Chapter 01
The Goals and Functions of Financial Management

Multiple Choice Questions
 
1. What is the primary goal of financial management? 
A. Increased earnings
B. Maximizing cash flow
C. Maximizing shareholder wealth
D. Minimizing risk of the firm

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
2. Proper risk-return management means that: 
A. the firm should take as few risks as possible.
B. consistent with the objectives of the firm, an appropriate trade-off between risk and return should be determined.
C. the firm should earn the highest return possible.
D. the firm should value future profits more highly than current profits.

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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-07 Maximizing Shareholder Wealth

3. Which of the following is not a major area of concern and emphasis in modern financial management and in this text? 
A. Inflation and its effect on profits
B. Stable short-term interest rates
C. Changing international environment
D. Increased reliance on debt

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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk.
Topic: 01-05 A Discipline Used by Financial Managers
 
4. Which of the following is not a major area of concern and emphasis in modern financial management and in this text? 
A. Marginal analysis
B. Risk-return trade-off
C. Commodity trading
D. Changing financial institutions

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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk.
Topic: 01-05 A Discipline Used by Financial Managers
 
5. Some of the effects of high inflation are: 
A. the gold standard was eliminated.
B. purchasing power increased.
C. interest rates fall.
D. Phantom profits and undervalued assets.

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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital

6. In the past, the study of finance has included: 
A. operational efficiency.
B. employee relationships.
C. legal cases.
D. mergers and acquisitions.

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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-02 Evolution of Finance as a Discipline
 
7. A financial manager's goal of maximizing current or short-term earnings may not be appropriate because: 
A. it considers the timing of the benefits.
B. increased earnings may be accompanied by acceptably higher levels of risk.
C. share ownership is widely dispersed.
D. earnings are subjective; they can be defined in various ways such as accounting or economic earnings.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
8. One of the major disadvantages of a sole proprietorship is: 
A. that there is unlimited liability to the owner.
B. the simplicity of decision making.
C. low organizational costs.
D. low operating costs.

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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management

9. The partnership form of organization: 
A. avoids the double taxation of earnings and dividends found in the corporate form of organization.
B. usually provides limited liability to the partners.
C. has unlimited life.
D. simplifies decision making.

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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
10. A corporation is not: 
A. owned by shareholders who enjoy the privilege of limited liability.
B. easily divisible between owners.
C. a separate legal entity with perpetual life.
D. a separate legal entity with limited life.

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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
11. Inflation: 
A. increases corporations' reliance on debt for capital expansion needs.
B. creates larger asset values on the firm's historical balance sheet.
C. makes it cheaper (in terms of interest costs) for firms to borrow money.
D. creates stability for investors.

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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital

12. Which of the following securities is not included as part of the capital market? 
A. Common stock
B. Commercial paper
C. Government bonds
D. Preferred stock

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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-15 The Role of the Financial Markets
 
13. Maximization of shareholder wealth is a concept in which: 
A. increased earnings is of primary importance.
B. profits are maximized on a quarterly basis.
C. virtually all earnings are paid as dividends to common shareholders.
D. optimally increasing the long-term value of the firm is emphasized.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-09 Market Share Price
 
14. The largest Canadian corporations are mainly: 
A. widely held.
B. family controlled.
C. U.S. controlled.
D. Japanese controlled.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management

15. Which of the following is not a true statement about the goal of maximizing shareholder wealth? 
A. It takes into account the timing of cash-flows.
B. It is a short-run point of view which takes risk into account.
C. It considers risk as a factor.
D. It is a long-run point of view which takes risk into account.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-09 Market Share Price
 
16. Increased international competition can be seen as a motivator to emphasize: 
A. asset diversification strategies.
B. the risk side of the risk-return relationship.
C. the return side of the risk-return relationship.
D. invest in a new risky project.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital
 
17. Corporations can reduce portfolio risk by: 
A. narrowing their focus on one successful product.
B. merging with companies in unrelated industries.
C. repurchasing their own stock.
D. selling their own stock.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-16 Structure and Functions of the Financial Markets

