Fm test banks ch1

Full file at http://testbanksite.
eu/Foundations-of-Financial-Management-10th-Canadian-Edition--Test-Bank
Chapter 01 The Goals and Functions of Financial

Management
Student: ___________________________________________________________________________
1. What is the primary goal of financial management?
A. Increased
earnings
B. Maximizing cash
flow
C. Maximizing shareholder
wealth
D. Minimizing risk of the
firm
2. Proper risk-return management means that:
A. the firm should take as few risks as

possible.
B. consistent with the objectives of the firm, an appropriate trade-off between risk
and return should be determined.
C. the firm should earn the highest return
possible.
D. the firm should value future profits more highly than
current profits.
3. Which of the following is not a major area of concern and emphasis in modern
financial management and in this text?
A. Inflation and its effect on

profits
B. Stable short-term interest
rates
C. Changing international
environment
D. Increased reliance on
debt
Full file at http://testbanksite.eu/Foundations-of-Financial-Management-10th-Canadian-Edition--Test-Bank
A. Marginal
analysis
B. Risk-return trade-
off
C. Commodity
trading
D. Changing financial
institutions
5. The effect of the high rates of inflation experienced during the 1970s and early 1980s
was to make:
A. the gold standard was

eliminated.
B. purchasing power
increased.
C. interest rates
fell.
D. capital budgeting decisions less
reliable.
6. In the past, the study of finance has included:
A. operational
efficiency.
B. employee
relationships.
C. legal
cases.
D. mergers and
acquisitions.
7. A financial manager's goal of maximizing current or short-term earnings may not be
appropriate because:
A. it considers the timing of the

benefits.
B. increased earnings may be accompanied by acceptably higher
levels of risk.
C. share ownership is widely
dispersed.
D. earnings are subjective; they can be defined in various ways such as accounting or
economic earnings.
8. 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. low organizational
costs.
D. low operating
costs.
9. The partnership form of 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.
10. A corporation is not:
A. owned by shareholders who enjoy the privilege of

limited liability.
B. easily divisible between
owners.
C. a separate legal entity with
perpetual life.
D. a separate legal entity with
limited life.
11. Inflation:
A. increases corporations' reliance on debt for capital

expansion needs.
B. creates larger asset values on the firm's historical
balance sheet.
C. makes it cheaper (in terms of interest costs) for firms to
borrow money.
D. creates stability for
investors.
12. Which of the following securities is not included as part of the capital market?
A. Common
stock
B. Commercial
paper
C. Government
bonds
D. Preferred
stock
13. Maximization of shareholder wealth is a concept in which:
A. increased earnings is of primary

importance.
B. profits are maximized on a quarterly
basis.
C. virtually all earnings are paid as dividends to common
shareholders.
D. optimally increasing the long-term value of the firm is
emphasized.
14. The largest Canadian corporations are mainly:
A. widely
held.
B. family
controlled.
C. U.S.
controlled.
D. Japanese
controlled.
15. 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 which takes risk into
account.
C. It considers risk as a
factor.
D. It is a long-run point of view which takes risk into
account.
16. Increased international competition can be seen as a motivator to emphasize:
A. asset diversification
strategies.
B. the risk side of the risk-return
relationship.
C. the return side of the risk-return
relationship.
D. invest in a new risky
project.
17. Corporations can reduce portfolio risk by:
A. narrowing their focus on one successful

product.
B. merging with companies in unrelated
industries.
C. repurchasing their own
stock.
D. selling their own
stock.
18. The shift to the return side of the risk-return relationship has occurred because:
A. narrow focus on
production.
B. stock
splits.
C. there has been a decrease in the use of advanced technology in the
production process.
D. there has been an increase in international
competition.
19. A corporate buy-back, or the repurchasing of shares, is:
A. an example of balance sheet

restructuring.
B. an excellent source of profits when the firm's stock is
over-priced.
C. a method of reducing the debt-to-
equity ratio.
D. shown as revenue on the income
statement.
20. Which of the following is (are) a result of high inflation?
A. Loss from disposal of

assets
B. Over-valued
liabilities
C. Lower stock
price
D. Under-valued
assets
21. A corporate restructuring can result in:
A. increased
revenue.
B. buying of low-profit margin
divisions.
C. selling of high-profit margin
divisions.
D. reductions in the work
force.
22. Which of the following is not an example of restructuring as discussed in the text?
A. Repurchase of common
stock
B. Creating a new organizational
chart
C. Merging with companies in related
industries
D. Divesting of an unprofitable
division
23. 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.
24. As mergers, acquisitions, and restructurings 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 and owners are actually the same people with the same
interests.
25. 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 dealers, and others buy common stock in companies
represented by their firms
D. stock transactions occur with reduced
brokerage fees.
26. 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. inside trades actually have a beneficial effect on the wealth of all
shareholders.
27. The 1990 Nobel Prize in economics was given to three finance professors. They are:
A. Harry Markowitz, Merton Miller, William

