(Test Bank) Fundamentals of Financial Management

Brigham, 13

Business

Test Bank

13th Edition

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Test Bank for Fundamentals of Financial Management, The downloadable file consists of 1256 pages, and the total size of the file is 5.96 MB. Purchase now only for highly discounted price.

Author(s): Brigham

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Chapter 1: Overview True/False Page 1 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use. (Difficulty Levels : Easy, Easy/Medium, Medium, Medium/Hard, and Hard) Test Bank for Fundamentals of Financial Management, 13 Edition by Brigham 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 qu estions. See the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines. Multiple Choice: True/False (1-1) Role of finance F M Answer: a EASY i. In most corporations, the CFO ranks under the CEO. a. True b. False (1-1) Role of finance F M Answer: b EASY ii. The Chairman of the Board must also be the CEO. a. True b. False (1-1) Role of finance F M Answer: a EASY iii. 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 CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT Chapter 1: Overview True/False Page 2 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use. 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 (1-3) Forms of organization F M Answer: a EASY iv. Partnerships and proprietorships generally have a tax advantage over corporations. a. True b. False (1-3) Forms of organization F M Answer: b EASY v. A disadvantage of the corporate for m 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 Chapter 1: Overview True/False Page 3 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use. (1-3) Forms of organization F M Answer: b EASY vi. An advantage of the cor porate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships. a. True b. False (1-3) Forms of organization F M Answer: a EASY vii. Some partners in a partnership may have different rights, priv ileges, and responsibilities than other partners. a. True b. False (1-3) Forms of organization F M Answer: b EASY viii . One advantage of the corporate form of organization is that it avoids double taxation. a. True b. False (1-3) Forms of organization F M Answer: a EASY ix. It is generally harder to transfer one’s ownership interest in a partnership than in a corporation. a. True b. False (1-3) Forms of organization F M Answer: a EASY Chapter 1: Overview True/False Page 4 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use. x. One danger of starting a proprietorship is that you may be expose d 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 (1-3) Forms of organization F M Answer: a EASY xi. If a corporation elects to be taxed as an S cor poration, 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 (1-3) Forms of organization F M Answer: b EASY xii. If a corporation elects to be taxed as an S corporatio n, 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 Chapter 1: Overview True/False Page 5 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use. (1-3) Forms of organization F M Answer: b EASY xiii . It is genera lly less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required. a. True b. False (1-3) Forms of organization F M Answer: a EASY xiv. The more capital a firm is likely to require, the g reater the probability that it will be organized as a corporation. a. True b. False (1-3) Forms of organization F M Answer: b EASY xv. 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 (1-3) Forms of organization F M Answer: a EASY xvi. Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject t o 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 Chapter 1: Overview True/False Page 6 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use. (1-4) Shareholder value F M Answer: b EASY xvii . In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS. a. True b. False (1-4) Shareholder value F M Answer: b EASY xviii . 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 (1-5) Intrinsic values F G M Answer: a EASY xix. 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 Chapter 1: Overview True/False Page 7 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use. (1-5) Intrinsi c values F M Answer: b EASY xx. 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 (1-6) Important trends E F M Answer: a EASY xxi. Globalization of business has been facilitated by improvements in information technology . a. True b. False (1-7) Business ethics B F M Answer: a EASY xxii . 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 (1-7) Business ethics B F M Answer: b EASY xxiii . 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 Chapter 1: Overview True/False Page 8 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use. (1-5) Intrinsic values F G Answer: a MEDIUM xxiv . 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 (1-5) Intrinsic values F G Answer: b MED IUM xxv. 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 b. False (1-5) Intrinsic values F G Answer: b MEDIUM xxvi . If a stock's intrinsic value is greater tha n its market price, then the stock is overvalued and should be sold. a. True b. False Chapter 1: Overview True/False Page 9 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use. (1-5) Intr insic values F G Answer: b MEDIUM xxvii . For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value. a. True b. False (1-5) Intrinsic values F G Answer: a MEDIUM xxviii . The term “marginal investor ” means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose, barring any new information coming out about the stock. It is the “marginal investor” who determines the actual stock price. a. True b. False (1-7) Business ethics B F M Answer: b MEDIUM xxix . If a lower level person in a firm does something illegal, like “cooking the books ” to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior , the lower level person cannot be prosecuted but the superior can be prosecuted. a. True b. False (1-7) Business ethics B F G Answer: a MEDIUM xxx. If someone de liberately understates costs and thereby increases profits, this can cause the price of the stock to rise above its intrinsic value. The stock price will probably fall in the future. Also, those who participated in the fraud can be prosecuted, and the fi rm itself can be penalized. a. True b. False Chapter 1: Overview