Chapter1 GE

Principles of Managerial Finance, 13e, Global Edition (Gitman)
Chapter 1 The Role of Managerial Finance

1.1 Define finance and the managerial finance function.
1) A financial analyst is responsible for maintaining and controlling the firm's daily cash
balances. Frequently manages the firm's short-term investments and coordinates short-term
borrowing and baning relationships.
Answer! FA"#$
%opic! &areer 'pportunities
(uestion #tatus! )evised
*) Finance is concerned with the process institutions+ marets+ and instruments involved in the
transfer of money among and between individuals+ businesses and government.
Answer! %),$
%opic! Finance Defined
-) Financial services are concerned with the duties of the financial manager.
Answer! FA"#$
%opic! )ole of Financial .anager
/) Financial managers actively manage the financial affairs of many types of business-financial
and non-financial+ private and public+ for-profit and not-for-profit.
Answer! %),$
0) %he capital e1penditures analyst2manager is responsible for the evaluation and
recommendation of proposed asset investments and may be involved in the financial aspects of
implementation of approved investments.
Answer! %),$
3) %he financial analyst administers the firm's credit policy by analy4ing or managing the
evaluation of credit applications+ e1tending credit+ and monitoring and collecting accounts
receivable.
Answer! FA"#$
%opic! .anagerial Finance Functions
1
&opyright 5 *61* 7earson $ducation
8) 9n large companies+ the pro:ect finance manager is responsible for coordinating the assets and
liabilities of the employees' pension fund.
Answer! FA"#$
;) %he corporate controller typically handles the accounting activities+ such as ta1 management+
data processing+ and cost and financial accounting.
Answer! %),$
<) .anagerial finance is concerned with design and delivery of advice and financial products to
individuals+ business+ and government.
Answer! FA"#$
16) %he corporate treasurer typically handles the both cost accounting and financial accounting.
Answer! FA"#$
11) %he corporate treasurer is the officer responsible for the firm's accounting activities+ such as
corporate accounting+ ta1 management+ financial accounting+ and cost accounting.
Answer! FA"#$
1*) %he corporate controller is the officer responsible for the firm's financial activities such as
financial planning and fund raising+ maing capital e1penditure decisions+ and managing cash+
credit+ the pension fund+ and foreign e1change.
Answer! FA"#$
1-) %he corporate treasurer's focus tends to be more e1ternal+ while the controller's focus is more
internal.
Answer! %),$
AA&#= >uidelines! )eflective thining sills
*
1/) %he part of finance concerned with design and delivery of advice and financial products to
individuals+ business+ and government is called
A) .anagerial Finance.
=) Financial .anager.
&) Financial #ervices.
D) none of the above.
Answer! &
AA&#= >uidelines! Analytic sills
10) .anagerial finance
A) involves tass such as budgeting+ financial forecasting+ cash management+ and funds
procurement.
=) involves the design and delivery of advice and financial products.
&) recogni4es funds on an accrual basis.
D) devotes the ma:ority of its attention to the collection and presentation of financial data.
Answer! A
13) Finance can be defined as
A) the system of debits and credits.
=) the science of the production+ distribution+ and consumption of wealth.
&) the art and science of managing money.
D) the art of merchandising products and services.
Answer! &
%opic! Finance Defined
18) Financial service
A) is concerned with the duties of the financial manager.
&) provides guidelines for the efficient operation of the business.
D) handles accounting activities related to data processing.
Answer! =
-
1;) &areer opportunities in financial services include all of the following $?&$7%
A) investments.
=) real estate and insurance.
&) capital e1penditures management.
D) personal financial planning.
Answer! &
1<) @hich of the following is a career opportunity in managerial financeA
A) 9nvestment.
=) )eal $state and 9nsurance.
&) &apital $1penditures .anagement.
D) 7ersonal Financial 7lanning.
Answer! &
*6) BBBBBBBB is concerned with the duties of the financial manager in the business firm.
A) Financial #ervices
=) Financial .anager
&) .anagerial Finance
D) Cone of the above
Answer! &
*1) %he BBBBBBBB is responsible for evaluating and recommending proposed asset investments.