Sharpe
B. Harry Markowitz, Franco Modigilani, Paul
Samuelson
C. Merton Miller, Franco Modigliani, Robert
Merton
D. William Sharpe, Richard Roll, Steve
Ross
28. Future financial managers will need to understand:
A. employment
standards.
B. production
engineering.
C. actuarial
calculations.
D. international currency hedging
strategies.
29. 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 risk-return and portfolio
theory.
D. theories of international capital
budgeting.
30. In the 1930s, financial practices didn't focus on:
A. maintenance of
liquidity.
B. reorganization of financially distressed
companies.
C. the bankruptcy
process.
D. international exchange
costs.
31. 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.
32. Money markets would include which of the following securities?
A. Common stock and corporate

bonds
B. Treasury bills and commercial
paper
C. Certificates of deposit and preferred
stock
D. Government
bonds.
33. 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. on-line
market.
D. third
market.
34. Companies that have higher risk than a competitor in the same industry will
generally have:
A. to pay a lower interest rate than its

competitors.
B. a higher relative stock price than its
competitors.
C. a lower cost of funds than its
competitors.
D. to pay a higher interest rate than its
competitors.
35. The financial markets allocate capital to corporations by:
A. reflecting expectations of the market participants in the corporation's

share price.
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
dealers.
36. Corporate restructuring has been one result of more institutional ownership.
Restructuring can cause:
A. stability in the asset and liabilities of

the firm.
B. the purchase of low-profit margin
divisions.
C. the promotion of current management and/or large increases in the
workforce.
D. changes in the asset and liabilities of
the firm.
37. Corporate restructuring in the late 1990s more often took the form of:
A. leveraged
buyouts.
B. mergers to refocus on core
businesses.
C. a change in capital
structure.
D. addition of senior
management.
38. The increase in the internationalization of financial markets has led:
A. to companies searching the global financial markets for high

cost funds.
B. to a decrease in Canadian companies listing on the New York Stock
Exchange.
C. to a decrease in debt obligations denominated in foreign currency on Canadian
corporate balance sheets.
D. to the tasks of the financial manager being
reshaped.
39. The internationalization of the financial markets has:
A. allowed firms such as Bombardier to raise capital around

the world.
B. raised the cost of
capital.
C. forced companies to value everything in U.S.
dollars.
D. created
ASPE.
40. Increased use of technology has increased corporate efficiency by:
A. increasing the firm's reliance on

debt.
B. creating larger asset values on the firm's
balance sheet.
C. made it cheaper (in terms of interest costs) for firms to
borrow money.
D. creating electronic communication
networks.
A. increased earnings are of primary

importance.
B. increased cash flows are of primary
importance.
C. increased dividends are of primary
importance.
D. increased share price is of primary
importance.
42. Capital structure is:
A. the relative mix of capital and intangible assets held by

the firm.
B. the relative importance of debt and equity in the firm's
financing.
C. the relative importance of long-term investment
decisions.
D. the terms required to borrow
money.
43. Financial markets allocate capital based on:
A. the pricing
mechanism.
B. the efforts of financial
intermediaries.
C. intervention by the Bank of
Canada.
D. the number of treasury bills
outstanding.
44. 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 and institutional
investors.
C. operation of the firm by the chief executive officer (CEO) and other senior
executives on the management team.
D. strategically directing the company through the board of directors with a focus on
social responsibility.
45. Agency theory examines the relationship between:
A. shareholders of the firm and its investment

dealers.
B. shareholders of the firm and its
managers.
C. the board of directors and large institutional
investors.
D. shareholders of the firm and its transfer
agent.
46. Agency theory would imply that conflicts are more likely to occur between
management and shareholders when:
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 is also the chief executive
officer (CEO).
D. the board of directors exerts strong and involved oversight of
managers.
A. lowered the cost of

capital.
capital.
dollars.
D. had no effect on the cost of
capital.
48. In analysis of a firm's market share value, an investor should not consider:
A. the risk inherent in the

firm.
B. the time pattern of the firm's earnings and
cash flow.
C. the quality and reliability of reported
earnings.
D. book value of
assets.
49. The increased percentage of ownership of public corporations by institutional

investors has:

