By Bryan Long,2014-07-01 12:10
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    Chapter One

    Financial Economics

    1. The primary goal of corporate management is to B shareholder wealth.

    (a) minimize

    (b) maximize

    (c) leverage

    (d) mitigate

    2. _____A___ stock market imposes ________ discipline on managers to take actions to maximize the

    market value of the firm’s shares.

    (a) competitive, strong

    (b) dispersed, weak

    (c) mature, no

    (d) dispersed, strong

    3. The _A_______ form is especially well suited to the separation of ownership and management of firms

    because it allows relatively frequent changes in owners by share transfer without affecting the operations

    of the firm.

    (a) corporate

    (b) sole proprietorship

    (c) partnership

    (d) household

    4. ___B is anything that has economic value.

    (a) A partnership

    (b) An asset

    (c) A balance sheet

    (d) An income statement

    5. A household’s wealth or net worth is measured by the value of its ___B_____ minus its ________.

    (a) liabilities; assets

    (b) assets; liabilities

    (c) stocks; bonds

    (d) bonds; liabilities

    6. The branch of finance dealing with financial decisions of firms is called ___D_____ or ________.

    (a) investments; international finance

    (b) markets; institutions

    (c) business finance; institutions

    (d) business finance; corporate finance

    7. Bonds promise _____C___ cash payments, while stocks pay the ________ value left over after all

    other claimants have been paid.

    (a) variable; residual

    (b) residual; fixed

    (c) fixed; residual

    (d) fixed; variable

    8. The day-to-day financial affairs of the firm are usually referred to as _A_______.

    (a) working capital management

    (b) capital structure

    (c) capital budgeting

    (d) strategic planning

    9. A disadvantage of the sole proprietorship is the fact that the sole proprietor has _B_______.

    (a) limited liability for the debts of the firm


    (b) unlimited liability for the debts of the firm

    (c) expensive costs to establish the firm

    (d) limited authority over the day-to-day business decisions of the firm 10. In the U.S. corporations with concentrated ownership are called ________ and corporations with broadly dispersed ownership are called ___A_____.

    (a) private corporations; public corporations

    (b) public corporations; private corporations

    (c) public corporations; monopolies

    (d) private corporations; state owned corporations

    11. Billy owns a house worth $350,000 and has a $55,000 bank account. Billy owes $270,000 to the bank on a home mortgage loan and has a $12,000 credit card debt outstanding. Calculate Billy’s net worth.--B

    (a) $135,000

    (b) $123,000

    (c) $497,000

    (d) $37,000

    12. Marlowe owns a house worth $150,000, a car worth $25,000 and has an $18,000 bank account. Marlowe owes $135,000 to the bank on a home mortgage loan, $18,000 on the car loan and has an $18,000 credit card debt outstanding. Calculate Marlowe’s net worth. C

    (a) $58,000

    (b) $123,000

    (c) $22,000

    (d) $37,000

    13. An advantage of the corporate form of ownership is ___C_____.

    (a) no liability

    (b) unlimited liability

    (c) limited liability

    (d) CEO liability

    14. In the corporate form, the separated structure creates the potential for __A______ between owners and managers.

    (a) a conflict of interest

    (b) increased transactional costs

    (c) stability in relations

    (d) none of the above

    15. All of the following are reasons for having a separation of management and ownership of the firm except: C

    (a) the “going concern” effect favors the separated structure

    (b) professional managers may be found who possess a superior ability to run the business

    (c) it prevents the possibility of a conflict of interest between the owners and management

    (d) it allows for savings in the cost of information gathering

    16. D involves the evaluation of costs and benefits spread out over time, and it is largely a financial decision-making process.

    (a) Stock valuation

    (b) Bond valuation

    (c) Inventory costing

    (d) Strategic planning

17. Shareholder wealth maximization depends on all of the following except: C


    (a) production technology

    (b) market interest rates

    (c) risk aversion

    (d) market risk premiums

    18. A problem with using the profit maximization criterion is __D______.

    (a) deciding which period’s profit is to be maximized

    (b) the definition of “maximize profits” is ambiguous

    (c) the failure to consider risk

    (d) all of the above

    19. The existence of a well functioning stock market facilitates the efficient separation of the ownership

    and management of firms, since stock prices can be substituted for external information about ___B_____.

    (a) the firm’s production technology

    (b) the wealth, preferences, and other investment opportunities of the owners

    (c) the historic costs of the firm’s infrastructure

    (d) the firm’s ability to meet its projected goals

    20. One place to look for a statement of the goals of a corporation’s top managers is the __C______.

    (a) balance sheet

    (b) income statement

    (c) annual report

    (d) bankruptcy filing

    21. In the absence of a stock market, managers would require information that is ____A____ to obtain.

    (a) costly if not impossible

    (b) costless

    (c) readily available

    (d) time-consuming but inexpensive

    22. Management’s task is made much easier when it can observe the ____B____ of its own and other firms’ shares.

    (a) book prices

    (b) market prices

    (c) historical prices

    (d) security prices

    23. _____D___ are entitled to a share of any of the distributions from the corporation such as cash


    (a) Sole proprietors

    (b) General partners

    (c) Professional managers

    (d) Shareholders

    24. ___A_____ is the founder of modern portfolio theory.