A) Financial .anager
=) &redit .anager
&) 7ension Fund .anager
D) &apital $1penditures .anager
Answer! D
**) %he treasurer is commonly responsible for
A) ta1es.
=) data processing.
&) maing capital e1penditures.
D) cost accounting.
Answer! &
/
*-) %he controller is commonly responsible for
A) managing cash.
=) financial accounting.
&) managing credit activities.
D) financial planning.
Answer! =
*/) %he officer responsible for the firm's financial activities such as financial planning and fund
raising+ maing capital e1penditure decisions+ and managing cash+ credit+ the pension fund+ and
foreign e1change is
A) treasurer.
=) controller.
&) foreign e1change manager.
Answer! A
*0) %he officer responsible for the firm's accounting activities+ such as corporate accounting+ ta1
management+ financial accounting+ and cost accounting is the
A) treasurer.
=) controller.
&) foreign e1change manager.
Answer! =
1.* Describe the legal forms of business organi4ation.
1) 9n partnerships+ owners have unlimited liability and may have to cover debts of other less
financially sound partners.
Answer! %),$
%opic! "egal Form of 'rgani4ation
*) 9n partnerships+ a partner can readily transfer his2her wealth to other partners.
Answer! FA"#$
0
-) %he sole proprietor has unlimited liabilityD his or her total investment in the business+ but not
his or her personal assets+ can be taen to satisfy creditors.
Answer! FA"#$
/) 9n limited partnerships+ all partners' liabilities are limited to their investment in the
partnership.
Answer! FA"#$
0) @hich of the following legal forms of organi4ation is most e1pensive to organi4eA
A) #ole proprietorships.
=) 7artnerships.
&) &orporations.
D) "imited partnership.
Answer! &
3) @hich of the following legal forms of organi4ation's income is C'% ta1ed under individual
income ta1 rateA
=) 7artnerships.
&) "imited partnership.
D) &orporation.
Answer! D
8) ,nder which of the following legal forms of organi4ation+ is ownership readily transferableA
=) 7artnerships.
&) "imited partnership.
D) &orporation.
Answer! D
3
;) About 80 percent of all business firms are
A) sole proprietorships.
=) partnerships.
&) corporations.
D) #-corporations.
Answer! A
<) A ma:or weaness of a partnership is
A) limited liability.
=) difficulty liquidating or transferring ownership.
&) access to capital marets.
D) low organi4ational costs.
Answer! =
16) All of the following are ey strengths of a corporation $?&$7%
A) access to capital marets.
=) limited liability.
&) low organi4ation costs.
D) readily transferable ownership.
Answer! &
11) @hich of the following legal forms of organi4ation is characteri4ed by limited liabilityA
A) #ole proprietorship.
=) 7artnership.
&) &orporation.
D) 7rofessional partnership.
Answer! &
1*) %he dominant form of organi4ation with respect to receipts and net profits is the
A) sole proprietorship.
=) partnership.
&) corporation.
D) #-corporation.
Answer! &
8
1-) 9n aEn) BBBBBBBB+ owners have limited liability with regard to the business. %hey are not
personally liable for the malpractice of other owners.
A) limited partnership
=) #-corporation
&) partnership
D) limited liability partnership
Answer! D
1.- Describe the goal of the firm+ and e1plain why ma1imi4ing the value of the firm is an
appropriate goal for a business.
1) Figh cash flow is generally associated with a higher share price whereas higher ris tends to
result in a lower share price.
Answer! %),$
%opic! Fundamental &oncepts
*) @hen considering each financial decision alternative or possible action in terms of its impact
on the share price of the firm's stoc+ financial managers should accept only those actions that
are e1pected to increase the firm's profitability.
Answer! FA"#$
%opic! >oal of the Firm
AA&#= >uidelines! $thical understanding and reasoning abilities
-) %o achieve the goal of profit ma1imi4ation for each alternative being considered+ the financial
manager would select the one that is e1pected to result in the highest monetary return.
Answer! %),$
/) Dividend payments change directly with changes in earnings per share.
