Financial Management Quiz 1

The primary goal of a publicly owned corporation is to ________.

• maximize dividends per share

• maximize shareholder wealth

• maximize earnings per share after taxes

• minimize shareholder risk

The five basic principles of finance include all of the following EXCEPT

• Cash flow is what matters.

• Money has a time value.

• Risk requires a reward.

• Incremental profits determine value.

The expected return on a riskless asset is greater than zero due to

• an expected return for delaying consumption.

• an expected return for opportunity costs.

• an expected return for taxes.

• irrational investors who believe risk is always present.

The principle of risk-return trade-off means that

• higher risk investments must earn higher returns.

• an investor who takes more risk will earn a higher return.

• a rational investor will only take on higher risk if he expects a higher return.

• an investor who bought stock in a small corporation five years ago has more money than an investor who bought U.S. Treasury bonds five years ago.

Profits are down so the controller decides to change the corporation's accounting policy relating to inventory costing. The change will allow the corporation to report higher income and higher assets, although the physical inventory has not changed. Which of the following statements is MOST correct?

• The stock price is likely to increase because income is higher.

• The stock price is likely to be unaffected because the stock market is efficient.

• The stock price is likely to decrease because reported inventory is higher.

• If the stock price increases, the stock market is efficient.

Ethical behavior

• is the fifth basic principles of finance.

• cannot be a concern to managers who are expected to maximize shareholder value.

• in the corporate world means not breaking any laws.

• is essential in business because unethical behavior destroys trust and business relationships.

Which of the following statements best represents the "Agency Problem"?

• Managers might attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders.

• The agency problem results from the separation of management and the ownership of the firm.

• The agency problem may interfere with the implementation of maximizing shareholder wealth.

• all of the above

Working capital management is concerned with

• how a firm can best manage its cash flows as they arise in its day-to-day operations.

• how a firm should raise money to fund its investments.

• what long-term investments a firm should undertake.

• managing a firm's capital stock.

A limited partnership provides limited liability to

• all general partners.

• only limited partners responsible for day to day management of the firm.

• only to limited partners who do not participate in the management of the business.

• all partners.

Which of the following statements about the corporate form of business organization is true?

• The corporate form has the disadvantage of double taxation relative to a sole proprietorship.

• The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation.

• Sole proprietorships are the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor.

• The corporate form has the advantage of unlimited liability.