management.
general.
C. created less pressure on public companies to manage their firms more
efficiently.
D. increased the ethical standards of
management.
50. As finance emerged as an analytical, decision oriented discipline, the initial emphasis
was placed on capital acquisitions.
True False
51. Inflation is assumed to be a temporary problem that does not affect financial
decisions.
True False
52. Timing is not a particularly important consideration in financial decisions.
True False
53. Institutional investors have had increasing influence over corporations with their
ability to vote large blocks of stock and replace poor performing boards of directors.
True False
54. Insider trading involves the use of information not available to the general public to
make profits from trading in a company's shares.
True False
55. Agency theory assumes that corporate managers act to increase the wealth of
corporate shareholders.
True False
56. Historically the field of finance as a discipline described capital preservation, liquidity,
reorganization, and bankruptcy through the 1930s depression.
True False
57. The higher the profit of a firm, the higher the value the firm is assured of receiving in
the market.
True False
58. Social responsibility and profit maximization are synonymous.
True False
59. There is unlimited liability in a general partnership.
True False
60. In the mid1950s, finance began to change to a more analytical, decision oriented
approach.
True False
61. There are some serious problems with the financial goal of maximizing the earnings
of the firm.
True False
62. Maximizing the earnings of the firm is the goal of financial management.
True False
63. Because socially desirable goals can impede profitability in many instances,
managers should not try to operate under the assumption of wealth maximization.
True False
64. The sole proprietorship represents single-person ownership and offers the
advantages of simplicity of decision making and low organizational and operating
costs.
True False
65. Profits of sole proprietorships are taxed at corporate tax rates.
True False
66. The primary market includes the sale of securities by way of initial public offerings.
True False
67. The most common partnership arrangement carries limited liability to the partners.
True False
68. A limited partnership limits the profits partners may receive.
True False
69. In terms of size of revenues and profits, the corporation is by far the most important
form of business organization in Canada.
True False
70. Dividends paid to corporate shareholders have already been taxed once as corporate
income.
True False
71. One advantage of the corporate form of organization is that income received by
shareholders is not taxable since the corporation already paid taxes on the income
distributed.
True False
72. A corporation must have at least 35 shareholders.
True False
73. Profits of a manufacturing corporation are taxed at the same rate as dividends.
True False
74. Recently, the emphasis of financial management has been on the relationships
between risk and return.
True False
75. The formation of a corporation is a way to circumvent personal liability.
True False
76. The secondary market characteristically has had stable prices over the past 20
years.
True False
77. The first Nobel Prizes given to finance professors was for their contributions to capital
structure theory and portfolio theories of risk and return.
True False
78. Financial markets exist as a vast global network of individuals and financial
institutions that may be lenders, borrowers, or owners of public companies
worldwide.
True False
79. Inflation has led to phantom profits and undervalued assets.
True False
80. Money markets refer to those markets dealing with short-term securities having a life
of one year or less.
True False
81. Capital markets refer to those markets dealing with short-term securities having a life
of one year or less.
True False
82. New issues are sold in the secondary market.
True False
83. Existing securities are traded in the secondary market.
True False
84. The financial markets value assets based on the most productive current use.
True False
85. The 1990s demonstrated that the old valuation models were no longer effective.
True False
86. The largest financial intermediaries after the banks are insurance companies.
True False
87. The TSX Composite Index is representative of equity market value of the top listed
Canadian companies.
True False
88. The Internet is largely responsible for the internationalization of the financial
markets.
True False
89. Agency theory examines the relationship between companies and their customers.
True False
90. Honesty in business requires timely and full disclosure of pertinent firm
developments.
True False
91. Businesses will increasingly rely on B2B Internet applications to speed up cash flows.
True False
92. Issues over corporate governance are often agency problems.
True False
93. Agency theory examines the relationship between the owners of the firm and the
managers of the firm.
True False
94. Secondary markets are the markets that trade previously issued securities.
True False
95. Financial management builds upon the disciplines of economics and accounting.
Describe what
a: economics provides the financial manager

b: accounting provides the financial manager
96. Selecting profit maximization as the primary goal of the firm may not increase its
value, because a profit-only focus has several drawbacks. List and describe these
drawbacks.
97. What 4 factors will investors consider in the analysis of a firm market share value?
98. According to agency theory, other than maximizing shareholder wealth what other
self-interests do financial managers have?
99. Besides maximizing shareholder wealth, what should corporations consider to be
goals? List and briefly explain.
100 What are the 4 components of good corporate governance?

.
101 List the 4 components of good corporate governance and identify additional
. measures that could be added to strengthen corporate governance.
102 List the occasional functions of the finance manager connected to the efficient
. raising and investing of funds.
103 What are the characteristics of a sole proprietorship? What are the drawbacks?
.
104 What are the characteristics of a partnership? What are the advantages compared to
. a sole proprietorship?
105 What are the characteristics of a corporation?

.
106 What 2 choices does the board of directors have to distribute earnings of a
. corporation?

Management Key
1. What is the primary goal of financial management?
A. Increased
earnings
B. Maximizing cash
flow
C. Maximizing shareholder
wealth
D. Minimizing risk of the
firm
Accessibility: Keyboard Navigation
Block - Chapter 01 #1
Difficulty: Easy
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share
price.
Topic: 01-04 Maximizing Shareholder Wealth
Type: Memory
2. Proper risk-return management means that:
A. the firm should take as few risks as

possible.
B. consistent with the objectives of the firm, an appropriate trade-off between risk
and return should be determined.
C. the firm should earn the highest return
possible.
D. the firm should value future profits more highly than
current profits.
Difficulty: Easy
price.
Topic: 01-05 Measuring the Goal
Type: Memory
A. Inflation and its effect on

profits
B. Stable short-term interest
rates
C. Changing international
environment
D. Increased reliance on
debt
Difficulty: Medium
Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk.
Topic: 01-03 Goals of Financial Management
Type: Concept
A. Marginal
analysis
B. Risk-return trade-
off
C. Commodity
trading
D. Changing financial
institutions
Difficulty: Medium
Type: Concept
5. The effect of the high rates of inflation experienced during the 1970s and early
1980s was to make:
A. the gold standard was

eliminated.
B. purchasing power
increased.
C. interest rates
fell.
D. capital budgeting decisions less
reliable.
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-15 Risk
Type: Concept
6. In the past, the study of finance has included:
A. operational
efficiency.
B. employee
relationships.
C. legal
cases.
D. mergers and
acquisitions.
Difficulty: Easy
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-02 Evolution of Finance as a Discipline
Type: Concept
7. A financial manager's goal of maximizing current or short-term earnings may not

be appropriate because:
A. it considers the timing of the

benefits.
B. increased earnings may be accompanied by acceptably higher
levels of risk.
C. share ownership is widely
dispersed.
D. earnings are subjective; they can be defined in various ways such as accounting
or economic earnings.
Difficulty: Medium
price.
Type: Concept
8. 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. low organizational
costs.
D. low operating
costs.
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-11 Forms of Organization
Type: Memory
9. The partnership form of 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.
Difficulty: Easy
Type: Memory
10. A corporation is not:
A. owned by shareholders who enjoy the privilege of