18. The shift to the return side of the risk-return relationship has occurred because: 
A. narrow focus on production.
B. stock splits.
C. there has been a decrease in the use of advanced technology in the production process.
D. there has been an increase in international competition.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital
 
19. A corporate buy-back, or the repurchasing of shares, is: 
A. an example of balance sheet restructuring.
B. an excellent source of profits when the firm's stock is over-priced.
C. a method of reducing the debt-to-equity ratio.
D. shown as revenue on the income statement.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-09 Market Share Price
 
20. Which of the following is (are) a result of high inflation? 
A. Loss from disposal of assets
B. Over-valued liabilities
C. Lower stock price
D. Under-valued assets

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital

21. A corporate restructuring can result in: 
A. increased revenue.
B. buying of low-profit margin divisions.
C. selling of high-profit margin divisions.
D. reductions in the work force.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
22. Which of the following is not an example of restructuring as discussed in the text? 
A. Repurchase of common stock
B. Creating a new organizational chart
C. Merging with companies in related industries
D. Divesting of an unprofitable division

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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
23. Agency theory deals with the issue of: 
A. when to hire an agent to represent the firm in negotiations.
B. the legal liabilities of a firm if an employee, acting as the firm's agent, injures someone.
C. the limitations placed on an employee acting as the firm's agent to obligate or bind the firm.
D. the conflicts that can arise between the viewpoints and motivations of a firm's owners and managers.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Hard
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management

24. As mergers, acquisitions, and restructurings have increased in importance, agency theory has become more important in assessing whether: 
A. a stock repurchase should be undertaken.
B. shareholder goals are truly being achieved by managers in the long run.
C. managers are actually agents or only employees of the firm.
D. managers and owners are actually the same people with the same interests.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Hard
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
25. Insider trading occurs when: 
A. someone has information not available to the public, which they use to profit from trading in stocks.
B. corporate officers buy stock in their company.
C. lawyers, investment dealers, and others buy common stock in companies represented by their firms
D. stock transactions occur with reduced brokerage fees.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-11 Social Responsibility
 
26. The major difficulty in most insider-trading cases has been: 
A. that lenient judges have simply released the guilty individuals.
B. that insider trading, even though illegal, actually serves a beneficial economic and financial purpose.
C. that inside trades have not been legally well defined.
D. inside trades actually have a beneficial effect on the wealth of all shareholders.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Hard
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-11 Social Responsibility

27. Setting a goal of profit maximization has all of the following drawbacks except: 
A. investors understand that generally, more profit is better
B. Risk may increase as profit changes
C. Profit fails to take into account the timing of benefits
D. Accurately measuring profit is almost impossible

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-07 Maximizing Shareholder Wealth
 
28. Future financial managers will need to understand: 
A. employment standards.
B. production engineering.
C. actuarial calculations.
D. international currency hedging strategies.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital
 
29. Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the: 
A. options pricing model.
B. theories of working capital management.
C. theories of risk-return and portfolio theory.
D. theories of international capital budgeting.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-07 Maximizing Shareholder Wealth

30. In the 1930s, financial practices didn't focus on: 
A. maintenance of liquidity.
B. reorganization of financially distressed companies.
C. the bankruptcy process.
D. international exchange costs.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-02 Evolution of Finance as a Discipline
 
31. The increasing percentage ownership of public corporations by institutional investors has: 
A. had no effect on corporate management.
B. created higher returns for the stock market in general.
C. created more pressure on public companies to manage their firms more efficiently.
D. taken away the voice of the individual investor.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
32. Money markets would include which of the following securities? 
A. Common stock and corporate bonds
B. Treasury bills and commercial paper
C. Certificates of deposit and preferred stock
D. Government bonds.

