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67 Cards in this Set

  • Front
  • Back
T/F The financial manager must execute his or her duties independent of the other activities of the firm in order to properly maximize the value of the firm.
False
T/F A hostile takeover involves an attempt by one group of stockholders to solicit votes from other stockholders in order to put a new management team into place and is usually motivated by low stock price.
False
T/F 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.
False
T/F If management is maximizing the firm's net income, this is necessarily identical to maximizing earnings per share and stock price.
False
T/F If a firm's stock price fall during the year, this indicates that the firm's managers are not acting in the shareholders' best interest.
False
T/F The importance of the role of financial management is emphasized by examples of companies whose strategic financing decisions contributed to their demise, as in the case of Easter Airlines, or to their success, as with Delta Airlines, when economic conditions changed rapidly.
True
T/F The text makes the point that due to competitive pressures and the continuing need of firms to attract capital, most socially beneficial but cost increasing actions will have to be made mandatory by government.
True
T/F No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to compete, even if those cost-increasing actions yield significant benefits to the firm.
False
T/F One way to state the decision framework most useful for carrying out the firm's objective is that the financial managers should seek that combination of assets, liabilities, and capital which will generate the largest expected projected income over the relevant time horizon.
False
T/F Most firms today use executive stock options, as opposed to other incentive methods, to induce management to act in the best interests of stockholders.
True
T/F EVA (Economic Value Added) is a relatively new measure of managerial performance that is superior to net income because EVA takes account of the cost of equity financing.
True
In a competitive arket place "good ethics" is a wonderful idea but an impractical standard. There are simply too few benefits to be gained from maintaining high business ethics.
False
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 earnings per share (EPS) or stock price.

(c) The riskiness of projected EPS depends upon how the firm is financed.

(d) Stock price is dependent on the projected EPS and the use of debt but not on the timing of the earnings stream.

(e) Dividend policy is one aspect of the firm's financial policy that is determined directly by the shareholders.
(c) The riskiness of projected EPS depends upon how the firm is financed.
Which of the following statements is most correct?
a. The proper goal of the financial manager should be to maximize the firm's expected cash flow, because this will add the most wealth to each of the individual shareholders (owners) of the firm.
b. One way to state the decision framework most useful for carrying out the firm's objective is as follows: "The financial manager should seek that combination of assets, liabilities, and capital which will generate the largest expected projected after-tax income over the relevant time horizon."
c. The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, which means it depends upon the firm's assets, but EPS does not depend on the manner in which those assets are financed.
d. Since large, publicly‑owned firms are controlled by their management teams, and typically, ownership is widely dispersed, managers have great freedom in managing the firm. Managers may operate in the stockh
e. Agency problems exist between stockholders and managers, and between stockholders and creditors.
Which of the following statements is most correct?
a. EVA stands for efficient volume of assets.
b. The lower the EVA in any year, the better the job that management is doing.
c. EVA is found by subtracting the cost of debt (as measured by dollars of interest) from the firm’s net income.
d. There is a better link between EVA and stock price than between earnings per share and stock price.
e. A negative EVA means that managers are creating wealth for shareholders.
d. There is a better link between EVA and stock price than between earnings per share and stock price.
Which of the following does not need to be considered when assessing
the impact of financial decisions?
a. Projected earnings.
b. Financial market conditions.
c. Timing of the earnings flow.
d. Riskiness of the firm.
e. All of the above must be considered.
e. All of the above must be considered.
The simplest, most commonly used, and least expensive procedure for dissident shareholders to gain control of a firm and to oust the current management is a
a. Leveraged buyout.
b. Poison pill.
c. Takeover bid.
d. Greenmail offer.
e. Proxy fight.
e. Proxy fight.
Which of the following mechanisms is not used by shareholders to get
managers to act in shareholders' best interests?
a. Threat of firing.
b. Managerial compensation.
c. Leveraged buyout.
d. Threat of takeover.
e. Answers b and c above.
c. Leveraged buyout.