limited liability.
B. easily divisible between
owners.
C. a separate legal entity with
perpetual life.
D. a separate legal entity with
limited life.
Difficulty: Easy
Type: Memory
11. Inflation:
A. increases corporations' reliance on debt for capital

expansion needs.
B. creates larger asset values on the firm's historical
balance sheet.
C. makes it cheaper (in terms of interest costs) for firms to
borrow money.
D. creates stability for
investors.
Difficulty: Medium
Topic: 01-15 Risk
Type: Concept
12. Which of the following securities is not included as part of the capital market?
A. Common
stock
B. Commercial
paper
C. Government
bonds
D. Preferred
stock
Difficulty: Medium
Topic: 01-13 Structure and Functions of the Financial Markets
Type: Memory
A. increased earnings is of primary

importance.
B. profits are maximized on a quarterly
basis.
C. virtually all earnings are paid as dividends to common
shareholders.
D. optimally increasing the long-term value of the firm is
emphasized.
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-07 Management and Shareholder Wealth
Type: Concept
14. The largest Canadian corporations are mainly:
A. widely
held.
B. family
controlled.
C. U.S.
controlled.
D. Japanese
controlled.
Difficulty: Easy
Type: Memory
15. 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 which takes risk into
account.
C. It considers risk as a
factor.
D. It is a long-run point of view which takes risk into
account.
Difficulty: Medium
Type: Concept
16. Increased international competition can be seen as a motivator to emphasize:
A. asset diversification
strategies.
B. the risk side of the risk-return
relationship.
C. the return side of the risk-return
relationship.
D. invest in a new risky
project.
Difficulty: Medium
Topic: 01-15 Risk
Type: Memory
17. Corporations can reduce portfolio risk by:
A. narrowing their focus on one successful

product.
B. merging with companies in unrelated
industries.
C. repurchasing their own
stock.
D. selling their own
stock.
Difficulty: Medium
Topic: 01-14 Allocation of Capital
Type: Concept
18. The shift to the return side of the risk-return relationship has occurred because:
A. narrow focus on
production.
B. stock
splits.
C. there has been a decrease in the use of advanced technology in the
production process.
D. there has been an increase in international
competition.
Difficulty: Medium
Topic: 01-15 Risk
Type: Concept
19. A corporate buy-back, or the repurchasing of shares, is:
A. an example of balance sheet

restructuring.
B. an excellent source of profits when the firm's stock is
over-priced.
C. a method of reducing the debt-to-
equity ratio.
D. shown as revenue on the income
statement.
Difficulty: Medium
Type: Concept
20. Which of the following is (are) a result of high inflation?
A. Loss from disposal of

assets
B. Over-valued
liabilities
C. Lower stock
price
D. Under-valued
assets
Difficulty: Medium
Topic: 01-15 Risk
Type: Concept
21. A corporate restructuring can result in:
A. increased
revenue.
B. buying of low-profit margin
divisions.
C. selling of high-profit margin
divisions.
D. reductions in the work
force.
Difficulty: Medium
price.
Type: Memory
22. Which of the following is not an example of restructuring as discussed in the text?
A. Repurchase of common
stock
B. Creating a new organizational
chart
C. Merging with companies in related
industries
D. Divesting of an unprofitable
division
Difficulty: Medium
price.
Type: Concept
23. 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.
Difficulty: Hard
price.
Type: Concept
24. As mergers, acquisitions, and restructurings 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 and owners are actually the same people with the same
interests.
Difficulty: Hard
price.
Type: Concept
25. 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 dealers, and others buy common stock in companies
represented by their firms
D. stock transactions occur with reduced
brokerage fees.
Difficulty: Medium
Topic: 01-09 Ethical Behaviour
Type: Memory
26. 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. inside trades actually have a beneficial effect on the wealth of all
shareholders.
Difficulty: Hard
Type: Concept
27. The 1990 Nobel Prize in economics was given to three finance professors. They
are:
A. Harry Markowitz, Merton Miller, William

Sharpe
B. Harry Markowitz, Franco Modigilani, Paul
Samuelson
C. Merton Miller, Franco Modigliani, Robert
Merton
D. William Sharpe, Richard Roll, Steve
Ross
Difficulty: Medium
price.
Type: Memory
28. Future financial managers will need to understand:
A. employment
standards.
B. production
engineering.
C. actuarial
calculations.
D. international currency hedging
strategies.
Difficulty: Easy
Topic: 01-15 Risk
Type: Concept
29. 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 risk-return and portfolio
theory.
D. theories of international capital
budgeting.
Difficulty: Medium
price.
Type: Memory
30. In the 1930s, financial practices didn't focus on:
A. maintenance of
liquidity.
B. reorganization of financially distressed
companies.
C. the bankruptcy
process.
D. international exchange
costs.
Difficulty: Easy
Type: Memory
31. The increasing percentage ownership of public corporations by institutional

investors has:

management.
general.
C. created more pressure on public companies to manage their firms more
efficiently.
D. taken away the voice of the individual
investor.
Difficulty: Medium
price.
Type: Concept
32. Money markets would include which of the following securities?
A. Common stock and corporate

bonds
B. Treasury bills and commercial
paper
C. Certificates of deposit and preferred
stock
D. Government
bonds.
Difficulty: Easy
Topic: 01-12 The Role of the Financial Markets
Type: Memory
33. 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. on-line
market.
D. third
market.
Difficulty: Easy
Type: Memory
34. Companies that have higher risk than a competitor in the same industry will
generally have:
A. to pay a lower interest rate than its