True/False Page 10 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password -protected website for classroom use. (1-8) Conflicts B F M Answer: b MEDIUM xxxi . Managers always attempt to maximize the long -run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conf licts between stockholders and managers are not possible. However, there can be conflicts between stockholders and bondholders. a. True b. False (1-8) Conflicts F M Answer: a MEDIUM 32. A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers can improve the economy. However, hostile takeovers are controversial, and legislative actions hav e been taken to make them more difficult to undertake. a. True b. False Chapter 1: Overview Conceptual M/C Page 11 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license dis tributed with a certain product or service or otherwise on a password -protected website for classroom use. (1-5) Intrinsic values F M Answer: a HARD 33. If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it s hould design an executive compensation system whose goal is to maximize the stock's intrinsic value rather than the stock's current market price. a. True b. False Multiple Choice: Conceptual Please note that some of the answer choices, or answers that are very close, are used in different questions. This has caused us no difficulties, but please take this into account when you make up exams. (1-3) Forms of organization F M Answer: e EASY 34. Which of the following statements is CORRECT? a. One of th e disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy. b. Proprietorships are subject to more regulations than corporations. c. In any partnership, every partner has the same ri ghts, privileges, and liability exposure as every other partner. d. Corporations of all types are subject to the corporate income tax. e. Proprietorships and partnerships generally have a tax advantage over corporations. (1-3) Forms of organization F M Answer: c EASY 35. Which of the following statements is CORRECT? a. One of the advantages of the corporate form of organization is that it avoids double taxation. Chapter 1: Overview Conceptual M/C Page 12 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license dis tributed with a certain product or service or otherwise on a password -protected website for classroom use. b. It is easier to transfer one’s ownership interest in a partnership than in a corporation. c. One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability. d. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., “one person, one vote.” e. Corporations of all types are subject to the corporate income tax. Chapter 1: Overview Conceptual M/C Page 13 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license dis tributed with a certain product or service or otherwise on a password -protected website for classroom use. (1-3) Forms of organization F M Answer: a EASY 36. Which of the following statements is CORRECT? a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership. b. Corporations face fewer regulations than proprietorships. c. One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation, because taxes are levied at both t he firm level and the owner level. d. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required. e. If a partnership goes bankrupt, each partner is exposed to liabiliti es only up to the amount of his or her investment in the business. (1-3) Forms of organization F M Answer: a EASY 37. Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the followi ng statements is CORRECT? a. Relaxant’s shareholders (the ex -partners) will now be exposed to less liability. b. The company will probably be subject to fewer regulations and required disclosures. c. Assuming the firm is profitable, none of its income wil l be subject to federal income taxes. d. The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership. e. The firm will find it more difficult to raise additional capital to support its growth. (1-3) Forms of organization F M Answer: c EASY 38. Which of the following statements is CORRECT? a. Corporations generally face fewer regulations than proprietorships. b. Corporate shareholders are exposed to unlimited liability. c. It is usually easier to transfer ownership in a corporation than in a partnership. Chapter 1: Overview Conceptual M/C Page 14 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license dis tributed with a certain product or service or otherwise on a password -protected website for classroom use. d. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. e. There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small. (1-3) Forms of organization F M Answer: e EASY 39. Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a p artnership? a. Corporations generally face fewer regulations. b. Less of a corporation’s income is generally subject to federal taxes. c. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorpo ration. d. Corporate investors are exposed to unlimited liability. e. Corporations generally find it easier to raise large amounts of capital. Chapter 1: Overview Conceptual M/C Page 15 © 201 3 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as perm itted in a license dis tributed with a certain product or service or otherwise on a password -protected website for classroom use. (1-4) Shareholder value F M Answer: d EASY 40. The primary operating goal of a publicly -owned firm interested in serving its stockholders should be to a. Maximize its expected total corporate income. b. Maximize its expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value. e. Maxi mize the stock price on a specific target date. (1-1) Role of finance F M Answer: c MEDIUM 41. Which of the following statements is CORRECT? a. In most corporations, the CFO ranks above the CEO. b. By law in most states, the chairman of the board must al so be the CEO. c. 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 ch airman of the board, though many corporate control experts believe it is bad to vest both offices in the same person. d. The CFO generally reports to the firm's chief accounting officer, who is normally the controller. e. The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility. (1-3) Forms of organization F M Answer: a MEDIUM 42. Which of the following statements is CORRECT? a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations.