TEST BANK
TEST BANK
,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
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
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
TestBanksGuru
,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
TestBanksGuru
,Keywords: Goal Of The Firm,
Corporation Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
14) Maximization Of Shareholder Wealth
A) Represents A Zero Sum Game In Which One Corporation Gains At The Expense Of Others.
B) Provides Benefits To Society As Scarce Resources Are Directed To Their Most Productive Use.
C) Is Not A Practical Goal Since It Cannot Be Measured Effectively.
D) Is Achieved Only If Cash Flows Exceed Accounting
Profits. Answer: B
Diff: 1 Page Ref: 3
Keywords: Goal Of The Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
15) A Financial Manager Is Considering Two Projects, A And B. A Is Expected To Add $2 Million To
Profits This Year While B Is Expected To Add $1 Million To Profits This Year. Which Of The
Following Statements Is Most Correct?
A) The Manager Should Select Project A Because It Maximizes Profits.
B) The Manager Should Select The Project That Maximizes Long-Term Profits, Not Just One Year Of
Profits.
C) The Manager Should Select Project A Or He Is Irrational.
D) The Manager Should Select The Project That Causes The Stock Price To Increase The Most, Which
Could Be A Or B.
Answer: D
Diff: 2 Page Ref: 4
Keywords: Goal Of The Firm
Learning Obj.: L.O. 1.1
Aacsb: Analytical Thinking
TestBanksGuru
,16) Shareholder Wealth Maximization Means
A) Maximizing Earnings Per Share.
B) Maximizing Dividends Per Share.
C) Maximizing The Price Of Existing Common Stock.
D) Maximizing Stockholders
Equity. Answer: C
Diff: 1 Page Ref: 4
Keywords: Goal Of The Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
17) The Goal Of The Firm Should Be
A) Maximization Of Profits (Net Income Per Share).
B) Maximization Of Shareholder Wealth.
C) Maximization Of Market Share.
D) Maximization Of
Sales.
Answer: B
Diff: 1 Page Ref: 3
Keywords: Goal Of The Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
18) Which Of The Following Goals Of The Firm Are Synonymous (Equivalent) To The
Maximization Of Shareholder Wealth?
A) Profit Maximization
B) Risk Minimization
C) Maximization Of The Total Market Value Of The Firm's Common Stock
D) None Of The
Above Answer: C
Diff: 1 Page Ref: 4
TestBanksGuru
,Keywords: Goal Of The Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
19) Which Of The Following Is The Most Important Goal That A Corporation Should Strive For?
A) Maximize Current Profits
B) Maximize Market Share
C) Maximize Revenue
D) Maximize Shareholder
Wealth Answer: D
Diff: 1 Page Ref: 3
Keywords: Goal Of The Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
TestBanksGuru
,20) One Of The Causes Of The Recent Financial Crisis In The United States Has Been Excessive Risk
Taking Due To Underestimation Of Risk. How Does This Relate To Shareholder Wealth Maximization
And Financial Leverage? Can Overestimation Of Risk Also Be Detrimental?
Answer: Underestimation Of Risk Can Lead Managers To Borrow Excessively To Fund More And More
Projects. High Levels Of Debt Require Interest And Principal Payments Which May Become Impossible
To Make If The Company's Cash Flows Are Reduced, Even For Short Periods Of Time. Overestimation
Of Risk Can Also Be Problematic. Managers Who Take On Too Little Risk May Be Passing Up
Desirable Projects That Could Increase Shareholder Wealth. The Principle That Risk Requires A Reward
Does Not Mean That All Risk Is Bad, But Rather That Additional Risk Is Ok If Additional Expected
Returns Are High Enough. If All Risk Was Bad, Companies Would Go Out Of Business And All
Investors Would Buy U.S. Treasury Bills.
Diff: 2 Page Ref: 4, 9
Keywords: Risk Requires A Reward, Goal Of The
Firm Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
21) Documents Uncovered After The Exxon Valdez Oil Spill In Alaska Revealed That Exxon Could
Have Used Double-Hulled Oil Tankers That Would Have Prevented The Spill, But The Cost Of Refitting
Their Fleet Of Single- Hulled Tankers Was Considered Too High. Exxon Determined That The Cost Of
Cleaning Up An Oil Spill Would Be Less Than The Cost Of Refitting The Ships, Thus Increasing
Shareholder Value. Several Years After The Oil Spill, However, Exxon Was Fined Billions Of Dollars
For The Spill. How Do The Costs Of The Cleanup And The Fines Pertain To A Discussion Of
Maximizing Shareholder Value And Ethical Responsibility?