Which of the following actions is consistent with social responsibility
but is necessarily inconsistent with stockholder wealth maximization?
a. Investing in a smokestack "scrubber" to reduce the firm's air pollution as mandated by law.
b. Voluntarily installing expensive machinery to treat effluent discharge which is currently being dumped into a river where it is ruining the drinking water of the community where the plant is located.
c. Investing in a smokestack filter to reduce sulphur-dioxide emissions in order to reduce the current tax being levied on the firm by the state for its pollution.
d. Making a large corporate donation to the local community in order to fund a recreation complex which will be used by the community and the firm's employees.
e. Each of the above actions is consistent with social responsibility and none is necessarily inconsistent with stockholder wealth maximization.
e. Each of the above actions is consistent with social responsibility and none is necessarily inconsistent with stockholder wealth maximization.
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.
d. Maximize the stock price per share.
Which of the following statements is most correct?
a. In a partnership, liability for other partners' misdeeds includes but is limited to the amount a particular partner has invested in the business.
b. Partnerships must be formed according to specific rules which include the filing of a formal written agreement with state authorities where the partnership does business.
c. A fast growth company would be more likely to set up a partnership for its business organization than would a slow-growth company.
d. Partnerships have difficulty attracting capital in part because of the 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.
d. Partnerships have difficulty attracting capital in part because of the other disadvantages of the partnership form of business, including impermanence of the organization.
A financial manager must choose between three alternative investments. Each asset is expected to provide earnings over a three‑year period as described below. Based on the wealth maximization goal, the financial manager would
Year Asset 1 Asset 2 Asset 3
1 $21,000 $ 9,000 $ 8,000
2 15,000 15,000 21,000
3 9,000 18,000 19,000
_____________________________________________________
$45,000 $42,000 $48,000

A. choose Asset 1.
B. choose Asset 2.
C. choose Asset 3.
D. be indifferent between Asset 1 and Asset 2.
A. choose Asset 1.
The implementation of a pro‑active ethics program is expected to result in
A. a positive corporate image and increased respect, but is not expected to affect cash flows.
B. an increased share price resulting from a decrease in risk, but is not expected to affect cash flows.
C. a positive corporate image and increased respect, but is not expected to affect share price.
D. a positive corporate image and increased respect, a reduction in risk, and enhanced cash flow resulting in an increase in share price.
D. a positive corporate image and increased respect, a reduction in risk, and enhanced cash flow resulting in an increase in share price.
The difference between the cost of funds used to finance an
investment and its after-tax operating profits is called
A. earnings per share.
B. dividend.
C. economic value added.
D. retained earnings.
C. economic value added.
The key variables in the owner wealth maximization process are
A. earnings per share and risk.
B. cash flows and risk.
C. earnings per share and share price.
D. profits and risk.
B. cash flows and risk.
Return and risk are the key determinants in share price. Increased
return results in, other things remaining the same.
A. a lower share price.
B. a higher share price.
C. an unchanged share price.
D. an undetermined share price.
B. a higher share price.
Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life
a. I and II only
b. III and IV only
c. I, II, and III only
d. II, III, and IV only
e. I, III, and IV only
e. I, III, and IV only
Which of the following help convince managers to work in the best interest of the stockholders?
I. compensation based on the value of the stock
II. stock option plans
III. threat of a company takeover
IV. threat of a proxy fight
a. I and II only
b. III and IV only
c. I, II, and III only
d. I, III, and IV only
e. I, II, III, and IV.
e. I, II, III, and IV.
Which of the following are agency costs?
I. forgoing an investment opportunity which would add to the market value of the
owner’s equity
II. paying a dividend to each of the existing shareholders
III. purchasing new equipment which increases the value of each share of stock
IV. hiring outside auditors to verify the accuracy of the company financial statements
a. II and III only b. I and III only
c. I and IV only d. II and IV only
e. I, II, and IV only
c. I and IV only
Which form of business structure faces the greatest agency problems?
a. sole proprietorship
b. general partnership
c. limited partnership
d. corporation
e. limited liability company
d. corporation
Which one of the following business types is best suited to raising large amounts of
capital?
a. sole proprietorship
b. limited liability company
c. corporation
d. general partnership
e. limited partnership
c. corporation
Which type of business organization has all the respective rights and privileges of a
legal person?
a. sole proprietorship
b. general partnership
c. limited partnership
d. corporation
e. limited liability company
d. corporation
The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the:
a. treasurer.
b. director.
c. controller.
d. chairman of the board.
e. chief operations officer.
e. chief operations officer.
