An Overview of Financial Management: Multiple Choice: Conceptual
An Overview of Financial Management: Multiple Choice: Conceptual
An Overview of Financial Management: Multiple Choice: Conceptual
Easy:
1
. Firm organization Answer: c Diff: E
corporate tax. The other statements are false. Corporations are subject
to limited liability, but are subject to more regulations than the other
2
. Firm organization Answer: c Diff: E
transferred.
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d. Statements b and c are correct.
e. None of the statements above is correct.
3
. Firm organization Answer: a Diff: E
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Firm organization Answer: a Diff: E
4
. Until this year, Cheers Inc. was organized as a partnership. This year,
the partners have decided to organize the business as a corporation. As
a result of this change in organizational form, which of the following
statements is most correct?
4
. Firm organization Answer: a Diff: E
Except for statement a, all the other statements are exactly opposite for
corporations.
5
. Firm organization Answer: c Diff: E N
6
. Corporate form Answer: c Diff: E
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a. Corporations generally face fewer regulations.
b. Corporations generally face lower taxes.
c. Corporations generally find it easier to raise capital.
d. Corporations enjoy unlimited liability.
e. Statements c and d are correct.
7
. Corporate form Answer: a Diff: E
proprietorships.
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Goal of firm Answer: d Diff: E
8
. The primary goal of a publicly-owned firm interested in serving its
stockholders should be to
a. Compensating managers with stock can reduce the agency problem between
stockholders and managers.
b. Restrictions are included in credit agreements to protect bondholders
from the agency problem that exists between bondholders and
stockholders.
c. The threat of a takeover can reduce the agency problem between
bondholders and stockholders.
d. Statements a and b are correct.
e. All of the statements above are correct.
AgencyAnswer: a Diff: E
10
. Which of the following work to reduce agency conflicts between
stockholders and bondholders?
8
. Goal of firm Answer: d Diff: E
9
. Agency Answer: d Diff: E
stockholders.
10
. Agency Answer: a Diff: E
Statement a is correct; the other statements are false. Restrictive
covenants resolve differences between bondholders and stockholders.
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c. The passage of laws that make it easier for companies to resist
hostile takeovers.
d. Statements b and c are correct.
e. All of the statements above are correct.
11
. Agency Answer: b Diff: E
firm is underperforming. Managers who fear losing their jobs will try to
will exacerbate the agency conflict, while statement c reduces the agency
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Agency Answer: d Diff: E
12
. Which of the following actions are likely to reduce the agency problem
between stockholders and managers?
a. Bond covenants.
b. The threat of a takeover.
c. Pressure from the board of directors.
d. Statements a and b are correct.
e. Statements b and c are correct.
12
. Agency Answer: d Diff: E
13
. Managerial incentives Answer: e Diff: E
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Managerial incentives Answer: e Diff: E N
14
. Which of the following is likely to encourage a firm’s managers to make
decisions that are in the best interest of shareholders?
14
. Managerial incentives Answer: e Diff: E N
15
. Miscellaneous concepts Answer: c Diff: E
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Miscellaneous concepts Answer: e Diff: E
16
. Which of the following statements is most correct?
16
. Miscellaneous concepts Answer: e Diff: E
17
. Miscellaneous concepts Answer: c Diff: E
18
. Miscellaneous concepts Answer: a Diff: E
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a. Hostile takeovers are most likely to occur when a firm’s stock is
undervalued, relative to its potential, because of poor management.
b. One advantage to remaining a sole proprietor is that you have limited
liability.
c. In general, bondholders have a greater preference for riskier projects
than do stockholders.
d. Statements b and c are correct.
e. All of the statements above are correct.
19
. Miscellaneous concepts Answer: b Diff: E
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Miscellaneous concepts Answer: e Diff: E N
20
. Which of the following statements is most correct?
Medium:
20
. Miscellaneous concepts Answer: e Diff: E N
21
. Business ethics Answer: e Diff: M
22
. Social welfare Answer: a Diff: M
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the part of corporations are completely different and neither is
relevant in maximizing stock price.
d. In a competitive market, if a group of firms do not spend resources
making social welfare improvements, but another group does, in
general, this will not affect the second group’s ability to attract
capital.
e. If government did not mandate socially responsible corporate actions,
such as those relating to product safety and fair hiring practices,
most firms in competitive markets would still pursue such policies
voluntarily.
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Corporate charter and bylaws Answer: b Diff: M
23
. Which of the following statements is most correct?
a. The corporate bylaws are the set of rules drawn up by the state to
enable managers to run the firm in accordance with state laws.
b. Procedures for electing corporate directors are contained in bylaws,
while the declaration of the activities that the firm will pursue and
the number of directors are included in the corporate charter.
c. Procedures that govern changes in the bylaws of the corporation are
contained in the corporate charter.
d. Although most companies design a charter, only the bylaws are legally
required to be filed with the secretary of state in order for a
corporation to be in official existence.
e. None of the statements above is correct.
23
. Corporate charter and bylaws Answer: b Diff: M
24
. Corporate form Answer: d Diff: M
25
. Partnership form Answer: d Diff: M
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other disadvantages of the partnership form of business, including
impermanence of the organization.
e. A major disadvantage of a partnership as a form of business
organization is the high cost and practical difficulty of its
formation.
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Firm organization Answer: c Diff: M
26
. Which of the following statements is most correct?
a. The optimal dividend policy is the one that satisfies the shareholders
because they supply the firm’s capital.
b. The use of debt financing has no effect on cash flow or stock price.
c. The riskiness of projected cash flows depends upon how the firm is
financed.
d. Stock price is dependent on the projected cash flows and the use of
debt, but not on the timing of the cash flow stream.
e. Dividend policy is one aspect of the firm’s financial policy that is
determined directly by the shareholders.
26
. Firm organization Answer: c Diff: M
27
. Firm organization Answer: e Diff: M
28
. Financial policy and cash flows Answer: c Diff: M
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Corporate goals and control Answer: e Diff: M
29
. Which of the following statements is most correct?
29
. Corporate goals and control Answer: e Diff: M
30
. Agency Answer: c Diff: M
false. Even if managers stay within the law, the threat of firing and/or
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stay within the law, there are no effective controls that stockholders
can implement to control managerial decision making.
c. The agency conflicts between bondholders and stockholders can be
reduced with the use of restrictive bond covenants.
d. An agency relationship exists when one or more persons hire another
person to perform some service but withhold decision-making authority
from that person.
e. None of the statements above is correct.
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Agency Answer: d Diff: M
31
. Which of the following statements is most correct?
a. One of the ways in which firms can mitigate or reduce agency problems
between bondholders and stockholders is by increasing the amount of
debt in the capital structure.
b. The threat of takeover is one way in which the agency problem between
stockholders and managers can be alleviated.
c. Managerial compensation can be structured to reduce agency problems
between stockholders and managers.
d. Statements b and c are correct.
e. All of the statements above are correct.
31
. Agency Answer: d Diff: M
32
. Miscellaneous concepts Answer: e Diff: M
large firms. This makes it harder for small companies to raise outside
capital.
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d. Because of their size, it is easier for sole proprietors and
partnerships to raise outside capital than it is for a corporation.
e. One advantage to forming a corporation is that the owners of the
corporations have limited liability.
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CHAPTER 1
ANSWERS AND SOLUTIONS
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