Answer: Managers Are Supposed To Maximize Shareholder Value. Exxon's Analysis Of The Costs Of
An Oil Spill Versus The Cost Of Improving Their Tankers Seems To Have Been A Reasonable One At
The Time It Was Undertaken. The Social Costs Of Killing Birds And Fish Were Expected To Be Low.
The Outrage At Exxon's Conduct And The Subsequent Large Fines Will Change The Estimation Of
Future Costs For Similar Situations. Managers Need To Consider The Impact Of Their Decisions On
Their Companies' Cash Flows. Socially Undesirable Activities May Lead To Boycotts, Protests, Lower
Sales, Fines, Etc. These Costs Must Be Included In Their Analyses. Society Sets Limits Within Which
Corporations Must Operate Or The Corporations, And Their Shareholders, Will Suffer. Therefore, Acting
In Ethical And Socially Responsible Ways Is Congruent With The Goal Of Shareholder Wealth
Maximization.
Diff: 2 Page Ref: 4, 9, 10
Keywords: Goal Of The Firm, Maximizing Shareholder Value, Ethical Responsibility, Cash Flow
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
TestBanksGuru
, Learning Objective 1.2
1) When Making Financial Decisions, Managers Should Always Look At Marginal, Or Incremental
Cash Flows.
Answer: True Diff:
1 Page Ref: 5
Keywords: Marginal Or Incremental Cash Flows
Learning Obj.: L.O. 1.2
Aacsb: Reflective Thinking
2) An Investment Project Is Acceptable If The Total Cash Received Over The Life Of The Project
Exceeds The Total Cash Spent Over The Life Of The Project.
Answer: False Diff:
2 Page Ref: 5
Keywords: Cash Flow, Time Value Of Money
Learning Obj.: L.O. 1.2
Aacsb: Reflective Thinking
3) If Two Companies Have The Same Net Income And The Same Level Of Risk, They Must Also
Have The Same Stock Price Or The Market Is Not In Equilibrium.
Answer: False Diff:
2 Page Ref: 4
Keywords: Net Income, Risk, Timing Of Cash Flow
Learning Obj.: L.O. 1.2
Aacsb: Analytical Thinking
4) Profits Represent Money That Can Be Spent, And As Such, Form The Basis For Determining The
Value Of Financial Decisions.
Answer: False Diff:
2 Page Ref: 4
Keywords: Profits, Cash Flow
TestBanksGuru
TEST BANK
,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
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
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
TestBanksGuru
,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
TestBanksGuru
,Keywords: Goal Of The Firm,
Corporation Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
14) Maximization Of Shareholder Wealth
A) Represents A Zero Sum Game In Which One Corporation Gains At The Expense Of Others.
B) Provides Benefits To Society As Scarce Resources Are Directed To Their Most Productive Use.
C) Is Not A Practical Goal Since It Cannot Be Measured Effectively.
D) Is Achieved Only If Cash Flows Exceed Accounting
Profits. Answer: B
Diff: 1 Page Ref: 3
Keywords: Goal Of The Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
15) A Financial Manager Is Considering Two Projects, A And B. A Is Expected To Add $2 Million To
Profits This Year While B Is Expected To Add $1 Million To Profits This Year. Which Of The
Following Statements Is Most Correct?
A) The Manager Should Select Project A Because It Maximizes Profits.
B) The Manager Should Select The Project That Maximizes Long-Term Profits, Not Just One Year Of
Profits.
C) The Manager Should Select Project A Or He Is Irrational.
D) The Manager Should Select The Project That Causes The Stock Price To Increase The Most, Which
Could Be A Or B.
Answer: D
Diff: 2 Page Ref: 4
Keywords: Goal Of The Firm
Learning Obj.: L.O. 1.1
Aacsb: Analytical Thinking
TestBanksGuru
,16) Shareholder Wealth Maximization Means
A) Maximizing Earnings Per Share.
B) Maximizing Dividends Per Share.
C) Maximizing The Price Of Existing Common Stock.
D) Maximizing Stockholders
Equity. Answer: C
Diff: 1 Page Ref: 4
Keywords: Goal Of The Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
17) The Goal Of The Firm Should Be
A) Maximization Of Profits (Net Income Per Share).
B) Maximization Of Shareholder Wealth.
C) Maximization Of Market Share.
D) Maximization Of
Sales.
Answer: B
Diff: 1 Page Ref: 3
Keywords: Goal Of The Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
18) Which Of The Following Goals Of The Firm Are Synonymous (Equivalent) To The
Maximization Of Shareholder Wealth?
A) Profit Maximization
B) Risk Minimization
C) Maximization Of The Total Market Value Of The Firm's Common Stock
D) None Of The
Above Answer: C
Diff: 1 Page Ref: 4
TestBanksGuru
,Keywords: Goal Of The Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
19) Which Of The Following Is The Most Important Goal That A Corporation Should Strive For?
