Test Bank for Foundations of Finance 10th Edition by Arthur J. Keown, John D. Martin, and J. William Petty

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Foundations of Finance, 10e
(Keown/Martin/Petty)
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.
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.
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.
Answer: FALSE
Diff: 1 Page Ref: 3
Keywords: Goal of the Firm
Learning Obj.: L.O. 1.1
AACSB: Reflective Thinking




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4) Shareholder wealth maximization means maximizing the price of the existing common stock.
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.
Answer: TRUE
Diff: 2 Page Ref: 4
Keywords: Goal of the Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
AACSB: Reflective Thinking




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6) Corporate managers should accept investment projects that maximize profits in the short run because
of the time value of money.
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.
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.
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.
Answer: FALSE
Diff: 1 Page Ref: 4
Keywords: Goal of the Firm
Learning Obj.: L.O. 1.1
AACSB: Reflective Thinking


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10) The goal of profit maximization ignores the risk of financial decisions.
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.
Answer: FALSE
Diff: 1 Page Ref: 4
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.
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
Answer: B
Diff: 1 Page Ref: 3



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