A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a:
a. limited liability company.
b. general partnership.
c. limited proprietorship.
d. sole proprietorship.
e. corporation.
a. limited liability company.
The primary goal of financial management is to:
a. maximize current dividends per share of the existing stock.
b. maximize the current value per share of the existing stock.
c. avoid financial distress.
d. minimize operational costs and maximize firm efficiency.
e. maintain steady growth in both sales and net earnings.
b. maximize the current value per share of the existing stock.
Agency costs refer to:
a. the total dividends paid to stockholders over the lifetime of a firm.
b. the costs that result from default and bankruptcy of a firm.
c. corporate income subject to double taxation.
d. the costs of any conflicts of interest between stockholders and management.
e. the total interest paid to creditors over the lifetime of the firm.
d. the costs of any conflicts of interest between stockholders and management.
Which form of business structure faces the greatest agency problems?
a. sole proprietorship
b. general partnership
c. limited partnership
d. corporation
e. limited liability company
d. corporation
A stakeholder is:
a. any person or entity that owns shares of stock of a corporation.
b. any person or entity that has voting rights based on stock ownership of a corporation.
c. a person who initially started a firm and currently has management control over the cash flows of the firm due to his/her current ownership of company stock.
d. a creditor to whom the firm currently owes money and who consequently has a claim on the cash flows of the firm.
e. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.
e. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.
Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life
a. I and II only
b. III and IV only
c. I, II, and III only
d. II, III, and IV only
e. I, III, and IV only
e. I, III, and IV only
Which one of the following statements is correct concerning corporations?
a. The largest firms are usually corporations.
b. The majority of firms are corporations.
c. The stockholders are usually the managers of a corporation.
d. The ability of a corporation to raise capital is quite limited.
e. The income of a corporation is taxed as personal income of the stockholders.
a. The largest firms are usually corporations.
Which one of the following statements is correct?
a. Both partnerships and corporations incur double taxation.
b. Both sole proprietorships and partnerships are taxed in a similar fashion.
c. Partnerships are the most complicated type of business to form.
d. Both partnerships and corporations have bylaws.
e. All types of business formations have limited lives.
b. Both sole proprietorships and partnerships are taxed in a similar fashion.
Which one of the following actions by a financial manager creates an agency problem?
a. refusing to borrow money when doing so will create losses for the firm
b. refusing to lower selling prices if doing so will reduce the net profits
c. agreeing to expand the company at the expense of stockholders’ value
d. agreeing to pay bonuses based on the market value of the company stock
e. increasing current costs in order to increase the market value of the stockholders’
equity
c. agreeing to expand the company at the expense of stockholders’ value
Which of the following help convince managers to work in the best interest of the
stockholders?
I. compensation based on the value of the stock
II. stock option plans
III. threat of a proxy fight
IV. threat of conversion to a partnership
a. I and II only
b. II and III only
c. I, II and III only
d. I and III only
e. I, II, III, and IV
c. I, II and III only
. Emerging trends resulting from the agency problem are all of the following EXCEPT
A. large private corporations.
B. restructuring through leveraged buyouts.
C. management by active investors.
D. prohibiting managers from maintaining an ownership interest.
D. prohibiting managers from maintaining an ownership interest.
relationships between the various interest groups (or stakeholders) of the firm, such as principal (owner) and the agent (manager)
agency relationship
The art and science of managing money and related issues -- credit, capital, investments, etc. The study of value. Concerned with the creation and maintenance of economic value or wealth.
Finance
A _______ arises whenever one or more individuals, called principals, (1) hires another individual or organization, called an agent, to perform some service and (2) then delegates decision-making authority to that agent
agency relationship
There is a tradeoff between risk and return. We will not take additional risk unless we will be compensated with additional return. This is known as the _____________.
risk-return tradeoff
T/F If a bank uses quarterly compounding for savings accounts, the
nominal rate will be greater than the effective annual rate.
False
T/F If a bank uses quarterly compounding for savings accounts, the
nominal rate will be greater than the effective annual rate.
