Fundamentals of Financial Management – 16th Edition by Eugene F. Brigham & Joel F. Houston | Complete Test Bank with Verified Answers and Detailed Explanations | Corporate Finance, Investment, and Business Decision-Making Study Guide 2025/2026

TEST BANK FOR Fundamentals of Financial Management 16th Edition
by Eugene F. Brigham and Joel F. Houston




1. An Overview of Financial Management.

,True / False

Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are
used in multiple-choice questions.

Multiple Choice: True/False


1. In most corporations, the CFO ranks under the CEO.
a. True
b. False
ANSWER: True

2. The Chairman of the Board must also be the CEO.
a. True
b. False
ANSWER: False

3. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest
ranking individual. The CEO generally works under the board and its chairman, and the board generally has the
authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she
can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a
person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe
it is bad to vest both offices in the same person.
a. True
b. False
ANSWER: True

4. Partnerships and proprietorships generally have a tax advantage over corporations.
a. True
b. False
ANSWER: True

5. A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to
personal liabilities in the event of bankruptcy than are investors in a typical partnership.
a. True
b. False
ANSWER: False

6. An advantage of the corporate form of organization is that corporations are generally less highly
regulated than proprietorships and partnerships.
a. True
b. False
ANSWER: False
7. Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.
a. True

b. False
ANSWER: True

,8. One advantage of the corporate form of organization is that it avoids double taxation.
a. True
b. False
ANSWER: False

9. It is generally harder to transfer one's ownership interest in a partnership than in a corporation.
a. True
b. False
ANSWER: True

10. One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes
bankrupt. This problem would be avoided if you formed a corporation to operate the business.
a. True
b. False
ANSWER: True

11. If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its
stockholders will have to pay personal taxes on the firm's net income.
a. True
b. False
ANSWER: True

12. If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal
taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small
businesses.
a. True
b. False
ANSWER: False

13. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship,
extensive legal documents are required.
a. True
b. False
ANSWER: False

14. The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.
a. True
b. False
ANSWER: True
15. One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for
the firm's investors to transfer their ownership interests.
a. True
b. False
ANSWER: False

16. Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations'
stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to
transfer shares of stock than partnership interests.

, a. True
b. False
ANSWER: True

17. In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock
price in the long run, or the stock's "intrinsic value."
a. True
b. False
ANSWER: True

18. If management operates in a manner designed to maximize the firm's expected profits for the current year,
this will also maximize the stockholders' wealth as of the current year.
a. True
b. False
ANSWER: False

19. In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.
a. True
b. False
ANSWER: False

20. In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock
price on a specific target date.
a. True
b. False
ANSWER: False

21. As a result of financial scandals occurring during the past decade, there has been a strong push to improve
business ethics.
a. True
b. False
ANSWER: True

22. There are many types of unethical business behavior. One example is where executives provide information
that they know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it is
not illegal to provide it to stockholders because they are the owners of the firm, not outsiders.
a. True
b. False
ANSWER: False
23. A stock's market price would equal its intrinsic value if all investors had all the information that is available
about the stock. In this case the stock's market price would equal its intrinsic value.
a. True
b. False
ANSWER: True

24. If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued,
and it would be a good buy.
a. True