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CFIN 3 3rd Edition by Besley - Test Bank
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, Chapter 1 An Overview of Managerial Finance 1CHAPTER 1—AN OVERVIEW OF MANAGERIAL FINANCE
TRUE/FALSE
1. In general, the role of the financial manager is to plan for the acquisition and use of funds so as to maximize the
value of the firm.
ANS: T DIF: Easy TOP: Financial manager
2. 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.
ANS: F DIF: Easy TOP: Financial manager
3. Two key limitations of the proprietorship form of business involve potential difficulty in raising needed capital
and the presence of unlimited personal liability for business debts.
ANS: T DIF: Easy TOP: Proprietorship
4. 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.
ANS: F DIF: Easy TOP: Hostile takeover
5. 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.
ANS: F DIF: Easy TOP: Social responsibility
6. The proper goal of the financial manager should be to maximize the firm's expected profit, because this will add
the most wealth to each of the individual shareholders (owners) of the firm.
ANS: F DIF: Easy TOP: Goal of firm
7. 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.
ANS: F DIF: Easy TOP: Objectives of firm
8. The riskiness inherent in a firm's earnings per share (EPS) depends on both the types of projects the firm takes on
and the manner in which the projects are financed.
ANS: T DIF: Easy TOP: Risk and earnings
9. Cultural differences in do not impact the multinational corporations as they expand into different geographic
regions.
ANS: F DIF: Easy TOP: Multinational Corporations
10. Normal profits are those that result in rates of return that are just sufficient to attract new capital in financial
markets.
ANS: T DIF: Easy TOP: Normal profits
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
, Chapter 1 An Overview of Managerial Finance 2
11. If a firm's managers want to maximize stock price it is in their best interests to operate efficient, low-cost plants,
develop new and safe products that consumers want, and maintain good relationships with customers, suppliers,
creditors, and the communities in which they operate.
ANS: T DIF: Easy TOP: Social welfare and finance
12. In a competitive marketplace "good ethics" is a wonderful idea but an impractical standard. There are simply too
few benefits to be gained from maintaining high business ethics.
ANS: F DIF: Easy TOP: Business ethics
13. Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash
flows denominated in the parent company's home currency.
ANS: T DIF: Easy TOP: Exchange rate risk
14. A financial manager's task is to make decisions concerning the acquisition and use of funds for the greatest
benefit of the firm.
ANS: T DIF: Easy TOP: Financial management
15. Incentive compensation plans are used to attract and retain top managerial talent as well as to align the interests of
management with shareholders.
ANS: T DIF: Easy TOP: Managerial incentives
16. The finance function is relatively independent of most other corporate functions. Marketing decisions, for
example, might affect the firm's need for funds but are not affected by conditions in financial markets or other
financing issues.
ANS: F DIF: Medium TOP: Financial management
17. 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.
ANS: T DIF: Medium TOP: Managerial incentives
18. The disadvantages associated with a proprietorship are similar to those under a partnership. One exception to this
is due to the formal nature of the partnership agreement and the commitment of the partners' personal assets. As a
result, partnerships do not have difficulty raising large amounts of capital.
ANS: F DIF: Medium TOP: Partnership
19. The term multinational corporation is used to describe a firm that operates in two more countries.
ANS: T DIF: Medium TOP: Multinational corporations
20. Nations do not have the sovereignty to expropriate the assets of a firm without compensation.
ANS: F DIF: Medium TOP: Political risk
21. Having the manager's compensation tied to the company's performance increases the agency problem that
corporations face.
ANS: F DIF: Medium TOP: Agency problem
22. Managers of firms using accounting manipulations to inflate current earnings are likely to generate long-term
benefits to the shareholders of the firm.
ANS: F DIF: Medium TOP: Business Ethics
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
, Chapter 1 An Overview of Managerial Finance 3
23. A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited
liability for business which limits his losses to what he has invested in the company.
ANS: F DIF: Medium TOP: Proprietorship
24. The corporate charter is a document filed with the secretary of the state in which the firm is incorporated that
provides information about the company, including its name, address, directors, and amount of capital stock.
ANS: T DIF: Medium TOP: Corporate charter and bylaws
25. Industrial groups are organizations comprised of companies in different industries with common ownership
interests, which include firms necessary to sell and manufacture products.
ANS: T DIF: Medium TOP: Foreign forms of business
MULTIPLE CHOICE
1. The primary goal of a publicly-owned firm interested in serving its stockholders should be to
a. Minimize the debt used by a firm.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.
ANS: D DIF: Easy OBJ: TYPE: Conceptual TOP: Goal of firm
2. Which of the following mechanisms is not used by shareholders to get managers to act in shareholder's best
interests?
a. Threat of firing
b. Managerial compensation.
c. Golden parachute.
d. Threat of takeover.
e. Answers b and c above.
ANS: C DIF: Easy OBJ: TYPE: Conceptual
TOP: Managerial incentives
3. Which of the following is a reason why companies move into international operations?
a. To take advantage of lower production costs in regions of inexpensive labor.
b. To develop new markets for their finished products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the above.
ANS: E DIF: Easy OBJ: TYPE: Conceptual
TOP: International operations motivation
4. Which of the following should be the primary goal pursued by the financial manager of a firm?
a. Maximize net income (profits).
b. Maximize the firm's net worth, or book value.
c. Maximize dividends paid to common stockholders.
d. Minimize variable operating expenses.
e. Maximize the market value of the firm's stock.
ANS: E DIF: Easy OBJ: TYPE: Conceptual TOP: Agency costs
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
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