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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-14 Forms of Organization

33. When a corporation uses the financial markets to raise new funds, the sale of securities is made in the: 
A. primary market.
B. secondary market.
C. on-line market.
D. third market.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-16 Structure and Functions of the Financial Markets
 
34. Companies that have higher risk than a competitor in the same industry will generally have: 
A. to pay a lower interest rate than its competitors.
B. a higher relative stock price than its competitors.
C. a lower cost of funds than its competitors.
D. to pay a higher interest rate than its competitors.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital
 
35. The financial markets allocate capital to corporations by: 
A. reflecting expectations of the market participants in the corporation's share price.
B. requiring higher returns from companies with lower risk than their competitors.
C. rewarding companies with expected high returns with lower relative stock prices.
D. relying on the opinion of investment dealers.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-16 Structure and Functions of the Financial Markets

36. Corporate restructuring has been one result of more institutional ownership. Restructuring can cause: 
A. stability in the asset and liabilities of the firm.
B. the purchase of low-profit margin divisions.
C. the promotion of current management and/or large increases in the workforce.
D. changes in the asset and liabilities of the firm.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-12 Ethical Behaviour
 
37. Corporate restructuring in the late 1990s more often took the form of: 
A. leveraged buyouts.
B. mergers to refocus on core businesses.
C. a change in capital structure.
D. addition of senior management.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-02 Evolution of Finance as a Discipline
 
38. The increase in the internationalization of financial markets has led: 
A. to companies searching the global financial markets for high cost funds.
B. to a decrease in Canadian companies listing on the New York Stock Exchange.
C. to a decrease in debt obligations denominated in foreign currency on Canadian corporate balance sheets.
D. to the tasks of the financial manager being reshaped.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-12 Ethical Behaviour

39. The internationalization of the financial markets has: 
A. allowed firms such as Bombardier to raise capital around the world.
B. raised the cost of capital.
C. forced companies to value everything in U.S. dollars.
D. created ASPE.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital
 
40. Increased use of technology has increased corporate efficiency by: 
A. increasing the firm's reliance on debt.
B. creating larger asset values on the firm's balance sheet.
C. made it cheaper (in terms of interest costs) for firms to borrow money.
D. creating electronic communication networks.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital
 
41. Maximization of shareholder wealth is a concept in which: 
A. increased earnings are of primary importance.
B. increased cash flows are of primary importance.
C. increased dividends are of primary importance.
D. increased share price is of primary importance.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management

42. Capital structure is: 
A. the relative mix of capital and intangible assets held by the firm.
B. the relative importance of debt and equity in the firm's financing.
C. the relative importance of long-term investment decisions.
D. the terms required to borrow money.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Hard
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-02 Evolution of Finance as a Discipline
 
43. Financial markets allocate capital based on: 
A. the pricing mechanism.
B. the efforts of financial intermediaries.
C. intervention by the Bank of Canada.
D. the number of treasury bills outstanding.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
44. Corporate governance is the: 
A. relationship and exercise of oversight by the board of directors of the company.
B. relationship between the chief financial officer and institutional investors.
C. operation of the firm by the chief executive officer (CEO) and other senior executives on the management team.
D. strategically directing the company through the board of directors with a focus on social responsibility.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-10 Management and Shareholder Wealth

45. Agency theory examines the relationship between: 
A. shareholders of the firm and its investment dealers.
B. shareholders of the firm and its managers.
C. the board of directors and large institutional investors.
D. shareholders of the firm and its transfer agent.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
46. Agency theory would imply that conflicts are more likely to occur between management and shareholders when: 
A. the company is owned and operated by the same person.
B. management acts in the best interests of maximizing shareholder wealth.
C. the chairman of the board is also the chief executive officer (CEO).
D. the board of directors exerts strong and involved oversight of managers.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-09 Market Share Price
 
47. The internationalization of the financial markets has: 
A. lowered the cost of capital.
B. raised the cost of capital.
C. forced companies to value everything in U.S. dollars.
D. had no effect on the cost of capital.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital

48. In analysis of a firm's market share value, an investor should not consider: 
A. the risk inherent in the firm.
B. the time pattern of the firm's earnings and cash flow.
C. the quality and reliability of reported earnings.
D. book value of assets.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-08 Measuring the Goal
 
