FIN 3403 CHAPTER 1 EXAM
QUESTIONS WITH CORRECT
ANSWERS
Why should financial managers strive to maximize the current value per share of the
existing stock?
Doing so guarantees the company will grow in size at the maximum possible rate.
Doing so increases employee salaries.
Because they have been hired to represent the interests of the current shareholders.
Because this will increase the current dividends per share.
Because managers often receive shares of stock as part of their compensation. -
Answer- Because they have been hired to represent the interests of the current
shareholders.
Decisions made by financial managers should primarily focus on increasing which one
of the following?
Size of the firm.
Growth rate of the firm.
Gross profit per unit produced.
Market value per share of outstanding stock.
Total sales. - Answer- Market value per share of outstanding stock.
The Sarbanes-Oxley Act of 2002 is a governmental response to:
Decreasing corporate profits.
The terrorists attacks on 9/11/2001.
A weakening economy.
Deregulation of the stock exchanges.
Management greed and abuses. - Answer- Management greed and abuses.
Which one of the following is an unintended result of the Sarbanes-Oxley Act?
More detailed and accurate financial reporting.
,Increased management awareness of internal controls.
Corporations delisting from major exchanges.
Increased responsibility for corporate officers.
Identification of internal control weaknesses. - Answer- Corporations delisting from
major exchanges
A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:
Must continue to provide audited financial statements to the public.
Must continue to provide a detailed list of internal control deficiencies on an annual
basis.
Can provide less information to its shareholders than it did prior to "going dark.".
Can continue publicly trading its stock but only on the exchange on which it was
previously listed.
Ceases to exist. - Answer- Can provide less information to its shareholders than it did
prior to "going dark.".
Which of the following are results related to the enactment of the Sarbanes-Oxley Act of
2002?
I. Increased foreign stock exchange listings of U.S. stocks.
II. Decreased compliance costs.
III. Increased privatization of public corporations.
IV. Increased public disclosure by all corporations.
A. I and III only.
B. II and IV only.
C. I, II, and III only.
D. II, III, and IV only.
E. I, III, and IV only. - Answer- I and III only.
Which one of the following actions by a financial manager is most apt to create an
agency problem?
Refusing to borrow money when doing so will create losses for the firm.
Refusing to lower selling prices if doing so will reduce the net profits.
Refusing to expand the company if doing so will lower the value of the equity.
Agreeing to pay bonuses based on the market value of the company stock rather than
on the firm's level of sales.
, Increasing current profits when doing so lowers the value of the firm's equity. - Answer-
Increasing current profits when doing so lowers the value of the firm's equity.
Which of the following help convince managers to work in the best interest of the
stockholders? Assume there are no golden parachutes.
I. Compensation based on the value of the stock.
II. Stock option plans.
III. Threat of a company takeover.
IV. Threat of a proxy fight.
A. I and II only.
B. III and IV only.
C. I, II, and III only.
D. I, III, and IV only.
E. I, II, III, and IV. - Answer- I, II, III, and IV.
Which form of business structure is most associated with agency problems?
Sole proprietorship.
General partnership.
Limited partnership.
Corporation.
Limited liability company. - Answer- Corporation.
Which one of the following terms is defined as the management of a firm's long-term
investments?
Working capital management.
Financial allocation.
Agency cost analysis.
Capital budgeting.
Capital structure. - Answer- Capital Budgeting
Which one of the following terms is defined as the mixture of a firm's debt and equity
financing?
Working capital management.
Cash management.
Cost analysis.
Capital budgeting.
Capital structure. - Answer- Capital structure
Which one of the following is defined as a firm's short-term assets and its short-term
liabilities?
Working capital.
Debt.
Investment capital.
Net capital.
QUESTIONS WITH CORRECT
ANSWERS
Why should financial managers strive to maximize the current value per share of the
existing stock?
Doing so guarantees the company will grow in size at the maximum possible rate.
Doing so increases employee salaries.
Because they have been hired to represent the interests of the current shareholders.
Because this will increase the current dividends per share.
Because managers often receive shares of stock as part of their compensation. -
Answer- Because they have been hired to represent the interests of the current
shareholders.
Decisions made by financial managers should primarily focus on increasing which one
of the following?
Size of the firm.
Growth rate of the firm.
Gross profit per unit produced.
Market value per share of outstanding stock.
Total sales. - Answer- Market value per share of outstanding stock.
The Sarbanes-Oxley Act of 2002 is a governmental response to:
Decreasing corporate profits.
The terrorists attacks on 9/11/2001.
A weakening economy.
Deregulation of the stock exchanges.
Management greed and abuses. - Answer- Management greed and abuses.
Which one of the following is an unintended result of the Sarbanes-Oxley Act?
More detailed and accurate financial reporting.
,Increased management awareness of internal controls.
Corporations delisting from major exchanges.
Increased responsibility for corporate officers.
Identification of internal control weaknesses. - Answer- Corporations delisting from
major exchanges
A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:
Must continue to provide audited financial statements to the public.
Must continue to provide a detailed list of internal control deficiencies on an annual
basis.
Can provide less information to its shareholders than it did prior to "going dark.".
Can continue publicly trading its stock but only on the exchange on which it was
previously listed.
Ceases to exist. - Answer- Can provide less information to its shareholders than it did
prior to "going dark.".
Which of the following are results related to the enactment of the Sarbanes-Oxley Act of
2002?
I. Increased foreign stock exchange listings of U.S. stocks.
II. Decreased compliance costs.
III. Increased privatization of public corporations.
IV. Increased public disclosure by all corporations.
A. I and III only.
B. II and IV only.
C. I, II, and III only.
D. II, III, and IV only.
E. I, III, and IV only. - Answer- I and III only.
Which one of the following actions by a financial manager is most apt to create an
agency problem?
Refusing to borrow money when doing so will create losses for the firm.
Refusing to lower selling prices if doing so will reduce the net profits.
Refusing to expand the company if doing so will lower the value of the equity.
Agreeing to pay bonuses based on the market value of the company stock rather than
on the firm's level of sales.
, Increasing current profits when doing so lowers the value of the firm's equity. - Answer-
Increasing current profits when doing so lowers the value of the firm's equity.
Which of the following help convince managers to work in the best interest of the
stockholders? Assume there are no golden parachutes.
I. Compensation based on the value of the stock.
II. Stock option plans.
III. Threat of a company takeover.
IV. Threat of a proxy fight.
A. I and II only.
B. III and IV only.
C. I, II, and III only.
D. I, III, and IV only.
E. I, II, III, and IV. - Answer- I, II, III, and IV.
Which form of business structure is most associated with agency problems?
Sole proprietorship.
General partnership.
Limited partnership.
Corporation.
Limited liability company. - Answer- Corporation.
Which one of the following terms is defined as the management of a firm's long-term
investments?
Working capital management.
Financial allocation.
Agency cost analysis.
Capital budgeting.
Capital structure. - Answer- Capital Budgeting
Which one of the following terms is defined as the mixture of a firm's debt and equity
financing?
Working capital management.
Cash management.
Cost analysis.
Capital budgeting.
Capital structure. - Answer- Capital structure
Which one of the following is defined as a firm's short-term assets and its short-term
liabilities?
Working capital.
Debt.
Investment capital.
Net capital.
