) Financial management requires both short-term activities as well as long-term planning such
as raising funds.
68) One of the primary disadvantages of maximizing shareholder value is that it only provides a
short-term perspective.
69) If a company has a written code of ethics, they will generally avoid ethical problems.
70) Risk management will be an important factor over the next decade.
71) With the creation of Internet trading, trading through brokers became less profitable for
investors mainly because of the higher fees.
72) Which of the following did not contribute to the financial crisis?
A) Solid credit ratings from the ratings agencies
B) The extension of credit to high-risk borrowers
C) The merger of JPMorgan Chase and Bear Stearns
D) All of the options contributed to the financial crisis.
73) Credit default swaps are
A) an insurance product designed to protect financial institutions from customers who default on
their loans.
B) securities with a maturity of less than one year.
C) the result of a leveling off or slowing down of stock price increases.
D) market trades in previously issued securities.
74) What should be the primary goal of financial management?
A) Increased earnings
B) Maximizing cash flow
C) Maximizing shareholder wealth
D) Minimizing risk of the firm