Finance Essay

3044 Words Jan 20th, 2014 13 Pages
(Difficulty: E = Easy, M = Medium, and T = Tough)



(1.2) Goal of firm Answer: b Diff: E
[i]. The proper goal of the financial manager should be to maximize the firm's expected profit, since this will add the most wealth to each of the individual shareholders (owners) of the firm.

a. True b. False

(1.2) Goal of firm Answer: b Diff: E
[ii]. If a firm has a single owner, we may say that the proper goal of a financial manager would be to maximize the firm's earnings per share.

a. True b. False

(1.2) Managerial incentives Answer: b Diff: E
[iii]. Executive stock options are shares of stock awarded to managers on the basis of corporate performance.

a. True b.
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True b. False


(1.2) Managerial incentives Answer: a Diff: M
[ix]. In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken over by groups who are more aligned with stockholder interests.

a. True b. False

(1.3) Hostile takeovers Answer: b Diff: M
[x]. A hostile takeover is a method of seizing control of a company and involves an action taken against the opposition of incumbent management. However, this action is typically motivated by a desire to control the firm's assets and is rarely motivated by a low share price.

a. True b. False

Multiple Choice: Conceptual


(1.2) Goal of firm Answer: d Diff: E
[xi]. The primary goal of a publicly-owned firm interested in serving its stockholders should be to

a. Maximize expected total corporate profit. b. Maximize expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share. e. Maximize expected net income.

(1.3) Agency Answer: d Diff: E
[xii]. Which of the following statements is most correct?

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

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