Test Bank for Fundamentals of Financial Management, 17th Edition by Eugene F. Brigham

Chap 01 17e - Brigham Complete Chapters Included ✅

Indicate whether the statement is true or false.
1. A stock's market price would equal its intrinsic value if all investors had all the information that is available about
the stock. In this case, the stock's market price would equal its intrinsic value.
a. True
b. False

ANSWER: True

2. If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific
stockholders), it should design an executive compensation system whose focus is on the firm's long-term value.
a. True
b. False

ANSWER: True

3. A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm
and replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers
can improve the economy. However, hostile takeovers are controversial, and legislative actions have been taken
to make them more difficult to undertake.
a. True
b. False

ANSWER: True

4. If management operates in a manner designed to maximize the firm's expected profits for the current year, this
will also maximize the stockholders' wealth as of the current year.
a. True
b. False

ANSWER: False

5. If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it
would be a good buy.
a. True
b. False

ANSWER: False

6. One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes
bankrupt. This problem would be avoided if you formed a corporation to operate the business.
a. True
b. False

ANSWER: True




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7. It is generally harder to transfer one's ownership interest in a partnership than in a corporation.
a. True
b. False

ANSWER: True

8. For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.
a. True
b. False

ANSWER: False

9. In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.
a. True
b. False

ANSWER: False

10. If a lower-level person in a firm does something illegal, like "cooking the books" to understate costs and thereby
increase profits above the correct profits because they were told to do so by a superior, the lower-level person
cannot be prosecuted, but the superior can be prosecuted.
a. True
b. False

ANSWER: False

11. One advantage of the corporate form of organization is that it avoids double taxation.
a. True
b. False

ANSWER: False

12. Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values.
This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.
a. True
b. False

ANSWER: False

13. The Chairman of the Board must also be the CEO.
a. True
b. False

ANSWER: False




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Chap 01 17e - Brigham

14. Partnerships and proprietorships generally have a tax advantage over corporations.
a. True
b. False

ANSWER: True

15. Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.
a. True
b. False

ANSWER: True

16. In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in
the long run, or the stock's "intrinsic value."
a. True
b. False

ANSWER: True

17. The board of directors is the highest-ranking body in a corporation, and the chairman of the board is the highest-
ranking individual. The CEO generally works under the board and its chairman, and the board generally has the
authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but they
can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a
person to simultaneously serve as CEO and chairman of the board, though many corporate control experts
believe it is bad to vest both offices in the same person.
a. True
b. False

ANSWER: True

18. ​The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its
price fell and sell it if it rose, barring any new information coming out about the stock. It is the "marginal investor"
who determines the actual stock price.
a. True
b. False

ANSWER: True

19. As a result of financial scandals occurring during the past decade, there has been a strong push to improve
business ethics.
a. True
b. False

ANSWER: True




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Chap 01 17e - Brigham

20. If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold.
a. True
b. False

ANSWER: False

21. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive
legal documents are required.
a. True
b. False

ANSWER: False

22. In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a
specific target date.
a. True
b. False

ANSWER: False

Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements
are used in multiple-choice questions.

Multiple Choice: True/False

23. In most corporations, the CFO ranks under the CEO.
a. True
b. False

ANSWER: True

24. If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its
stockholders will have to pay personal taxes on the firm's net income.
a. True
b. False

ANSWER: True

25. Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations'
stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to
transfer shares of stock than partnership interests.
a. True
b. False

ANSWER: True




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