49. The increased percentage of ownership of public corporations by institutional investors has: 
A. had no effect on corporate management.
B. created higher returns for the stock market in general.
C. created less pressure on public companies to manage their firms more efficiently.
D. increased the ethical standards of management.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management

True / False Questions
 
50. As finance emerged as an analytical, decision oriented discipline, the initial emphasis was placed on capital acquisitions. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-02 Evolution of Finance as a Discipline

51. Inflation is assumed to be a temporary problem that does not affect financial decisions. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-01 The Field of Finance
 
52. Timing is not a particularly important consideration in financial decisions. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-02 Evolution of Finance as a Discipline
 
53. Institutional investors have had increasing influence over corporations with their ability to vote large blocks of stock and replace poor performing boards of directors. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
54. Insider trading involves the use of information not available to the general public to make profits from trading in a company's shares. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-11 Social Responsibility

55. Agency theory assumes that corporate managers act to increase the wealth of corporate shareholders. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
56. Historically the field of finance as a discipline described capital preservation, liquidity, reorganization, and bankruptcy through the 1930s depression. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-02 Evolution of Finance as a Discipline
 
57. The higher the profit of a firm, the higher the value the firm is assured of receiving in the market. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-08 Measuring the Goal
 
58. Social responsibility and profit maximization are synonymous. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-10 Management and Shareholder Wealth

59. There is unlimited liability in a general partnership. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
60. In the mid 1950s, finance began to change to a more analytical, decision oriented approach. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-02 Evolution of Finance as a Discipline
 
61. There are some serious problems with the financial goal of maximizing the earnings of the firm. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-07 Maximizing Shareholder Wealth
 
62. Maximizing the earnings of the firm is the goal of financial management. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk.
Topic: 01-05 A Discipline Used by Financial Managers

63. Because socially desirable goals can impede profitability in many instances, managers should not try to operate under the assumption of wealth maximization. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-09 Market Share Price
 
64. The sole proprietorship represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
65. Profits of sole proprietorships are taxed at corporate tax rates. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
66. The primary market includes the sale of securities by way of initial public offerings. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-16 Structure and Functions of the Financial Markets

67. The most common partnership arrangement carries limited liability to the partners. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
68. A limited partnership limits the profits partners may receive. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
69. In terms of size of revenues and profits, the corporation is by far the most important form of business organization in Canada. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
70. Dividends paid to corporate shareholders have already been taxed once as corporate income. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management

71. One advantage of the corporate form of organization is that income received by shareholders is not taxable since the corporation already paid taxes on the income distributed. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
72. A corporation must have at least 35 shareholders. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
73. Profits of a manufacturing corporation are taxed at the same rate as dividends. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
74. Recently, the emphasis of financial management has been on the relationships between risk and return. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-12 Ethical Behaviour

75. The formation of a corporation is a way to circumvent personal liability. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
76. The secondary market characteristically has had stable prices over the past 20 years. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-16 Structure and Functions of the Financial Markets
 
77. The first Nobel Prizes given to finance professors was for their contributions to capital structure theory and portfolio theories of risk and return. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
78. Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-14 Forms of Organization

79. Inflation has led to phantom profits and undervalued assets. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-16 Structure and Functions of the Financial Markets
 
80. Money markets refer to those markets dealing with short-term securities having a life of one year or less. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-14 Forms of Organization
 
81. Capital markets refer to those markets dealing with short-term securities having a life of one year or less. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-14 Forms of Organization
 
82. New issues are sold in the secondary market. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-16 Structure and Functions of the Financial Markets

83. Existing securities are traded in the secondary market. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-16 Structure and Functions of the Financial Markets
 
84. The financial markets value assets based on the most productive current use. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital
 
85. The 1990s demonstrated that the old valuation models were no longer effective. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-02 Evolution of Finance as a Discipline
 
86. The largest financial intermediaries after the banks are insurance companies. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-09 Market Share Price

87. The TSX Composite Index is representative of equity market value of the top listed Canadian companies. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-17 Allocation of Capital
 
