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Chapter 1:
Introduction to Financial Management
CHAPTER 1
Introduction to Financial Management
I.
DEFINITIONS
Topic: CORPORATE CONTROLLER
1.
The corporate officer generally responsible for tasks related to tax management, cost accounting,
financial accounting, and data processing is the:
A)
Corporate Treasurer.
B)
Director.
C)
Corporate Controller.
D)
Chairman of the Board.
E)
Vice President of Operations.
Answer: C
Topic: CORPORATE TREASURER
2.
The corporate officer generally responsible for tasks related to cash and credit management,
financial planning, and capital expenditures is the:
A)
Corporate Treasurer.
B)
Director.
C)
Corporate Controller.
D)
Chairman of the Board.
E)
Vice President of Operations.
Answer: A
Topic: CAPITAL BUDGETING
3.
The process of planning and managing a firm's long-term investments is called:
A)
Working capital management.
B)
Financial depreciation.
C)
Agency cost analysis.
D)
Capital budgeting.
E)
Capital structure.
Answer: D
Topic: CAPITAL STRUCTURE
4.
The mixture of debt and equity used by the firm to finance its operations is called:
A)
working capital management.
B)
financial depreciation.
C)
agency cost analysis.
D)
capital budgeting.
E)
capital structure.
Answer: E
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Chapter 1: Introduction to Financial Management
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7.
8.
9.
Topic: WORKING CAPITAL MANAGEMENT
The management of the firm's short-term assets and liabilities is called:
A)
Working capital management.
B)
Financial depreciation.
C)
Agency cost analysis.
D)
Capital budgeting.
E)
Capital structure.
Answer: A
Topic: SOLE PROPRIETORSHIP
A business owned by a single individual is called a(n):
A)
Corporation.
B)
Sole proprietorship.
C)
Partnership.
D)
Closed receivership.
E)
Open structure.
Answer: B
Topic: PARTNERSHIP
A business formed by two or more individuals or entities is called a(n):
A)
Corporation.
B)
Sole proprietorship.
C)
Partnership.
D)
Closed receivership.
E)
Open structure.
Answer: C
Topic: CORPORATION
A business created as a distinct legal entity composed of one or more individuals or entities is
called a(n):
A)
Corporation.
B)
Sole proprietorship.
C)
Partnership.
D)
Closed receivership.
E)
Open structure.
Answer: A
Topic: PARTNERSHIP AGREEMENT
The division of profits and losses between the members of a partnership is formalized in the:
A)
Indemnity clause.
B)
Indenture contract.
C)
Statement of purpose.
D)
Partnership agreement.
E)
Group charter.
Answer: D
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Chapter 1:
Introduction to Financial Management
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12.
13.
14.
Topic: ARTICLES OF INCORPORATION
The document that legally establishes domicile for a corporation is called the:
A)
Indenture contract.
B)
Partnership agreement.
C)
Amended homestead filing.
D)
Bylaws.
E)
Articles of incorporation.
Answer: E
Topic: BYLAWS
The rules by which corporations govern themselves are called:
A)
Indenture provisions.
B)
Indemnity provisions.
C)
Partnership agreements.
D)
Bylaws.
E)
Articles of incorporation.
Answer: D
Topic: LIMITED LIABILITY CORPORATION
A business entity operated and taxed like a partnership, but with the limited liability feature for
owners, is called a:
A)
Limited liability corporation.
B)
General partnership.
C)
Cartel.
D)
Sole proprietorship.
E)
Corporation.
Answer: A
Topic: FINANCIAL MANAGEMENT GOAL
The primary goal of financial management is to:
A)
Maximize current sales.
B)
Maximize the current value per share of the existing stock.
C)
Avoid financial distress.
D)
Minimize operational costs.
E)
Maintain steady earnings growth.
Answer: B
Topic: AGENCY PROBLEM
The possibility of conflict of interest between the stockholders and management of the firm is
called:
A)
The shareholders' conundrum.
B)
Corporate breakdown.
C)
The agency problem.
D)
Corporate activism.
E)
Legal liability.
Answer: C
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Chapter 1: Introduction to Financial Management
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Topic: AGENCY COSTS
Agency costs
A)
The total dividends paid to shareholders over the lifetime of the firm.
B)
The costs that result from default and bankruptcy of the firm.
C)
Corporate income subject to double taxation.
D)
The costs of the conflict of interest between stockholders and management.
E)
The total interest paid to creditors over the lifetime of the firm.
Answer: D
Topic: STAKEHOLDERS
A stakeholder is:
A)
Given to each stockholder when they first purchase their stock.
B)
A proxy vote made at a shareholders meeting.
C)
A founding stockholder of the firm.
D)
An original creditor of the firm.
E)
A person or entity other than a stockholder or creditor who potentially has a claim on the cash
flows of the firm.
Answer: E
Topic: PRIMARY MARKET
The original sale of securities by governments and corporations occurs in the:
A)
Primary market.
B)
Secondary market.
C)
Dealer market.
D)
Auction market.
E)
Liquidation market.
Answer: A
Topic: SECONDARY MARKET
The purchase and sale of securities after the original issuance occurs in the:
A)
Primary market.
