(Test Bank) Foundations of Financial Management

Block, 18

Business

Test Bank

18th Edition

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Test Bank for Foundations of Financial Management, The downloadable file consists of 754 pages, and the total size of the file is 5.28 MB. Purchase now only for highly discounted price.

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Version 1 1 CHAPTER 1 1) Which of the following did not contribute to the financial crisis? A) Solid credit ratings from the ratings agencies B) The extension of credit to high-risk borrowers C) The merger of JPMorgan Chase and Bear Stearns D) All of the options contributed to the financial crisis. 2) Credit default swaps are A) an insurance product designed to protect financial institutions from customers who default on their loans. B) securities with a maturity of less than one year. C) the result of a leveling off or slowing down of stock price increases. D) market trades in previously issued securities. 3) What should be the primary goal of financial management? A) Increased earnings B) Maximizing cash flow C) Maximizing shareholder wealth D) Minimizing risk of the firm 4) In the past, the study of finance has included A) mergers and acquisitions. B) raising capital. C) bankruptcy. D) All of the options Version 1 2 5) Professor Merton Miller received the Nobel Prize in Economics for his work on A) dividend policy. B) investment theory. C) working capital management. D) capital structure theory. 6) Professors Harry Markowitz and William Sharpe received their Nobel Prize in Economics for their contributions to the A) options pricing model. B) theories of working capital management. C) theories of portfolio based management and the risk along with return on securities. D) theories of international capital budgeting. 7) Behavioral finance is the study of A) how investors react to accounting-based profit fluctuations. B) how investors react to interest rates and foreign currency fluctuations. C) how investors react to certain ways to diversify a portfolio. D) how investors react to the amount of risk versus the amount of return in securities. 8) Which of the following is NOT addressed by the Dodd-Frank Act? A) Liquidation of non-bank financial companies such as insurance companies. B) Identifies systematic risk of U.S. financial system. C) Written certifications of financial statements by the CEO and CFO. D) Registration of hedge funds with the SEC. Version 1 3 9) Proper risk-return management means that A) the firm should take as few risks as possible. B) the firm must determine an appropriate trade-off between risk and return. C) the firm should earn the highest return possible. D) the firm should value future profits more highly than current profits. 10) One of the major disadvantages of a sole proprietorship is A) that there is unlimited liability to the owner. B) the simplicity of decision making. C) high organizational costs. D) high operating costs. 11) One of the major advantages of a sole proprietorship is A) that the owner has limited liability. B) that stock in the proprietorship can be easily transferred. C) that it is exempt from many tax rules that would otherwise apply when employees are hired by the firm. D) low operating costs. 12) The partnership form of an organization A) avoids the double taxation of earnings and dividends found in the corporate form of organization. B) usually provides limited liability to the partners. C) has unlimited life. D) simplifies decision making. Version 1 4 13) A corporation is A) owned by stockholders who enjoy the privilege of limited liability. B) easily divisible between owners. C) a separate legal entity with unlimited life. D) All of the options are correct. 14) With an S corporation A) income is taxed as direct income to stockholders. B) stockholders have the same liability as members of a partnership. C) the number of stockholders is unlimited. D) the life of the corporation is limited. 15) An S corporation A) is similar to a partnership in that it carries unlimited liability. B) is a separate legal entity that is treated like a normal corporation. C) has all the organizational benefits of a corporation and its income is only taxed once. D) All of the options 16) From the 2017 Tax Cuts and Job Act, a reason to choose sole proprietorship, partnership or corporation as a form of organization is: A) the number of people in the organization. B) the liability of the owner. C) the complexity involved with state and federal regulations and taxation. D) All of the options are correct. Version 1 5 17) Corporate governance is the A) relationship and exercise of oversight by the board of directors of the company. B) relationship between the chief financial officer (CFO) and institutional investors. C) operation of a company by the chief executive officer (CEO) and other senior executives on the management team. D) governance of the company by the board of directors with a focus on pleasing management. 18) Many companies such as Tyco, Enron, and WorldCom that suffered financial distress in the late 1990s and early 2000s A) committed fraud. B) had failed corporate governance oversight. C) went bankrupt. D) All of the options are true. 19) Agency theory examines the relationship between the A) shareholders of the firm and the firm's investment banker. B) owners of the firm and the managers of the firm. C) board of directors and large institutional investors. D) shareholders and the firm's transfer agent. 