88. The Internet is largely responsible for the internationalization of the financial markets. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-14 Forms of Organization
 
89. Agency theory examines the relationship between companies and their customers. 
FALSE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
90. Honesty in business requires timely and full disclosure of pertinent firm developments. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-11 Social Responsibility

91. Businesses will increasingly rely on B2B Internet applications to speed up cash flows. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-02 Evolution of Finance as a Discipline
 
92. Issues over corporate governance are often agency problems. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
93. Agency theory examines the relationship between the owners of the firm and the managers of the firm. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-06 Goals of Financial Management
 
94. Secondary markets are the markets that trade previously issued securities. 
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.
Topic: 01-16 Structure and Functions of the Financial Markets

Short Answer Questions

95. Financial management builds upon the disciplines of economics and accounting. Complete the following statements:

a) Economics provides the financial manager with
b) Accounting provides the financial manager with 
Economics provides the financial manager with the following:

• A broad picture of the economy and the key measures that influence the corporation's decisions and performance (gross domestic product, industrial production, disposable income, unemployment, inflation, interest rates, taxes).
• An understanding of the institutional structure of our mixed capitalist system (government regulation, Bank of Canada, chartered banks, investment dealers, trusts, insurance companies, financial markets). Capital is accumulated and valued in competitive financial markets, affecting its cost and availability to the firm.
• A structure for decision making (risk analysis, pricing theory through supply and demand relationships, comparative return analysis).

Accounting provides the financial manager with the following:

• Much of the language of finance (assets, liabilities, cash flow).
• Financial data (income statements, balance sheets, statement of cash flows). The financial manager must know how to interpret and use this data in allocating the firm's financial resources to generate the best value on the basis of return and risk.

Finance links economic theory with the numbers of accounting, and all corporate managers—whether in the area of production, sales, research, marketing, management, or long run strategic planning-must know what it means to assess the financial performance of the firm.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Hard
Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.
Topic: 01-01 The Field of Finance

96. Selecting profit maximization as the primary goal of the firm may not increase its value, because a profit-only focus has several drawbacks. List and describe these drawbacks. 
1. Risk may increase as profit changes. More debts or investment in projects with cyclical earnings to increase profits also increase risk. Shareholders may consider the increase in risk insufficient for the increased earnings.
2. Profit fails to take into account the timing of benefits. We might be indifferent between the following alternatives if our emphasis were solely on maximizing earnings, as the total is the same. However, alternative B is clearly superior, because larger benefits occur earlier; we could reinvest the difference in earnings for alternative B for an extra period.

Earnings per Share

	Period 1	Period 2	Total	
Alternative A	$1.50	$2.00	$3.50	
Alternative B	$2.00	1.50	3.5	

3. Accurately measuring profit is almost impossible. Economics and accounting define profit (earnings) differently. Furthermore, earnings may not correspond to current values due to the methods used to capture accounting accruals and the amortization of capital expenditures. As well, financial statements are subject to manipulation by managers, so reported earnings may be misleading.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-07 Maximizing Shareholder Wealth

97. What 4 factors will investors consider in the analysis of a firm market share value? 
• The risk inherent in the firm (nature of its operations and how the firm is financed)
• The time pattern of the firm's earnings and cash flows
• The quality and reliability of reported earnings (as a guidepost to future earning power)
• Economic and political factors

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.
Topic: 01-08 Measuring the Goal
 
98. According to agency theory, other than maximizing shareholder wealth what other self-interests do financial managers have? 
Financial managers are interested in:

• Maintaining their jobs (may discourage value-enhancing takeovers)
• Protecting "private spheres of influence"
• Maximizing their own compensation package
• Arbitrating among the firm's different stakeholders (shareholders, creditors, employees, unions, environmentalists, consumer groups, Canada Revenue Agency, government regulatory bodies, customers)

Pursuit of these interests may emphasize short-term results over long-term wealth building. Management may also perceive the risk of investment decisions differently from shareholders, leading to different points of view as to the best decision regarding the investment of the firm's resources.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-09 Market Share Price

