TEST BANK For Foundations of Financial Management, 18th
Edition by Stanley Block, Geoffrey Hirt, Bartley Danielsen
The fundamental goal of business is... - ANSWER:To maximize shareholder wealth
Finance is.. - ANSWER:the study of how individuals, institutions, governments, and
businesses acquire, spend, and manage money and other financial assets
Financial Management is... - ANSWER:the maintenance and creation of economic
value or wealth by focusing on decision making with an eye toward creating wealth
7 Principles of Finance - ANSWER:1. Cash flow is what matters
2. Money has a time value
3. Make prices are generally right
4. Risk requires reward
5. Conflicts of interest cause agency problems
6. Diversification is important
7. Ethics and Trust
Incremental (marginal) cash flow - ANSWER:difference between the cash flow a
company would produce with and without a certain investment opportunity
Cash flow - ANSWER:movements of money into and out of a business, typically
categorized as cash flows from operations, investing, and financing
What is the most fundamental principle of finance? - ANSWER:Money has a time
value
Opportunity Cost - ANSWER:the most desirable alternative given up as the result of a
decision
Investors will not invest if they don't expect to receive a return that satisfies these
two requirements.. - ANSWER:1. A return for delaying consumption
2. An additional return for taking on risk
Efficient Market - ANSWER:prices of the assets traded in that market fully reflect all
available information at any instant in time
What is an efficient market characterized by? - ANSWER:large number of profit-
driven individuals who act very quickly by buying or selling shares of stock in
response to the release of new info
(T/F) Stock prices are a useful barometer of the value of a firm - ANSWER:True
, Managers can expect their company's share prices to respond quickly to investors
assessment of their decisions
Market Sentiment - ANSWER:The prevailing mood among investors about the future
outlook for an individual security or for the market; psychology of market
participants
(T/F) People tend to be overconfident when investing and mistake luck for skill -
ANSWER:True
Agency Problem - ANSWER:the possibility of conflict of interest between the
stockholders and management of a firm
Agency Costs - ANSWER:the costs of the conflict of interest between stockholders
and management; when the managers do not act in the best interests of their
principal
What is a possible downside to manager rewards? - ANSWER:Incentivize short
sighted decisions
Capital Budgeting - ANSWER:the process of planning and managing a firm's long-
term investments
Capital Structure Decision - ANSWER:the decision-making process with funding
choices and the mix of long-term sources of funds
(how should the firm raise homey to fund long term investments?)
Working Capital Management - ANSWER:the management of the firm's investment
in current assets and current liabilities
(how can the firm best manage its cash flows as they arise in day to day operations?)
Financial Markets - ANSWER:those institutions and procedures that facilitate
transactions in all types of financial claims
What is the role of the treasurer? - ANSWER:Financial Duties:
-cash and credit management
-making capital expenditure decisions
-raising funds
-financial planning
-managing any foreign currency received by the firm
*we will focus more on the treasurer's duties than the controllers
What is the role of the controller? - ANSWER:Accounting Duties:
-writing financial statements
Edition by Stanley Block, Geoffrey Hirt, Bartley Danielsen
The fundamental goal of business is... - ANSWER:To maximize shareholder wealth
Finance is.. - ANSWER:the study of how individuals, institutions, governments, and
businesses acquire, spend, and manage money and other financial assets
Financial Management is... - ANSWER:the maintenance and creation of economic
value or wealth by focusing on decision making with an eye toward creating wealth
7 Principles of Finance - ANSWER:1. Cash flow is what matters
2. Money has a time value
3. Make prices are generally right
4. Risk requires reward
5. Conflicts of interest cause agency problems
6. Diversification is important
7. Ethics and Trust
Incremental (marginal) cash flow - ANSWER:difference between the cash flow a
company would produce with and without a certain investment opportunity
Cash flow - ANSWER:movements of money into and out of a business, typically
categorized as cash flows from operations, investing, and financing
What is the most fundamental principle of finance? - ANSWER:Money has a time
value
Opportunity Cost - ANSWER:the most desirable alternative given up as the result of a
decision
Investors will not invest if they don't expect to receive a return that satisfies these
two requirements.. - ANSWER:1. A return for delaying consumption
2. An additional return for taking on risk
Efficient Market - ANSWER:prices of the assets traded in that market fully reflect all
available information at any instant in time
What is an efficient market characterized by? - ANSWER:large number of profit-
driven individuals who act very quickly by buying or selling shares of stock in
response to the release of new info
(T/F) Stock prices are a useful barometer of the value of a firm - ANSWER:True
, Managers can expect their company's share prices to respond quickly to investors
assessment of their decisions
Market Sentiment - ANSWER:The prevailing mood among investors about the future
outlook for an individual security or for the market; psychology of market
participants
(T/F) People tend to be overconfident when investing and mistake luck for skill -
ANSWER:True
Agency Problem - ANSWER:the possibility of conflict of interest between the
stockholders and management of a firm
Agency Costs - ANSWER:the costs of the conflict of interest between stockholders
and management; when the managers do not act in the best interests of their
principal
What is a possible downside to manager rewards? - ANSWER:Incentivize short
sighted decisions
Capital Budgeting - ANSWER:the process of planning and managing a firm's long-
term investments
Capital Structure Decision - ANSWER:the decision-making process with funding
choices and the mix of long-term sources of funds
(how should the firm raise homey to fund long term investments?)
Working Capital Management - ANSWER:the management of the firm's investment
in current assets and current liabilities
(how can the firm best manage its cash flows as they arise in day to day operations?)
Financial Markets - ANSWER:those institutions and procedures that facilitate
transactions in all types of financial claims
What is the role of the treasurer? - ANSWER:Financial Duties:
-cash and credit management
-making capital expenditure decisions
-raising funds
-financial planning
-managing any foreign currency received by the firm
*we will focus more on the treasurer's duties than the controllers
What is the role of the controller? - ANSWER:Accounting Duties:
-writing financial statements