competitors.
B. a higher relative stock price than its
competitors.
C. a lower cost of funds than its
competitors.
D. to pay a higher interest rate than its
competitors.
Difficulty: Medium
Topic: 01-15 Risk
Type: Concept
35. The financial markets allocate capital to corporations by:
A. reflecting expectations of the market participants in the corporation's

share price.
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
dealers.
Difficulty: Medium
Type: Concept
36. Corporate restructuring has been one result of more institutional ownership.
Restructuring can cause:
A. stability in the asset and liabilities of

the firm.
B. the purchase of low-profit margin
divisions.
C. the promotion of current management and/or large increases in the
workforce.
D. changes in the asset and liabilities of
the firm.
Difficulty: Easy
Topic: 01-10 Functions of Financial Management
Type: Memory
37. Corporate restructuring in the late 1990s more often took the form of:
A. leveraged
buyouts.
B. mergers to refocus on core
businesses.
C. a change in capital
structure.
D. addition of senior
management.
Difficulty: Easy
Type: Memory
38. The increase in the internationalization of financial markets has led:
A. to companies searching the global financial markets for high

cost funds.
B. to a decrease in Canadian companies listing on the New York Stock
Exchange.
C. to a decrease in debt obligations denominated in foreign currency on Canadian
corporate balance sheets.
D. to the tasks of the financial manager being
reshaped.
Difficulty: Easy
Type: Memory
A. allowed firms such as Bombardier to raise capital around

the world.
capital.
dollars.
D. created
ASPE.
Difficulty: Medium
Topic: 01-15 Risk
Type: Concept
40. Increased use of technology has increased corporate efficiency by:
A. increasing the firm's reliance on

debt.
B. creating larger asset values on the firm's
balance sheet.
C. made it cheaper (in terms of interest costs) for firms to
borrow money.
D. creating electronic communication
networks.
Difficulty: Medium
Topic: 01-15 Risk
Type: Concept
A. increased earnings are of primary

importance.
B. increased cash flows are of primary
importance.
C. increased dividends are of primary
importance.
D. increased share price is of primary
importance.
Difficulty: Medium
price.
Type: Concept
42. Capital structure is:
A. the relative mix of capital and intangible assets held by

the firm.
B. the relative importance of debt and equity in the firm's
financing.
C. the relative importance of long-term investment
decisions.
D. the terms required to borrow
money.
Difficulty: Hard
Type: Memory
43. Financial markets allocate capital based on:
A. the pricing
mechanism.
B. the efforts of financial
intermediaries.
C. intervention by the Bank of
Canada.
D. the number of treasury bills
outstanding.
Difficulty: Easy
Type: Concept
44. 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 and institutional
investors.
C. operation of the firm by the chief executive officer (CEO) and other senior
executives on the management team.
D. strategically directing the company through the board of directors with a focus
on social responsibility.
Difficulty: Easy
Topic: 01-08 Social Responsibility
Type: Memory
45. Agency theory examines the relationship between:
A. shareholders of the firm and its investment

dealers.
B. shareholders of the firm and its
managers.
C. the board of directors and large institutional
investors.
D. shareholders of the firm and its transfer
agent.
Difficulty: Easy
price.
Type: Memory
46. Agency theory would imply that conflicts are more likely to occur between
management and shareholders when:
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 is also the chief executive
officer (CEO).
D. the board of directors exerts strong and involved oversight of
managers.
Difficulty: Medium
Type: Concept
A. lowered the cost of

capital.
capital.
dollars.
D. had no effect on the cost of
capital.
Difficulty: Medium
Topic: 01-15 Risk
Type: Concept
48. In analysis of a firm's market share value, an investor should not consider:
A. the risk inherent in the

firm.
B. the time pattern of the firm's earnings and
cash flow.
C. the quality and reliability of reported
earnings.
D. book value of
assets.
Difficulty: Easy
price.
Topic: 01-06 Market Share Price
Type: Memory
49. The increased percentage of ownership of public corporations by institutional

investors has:

management.
general.
C. created less pressure on public companies to manage their firms more
efficiently.
D. increased the ethical standards of
management.
Difficulty: Medium
price.
Type: Concept
50. As finance emerged as an analytical, decision oriented discipline, the initial

emphasis was placed on capital acquisitions.
TRUE
Difficulty: Easy
Type: Concept
51. Inflation is assumed to be a temporary problem that does not affect financial
decisions.
FALSE
Difficulty: Easy
Topic: 01-01 The Field of Finance
Type: Memory
52. Timing is not a particularly important consideration in financial decisions.
FALSE
Difficulty: Easy
Type: Concept
53. Institutional investors have had increasing influence over corporations with their
ability to vote large blocks of stock and replace poor performing boards of
directors.
TRUE
Difficulty: Easy
price.
Type: Memory
54. Insider trading involves the use of information not available to the general public
to make profits from trading in a company's shares.
TRUE
Difficulty: Easy
Type: Memory
55. Agency theory assumes that corporate managers act to increase the wealth of
corporate shareholders.
FALSE
Difficulty: Easy
price.
Type: Memory
56. Historically the field of finance as a discipline described capital preservation,