Answer! FA"#$
0) %he wealth of corporate owners is measured by the share price of the stoc.
Answer! %),$
;
3) )is and the magnitude and timing of cash flows are the ey determinants of share price+
which represents the wealth of the owners in the firm.
Answer! %),$
8) A high earnings per share E$7#) does not necessarily translate into a high stoc price.
Answer! %),$
;) %he profit ma1imi4ation goal ignores the timing of returns+ does not directly consider cash
flows+ and ignores ris.
Answer! %),$
<) @hen considering each financial decision alternative or possible action in terms of its impact
on the share price of the firm's stoc+ financial managers should accept only those actions that
are e1pected to ma1imi4e shareholder value.
Answer! %),$
16) An increase in firm ris tends to result in a higher share price since the stocholder must be
compensated for the greater ris.
Answer! FA"#$
11) #tocholders e1pect to earn higher rates of return on investments of lower ris and lower
rates of return on investments of higher ris.
Answer! FA"#$
1*) %he goal of ethics is to motivate business and maret participants to adhere to both the letter
and the spirit of laws and regulations in all aspects of business and professional practice.
Answer! %),$
%opic! %he )ole of $thics
(uestion #tatus! 7revious $dition
<
1-) %he primary goal of the financial manager is
A) minimi4ing ris.
=) ma1imi4ing profit.
&) ma1imi4ing wealth.
D) minimi4ing return.
Answer! &
1/) &orporate owner's receive reali4able return through
A) earnings per share and cash dividends.
=) increase in share price and cash dividends.
&) increase in share price and earnings per share.
D) profit and earnings per share.
Answer! =
10) %he wealth of the owners of a corporation is represented by
A) profits.
=) earnings per share.
&) share value.
D) cash flow.
Answer! &
13) @ealth ma1imi4ation as the goal of the firm implies enhancing the wealth of
A) the =oard of Directors.
=) the firm's employees.
&) the federal government.
D) the firm's stocholders.
Answer! D
18) %he goal of profit ma1imi4ation would result in priority for
A) cash flows available to stocholders.
=) ris of the investment.
&) earnings per share.
D) timing of the returns.
Answer! &
16
1;) 7rofit ma1imi4ation as a goal is not ideal because it does C'% directly consider
A) ris and cash flow.
=) cash flow and stoc price.
&) ris and $7#.
D) $7# and stoc price.
Answer! A
1<) 7rofit ma1imi4ation as the goal of the firm is not ideal because
A) profits are only accounting measures.
=) cash flows are more representative of financial strength.
&) profit ma1imi4ation does not consider ris.
D) profits today are less desirable than profits earned in future years.
Answer! &
*6) 7rofit ma1imi4ation fails because it ignores all $?&$7%
A) the timing of returns.
&) cash flows available to stocholders.
D) ris.
Answer! =
*1) %he ey variables in the owner wealth ma1imi4ation process are
A) earnings per share and ris.
=) cash flows and ris.
&) earnings per share and share price.
D) profits and ris.
Answer! =
11
**) &ash flow and ris are the ey determinants in share price. 9ncreased cash flow results in
BBBBBBBB+ other things remaining the same.
A) a lower share price
=) a higher share price
&) an unchanged share price
D) an undetermined share price
Answer! =
*-) &ash flow and ris are the ey determinants in share price. 9ncreased ris+ other things
remaining the same+ results in
A) a lower share price.
=) a higher share price.
&) an unchanged share price.
D) an undetermined share price.
Answer! A
*/) Financial managers evaluating decision alternatives or potential actions must consider
A) only ris.
=) only return.
&) both ris and return.
D) ris+ return+ and the impact on share price.
Answer! D
*0) An ethics program is e1pected to have a BBBBBBBB impact on the firm's share price.
A) positive
=) negative
&) no impact
D) undetermined
Answer! A
%opic! )ole of $thics
1*
*3) Figher cash flow and greater ris
A) have no effect on share price.
=) have an inverse effect on share price.
&) adversely affect share price.
D) have the same effect on share price.
Answer! =
*8) As the ris of a stoc investment increases+ investors'
A) return will increase.