    (a) Harry Markowitz

    (b) Merton Miller

    (c) William Sharpe

    (d) Bill Gates

    25. In Germany, public corporations are identifiable by ________ after the company name, whereas

    private companies are denoted by _____C___.

    (a) PLC, Inc.

    (b) GmbH, AG

    (c) AG, GmbH

    (d) SpA, GmbH


26. In the United Kingdom, public corporations are identifiable by ___D_____ after the company name,

    whereas private companies are denoted by ________.

    (a) Inc, PLC

    (b) LTD, PLC

    (c) AG, GmbH

    (d) PLC, LTD

    27. Shareholders elect ___B_____ who in turn select ________ to run the business.

    (a) a board of directors; a treasurer

    (b) a board of directors; managers

    (c) managers; a board of directors

    (d) a board of directors; accountants28. In a competitive stock market, ___A_____ offer(s)

    another important mechanism for aligning the incentives of managers with those of shareholders.

    (a) takeovers

    (b) increased taxes

    (c) liquidation

    (d) increased liability

    29. If a raider is interested in making a profit through the takeover of a prospective firm, the only

    expenses that need be incurred are ___D_____.

    (a) the cost of identifying a mismanaged firm

    (b) the cost of acquiring the firm’s shares

    (c) physical capital

    (d) both (a) and (b)

    30. The cost of identifying a mismanaged firm can be low if the raider is which of the following:


    (a) a supplier

    (b) a customer

    (c) a competitor

    (d) all of the above

    31. Takeover mechanisms can most effectively be reduced by ____C____.

    (a) directives from the board of directors

    (b) media intervention

    (c) government policies

    (d) public disapproval

    32. The chief financial officer (CFO) of a corporation normally reports to the ___C_____ of the company.

    (a) controller

    (b) treasurer

    (c) chief executive officer

    (d) chairman of the board of directors

    33. All of the following departments typically report to the chief financial officer (CFO) except:


    (a) marketing

    (b) financial planning

    (c) treasury

    (d) control

    34. The treasurer’s job includes managing all of the following except: D

    (a) the firm’s exposure to currency and interest rate risks

    (b) the tax department

    (c) relations with the external investment community

    (d) the analysis of proposed mergers and acquisitions 35. The activities of the vice president for financial planning include all of the following except:



    (a) analyzing proposed mergers

    (b) analyzing proposed spin-offs

    (c) preparing internal reports comparing planned and actual costs

    (d) analyzing major capital expenditures

    36. Which of the following statements is most correct? B

    (a) The shareholders of a corporation elect managers who in turn select a board of directors to

    run the business.

    (b) Partnerships do not pay corporate tax.

    (c) A disadvantage of the corporation is unlimited liability.

    (d) The government is powerless to discourage corporate takeovers.

     37. For a typical firm, which of the following statements is most correct? A

    (a) The CFO has three departments reporting to him: financial planning, treasury and control.

    (b) The treasurer oversees the accounting and auditing activities of the firm.

    (c) The controller has responsibility for managing the financing activities of the firm and for

    working capital management.

    (d) The CEO is a senior vice president with responsibility for all the financial functions in the


    37. Which of the following are financial decisions a firm has to make? D

    (a) financing decisions

    (b) capital budgeting decisions

    (c) working capital decisions

    (d) all of the above

    38. The controller’s job includes responsibility for __B______.

    (a) relations with the external investment community

    (b) preparation of financial statements for use by shareholders, creditors and regulatory


    (c) analysis of proposed mergers, acquisitions and spin-offs

    (d) all of the above

    39. The basic unit of analysis in capital budgeting is the ___B____.

    (a) financing project

    (b) investment project

    (c) strategic project

    (d) variable project

    40. The steps involved in any capital budgeting process include: D

    (a) evaluating projects

    (b) deciding which projects to undertake

    (c) identifying ideas for new investment projects

    (d) all of the above

     40.Preferred stock, bonds, and convertible securities are also known as ___B_____.

    (a) nonmarketable claims

    (b) standardized securities

    (c) variable securities

    (d) covenants

    41. The basic unit of analysis in capital structure decisions is the __A______.

    (a) firm as a whole

    (b) investment project

    (c) firm’s personnel

    (d) financial system

    42. Which one of the following correctly orders the steps involved in capital structure decisions? D

    (a) determining a feasible financing plan; identifying new ideas for investment projects

    (b) determining the optimal financing mix; determining a feasible financing plan


    (c) identifying ideas for investment projects; determining the optimal financing mix

    (d) determining a feasible financing plan; determining the optimal financing mix 43. Which of the following is not a financial function of a corporation? D

    (a) investor relations

    (b) tax administration

    (c) provision of capital

    (d) regulatory legislation

    44. Which of the following functions may be categorized as administration of funds? A

    (a) custodial responsibilities

    (b) tax administration

    (c) internal auditing

    (d) all of the above

    45.Investor relations includes: B

    (a) government reporting

    (b) establishment and maintenance of communications with company stockholders

    (c) relations with taxing agencies

    (d) consultation with and advice to other corporate executives

    45. Oscar owns a boat worth $2 million, a house worth $5.5.million and has $900,000 in a bank account.

    Oscar owes $1.1 million to the bank on the boat loan, $2 million on the home loan and has $20,000

    credit card debt. Calculate Oscar’s net worth. B

    (a) $3.12 million

    (b) $5.28 million

    (c) $7.28 million

    (d) $8.4 million


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