liquidity, reorganization, and bankruptcy through the 1930s depression.
TRUE
Difficulty: Easy
Type: Memory
57. The higher the profit of a firm, the higher the value the firm is assured of receiving
in the market.
FALSE
Difficulty: Medium
price.
Type: Concept
58. Social responsibility and profit maximization are synonymous.
FALSE
Difficulty: Easy
Topic: 01-08 Social Responsibility
Type: Concept
59. There is unlimited liability in a general partnership.
TRUE
Difficulty: Easy
Type: Memory
60. In the mid1950s, finance began to change to a more analytical, decision oriented
approach.
TRUE
Difficulty: Easy
Type: Memory
61. There are some serious problems with the financial goal of maximizing the
earnings of the firm.
TRUE
Difficulty: Easy
price.
Type: Concept
62. Maximizing the earnings of the firm is the goal of financial management.
FALSE
Difficulty: Easy
Type: Concept
63. Because socially desirable goals can impede profitability in many instances,
managers should not try to operate under the assumption of wealth
maximization.
FALSE
Difficulty: Medium
Type: Memory
64. The sole proprietorship represents single-person ownership and offers the
advantages of simplicity of decision making and low organizational and operating
costs.
TRUE
Difficulty: Easy
Type: Memory
65. Profits of sole proprietorships are taxed at corporate tax rates.
FALSE
Difficulty: Easy
Type: Memory
66. The primary market includes the sale of securities by way of initial public
offerings.
TRUE
Difficulty: Easy
Type: Memory
67. The most common partnership arrangement carries limited liability to the
partners.
FALSE
Difficulty: Medium
Type: Memory
68. A limited partnership limits the profits partners may receive.
FALSE
Difficulty: Easy
Type: Memory
69. In terms of size of revenues and profits, the corporation is by far the most
important form of business organization in Canada.
TRUE
Difficulty: Easy
Type: Concept
70. Dividends paid to corporate shareholders have already been taxed once as
corporate income.
TRUE
Difficulty: Easy
Type: Concept
71. One advantage of the corporate form of organization is that income received by
shareholders is not taxable since the corporation already paid taxes on the income
distributed.
FALSE
Difficulty: Easy
Type: Concept
72. A corporation must have at least 35 shareholders.
FALSE
Difficulty: Easy
Type: Memory
73. Profits of a manufacturing corporation are taxed at the same rate as dividends.
FALSE
Difficulty: Easy
Type: Concept
74. Recently, the emphasis of financial management has been on the relationships
between risk and return.
TRUE
Difficulty: Medium
Type: Concept
75. The formation of a corporation is a way to circumvent personal liability.
TRUE
Difficulty: Medium
Type: Concept
76. The secondary market characteristically has had stable prices over the past 20
years.
FALSE
Difficulty: Easy
Type: Memory
77. The first Nobel Prizes given to finance professors was for their contributions to
capital structure theory and portfolio theories of risk and return.
TRUE
Difficulty: Easy
price.
Type: Memory
78. Financial markets exist as a vast global network of individuals and financial
institutions that may be lenders, borrowers, or owners of public companies
worldwide.
TRUE
Difficulty: Easy
Type: Memory
79. Inflation has led to phantom profits and undervalued assets.
TRUE
Difficulty: Easy
Type: Concept
80. Money markets refer to those markets dealing with short-term securities having a
life of one year or less.
TRUE
Difficulty: Easy
Type: Memory
81. Capital markets refer to those markets dealing with short-term securities having a
life of one year or less.
FALSE
Difficulty: Easy
Type: Memory
82. New issues are sold in the secondary market.
FALSE
Difficulty: Easy
Type: Memory
83. Existing securities are traded in the secondary market.
TRUE
Difficulty: Easy
Type: Memory
84. The financial markets value assets based on the most productive current use.
TRUE
Difficulty: Easy
Topic: 01-15 Risk
Type: Concept
85. The 1990s demonstrated that the old valuation models were no longer effective.
FALSE
Difficulty: Medium
Type: Concept
86. The largest financial intermediaries after the banks are insurance companies.
FALSE
Difficulty: Easy
Type: Memory
87. The TSX Composite Index is representative of equity market value of the top listed
Canadian companies.
TRUE
Difficulty: Easy
Topic: 01-15 Risk
Type: Memory
88. The Internet is largely responsible for the internationalization of the financial
markets.
FALSE
Difficulty: Medium
Type: Concept
89. Agency theory examines the relationship between companies and their
customers.
FALSE
Difficulty: Easy
price.
Type: Memory
90. Honesty in business requires timely and full disclosure of pertinent firm
developments.
TRUE
Difficulty: Medium
Type: Concept
91. Businesses will increasingly rely on B2B Internet applications to speed up cash
flows.
TRUE
Difficulty: Easy
Type: Memory
92. Issues over corporate governance are often agency problems.
TRUE
Difficulty: Medium
price.
Type: Concept
93. Agency theory examines the relationship between the owners of the firm and the
managers of the firm.
TRUE
Difficulty: Medium
price.
Type: Memory
94. Secondary markets are the markets that trade previously issued securities.
TRUE
Difficulty: Medium
Type: Memory
95. Financial management builds upon the disciplines of economics and accounting.
Describe what
a: economics provides the financial manager

b: accounting provides the financial manager
Economics provides the financial manager with
• A broad picture of the economy and the key measures that influence the
corporation's decisions and performance (gross domestic product, industrial
production, disposable income, unemployment, inflation, interest rates, taxes).
• An understanding of the institutional structure of our mixed capitalist system
(government regulation, Bank of Canada, chartered banks, investment dealers,
trusts, insurance companies, financial markets). Capital is accumulated and valued
in competitive financial markets, affecting its cost and availability to the firm.
• A structure for decision making (risk analysis, pricing theory through supply and
demand relationships, comparative return analysis).
Accounting provides the financial manager with
• Much of the language of finance (assets, liabilities, cash flow).

