CHAPTER 1
AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL ENVIRONMENT
True/False
Easy:
(1.2) Firm organization Answer: b EAS
Y
1. The form of organization for a business is not an important issue, as this decision has very
little effect on the income and wealth of the firm's owners.
a. True
b. False
(1.2) Firm organization Answer: b EAS
Y
2. The major advantage of a regular partnership or a corporation as a form of business
organization is the fact that both offer their owners limited liability, whereas
proprietorships do not.
a. True
b. False
(1.2) Partnership Answer: a EAS
Y
,3. There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2)
limited life of the organization, and (3) difficulty of transferring ownership. These combine
to make it difficult for partnerships to attract large amounts of capital and thus to grow to a
very large size.
a. True
b. False
(1.2) Proprietorship Answer: a EAS
Y
4. Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital
and (2) the owner's unlimited personal liability for the business' debts.
a. True
b. False
(1.2) Limited liability Answer: a EAS
Y
5. One key value of limited liability is that it lowers owners' risks and thereby enhances a
firm's value.
a. True
b. False
(1.3) Value maximization Answer: b EAS
Y
6. If a firm's goal is to maximize its earnings per share, this is the best way to maximize the
price of the common stock and thus shareholders' wealth.
, a. True
b. False
(1.4) Financial intermediaries Answer: a EAS
Y
7. 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
(1.7) Financial markets Answer: b EAS
Y
8. If an individual investor buys or sells a currently outstanding stock through a broker, this is
a primary market transaction.
a. True
b. False
(1.7) Financial markets Answer: a EAS
Y
9. 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
, (1.10) Stock market transactions Answer: a EAS
Y
10. One of the functions of NYSE specialists is to facilitate trading by keeping an inventory of
shares of the stocks in which they specialize, buying when investors want to sell and selling
when they want to buy. They change the bid and ask prices of the securities so as to keep
supply and demand in balance.
a. True
b. False
AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL ENVIRONMENT
True/False
Easy:
(1.2) Firm organization Answer: b EAS
Y
1. The form of organization for a business is not an important issue, as this decision has very
little effect on the income and wealth of the firm's owners.
a. True
b. False
(1.2) Firm organization Answer: b EAS
Y
2. The major advantage of a regular partnership or a corporation as a form of business
organization is the fact that both offer their owners limited liability, whereas
proprietorships do not.
a. True
b. False
(1.2) Partnership Answer: a EAS
Y
,3. There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2)
limited life of the organization, and (3) difficulty of transferring ownership. These combine
to make it difficult for partnerships to attract large amounts of capital and thus to grow to a
very large size.
a. True
b. False
(1.2) Proprietorship Answer: a EAS
Y
4. Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital
and (2) the owner's unlimited personal liability for the business' debts.
a. True
b. False
(1.2) Limited liability Answer: a EAS
Y
5. One key value of limited liability is that it lowers owners' risks and thereby enhances a
firm's value.
a. True
b. False
(1.3) Value maximization Answer: b EAS
Y
6. If a firm's goal is to maximize its earnings per share, this is the best way to maximize the
price of the common stock and thus shareholders' wealth.
, a. True
b. False
(1.4) Financial intermediaries Answer: a EAS
Y
7. 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
(1.7) Financial markets Answer: b EAS
Y
8. If an individual investor buys or sells a currently outstanding stock through a broker, this is
a primary market transaction.
a. True
b. False
(1.7) Financial markets Answer: a EAS
Y
9. 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
, (1.10) Stock market transactions Answer: a EAS
Y
10. One of the functions of NYSE specialists is to facilitate trading by keeping an inventory of
shares of the stocks in which they specialize, buying when investors want to sell and selling
when they want to buy. They change the bid and ask prices of the securities so as to keep
supply and demand in balance.
a. True
b. False
