Chapter 1—An Overview of Managerial Finance
TRUE/FALSE
1. In general, the role of the financial manager is to plan for the acquisition and use of
funds so as to maximize the value of the firm.
ANS: T DIF: Easy TOP: Financial manager
2. The financial manager must execute his or her duties independent of the other activities
of the firm in order to properly maximize the value of the firm.
ANS: F DIF: Easy TOP: Financial manager
3. Two key limitations of the proprietorship form of business involve potential difficulty in
raising needed capital and the presence of unlimited personal liability for business
debts.
ANS: T DIF: Easy TOP: Proprietorship
4. A hostile takeover involves an attempt by one group of stockholders to solicit votes
from other stockholders in order to put a new management team into place and is
usually motivated by low stock price.
ANS: F DIF: Easy TOP: Hostile takeover
5. No firm can take cost-increasing, socially responsible actions in a competitive
marketplace and expect to continue to compete, even if those cost-increasing actions
yield significant benefits to the firm.
ANS: F DIF: Easy TOP: Social responsibility
6. The proper goal of the financial manager should be to maximize the firm's expected
profit, because this will add the most wealth to each of the individual shareholders
(owners) of the firm.
ANS: F DIF: Easy TOP: Goal of firm
7. One way to state the decision framework most useful for carrying out the firm's
objective is that the financial managers should seek that combination of assets,
liabilities, and capital which will generate the largest expected projected income over
the relevant time horizon.
ANS: F DIF: Easy TOP: Objectives of firm
8. The riskiness inherent in a firm's earnings per share (EPS) depends on both the types of
projects the firm takes on and the manner in which the projects are financed.
ANS: T DIF: Easy TOP: Risk and earnings
,9. Performance shares are dollar bonuses awarded to managers on the basis of corporate
performance.
ANS: F DIF: Easy TOP: Managerial incentives
10. Normal profits are those that result in rates of return that are just sufficient to attract
new capital in financial markets.
ANS: T DIF: Easy TOP: Normal profits
11. If a firm's managers want to maximize stock price it is in their best interests to operate
efficient, low-cost plants, develop new and safe products that consumers want, and
maintain good relationships with customers, suppliers, creditors, and the communities
in which they operate.
ANS: T DIF: Easy TOP: Social welfare and finance
12. In a competitive marketplace "good ethics" is a wonderful idea but an impractical
standard. There are simply too few benefits to be gained from maintaining high
business ethics.
ANS: F DIF: Easy TOP: Business ethics
13. Exchange rate risk is the risk that the cash flows from a foreign project will be worth
less than those same cash flows denominated in the parent company's home currency.
ANS: T DIF: Easy TOP: Exchange rate risk
14. A financial manager's task is to make decisions concerning the acquisition and use of
funds for the greatest benefit of the firm.
ANS: T DIF: Easy TOP: Financial management
15. Incentive compensation plans are used to attract and retain top managerial talent as
well as to align the interests of management with shareholders.
ANS: T DIF: Easy TOP: Managerial incentives
16. The finance function is relatively independent of most other corporate functions.
Marketing decisions, for example, might affect the firm's need for funds but are not
affected by conditions in financial markets or other financing issues.
ANS: F DIF: Medium TOP: Financial management
17. In a competitive marketplace, if managers deviate too far from making decisions that
are consistent with stockholder wealth maximization, they risk being disciplined by the
market. Part of this discipline involves the threat of being taken over by groups who are
more aligned with stockholder interests.
ANS: T DIF: Medium TOP: Managerial incentives
,18. The disadvantages associated with a proprietorship are similar to those under a
partnership. One exception to this is due to the formal nature of the partnership
agreement and the commitment of the partners' personal assets. As a result,
partnerships do not have difficulty raising large amounts of capital.
ANS: F DIF: Medium TOP: Partnership
19. The term multinational corporation is used to describe a firm that operates in two more
countries.
ANS: T DIF: Medium TOP: Multinational corporations
20. Nations do not have the sovereignty to expropriate the assets of a firm without
compensation.