A) Maximize Current Profits
B) Maximize Market Share
C) Maximize Revenue
D) Maximize Shareholder
Wealth Answer: D
Diff: 1 Page Ref: 3
Keywords: Goal Of The Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
TestBanksGuru
,20) One Of The Causes Of The Recent Financial Crisis In The United States Has Been Excessive Risk
Taking Due To Underestimation Of Risk. How Does This Relate To Shareholder Wealth Maximization
And Financial Leverage? Can Overestimation Of Risk Also Be Detrimental?
Answer: Underestimation Of Risk Can Lead Managers To Borrow Excessively To Fund More And More
Projects. High Levels Of Debt Require Interest And Principal Payments Which May Become Impossible
To Make If The Company's Cash Flows Are Reduced, Even For Short Periods Of Time. Overestimation
Of Risk Can Also Be Problematic. Managers Who Take On Too Little Risk May Be Passing Up
Desirable Projects That Could Increase Shareholder Wealth. The Principle That Risk Requires A Reward
Does Not Mean That All Risk Is Bad, But Rather That Additional Risk Is Ok If Additional Expected
Returns Are High Enough. If All Risk Was Bad, Companies Would Go Out Of Business And All
Investors Would Buy U.S. Treasury Bills.
Diff: 2 Page Ref: 4, 9
Keywords: Risk Requires A Reward, Goal Of The
Firm Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
21) Documents Uncovered After The Exxon Valdez Oil Spill In Alaska Revealed That Exxon Could
Have Used Double-Hulled Oil Tankers That Would Have Prevented The Spill, But The Cost Of Refitting
Their Fleet Of Single- Hulled Tankers Was Considered Too High. Exxon Determined That The Cost Of
Cleaning Up An Oil Spill Would Be Less Than The Cost Of Refitting The Ships, Thus Increasing
Shareholder Value. Several Years After The Oil Spill, However, Exxon Was Fined Billions Of Dollars
For The Spill. How Do The Costs Of The Cleanup And The Fines Pertain To A Discussion Of
Maximizing Shareholder Value And Ethical Responsibility?
Answer: Managers Are Supposed To Maximize Shareholder Value. Exxon's Analysis Of The Costs Of
An Oil Spill Versus The Cost Of Improving Their Tankers Seems To Have Been A Reasonable One At
The Time It Was Undertaken. The Social Costs Of Killing Birds And Fish Were Expected To Be Low.
The Outrage At Exxon's Conduct And The Subsequent Large Fines Will Change The Estimation Of
Future Costs For Similar Situations. Managers Need To Consider The Impact Of Their Decisions On
Their Companies' Cash Flows. Socially Undesirable Activities May Lead To Boycotts, Protests, Lower
Sales, Fines, Etc. These Costs Must Be Included In Their Analyses. Society Sets Limits Within Which
Corporations Must Operate Or The Corporations, And Their Shareholders, Will Suffer. Therefore, Acting
In Ethical And Socially Responsible Ways Is Congruent With The Goal Of Shareholder Wealth
Maximization.
Diff: 2 Page Ref: 4, 9, 10
Keywords: Goal Of The Firm, Maximizing Shareholder Value, Ethical Responsibility, Cash Flow
Learning Obj.: L.O. 1.1
Aacsb: Reflective Thinking
TestBanksGuru
, Learning Objective 1.2
1) When Making Financial Decisions, Managers Should Always Look At Marginal, Or Incremental
Cash Flows.
Answer: True Diff:
1 Page Ref: 5
Keywords: Marginal Or Incremental Cash Flows
Learning Obj.: L.O. 1.2
Aacsb: Reflective Thinking
2) An Investment Project Is Acceptable If The Total Cash Received Over The Life Of The Project
Exceeds The Total Cash Spent Over The Life Of The Project.
Answer: False Diff:
2 Page Ref: 5
Keywords: Cash Flow, Time Value Of Money
Learning Obj.: L.O. 1.2
Aacsb: Reflective Thinking
3) If Two Companies Have The Same Net Income And The Same Level Of Risk, They Must Also
Have The Same Stock Price Or The Market Is Not In Equilibrium.
Answer: False Diff:
2 Page Ref: 4
Keywords: Net Income, Risk, Timing Of Cash Flow
Learning Obj.: L.O. 1.2
Aacsb: Analytical Thinking
4) Profits Represent Money That Can Be Spent, And As Such, Form The Basis For Determining The
Value Of Financial Decisions.
Answer: False Diff:
2 Page Ref: 4
Keywords: Profits, Cash Flow
TestBanksGuru