=) return will decrease.
&) required rate of return will decrease.
D) required rate of return will increase.
Answer! D
*;) 9f #teve Gobs+ the &$' of Apple+ were to pass away+ what do you thin would happen to
price of Apple's stocA
A) 9t would decrease because of the perceived increased ris because of lac of near-term
leadership.
=) 9t would increase because of the perceived increased ris because of lac of near-term
leadership.
&) 9t would decrease because of the perceived decreased ris because of lac of near-term
leadership.
D) 9t would increase because of the perceived decreased ris because of lac of near-term
leadership.
Answer! A
(uestion #tatus! Cew
*<) All of the following as considered staeholders $?&$7%
A) consumers
=) suppliers
&) employees
D) competitors
Answer! D
(uestion #tatus! Cew
1-
-6) A financial manager must choose between four alternative Assets! 1+ *+ -+ and /. $ach asset
costs H-0+666 and is e1pected to provide earnings over a three-year period as described below.
=ased on the profit ma1imi4ation goal+ the financial manager would choose
A) Asset 1.
=) Asset *.
&) Asset -.
D) Asset /.
Answer! =
-1) A financial manager must choose between three alternative investments. $ach asset is
e1pected to provide earnings over a three-year period as described below. =ased on the wealth
ma1imi4ation goal+ the financial manager would
A) choose Asset 1.
=) choose Asset *.
&) choose Asset -.
D) be indifferent between Asset 1 and Asset *.
Answer! A
-*) A more recent issue that is causing ma:or problems in the business community is
A) the privati4ation of ownership.
=) short-term versus long-term financial goals of management.
&) ethical problems.
D) environmental concerns.
Answer! &
1/
--) An effective ethics program can have all of the following positive benefits+ $?&$7%
A) reduce potential litigation and :udgment costs.
=) maintain a positive corporate image and build shareholder confidence.
&) gain the loyalty+ commitment+ and respect of the firm's staeholders.
D) maing sure violations are penali4ed+ while at the same time not sub:ecting the employee to
publicity.
Answer! D
-/) &orporate ethics policies typically apply to BBBBBBBB in dealing with BBBBBBBB.
A) employee actionsD customers and creditors
=) employee actionsD customers+ vendors+ and regulators
&) management actionsD all corporate constituents
D) employee actionsD all corporate constituents
Answer! D
-0) An effective ethics program can
A) weaened corporate value.
=) had no effect on a corporation's value
&) enhance a corporation's value.
D) be thought of as unimportant to corporate owners.
Answer! &
-3) %he implementation of a pro-active ethics program is e1pected to result in
A) a positive corporate image and increased respect+ but is not e1pected to affect cash flows.
=) an increased share price resulting from a decrease in ris+ but is not e1pected to affect cash
flows.
&) a positive corporate image and increased respect+ but is not e1pected to affect share price.
D) a positive corporate image and increased respect+ a reduction in ris+ and enhanced cash flow
resulting in an increase in share price.
Answer! D
10
1./ Describe how the managerial finance function is related to economics and accounting.
1) .arginal cost-benefit analysis states that financial decisions should be made and actions taen
only when added benefits e1ceed added costs.
Answer! %),$
%opic! $conomic &oncepts
*) %he financial manager places primary emphasis on cash flows+ the inflow and outflow of cash.
Answer! %),$
-) %he accrual method recogni4es revenue at the point of sale and recogni4es e1penses when
incurred.
Answer! %),$
%opic! Accounting &oncepts
/) %he accountant evaluates financial statements+ develops additional data+ and maes decisions
based on his or her assessment of the associated returns and riss.
Answer! FA"#$
0) %he financial manager prepares financial statements that recogni4e revenue at the point of sale
and e1penses when incurred.
Answer! FA"#$
3) ,sing certain standardi4ed and generally accepted principles+ the accountant prepares
financial statements that recogni4e revenue at the point of sale and e1penses when incurred.
Answer! %),$
8) %he financial manager must loo beyond financial statements to obtain insight into developing
or e1isting problems since the accrual accounting data do not fully describe the circumstances of
a firm.
