Foundations of Financial Management, 17e (Block)
Chapter 1 The Goals and Activities of Financial Management
1) As finance emerged as a new field, much emphasis was placed on mergers and acquisitions.
Answer: TRUE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) Inflation is assumed to be a temporary problem that does not affect financial decisions.
Answer: FALSE
Difficulty: 1 Easy
Topic: Financial management decisions
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
3) Financial capital is composed of long-term plant and equipment, as well as other tangible
investments.
Answer: FALSE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
4) Real capital is composed of long-term plant and equipment.
Answer: TRUE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Remember
1
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No reproduction or distribution without the prior written consent of McGraw-Hill Education.
,AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
5) During the 1930s, financial practice revolved around such topics as the preservation of capital,
maintenance of liquidity, the reorganization of financially troubled corporations, and bankruptcy.
Answer: TRUE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
6) In the mid 1950s, finance began to change to a more analytical, decision-oriented approach.
Answer: TRUE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
7) Recently, the emphasis of financial management has been on the relationship between risk and
return.
Answer: TRUE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.; 01-03 The relationship of risk to return is a central focus of finance.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
8) The first Nobel Prizes given to finance professors were for their contributions to capital
structure theory and portfolio theories of risk and return.
Answer: TRUE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Remember
2
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No reproduction or distribution without the prior written consent of McGraw-Hill Education.
,AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
9) How investors handle risk is an important topic that usually only economists observe.
Answer: FALSE
Explanation: Behavioral finance is something that the finance industry puts heavy emphasis on.
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
10) Mortgage-backed securities were devalued by accounting standards because of the high credit
ratings (AAA).
Answer: FALSE
Explanation: These securities were devalued because borrowers defaulted on their loans and
didn't have the financial means to back up their loans in other ways.
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
11) "Credit default swaps" are one of several tools that Congress and the President of the United
States have jointly developed to ease the financial crisis that began in 2008.
Answer: FALSE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
3
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No reproduction or distribution without the prior written consent of McGraw-Hill Education.
,12) The Dodd-Frank Act was created by Congress along with its goals and regulatory
responsibility, but it is facilitated by various agencies.
Answer: TRUE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
13) The Dodd-Frank Act contains the Volcker Rule, which encourages financial institutions to
allow for more speculative investments for average investors.
Answer: FALSE
Difficulty: 2 Medium
Topic: Ethics, governance, and regulation
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
14) The Dodd-Frank Act's oversight allowing regulation of banking fees and available products
has been considered as not being in the best interests of a free market.
Answer: TRUE
Difficulty: 2 Medium
Topic: Ethics, governance, and regulation
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
15) The Internet impacts e-commerce by creating a mechanism for improved communications
between a business, its customers, and its suppliers.
Answer: TRUE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
4
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
,16) The Internet is responsible for many new business models.
Answer: TRUE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
17) Businesses will increasingly rely on B2B Internet applications to speed up the cash flows
through their firms.
Answer: TRUE
Difficulty: 1 Easy
Topic: Introduction to corporate finance
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
18) Sole proprietorship means single-person ownership and offers the advantages of simplicity of
decision making and low organizational and operating costs.
Answer: TRUE
Difficulty: 1 Easy
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
19) Under the 2017 Tax Cuts and Jobs Act, the most significant change is that the corporate tax
rate goes from 35 percent to 21 percent, which puts U.S. Companies on competitive footing with
many other countries.
Answer: TRUE
Difficulty: 1 Easy
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
5
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
,20) Profits of sole proprietorships are taxed at corporate tax rates.
Answer: FALSE
Difficulty: 1 Easy
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
21) Sole Proprietorships, partnerships and limited liability partnerships are considered pass
through forms of organizations because the income passes through to the owners and is taxed at the
owner's individual tax rate.
Answer: TRUE
Difficulty: 1 Easy
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
22) To reduce the burden on small firms, the government established a 25 percent deduction of
qualified business income from pass through businesses.
Answer: FALSE
Difficulty: 1 Easy
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
23) There is unlimited liability in a general partnership.