• Financial data (income statements, balance sheets, statement of cash flows).
The financial manager must know how to interpret and use this data in allocating
the firm's financial resources to generate the best value on the basis of return and
risk.
Finance links economic theory with the numbers of accounting, and all corporate
managers—whether in the area of production, sales, research, marketing,
management, or long run strategic planning-must know what it means to assess
the financial performance of the firm.

Difficulty: Hard
Topic: 01-01 The Field of Finance
Type: Memory
96. Selecting profit maximization as the primary goal of the firm may not increase its
value, because a profit-only focus has several drawbacks. List and describe these
drawbacks.
1. Risk may increase as profit changes. More debts or investment in projects

with cyclical earnings to increase profits also increase risk. Shareholders may
consider the increase in risk insufficient for the increased earnings.
2. Profit fails to take into account the timing of benefits. We might be
indifferent between the following alternatives if our emphasis were solely on
maximizing earnings, as the total is the same. However, alternative B is clearly
superior, because larger benefits occur earlier; we could reinvest the difference in
earnings for alternative B for an extra period.
Earnings per Share
3. Accurately measuring profit is almost impossible. Economics and accounting

define profit (earnings) differently. Furthermore, earnings may not correspond to
current values due to the methods used to capture accounting accruals and the
amortization of capital expenditures. As well, financial statements are subject to
manipulation by managers, so reported earnings may be misleading.

Difficulty: Medium
price.
Type: Memory
97. What 4 factors will investors consider in the analysis of a firm market share value?
• The risk inherent in the firm (nature of its operations and how the firm is
financed)
• The time pattern of the firm's earnings and cash flows
• The quality and reliability of reported earnings (as a guidepost to future earning
power)
• Economic and political factors

Difficulty: Medium
price.
Type: Memory
98. According to agency theory, other than maximizing shareholder wealth what other
self-interests do financial managers have?
Financial managers are interested in:
• Maintaining their jobs (may discourage value-enhancing takeovers)

• Protecting "private spheres of influence"
• Maximizing their own compensation package
• Arbitrating among the firm's different stakeholders (shareholders, creditors,
employees, unions, environmentalists, consumer groups, Canada Revenue Agency,
government regulatory bodies, customers)
Pursuit of these interests may emphasize short-term results over long-term wealth
building. Management may also perceive the risk of investment decisions
differently from shareholders, leading to different points of view as to the best
decision regarding the investment of the firm's resources.

Difficulty: Medium
Type: Memory
99. Besides maximizing shareholder wealth, what should corporations consider to be

goals? List and briefly explain.
Corporations, which receive their operational charters from society, should

consider socially desirable actions that include:
• Community works (charitable giving, employment opportunities for marginalized

groups)
• Customer respect (safe products, fair pricing, appropriate advertising and
communication)
• Strong employee relations (fair benefits and compensation, equitable hiring,
education, health and safety)
• Environmental health (pollution controls, appropriate use and renewal of
resources)
• Human rights promotion (respecting the dignity of individuals globally)

Difficulty: Medium
Type: Memory
100. What are the 4 components of good corporate governance?
Good corporate governance results from:
• Board composition (strong leadership, competent education, balanced

competencies)
• Director and officers ownership positions in the firm (other than by stock options)
• A published code of ethics
• Independent audits and a financially literate audit committee

Difficulty: Medium
Type: Memory
101. List the 4 components of good corporate governance and identify additional
measures that could be added to strengthen corporate governance.
Good corporate governance results from:
• Board composition (strong leadership, competent education, balanced

competencies)
• Director and officers ownership positions in the firm (other than by stock options)
• A published code of ethics
• Independent audits and a financially literate audit committee
There have been increased demands for additional corporate governance practices
by firms, despite the increased costs of compliance and sometimes delays in
timely reporting of financial results. These measures include:
• Separating the roles of CEO and chair of the board

• Independent board of directors members
• Improved accounting standards (stock options, internal audit controls, "off-
balance sheet items")
• More stringent reporting and disclosure requirements
• Closer monitoring by regulatory bodies (securities commissions)
• Questioning the use of "dual class" shares

Difficulty: Hard
Type: Memory
102. List the occasional functions of the finance manager connected to the efficient
raising and investing of funds.
Intermediate financing, bond issues, leasing, stock issues, capital budgeting,

dividend decisions, forecasting

Difficulty: Easy
Type: Memory
103. What are the characteristics of a sole proprietorship? What are the drawbacks?
A sole proprietorship is characterized by:
• Single-person ownership
• Simplicity of decision making
• Low organizational and operating costs
• Unlimited liability to the owner (can lose personal assets in settlement of firm's
debts)
• Profits or losses taxed in hands of individual owner
Most small businesses with one to ten employees are sole proprietorships. The
unlimited liability is a serious drawback and few lenders are willing to advance
funds to a small business without a personal liability commitment from the owner.