Answer! %),$
13
;) %he accountant's primary function is
A) evaluating the financial statements.
=) maing decisions based on financial data.
&) the collection and presentation of financial data.
D) planning cash flows.
Answer! &
<) %he accountant recogni4es revenues and e1penses on
A) a cash basis.
=) a revenue basis.
&) an accrual basis.
D) an e1pense basis.
Answer! &
16) %he financial manager recogni4es revenues and e1penses utili4ing
A) the accrual method.
=) the actual inflows and outflows of cash.
&) the standardi4ed+ generally accepted+ accounting principles.
D) the revenue method.
Answer! =
11) %he financial manager is interested in the cash inflows and outflows of the firm+ rather than
the accounting data+ in order to ensure
A) profitability.
=) the ability to pay dividends.
&) the ability to acquire new assets.
D) solvency.
Answer! D
1*) %he accountant may be responsible for any of the following $?&$7%
A) processing purchase orders and invoices.
=) ensuring accounts payable are paid on time.
&) preparing the monthly income statement.
D) analy4ing the mi1 of current to fi1ed assets.
Answer! D
18
1-) $conomic theories that the financial manager must be able to utili4e for efficient business
operations+ include
A) supply-and-demand analysis.
=) marginal analysis.
&) profit-ma1imi4ing strategies.
D) price theory.
$) all of the above.
Answer! $
1/) %he primary economic principle used in managerial finance is
A) supply and demand.
=) the liquidity trap.
&) the crowding out effect.
D) marginal cost-benefit analysis.
Answer! D
10) Gohnson+ 9nc. has :ust ended the calendar year maing a sale in the amount of H16+666 of
merchandise purchased during the year at a total cost of H8+666. Although the firm paid in full
for the merchandise during the year+ it has yet to collect at year end from the customer. %he net
profit and cash flow from this sale for the year are
A) H-+666 and H16+666+ respectively.
=) H-+666 and -H8+666+ respectively.
&) H8+666 and -H-+666+ respectively.
D) H-+666 and H8+666+ respectively.
Answer! =
13) A firm has :ust ended its calendar year maing a sale in the amount of H106+666 of
merchandise purchased during the year at a total cost of H11*+066. Although the firm paid in full
for the merchandise during the year+ it has yet to collect at year end from the customer. %he net
profit and cash flow from this sale for the year are
A) H6 and H106+666+ respectively.
=) H-8+066 and -H106+666+ respectively.
&) H-8+066 and -H11*+066+ respectively.
D) H106+666 and H11*+066+ respectively.
Answer! &
1;
18) %he primary emphasis of the financial manager is the use of
A) accrued earnings.
=) cash flow.
&) organi4ation charts.
D) profit incentives.
Answer! =
1;) =y concentrating on cash flows within the firm the financial manager should be able to
A) prepare ta1 returns.
=) spea authoritatively to stocholders.
&) avoid insolvency.
D) control e1penses.
Answer! &
1<) .arginal analysis states that financial decisions should be made and actions taen only when
A) demand equals supply.
=) benefits equal costs.
&) added benefits e1ceed added costs.
D) added benefits are greater than 4ero.
Answer! &
*6) A firm has :ust ended its calendar year maing a sale in the amount of H*66+666 of
merchandise purchased during the year at a total cost of H106+066. Although the firm paid in full
for the merchandise during the year+ it has yet to collect at year end from the customer. %he
possible problem this firm may face is
A) low profitability.
=) lac of cash flow.
&) inability to receive credit.
D) high leverage.
Answer! =
1<
*1) %he amount earned during the accounting period on each outstanding share of common stoc
is called
A) common stoc dividend.
&) net profits after ta1es.
D) net income.
Answer! =
1.0 9dentify the primary activities of the financial manager.
1) Financial analysis and planning is concerned with analy4ing the mi1 of assets and liabilities.
Answer! FA"#$
*) Financing decisions deal with the left-hand side of the firm's balance sheet and involve the
most appropriate mi1 of current and fi1ed assets.