99. Besides maximizing shareholder wealth, what should corporations consider to be goals? List and briefly explain. 
Corporations, which receive their operational charters from society, should consider socially desirable actions that include:

• Community works (charitable giving, employment opportunities for marginalized groups)
• Customer respect (safe products, fair pricing, appropriate advertising and communication)
• Strong employee relations (fair benefits and compensation, equitable hiring, education, health and safety)
• Environmental health (pollution controls, appropriate use and renewal of resources)
• Human rights promotion (respecting the dignity of individuals globally)

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-11 Social Responsibility
 
100. What are the 4 components of good corporate governance? 
Good corporate governance results from:

• Board composition (strong leadership, competent education, balanced competencies)
• Director and officers ownership positions in the firm (other than by stock options)
• A published code of ethics
• Independent audits and a financially literate audit committee

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-11 Social Responsibility

101. List the 4 components of good corporate governance and identify additional measures that could be added to strengthen corporate governance. 
Good corporate governance results from:

• Board composition (strong leadership, competent education, balanced competencies)
• Director and officers ownership positions in the firm (other than by stock options)
• A published code of ethics
• Independent audits and a financially literate audit committee

There have been increased demands for additional corporate governance practices by firms, despite the increased costs of compliance and sometimes delays in timely reporting of financial results. These measures include:

• Separating the roles of CEO and chair of the board
• Independent board of directors members
• Improved accounting standards (stock options, internal audit controls, "off-balance sheet items")
• More stringent reporting and disclosure requirements
• Closer monitoring by regulatory bodies (securities commissions)
• Questioning the use of "dual class" shares

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-11 Social Responsibility
 
102. List the occasional functions of the finance manager connected to the efficient raising and investing of funds. 
Intermediate financing, bond issues, leasing, stock issues, capital budgeting, dividend decisions, forecasting

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.
Topic: 01-12 Ethical Behaviour

103. What are the characteristics of a sole proprietorship? What are the drawbacks? 
A sole proprietorship is characterized by:

• Single-person ownership
• Simplicity of decision making
• Low organizational and operating costs
• Unlimited liability to the owner (can lose personal assets in settlement of firm's debts)
• Profits or losses taxed in hands of individual owner

Most small businesses with one to ten employees are sole proprietorships. The unlimited liability is a serious drawback and few lenders are willing to advance funds to a small business without a personal liability commitment from the owner.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
104. What are the characteristics of a partnership? What are the advantages compared to a sole proprietorship? 
A partnership is characterized by

• Multiple ownership
• Ability to raise more capital and share ownership responsibilities
• Unlimited liability for the owners (one wealthy partner may have to bear a disproportionate share of losses in a general partnership)
• Taxation of profits or losses are allocated in percentages to partners

To circumvent the unlimited liability feature, a special form of partnership, called a limited partnership, can be utilized. Under this arrangement one or more partners are designated general partners and have unlimited liability for the debts of the firm; other partners are designated limited partners and are liable only for their initial contribution. The limited partners are normally prohibited from being active in the management of the firm.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management

105. What are the characteristics of a corporation? 
A corporation is characterized by:

• A legal entity unto itself (may sue or be sued, engage in contracts, acquire property)
• Ownership by shareholders (each with limited liability, although bankers may require small business owners to give their personal guarantee)
• Divisibility of the ownership (many shareholders)
• Continuous life span (not dependent on life of one shareholder)
• Taxation on its own income (individual shareholders pay tax on dividends or capital gain tax when shares are sold)

In terms of revenue and profits produced, the corporation is by far the most important form of economic unit.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management
 
106. What 2 choices does the board of directors have to distribute earnings of a corporation? 
Earnings generated by the corporation are owned equally by each shareholder, and the board of directors has two choices for these earnings.
Earnings can be:

• Paid out as dividends (shareholders pay tax on dividends: a dividend tax credit reduces the effect of double taxation)
• Reinvested in the firm (recorded as retained earnings)

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.
Topic: 01-13 Functions of Financial Management