Chapter 1 The Role of Managerial Finance

Principles of Managerial Finance, Brief Ed., 8e (Zutter/Smart)
Chapter 1 The Role of Managerial Finance

1.1 Finance and the firm.

1) A firm is a business organization that sells goods and services.
Answer: TRUE
Diff: 1
Topic: Finance and the firm
Learning Obj.: LG 1
Learning Outcome: F-01
AACSB: Analytical Thinking

2) In finance we say that the goal of the firm ought to be to maximize profits.
Answer: FALSE
Diff: 1
Topic: Finance and the firm
Learning Obj.: LG 1
Learning Outcome: F-01
AACSB: Analytical Thinking

3) Other things being equal, it is better to receive money sooner rather than later.
Answer: TRUE
Diff: 1
Topic: Managing the firm
Learning Obj.: LG 4
Learning Outcome: F-01
AACSB: Analytical Thinking

4) Financial managers evaluating decision alternatives or potential actions must consider
________.
A) only risk
B) only return
C) either risk or return
D) risk, return, and the impact on share price
Answer: D
Diff: 1
Topic: Maximize Shareholder Wealth
Learning Obj.: LG 3
Learning Outcome: F-01
AACSB: Analytical Thinking




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,5) If a firm earns a profit, it will necessarily also generate a positive cash flow.
Answer: FALSE
Diff: 2
Topic: Managing the firm
Learning Obj.: LG 4
Learning Outcome: F-01
AACSB: Analytical Thinking

6) If a firm's stockholders are risk averse, the firm can make its stockholders better off by earning
the highest possible returns on its investments.
Answer: FALSE
Diff: 2
Topic: Managing the firm
Learning Obj.: LG 4
Learning Outcome: F-01
AACSB: Analytical Thinking

7) Which of the following is an example of a firm's stakeholder?
A) suppliers
B) Federal Reserve
C) media
D) competitors
Answer: A
Diff: 1
Topic: What About Stakeholders?
Learning Obj.: LG 3
Learning Outcome: F-01
AACSB: Analytical Thinking




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,8) A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset
costs $35,000 and is expected to provide earnings over a three-year period as described below.




Based on the wealth maximization goal, the financial manager would choose ________.
A) Asset 1
B) Asset 2
C) Asset 3
D) Asset 4
Answer: A
Diff: 2
Topic: Maximize Shareholder Wealth
Learning Obj.: LG 3
Learning Outcome: F-01
AACSB: Reflective Thinking

9) In the most recent year, two different companies generated the same earnings per share. The
stocks of these two companies should trade at the same price.
Answer: FALSE
Diff: 2
Topic: Managing the firm
Learning Obj.: LG 4
Learning Outcome: F-01
AACSB: Analytical Thinking

10) One reason that firms exist is that most investors are risk averse, so they are not willing to
make the kinds of risky investments that firms typically undertake.
Answer: FALSE
Diff: 1
Topic: Finance and the firm
Learning Obj.: LG 1
Learning Outcome: F-01
AACSB: Analytical Thinking




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, 11) Which of the following is TRUE of stakeholders?
A) They are the owners of a firm.
B) They are groups to whom a firm has financial obligations.
C) They are groups having a direct economic link to a firm.
D) They include only the bondholders, common stockholders, and preferred stockholders.
Answer: C
Diff: 1
Topic: What About Stakeholders?
Learning Obj.: LG 3
Learning Outcome: F-01
AACSB: Analytical Thinking

12) Which of the following is TRUE regarding cash flow?
A) Profits do not necessarily result in cash flows available to the stockholders.
B) It is guaranteed that the board of directors will increase dividends when net cash flows
increase.
C) A firm's income statement will never show a positive profit when its cash outflows exceed its
cash inflows.
D) An increase in revenue will always result in an increase in cash flow.
Answer: A
Diff: 1
Topic: Maximize Shareholder Wealth
Learning Obj.: LG 3
Learning Outcome: F-01
AACSB: Analytical Thinking

13) Investors who are risk averse will make risky investments as long as they expect
compensation for doing so.
Answer: TRUE
Diff: 1
Topic: Managing the firm
Learning Obj.: LG 4
Learning Outcome: F-01
AACSB: Analytical Thinking

14) Which of the following is TRUE of cash flows and risk?
A) Lower cash flow and lower risk result in an increase in share price.
B) Higher cash flow and lower risk result in an increase in share price.
C) Higher cash flow and higher risk result in an increase in share price.
D) Lower cash flow and higher risk result in an increase in share price.
Answer: B
Diff: 1
Topic: Maximize Shareholder Wealth
Learning Obj.: LG 3
Learning Outcome: F-01
AACSB: Analytical Thinking


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