Answer! FA"#$
-) .anagerial finance
A) involves tass such as budgeting+ financial forecasting+ cash management+ and funds
procurement.
&) recogni4es funds on an accrual basis.
D) devotes the ma:ority of its attention to the collection and presentation of financial data.
Answer! A
/) %he ey role of the financial manager is
A) decision maing.
=) the presentation of financial statements.
&) the preparation of data for future evaluation.
D) the collection of financial data.
Answer! A
*6
0) %he ey activities of the financial manager include all of the following $?&$7%
A) maing financing decisions.
=) financial analysis and planning.
&) managing financial accounting.
D) maing investment decisions.
Answer! &
3) 9ncluded in the primary activities of the financial manager are
A) financial analysis and planning.
=) maing investment decisions.
&) maing financing decisions.
D) analy4ing and planning cash flows.
$) all of the above.
Answer! $
8) %he financial manager may be responsible for any of the following $?&$7%
A) monitoring of quarterly ta1 payments.
=) analy4ing budget and performance reports.
&) determining whether to accept or re:ect a capital asset acquisition.
D) analy4ing the effects of more debt on the firm's capital structure.
Answer! A
;) .aing investment decisions includes all of the following $?&$7%
A) inventory.
=) fi1ed assets.
&) accounts receivable.
D) notes payable.
Answer! D
*1
<) .aing financing decisions includes all of the following $?&$7%
A) determining the appropriate mi1 of short-term and long-term financing.
=) deciding which individual short-term sources are best at a given point in time.
&) analy4ing quarterly budget and performance reports.
D) deciding which individual long-term sources are best at a given point in time.
Answer! &
16) .anaging the firm's assets includes all of the following $?&$7%
A) inventory.
=) fi1ed assets.
&) accounts receivable.
D) notes payable.
Answer! D
11) .anaging the firm's liabilities includes all of the following $?&$7%
A) accruals.
=) notes payable.
&) cash.
D) accounts payable.
Answer! &
1*) Financial analysis and planning involve all of the following $?&$7%
A) transforming data into a form that can be used to monitor the firm's financial position.
=) evaluating the need for increased or reduced productive capacity.
&) controlling the data processing activities.
D) determining the additional financing needs.
Answer! &
**
1-) %he financial manager's investment decisions determine
A) both the mi1 and the type of assets found on the firm's balance sheet.
=) both the mi1 and the type of liabilities found on the firm's balance sheet.
&) both the mi1 and the type of assets and liabilities found on the firm's balance sheet.
D) both the mi1 and the type of short-term and long-term financing.
Answer! A
1/) 9n planning and managing the requirements of the firm+ the financial manager is concerned
with
A) the mi1 and type of assets+ but not the type of financing utili4ed.
=) the type of financing utili4ed+ but not the mi1 and type of assets.
&) the acquisition of fi1ed assets+ allowing someone else to plan the level of current assets
required.
D) the mi1 and type of assets+ the type of financing utili4ed+ and analysis in order to monitor the
financial condition.
Answer! D
10) %he financial manager's financing decisions determine
A) both the mi1 and the type of assets found on the firm's balance sheet.
=) the most appropriate mi1 of short-term and long-term financing.
&) both the mi1 and the type of assets and liabilities found on the firm's balance sheet.
D) the proportion of the firm's earnings to be paid as dividend.
Answer! =
1.3 Describe the nature of the principle-agent relationship between owners and managers of a
corporation+ and e1plain how various corporate governance mechanisms attempt to manage
agency problems.
1) %he lielihood that managers may place personal goals ahead of corporate goals is called the
agency problem.
Answer! %),$
%opic! Agency 9ssue
*-
*) Agents of corporate owners are themselves owners of the firm and have been elected by all the
corporate owners to represent them in decision-maing and management of the firm.
Answer! FA"#$
%opic! Agency 9ssue
-) %he agency problem occurs when the firm selects an ineffective mareting advertising and 7)
firm to represent them.
Answer! FA"#$
%opic! Agency 9ssue
/) .ost recent studies on e1ecutive compensation have failed to find a strong relationship
between &$' compensation and share price.