20) Agency theory would imply that conflicts are more likely to occur between management and shareholders when Version 1 6 A) the company is owned and operated by the same person. B) management acts in the best interests of maximizing shareholder wealth. C) the chairman of the board of directors is also the chief executive officer (CEO). D) the board of directors exerts strong and involved oversight of management. 21) Agency theory deals with the issue of A) when to hire an agent to represent the firm in negotiations. B) the legal liabilities of a firm if an employee, acting as the firm's agent, injures someone. C) the limitations placed on an employee acting as the firm's agent to obligate or bind the firm. D) the conflicts that can arise between the viewpoints and motivations of a firm's owners and managers. 22) Agency problems are least likely to arise in which organizational form? A) Sole proprietorship B) Limited partnership C) Corporation D) Subchapter S corporation 23) Institutional investors are important in today's business world because A) as large investors, they have more say in how businesses are managed. B) they have a fiduciary responsibility to the workers and investors that they represent to see that the firms they own are managed in an ethical way. C) as a group they can vote large blocks of stock for the election of board members. D) All of the options are correct. Version 1 7 24) The increasing percentage ownership of public corporations by institutional investors has A) had no effect on corporate management. B) created higher returns for the stock market in general. C) created more pressure on public companies to manage their firms more efficiently. D) taken away the voice of the individual investor. 25) The Sarbanes-Oxley Act was passed in an effort to A) protect small business from large corporations dominating the market. B) ensure that partnerships divide profits among partners in a fair manner. C) guarantee that outside auditors can control corporate accounting practices. D) control corrupt corporate financial behavior. 26) The Sarbanes-Oxley Act set up the Public Company Accounting Oversight Board with the responsibility for all of the following except A) internal controls within companies. B) controlling the quality of audits. C) certifying the competence of financial executives. D) setting rules and standards for the independence of auditors. 27) A financial manager's goal of maximizing current or short-term earnings may not be appropriate because Version 1 8 A) it fails to consider the timing when shareholders want increased earnings and may instead consider the manager’s own goals. B) increased earnings may be accompanied by unacceptably higher levels of risk. C) earnings are subjective; they can be defined in various ways such as accounting or economic earnings. D) All of the options are true. 28) Maximization of shareholder wealth is a concept in which A) increased earnings is of primary importance. B) profits are maximized on an annual basis. C) virtually all earnings are paid as dividends to common stockholders. D) optimally increasing the long-term value of the firm is emphasized. 29) Which of the following is not a true statement about the goal of maximizing shareholder wealth? A) It takes into account the timing of cash-flows. B) It is a short-run point of view. C) It considers risk as a factor. D) None of the options is a false statement. 30) As mergers, acquisitions, and restructuring have increased in importance, agency theory has become more important in assessing whether A) a stock repurchase should be undertaken. B) shareholder goals are truly being achieved by managers in the long run. C) managers are actually agents or only employees of the firm. D) managers are owners of the company and act the same with the same interests. Version 1 9 31) Insider trading occurs when A) someone has information not available to the public which they use to profit from trading in stocks. B) corporate officers buy stock in their company. C) lawyers, investment bankers, and others buy common stock in companies represented by their firms. D) any stock transaction that violates the Federal Trade Commissions restrictions. 32) The major difficulty in most insider-trading cases has been A) that lenient judges have simply released the guilty individuals. B) that insider trading, even though illegal, actually serves a beneficial economic and financial purpose. C) that inside trades have not been legally well-defined. D) that it is hard to figure out which owner(s) benefited from the trade. 33) What is the major difference between money markets and capital markets? A) One is more domestic while the other is more international. B) One includes stock while the other includes loans. C) The size of the profit or return on the market. D) The timing of how long the security will be held onto. 34) Capital markets do not include which of the following securities? A) Common stock B) Commercial paper C) Government bonds D) Preferred stock Version 1 10 35) When a corporation uses the financial markets to raise new funds, the sale of securities is made in the A) primary market. B) secondary market. C) online market. D) third market. 