ANS: F DIF: Medium TOP: Political risk
21. Having the manager's compensation tied to the company's performance increases the
agency problem that corporations face.
ANS: F DIF: Medium TOP: Agency problem
22. Managers of firms using accounting manipulations to inflate current earnings are likely
to generate long-term benefits to the shareholders of the firm.
ANS: F DIF: Medium TOP: Business Ethics
23. A proprietorship is an unincorporated business owned by one individual and the owner
benefits from the limited liability for business which limits his losses to what he has
invested in the company.
ANS: F DIF: Medium TOP: Proprietorship
24. The corporate charter is a document filed with the secretary of the state in which the
firm is incorporated that provides information about the company, including its name,
address, directors, and amount of capital stock.
ANS: T DIF: Medium TOP: Corporate charter and bylaws
25. Industrial groups are organizations comprised of companies in different industries with
common ownership interests, which include firms necessary to sell and manufacture
products.
ANS: T DIF: Medium TOP: Foreign forms of business
MULTIPLE CHOICE
1. The primary goal of a publicly-owned firm interested in serving its stockholders should
be to
a. Minimize the debt used by a firm.
, b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.
ANS: D DIF: Easy OBJ: TYPE: Conceptual TOP: Goal of firm
2. Which of the following mechanisms is not used by shareholders to get managers to act
in shareholder's best interests?
a. Threat of firing
b. Managerial compensation.
c. Golden parachute.
d. Threat of takeover.
e. Answers b and c above.
ANS: C DIF: Easy OBJ: TYPE: Conceptual
TOP: Managerial incentives
3. Which of the following is a reason why companies move into international operations?
a. To take advantage of lower production costs in regions of inexpensive labor.
b. To develop new markets for their finished products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the above.
ANS: E DIF: Easy OBJ: TYPE: Conceptual
TOP: International operations motivation
4. Which of the following should be the primary goal pursued by the financial manager of a
firm?
a. Maximize net income (profits).
b. Maximize the firm's net worth, or book value.
c. Maximize dividends paid to common stockholders.
TRUE/FALSE
1. In general, the role of the financial manager is to plan for the acquisition and use of
funds so as to maximize the value of the firm.
ANS: T DIF: Easy TOP: Financial manager
2. The financial manager must execute his or her duties independent of the other activities
of the firm in order to properly maximize the value of the firm.
ANS: F DIF: Easy TOP: Financial manager
3. Two key limitations of the proprietorship form of business involve potential difficulty in
raising needed capital and the presence of unlimited personal liability for business
debts.
ANS: T DIF: Easy TOP: Proprietorship
4. A hostile takeover involves an attempt by one group of stockholders to solicit votes
from other stockholders in order to put a new management team into place and is
usually motivated by low stock price.
ANS: F DIF: Easy TOP: Hostile takeover
5. No firm can take cost-increasing, socially responsible actions in a competitive
marketplace and expect to continue to compete, even if those cost-increasing actions
yield significant benefits to the firm.
ANS: F DIF: Easy TOP: Social responsibility
6. The proper goal of the financial manager should be to maximize the firm's expected
profit, because this will add the most wealth to each of the individual shareholders
(owners) of the firm.
ANS: F DIF: Easy TOP: Goal of firm
7. One way to state the decision framework most useful for carrying out the firm's
objective is that the financial managers should seek that combination of assets,
liabilities, and capital which will generate the largest expected projected income over
the relevant time horizon.
ANS: F DIF: Easy TOP: Objectives of firm
8. The riskiness inherent in a firm's earnings per share (EPS) depends on both the types of
projects the firm takes on and the manner in which the projects are financed.
ANS: T DIF: Easy TOP: Risk and earnings
,9. Performance shares are dollar bonuses awarded to managers on the basis of corporate
performance.
ANS: F DIF: Easy TOP: Managerial incentives
10. Normal profits are those that result in rates of return that are just sufficient to attract
new capital in financial markets.