Answer: TRUE
Difficulty: 1 Easy
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
6
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
,24) A limited partnership limits the profits partners may receive.
Answer: FALSE
Difficulty: 1 Easy
Topic: Forms of business organization
Learning Objective: 01-01 The field of finance integrates concepts from economics, accounting,
and a number of other areas.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
25) In terms of revenues and profits, the corporation is by far the most important form of business
organization in the United States.
Answer: TRUE
Difficulty: 1 Easy
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
26) As noted in Finance in Action, initial public offerings have now increased because long-term
results are favored by shareholders and institutional investors.
Answer: FALSE
Difficulty: 2 Medium
Topic: Initial public offerings
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
27) Dividends paid to corporate stockholders have already been taxed once as corporate income.
Answer: TRUE
Difficulty: 1 Easy
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
7
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
,28) One advantage of the corporate form of organization is that income received by stockholders is
not taxable since the corporation already paid taxes on the income distributed.
Answer: FALSE
Difficulty: 1 Easy
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
29) A corporation must have more than 100 stockholders to qualify for Subchapter S designation.
Answer: FALSE
Difficulty: 2 Medium
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
30) Profits of a Subchapter S corporation are taxed at corporate tax rates.
Answer: FALSE
Difficulty: 1 Easy
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
31) The formation of a Subchapter S corporation is a way to circumvent the double taxation of a
small corporation.
Answer: TRUE
Difficulty: 2 Medium
Topic: Forms of business organization
Learning Objective: 01-02 A firm can have many different forms of organization.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
8
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
,32) Corporate governance issues have become less important to the financial community during
the first decade of the new millennium.
Answer: FALSE
Difficulty: 1 Easy
Topic: Ethics, governance, and regulation
Learning Objective: 01-04 The primary goal of financial managers is to maximize the wealth of
the shareholders.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
33) Agency theory examines the relationship between companies and their customers.
Answer: FALSE
Difficulty: 1 Easy
Topic: Agency costs and problems
Learning Objective: 01-04 The primary goal of financial managers is to maximize the wealth of
the shareholders.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
34) Institutional investors have had increasing influence over corporations with their ability to vote
with large blocks of stock and replace poorly performing boards of directors.
Answer: TRUE
Difficulty: 1 Easy
Topic: Goal of financial management
Learning Objective: 01-04 The primary goal of financial managers is to maximize the wealth of
the shareholders.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
35) Agency theory assumes that corporate managers act to increase the wealth of corporate
shareholders.
Answer: FALSE
Difficulty: 1 Easy
Topic: Agency costs and problems
Learning Objective: 01-04 The primary goal of financial managers is to maximize the wealth of
the shareholders.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
9
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
, 36) The Sarbanes-Oxley Act reduced agency conflicts by giving corporate managers greater
flexibility to select their preferred candidates to the board of directors.
Answer: FALSE
Difficulty: 2 Medium
Topic: Ethics, governance, and regulation
Learning Objective: 01-04 The primary goal of financial managers is to maximize the wealth of
the shareholders.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
37) A major focus of the Sarbanes-Oxley Act is to make sure that publicly traded companies
accurately present their assets, liabilities, and income in their financial statements.
Answer: TRUE
Difficulty: 2 Medium
Topic: Ethics, governance, and regulation
Learning Objective: 01-04 The primary goal of financial managers is to maximize the wealth of
the shareholders.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
38) The Sarbanes-Oxley Act is primarily intended to increase public scrutiny of private companies
that had previously been exempt from many public disclosure requirements.
Answer: FALSE
Difficulty: 2 Medium
Topic: Ethics, governance, and regulation
Learning Objective: 01-04 The primary goal of financial managers is to maximize the wealth of
the shareholders.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
39) Timing is not a particularly important consideration in financial decisions.
Answer: FALSE
Difficulty: 1 Easy
Topic: Financial management decisions
Learning Objective: 01-04 The primary goal of financial managers is to maximize the wealth of
the shareholders.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
10
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