False
T/F . The greater the number of compounding periods within a year, the
greater the future value of a lump sum invested initially, and the
greater the present value of a given lump sum to be received at
maturity.
False
T/F The market value of any real or financial asset, including stocks,
bonds, or art work, may be found by determining future cash flows and
then discounting them back to the present.
True
T/F If the discount (or interest) rate is positive, the present value of an
expected series of payments will always exceed the future value of the
same series.
False
T/F The process of discounting or finding the present value
of a cash flow to be received in the future is really
the reverse of compounding.
True
T/F One of the potential benefits of investing early for
retirement is that an investor can receive greater
benefits from the compounding of interest.
True
T/F . The effective annual rate is always greater than the
nominal rate as a result of compounding effects.
True
T/F If we calculate a periodic interest rate, say a monthly
rate, in order to get the nominal annual rate, we can
multiply the periodic rate by the number of periods
within a year.
True
T/F The present value of a future sum decreases as either
the discount rate or the number of discount periods per
year increase.
True
T/F The payment made each period on an amortized loan is
constant, and it consists of some interest and some
principal. The later we are in the loan's life, the
larger the principal portion of the payment.
True
T/F Since we usually assume positive interest rates in time value
analyses, the present value of a three year annuity will always
be less than the future value of a single lump sum, if the
annuity payment equals the original lump sum investment.
False
T/F One of the potential benefits of investing early for retirement
is that an investor can receive greater benefits from the
compounding of interest.
True
T/F The opportunity cost rate is only applicable if you as an
investor actually have an alternative investment to compare.
False
You have recently been employed by a firm for a period of 1 year. The firm has given you the option of receiving your salary as a lump sum value of $30,000 at the end of the year or as 12 monthly payments of $2,400 starting one month after you start work. If your relevant discount rate is 2 percent per month, then which salary options would you prefer? (Ignore taxes, risk, and consumption needs.)
a. The lump sum payment, since it has the larger future value.
b. Monthly payments, since you do not have to wait so long to receive your money.
c. Either one, since they have the same present values.
d. The lump sum payment, since it has the larger present value.
e. Monthly payments, since it has the larger present value.
e. Monthly payments, since it has the larger present value.
Which of the following is most correct?
a. The present value of a 5-year annuity due will exceed the present value of a 5-year ordinary annuity. (Assume that both annuities pay $100 per period and there is no chance of default.)
b. If a loan has a nominal rate of 10 percent, then the effective rate can never be less than 10 percent.
c. If there is annual compounding, then the effective, periodic, and nominal rates of interest are really all the same.
d. Answers a and c are correct.
e. All of the answers above are correct.
e. All of the answers above are correct.
Which of the following statements is most correct?
a. An investment which compounds interest semiannually, and has a nominal rate of 10 percent, will have an effective rate less than 10 percent.
b. The present value of a three-year $100 annuity due is less than the present value of a three-year $100 ordinary annuity.
c. The proportion of the payment of a fully amortized loan which goes toward interest declines over time.
d. Statements a and c are correct.
e. None of the answers above is correct.
c. The proportion of the payment of a fully amortized loan which goes toward interest declines over time.
One year ago, the Jenkins Family Fun Center deposited $3,600 in an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $5,000 to this account. They plan on making a final deposit of $7,500 to the account next year. How much will be available when they are ready to buy the equipment, assuming they earn a 7 percent rate of return?
a. $18,159.65
b. $19,430.84
c. $19,683.25
d. $20,194.54
e. $20,790.99
e. $20,790.99
Jamie deposits $1,000 into an account that pays 4 percent interest compounded annually. Chris deposits $1,000 into an account that pays 4 percent simple interest. Both deposits were made today. Which of the following statements are true concerning these two accounts?
I. At the end of one year, both Jamie and Chris will have the same amount in their accounts.
II. At the end of five years, Chris will have more money in his account than Jamie has in hers.
III. Chris will never earn any interest on interest.
IV. All else equal, Jamie made the better investment.
a. I and II only
b. III and IV only
c. I, II, and IV only
d. I, III, and IV only
e. II, III, and IV only
d. I, III, and IV only