B)
Secondary market.
C)
Dealer market.
D)
Auction market.
E)
Liquidation market.
Answer: B
Topic: DEALER MARKET
A market where dealers buy and sell securities for themselves, at their own risk, is called a(n):
A)
Primary market.
B)
Secondary market.
C)
Dealer market.
D)
Auction market.
E)
Liquidation market.
Answer: C
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Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e
Chapter 1:
Introduction to Financial Management
Topic: AUCTION MARKET
20.
A market where trading takes place between buyers and sellers directly is called a(n):
A)
Primary market.
B)
Secondary market.
C)
Dealer market.
D)
Auction market.
E)
Liquidation market.
Answer: D
II
CONCEPTS
Topic: BUSINESS ORGANIZATIONS
21.
Which of the following does NOT offer the protection of limited liability?
A)
corporation
B)
limited liability company
C)
sole proprietorship
D)
limited partnership
E)
S corporation
Answer: C
Topic: FINANCIAL MANAGEMENT GOAL
22.
The fundamental goal of financial management should be to:
A)
Maximize sales.
B)
Maximize the current value per share of the existing stock.
C)
Avoid financial distress.
D)
Maintain steady earnings growth.
E)
Maximize profits.
Answer: B
Topic: FINANCIAL MANAGER
23.
Which of the following does NOT address the question:
manager?
I. Deciding how much interest to pay the holders of the corporation's bonds.
II. Deciding the mix of long-term debt and equity.
III. Deciding which projects a firm should undertake.
IV. Deciding how much short-term debt to use.
A)
I only
B)
III only
C)
II and III only
D)
II, III, and IV only
E)
I, II, III, and IV
Answer: A
Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e
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Chapter 1: Introduction to Financial Management
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25.
26.
27.
Topic: BUSINESS ORGANIZATIONS
Which of the following statements is true regarding the corporate form of organization compared to
that of the sole proprietorship?
A)
The owners of the sole proprietorship have limited liability for the firm's debts.
B)
The sole proprietorship is the simplest business form to start-up.
C)
The corporation has a limited life.
D)
Dividends received by the corporation's shareholders are tax-exempt.
E)
It is more difficult to transfer ownership in a corporation.
Answer: B
Topic: AGENCY COSTS
Which of the following is NOT a type of agency cost?
A)
The cost of an audit of the firm's financial statements.
B)
The cost of a corporate jet provided to the CEO as part of her compensation package.
C)
Loans provided to the firm's managers at below-market interest rates.
D)
The costs of financing the firm.
E)
The cost of providing life insurance to the firm's CFO.
Answer: D
Topic: AGENCY THEORY
Commtel Partners hires Smith Brothers investment bank to negotiate the purchase of the fiber optic
assets of . Identify the parties to this transaction.
A)
Smith is the principal and Commtel is the agent.
B)
Commtel is the principal and Smith is the agent.
C)
Lightware is the principal and Commtel is the agent.
D)
Smith is the agent while Lightware and Commtel together are principals.
E)
Commtel is the principal and Lightware is the agent.
Answer: B
Topic: AGENCY COSTS
The Board of Directors of Beeline, Inc. have decided to base the salary of its financial manager
entirely upon the market share of the firm. Accordingly,
A)
the firm may incur some agency costs since the manager will be focused on the market share of
the firm rather than acting to maximize earnings.
B)
the financial manager will always act in the best interest of the shareholders since all agency
costs have been eliminated through salary incentives.
C)
this arrangement may be unnecessary, since the goal of the firm is to maximize earnings for
shareholders, and that is most likely accomplished through larger market share.
D)
the manager may not act to maximize the current value of the firm's stock, resulting in agency
costs for the firm's stockholders.
E)
the firm will incur some agency costs if the manager acts to maximize market share.
Answer: D
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Chapter 1:
Introduction to Financial Management
28.
Topic: AGENCY COSTS
Which of the following is/are correct regarding agency costs?
I. Indirect costs occur when managers, acting to minimize the risk of the firm, forego investments
shareholders would prefer they take.
II. Direct costs occur when shareholders must incur costs to monitor the manager's actions.
III. Direct costs occur when managers buy assets considered necessary by the firm's owners.
A)
I only
B)
I and II only
C)
II only
D)
II and III only
E)
I, II, and III
Answer: B
Topic: AGENCY THEORY
29.
Which of the following help ensure managers act in the best interest of owners?
I. A compensation package for managers that is a flat cash salary, with no bonuses or options.
II. Managers are promoted only when they have worked for the firm for at least 5 years.
III. The threat that if the firm does poorly, shareholders will use a proxy fight to replace the
existing management.
IV. There is a high degree of likelihood the firm will become a takeover candidate if the firm
performs poorly.
A)
I and II only
B)
II and III only
C)
III and IV only
D)
I and III only
E)
I, II, III, and IV
Answer: C
Topic: STOCK EXCHANGES
30.
Which of the following markets is considered an auction market?
A)
The New York Stock Exchange
B)
The over-the-counter (OTC) market
C)
NASDAQ
Answer: A
Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e
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