Difficulty: Medium
Type: Concept
104. What are the characteristics of a partnership? What are the advantages compared
to a sole proprietorship?
A partnership is characterized by
• Multiple ownership
• Ability to raise more capital and share ownership responsibilities
• Unlimited liability for the owners (one wealthy partner may have to bear a
disproportionate share of losses in a general partnership)
• Taxation of profits or losses are allocated in percentages to partners
To circumvent the unlimited liability feature, a special form of partnership, called a

limited partnership, can be utilized. Under this arrangement one or more
partners are designated general partners and have unlimited liability for the debts
of the firm; other partners are designated limited partners and are liable only for
their initial contribution. The limited partners are normally prohibited from being
active in the management of the firm.

Difficulty: Medium
Type: Concept
105. What are the characteristics of a corporation?
A corporation is characterized by:
• A legal entity unto itself (may sue or be sued, engage in contracts, acquire
property)
• Ownership by shareholders (each with limited liability, although bankers may
require small business owners to give their personal guarantee)
• Divisibility of the ownership (many shareholders)
• Continuous life span (not dependent on life of one shareholder)
• Taxation on its own income (individual shareholders pay tax on dividends or
capital gain tax when shares are sold)
In terms of revenue and profits produced, the corporation is by far the most
important form of economic unit.

Difficulty: Medium
Type: Memory
106. What 2 choices does the board of directors have to distribute earnings of a
corporation?
Earnings generated by the corporation are owned equally by each shareholder,

and the board of directors has two choices for these earnings.
Earnings can be:
• Paid out as dividends (shareholders pay tax on dividends: a dividend tax credit
reduces the effect of double taxation)
• Reinvested in the firm (recorded as retained earnings)

Difficulty: Easy
Type: Memory

Management Summary
Category # of Questions
Accessibility: Keyboard Navigation 94
Block - Chapter 01 106
Difficulty: Easy 54
Difficulty: Hard 6
Difficulty: Medium 46
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and econo 12
mics.
Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while consi 3
dering return and risk.
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholde 24
r wealth as measured by share price.
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or managem 20
ent interests.
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising a 26
nd investing of funds.
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining v 21
alue; and establishing yields.
Topic: 01-01 The Field of Finance 2
Topic: 01-02 Evolution of Finance as a Discipline 10
Topic: 01-03 Goals of Financial Management 3
Topic: 01-04 Maximizing Shareholder Wealth 16
Topic: 01-05 Measuring the Goal 5
Topic: 01-06 Market Share Price 3
Topic: 01-07 Management and Shareholder Wealth 7
Topic: 01-08 Social Responsibility 2
Topic: 01-09 Ethical Behaviour 7
Topic: 01-10 Functions of Financial Management 4
Topic: 01-11 Forms of Organization 20
Topic: 01-12 The Role of the Financial Markets 5
Topic: 01-13 Structure and Functions of the Financial Markets 1
Topic: 01-14 Allocation of Capital 9
Topic: 01-15 Risk 12
Type: Concept 47
Type: Memory 59

Fm test banks ch1

Uploaded by

Copyright:

Available Formats

Fm test banks ch1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Fm test banks ch1

Uploaded by

Copyright:

Available Formats

Full file at http://testbanksite.

Chapter 01 The Goals and Functions of Financial

1. What is the primary goal of financial management?

2. Proper risk-return management means that:

A. the firm should take as few risks as

A. Inflation and its effect on

A. the gold standard was

6. In the past, the study of finance has included:

A. it considers the timing of the

8. One of the major disadvantages of a sole proprietorship is:

A. that there is unlimited liability to the

9. The partnership form of organization:

10. A corporation is not:

A. owned by shareholders who enjoy the privilege of

A. increases corporations' reliance on debt for capital

13. Maximization of shareholder wealth is a concept in which:

A. increased earnings is of primary

14. The largest Canadian corporations are mainly:

A. It takes into account the timing of

16. Increased international competition can be seen as a motivator to emphasize:

17. Corporations can reduce portfolio risk by:

A. narrowing their focus on one successful

A. an example of balance sheet

20. Which of the following is (are) a result of high inflation?

A. Loss from disposal of

21. A corporate restructuring can result in:

A. when to hire an agent to represent the firm in

24. As mergers, acquisitions, and restructurings have increased in importance, agency

A. a stock repurchase should be

25. Insider trading occurs when:

26. The major difficulty in most insider-trading cases has been:

A. that lenient judges have simply released the guilty

A. Harry Markowitz, Merton Miller, William

28. Future financial managers will need to understand:

30. In the 1930s, financial practices didn't focus on:

A. had no effect on corporate

32. Money markets would include which of the following securities?

A. Common stock and corporate

A. to pay a lower interest rate than its

35. The financial markets allocate capital to corporations by:

A. reflecting expectations of the market participants in the corporation's

A. stability in the asset and liabilities of

A. to companies searching the global financial markets for high

39. The internationalization of the financial markets has:

A. allowed firms such as Bombardier to raise capital around

40. Increased use of technology has increased corporate efficiency by:

A. increasing the firm's reliance on

41. Maximization of shareholder wealth is a concept in which:

A. increased earnings are of primary

A. the relative mix of capital and intangible assets held by

43. Financial markets allocate capital based on:

44. Corporate governance is the:

A. relationship and exercise of oversight by the board of directors of the

45. Agency theory examines the relationship between:

A. shareholders of the firm and its investment

A. the company is owned and operated by the same

47. The internationalization of the financial markets has:

A. lowered the cost of

A. the risk inherent in the

49. The increased percentage of ownership of public corporations by institutional