Complete Test Bank for Foundations of Finance (10th Edition) – Keown, Martin & Petty | Verified Exam Questions and Solutions

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Test Bank Foundations of Finance, 10th Edition

by Arthur Keown, John Martin, J. Petty

All Chapters | Expert Verified Answers | Graded A+




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Chapter 1 An Introduction to the Foundations of Financial Management
Learning Objective 1.1

1) Financial management deals with the maintenance and creation of economic value or
wealth.

Correct Answer: TRUE

Diff: 1 Page Ref: 3

Keywords: Financial Management Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking




2) Each financial decision made by a corporate manager can be evaluated by its direct impact
on the corporation's stock price.

Correct Answer: FALSE Diff: 1 Page Ref: 4

Keywords: Goal of the Firm Learning Obj.: L.O. 1.1 AACSB: Reflective Thinking



3) The fundamental goal of a business is to maximize the retained earnings available to the
corporation's shareholders.

Correct Answer: FALSE Diff: 1 Page Ref: 3

Keywords: Goal of the Firm Learning Obj.: L.O. 1.1 AACSB: Reflective Thinking



4) Shareholder wealth maximization means maximizing the price of the existing common
stock.

Correct Answer: TRUE

Diff: 1 Page Ref: 3

Keywords: Shareholder Wealth, Goal of the Firm Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

5) It is important to evaluate a corporate manager's financial decision by measuring the effect
the decision

should have on the corporation's stock price if everything else were held constant. Correct Answer:
TRUE

Diff: 2 Page Ref: 4


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Keywords: Goal of the Firm, Maximize Shareholder Wealth Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

6) Corporate managers should accept investment projects that maximize profits in the short
run because of the time value of money.

Correct Answer: FALSE Diff: 2 Page Ref: 4

Keywords: Goal of the Firm, Profits, Time Value of Money Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking




7) The goal of the firm's financial managers should be the maximization of the total value of
the firm's stock.

Correct Answer: TRUE Diff: 1 Page Ref: 3

Keywords: Goal of the Firm Learning Obj.: L.O. 1.1 AACSB: Reflective Thinking



8) The payment of a dividend to current shareholders will have no impact on a corporation's
share price because the cash paid is not available to future potential shareholders who may want to
buy the corporation's stock.

Correct Answer: FALSE Diff: 1 Page Ref: 4

Keywords: Goal of the Firm Learning Obj.: L.O. 1.1 AACSB: Reflective Thinking



9) One problem with maximization of shareholder wealth as a goal is that it ignores risk taken
by the firm's financial decisions.

Correct Answer: FALSE Diff: 1 Page Ref: 4

Keywords: Goal of the Firm Learning Obj.: L.O. 1.1 AACSB: Reflective Thinking

10) The goal of profit maximization ignores the risk of financial decisions. Correct Answer:
FALSE

Diff: 1 Page Ref: 4 Keywords: Goal of the Firm Learning Obj.: L.O. 1.1 AACSB: Reflective Thinking



11) Only a firm's financial decisions affect its stock prices.

Correct Answer: FALSE

Diff: 1 Page Ref: 4

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Keywords: Determinants of Stock Price Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

12) Shareholders react to poor investment or dividend decisions by causing the total value of
the firm's stock to fall, and they react to good decisions by bidding the price of the stock up.

Correct Answer: TRUE Diff: 2 Page Ref: 4

Keywords: Determinants of Stock Price Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

13) The primary goal of a publicly owned corporation is to

A) maximize dividends per share

B) maximize shareholder wealth

C) maximize earnings per share after taxes

D) minimize shareholder risk

Correct Answer: B

Diff: 1 Page Ref: 3

Keywords: Goal of the Firm, Corporation Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

14) Maximization of shareholder wealth

A) represents a zero sum game in which one corporation gains at the expense of others.

B) provides benefits to society as scarce resources are directed to their most productive use.

C) is not a practical goal since it cannot be measured effectively.

D) is achieved only if cash flows exceed accounting profits.

Correct Answer: B

Diff: 1 Page Ref: 3

Keywords: Goal of the Firm, Maximize Shareholder Wealth Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

15) A financial manager is considering two projects, A and B. A is expected to add $2 million to
profits this year while B is expected to add $1 million to profits this year. Which of the following
statements is MOST correct?

A) The manager should select project A because it maximizes profits.



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