Answer! %),$
%opic! Agency 9ssue
0) %he ma:or purpose of the #arbanes-'1ley Act of *66* was to place caps on the compensation
that could be paid to corporate e1ecutives.
Answer! FA"#$
%opic! &orporate >overnance
3) %he board of directors is responsible for managing day-to-day operations and carrying out the
policies established by the chief e1ecutive officer.
Answer! FA"#$
8) %he president or chief e1ecutive officer is elected by the firm's stocholders and has ultimate
authority to guide corporate affairs and mae general policy.
Answer! FA"#$
;) Agency costs include all of the following $?&$7%
A) management reports to stocholders.
=) performance incentives paid to managers.
&) the cost of monitoring management behavior.
D) purchasing insurance against management misconduct.
Answer! A
%opic! Agency 9ssue
*/
<) 'ne way often used to insure that management decisions are in the best interest of the
stocholders is to
A) threaten to fire managers who are seen as not performing adequately.
=) remove management's perquisites.
&) tie management compensation to the performance of the company's common stoc price.
D) tie management compensation to the level of earnings per share.
Answer! &
%opic! Agency 9ssue
16) Among solutions to the agency problem in publicly-held corporations are all of the following
$?&$7%
A) stoc options.
=) performance shares.
&) cash bonuses tied to goal achievement.
D) bonuses based on short-term results.
Answer! D
%opic! Agency 9ssue
11) $merging trends resulting from the agency problem are all of the following $?&$7%
A) large private corporations.
=) restructuring through leveraged buyouts.
&) management by active investors.
D) prohibiting managers from maintaining an ownership interest.
Answer! D
%opic! Agency 9ssue
1*) %he board of directors is typically responsible for
A) developing strategic goals and plans.
=) hiring and firing.
&) both A and =.
D) neither A nor =.
Answer! &
*0
1-) %he #arbanes-'1ley Act of *66* was passed in response to
A) insider trading activities.
=) false disclosures in financial reporting.
&) the decline in technology stocs.
D) all of the above.
Answer! =
1/) %he #arbanes-'1ley Act of *66* did all of the following $?&$7%
A) tighten audit regulations and controls.
=) toughen penalties against overcompensated e1ecutives.
&) toughen penalties against e1ecutives who commit corporate fraud.
D) All of the above are true.
Answer! =
10) 9f a company's managers are C'% owners of the company+ then they are
A) dealers.
=) agents.
&) outsiders.
D) broers.
Answer! =
%opic! Agency 9ssue
13) %he conflict between the goals of a firm's owners and the goals of its non-owner managers is
A) the agency problem.
=) incompatibility.
&) serious only when profits decline.
D) of little importance in most large ,.#. firms.
Answer! A
%opic! Agency 9ssue
18) %he agency problem may result from a manager's concerns about any of the following
$?&$7%
A) :ob security.
=) personal wealth.
&) corporate goals.
D) company-provided perquisites.
Answer! &
%opic! Agency 9ssue
*3
1;) Agency costs include all of the following $?&$7%
A) bonding and structuring e1penses.
=) cost of goods sold.
&) monitoring e1penditures.
D) opportunity costs.
Answer! =
%opic! Agency 9ssue
1<) %he true ownerEs) of the corporation is Eare) the
A) board of directors.
=) chief e1ecutive officer.
&) stocholders.
D) creditors.
Answer! &
*6) %he BBBBBBBB has2have the ultimate responsibility in guiding corporate affairs and carrying
out policies.
A) board of directors
=) chief e1ecutive officer
&) stocholders
D) creditors
Answer! A
*1) %he responsibility for managing day-to-day operations and carrying out corporate policies
belongs to the
A) board of directors.
=) chief e1ecutive officer.
&) stocholders.
D) creditors.
Answer! =
**) 9n a corporation+ the members of the board of directors are elected by the
A) chief e1ecutive officer.
=) creditors.
&) stocholders.
D) employees.
Answer! &
*8
*-) 9nstitutional investors are professional investors who wor on behalf of the federal
government to ensure fairness in the financial marets.
Answer! FA"#$
%opic! Financial 9nstitutions and .arets
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