Foundations of Finance: An Introduction

Topics: Types of business entity, Stock market, Stock Pages: 30 (9130 words) Published: October 21, 2015
Foundations of Finance, 8e (Keown/Martin/Petty)
Chapter 1 An Introduction to the Foundations of Financial Management

Learning Objective 1

1) Financial management deals with the maintenance and creation of economic value or wealth. Answer: TRUE
Diff: 1
Keywords: Financial Management
AACSB: Reflective thinking skills

2) Each financial decision made by a corporate manager can be evaluated by its direct impact on the corporation's stock price. Answer: FALSE
Diff: 1
Keywords: Goal of the Firm
AACSB: Reflective thinking skills

3) The fundamental goal of a business is to maximize the retained earnings available to the corporation's shareholders. Answer: FALSE
Diff: 1
Keywords: Goal of the Firm
AACSB: Reflective thinking skills

4) Shareholder wealth maximization means maximizing the price of the existing common stock. Answer: TRUE
Diff: 1
Keywords: Shareholder Wealth, Goal of the Firm
AACSB: Reflective thinking skills

5) It is important to evaluate a corporate manager's financial decision by measuring the effect the decision should have on the corporation's stock price if everything else were held constant. Answer: TRUE

Diff: 2
Keywords: Goal of the firm, Shareholder Wealth Maximization AACSB: Reflective thinking skills

6) Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money. Answer: FALSE
Diff: 2
Keywords: Goal of the Firm, Profits, Time Value of Money
AACSB: Reflective thinking skills

7) The goal of the firm's financial managers should be the maximization of the total value of the firm's stock. Answer: TRUE
Diff: 1
Keywords: Goal of the Firm
AACSB: Reflective thinking skills
8) The payment of a dividend to current shareholders will have no impact on a corporation's share price because the cash paid is not available to future potential shareholders who may want to buy the corporation's stock. Answer: FALSE

Diff: 1
Keywords: Goal of the Firm
AACSB: Reflective thinking skills

9) One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the firm's financial decisions. Answer: FALSE
Diff: 1
Keywords: Goal of the Firm
AACSB: Reflective thinking skills

10) The goal of profit maximization ignores the risk of financial decisions Answer: TRUE
Diff: 1
Keywords: Goal of the Firm
AACSB: Reflective thinking skills

11) Only a firm's financial decisions affect its stock prices. Answer: FALSE
Diff: 1
Keywords: Determinants of Stock Price
AACSB: Reflective thinking skills

12) Shareholders react to poor investment or dividend decisions by causing the total value of the firm's stock to fall, and they react to good decisions by bidding the price of the stock up. Answer: TRUE

Diff: 2
Keywords: Determinants of Stock Price
AACSB: Reflective thinking skills

13) The primary goal of a publicly owned corporation is to ________. A) maximize dividends per share
B) maximize shareholder wealth
C) maximize earnings per share after taxes
D) minimize shareholder risk
Answer: B
Diff: 1
Keywords: Goal of the Firm, Corporation
AACSB: Reflective thinking skills

14) Maximization of shareholder wealth
A) represents a zero sum game in which one corporation gains at the expense of others. B) provides benefits to society as scarce resources are directed to their most productive use. C) is not a practical goal since it cannot be measured effectively. D) is achieved only if cash flows exceed accounting profits. Answer: A

Diff: 1
Keywords: Goal of the Firm, Maximize Shareholder Wealth
AACSB: Reflective thinking skills
15) A financial manager is considering two projects, A and B. A is expected to add $2 million to profits this year while B is expected to add $2 million to profits this year while B is expected to add $1 million to profits this year. Which of the following statements is MOST correct? A) The manager should...
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