36) Which of the following statements is not true of secondary markets? A) After securities are sold to the public, they are traded in the secondary market between investors. B) The secondary market prices are continually changing as investors buy and sell securities. C) The sale of securities is made in the secondary market by way of a new issue. D) In the secondary market, financial managers are given feedback about their firm's performance. 37) Companies that have higher risk than a competitor in the same industry will generally have A) to pay a higher interest rate than its competitors. B) a lower relative stock price than its competitors. C) a higher cost of funds than its competitors. D) All of the options are correct. 38) What is financial capital as defined in the financial industry? Version 1 11 A) The structure of the company B) The sales price of stock C) Profits D) Money 39) The financial markets allocate capital to corporations by A) reflecting expectations of the market participants in the price of the corporation's stock. B) requiring higher returns from companies with lower risk than their competitors. C) rewarding companies with expected high returns with lower relative stock prices. D) relying on the opinion of investment bankers. 40) Corporate restructuring can be a result of more institutional ownership. Restructuring can cause A) changes in the amount of assets versus the amount of liabilities of the firm. B) the sale of low-profit margin divisions. C) the removal of current management and/or large reductions in the workforce. D) All of the options are correct. 41) A corporate restructuring can result in A) changes in the capital structure. B) selling of low-profit margin divisions. C) the board of directors exercising control of the company’s major decisions. D) All of the options are true. 42) Which of the following is not an example of restructuring? Version 1 12 A) Increase or decrease the amount of common stock. B) Eliminating profitable but unrelated divisions. C) Merging with companies in related industries. D) Divesting of an unprofitable division. 43) Future financial managers will need to understand A) international cash flows. B) computerized funds transfers. C) international currency hedging strategies. D) All of the options are true. 44) The increase in the internationalization of financial markets has led to A) companies searching the global financial markets for low-cost funds. B) an increase in American Depository Receipts (ADRs) on the New York Stock Exchange. C) an increase in debt obligations denominated in foreign currency on U.S. corporate balance sheets. D) All of the options are true. 45) The internationalization of the financial markets has A) allowed firms such as McDonald's to raise capital around the world. B) raised the cost of capital. C) forced companies to price everything in U.S. dollars. D) All of the options are true. 46) The Internet has affected the financial markets by Version 1 13 A) creating more competition between markets. B) pushing the cost of trading down. C) forcing brokerage companies to consolidate. D) All of the options are true. 47) Increased productivity due to technology has A) increased corporations' reliance on debt for capital expansion needs. B) created larger asset values on the firm's historical balance sheet. C) made it cheaper (in terms of interest costs and timing of when money is transferred) for firms to borrow money. D) helped to keep corporate costs in check. 48) Companies that perform well A) can sell their stock for a lower price. B) can minimize dilution when issuing new shares. C) can issue debt at a lower interest rate. D) can minimize dilution when issuing new shares and can issue debt at a lower interest rate. 49) The entity that is responsible for establishing the allocation and cost of capital is/are A) the corporation. B) the economy. C) investors. D) customers. 50) The benefits of social responsibility often include Version 1 14 A) a better reputation. B) higher short-term earnings. C) lower expenses. D) None of the options 51) Who is accountable for social responsibility within a firm? A) The board of directors B) Management C) Investors D) The financial market 52) Regarding risk levels, financial managers should A) pursue higher-risk projects because they increase value. B) avoid higher-risk projects because they destroy value. C) focus primarily on market fluctuations. D) evaluate investors' desire for risk. 53) What is the future value of $2,000 deposited for one year earning 6 percent interest rate annually? A) $120 B) $2.000 C) $2,120 D) $4,120 54) What is the future value of $6,000 deposited for one year earning 5 percent interest rate annually? Version 1 15 A) $6,150 B) $6,100 C) $6,300 D) $7,101 55) What is the present value of a $750 payment made in three years when the discount rate is 5 percent? A) $646.96 B) $647.88 C) $712.50 D) $868.22 56) What is the present value of a $1500 payment made in three years when the discount rate is 8 percent? A) $125.69 B) $1,190.75 C) $1,100.53 D) $1,224.22 57) As finance emerged as a new field, much emphasis was placed on mergers and acquisitions. ⊚ true ⊚ false 58) Inflation is assumed to be a temporary problem that does not affect financial decisions. ⊚ true ⊚ false