ANS: T DIF: Easy TOP: Normal profits
11. If a firm's managers want to maximize stock price it is in their best interests to operate
efficient, low-cost plants, develop new and safe products that consumers want, and
maintain good relationships with customers, suppliers, creditors, and the communities
in which they operate.
ANS: T DIF: Easy TOP: Social welfare and finance
12. In a competitive marketplace "good ethics" is a wonderful idea but an impractical
standard. There are simply too few benefits to be gained from maintaining high
business ethics.
ANS: F DIF: Easy TOP: Business ethics
13. Exchange rate risk is the risk that the cash flows from a foreign project will be worth
less than those same cash flows denominated in the parent company's home currency.
ANS: T DIF: Easy TOP: Exchange rate risk
14. A financial manager's task is to make decisions concerning the acquisition and use of
funds for the greatest benefit of the firm.
ANS: T DIF: Easy TOP: Financial management
15. Incentive compensation plans are used to attract and retain top managerial talent as
well as to align the interests of management with shareholders.
ANS: T DIF: Easy TOP: Managerial incentives
16. The finance function is relatively independent of most other corporate functions.
Marketing decisions, for example, might affect the firm's need for funds but are not
affected by conditions in financial markets or other financing issues.
ANS: F DIF: Medium TOP: Financial management
17. In a competitive marketplace, if managers deviate too far from making decisions that
are consistent with stockholder wealth maximization, they risk being disciplined by the
market. Part of this discipline involves the threat of being taken over by groups who are
more aligned with stockholder interests.
ANS: T DIF: Medium TOP: Managerial incentives
,18. The disadvantages associated with a proprietorship are similar to those under a
partnership. One exception to this is due to the formal nature of the partnership
agreement and the commitment of the partners' personal assets. As a result,
partnerships do not have difficulty raising large amounts of capital.
ANS: F DIF: Medium TOP: Partnership
19. The term multinational corporation is used to describe a firm that operates in two more
countries.
ANS: T DIF: Medium TOP: Multinational corporations
20. Nations do not have the sovereignty to expropriate the assets of a firm without
compensation.
ANS: F DIF: Medium TOP: Political risk
21. Having the manager's compensation tied to the company's performance increases the
agency problem that corporations face.
ANS: F DIF: Medium TOP: Agency problem
22. Managers of firms using accounting manipulations to inflate current earnings are likely
to generate long-term benefits to the shareholders of the firm.
ANS: F DIF: Medium TOP: Business Ethics
23. A proprietorship is an unincorporated business owned by one individual and the owner
benefits from the limited liability for business which limits his losses to what he has
invested in the company.
ANS: F DIF: Medium TOP: Proprietorship
24. The corporate charter is a document filed with the secretary of the state in which the
firm is incorporated that provides information about the company, including its name,
address, directors, and amount of capital stock.
ANS: T DIF: Medium TOP: Corporate charter and bylaws
25. Industrial groups are organizations comprised of companies in different industries with
common ownership interests, which include firms necessary to sell and manufacture
products.
ANS: T DIF: Medium TOP: Foreign forms of business
MULTIPLE CHOICE
1. The primary goal of a publicly-owned firm interested in serving its stockholders should
be to
a. Minimize the debt used by a firm.
, b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.
ANS: D DIF: Easy OBJ: TYPE: Conceptual TOP: Goal of firm
2. Which of the following mechanisms is not used by shareholders to get managers to act
in shareholder's best interests?
a. Threat of firing
b. Managerial compensation.
c. Golden parachute.
d. Threat of takeover.
e. Answers b and c above.
ANS: C DIF: Easy OBJ: TYPE: Conceptual
TOP: Managerial incentives
3. Which of the following is a reason why companies move into international operations?
a. To take advantage of lower production costs in regions of inexpensive labor.
b. To develop new markets for their finished products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the above.
ANS: E DIF: Easy OBJ: TYPE: Conceptual
TOP: International operations motivation
4. Which of the following should be the primary goal pursued by the financial manager of a
firm?
a. Maximize net income (profits).
b. Maximize the firm's net worth, or book value.
c. Maximize dividends paid to common stockholders.
