Financial Management
Financial Management
Financial Management
__________ is concerned with the acquisition, financing, and management of assets with
some overall goal in mind.
A. Financial management
B. Profit maximization
C. Agency theory
D. Social responsibility
2. Jensen and Meckling showed that __________ can assure themselves that the __________
will make optimal decisions only if appropriate incentives are given and only if the __________
are monitored.
A. principals; agents; agents
B. agents; principals; principals
C. principals; agents; principals
D. agents; principals; agents
3. __________ is concerned with the maximization of a firm's earnings after taxes.
A. Shareholder wealth maximization
B. Profit maximization
C. Stakeholder maximization
D. EPS maximization
4. What is the most appropriate goal of the firm?
A. Shareholder wealth maximization.
B. Profit maximization.
C. Stakeholder maximization.
D. EPS maximization.
5. Which of the following statements is correct regarding profit maximization as the primary
goal of the firm?
A. Profit maximization considers the firm's risk level.
B. Profit maximization will not lead to increasing short-term profits at the expense of
lowering expected future profits.
C. Profit maximization does consider the impact on individual shareholder's EPS.
D. Profit maximization is concerned more with maximizing net income than the stock price.
6. __________ is concerned with the branch of economics relating the behavior of principals and
their agents.
A. Financial management
B. Profit maximization
C. Agency theory
D. Social responsibility
7. A concept that implies that the firm should consider issues such as protecting the consumer,
paying fair wages, maintaining fair hiring practices, supporting education, and considering
environmental issues.
A. Financial management
B. Profit maximization
C. Agency theory
D. Social responsibility
8. Which of the following is not normally a responsibility of the treasurer of the modern
corporation but rather the controller?
A. Budgets and forecasts
B. Asset management
C. Investment management
D. Financing management
9. The __________ decision involves determining the appropriate make-up of the right-hand side
of the balance sheet.
A. asset management
B. financing
C. investment
D. capital budgeting
10. To whom does the Treasurer most likely report?
A. Chief Financial Officer.
B. Vice President of Operations.
C. Chief Executive Officer.
D. Board of Directors.
1. The authors of your textbook suggest that you need to understand financial management even
if you have no intention of becoming a financial manager. One reason is that the successful
manager of the not-too-distant future will need to be much more of a __________ who has the
knowledge and ability to move not just vertically within an organization but horizontally as well.
Developing __________ will be the rule, not the exception.
A. specialist; specialties
B. generalist; general business skills
C. technician; quantitative skills
D. team player; cross-functional capabilities
2. The __________ decision involves a determination of the total amount of assets needed, the
composition of the assets, and whether any assets need to be reduced, eliminated, or replaced.
A. asset management
B. financing
C. investment
D. accounting
A.
B.
C.
D.
shareholders
stakeholders
creditors
customers
10. Which of the following statements is not correct regarding earnings per share (EPS)
maximization as the primary goal of the firm?
A. EPS maximization ignores the firm's risk level.
B. EPS maximization does not specify the timing or duration of expected EPS.
C. EPS maximization naturally requires all earnings to be retained.
D. EPS maximization is concerned with maximizing net income.
B. $6.00
C. $0.50
D. $6.50
6. The cost of monitoring management is considered to be a (an):
A. bankruptcy cost.
B. transaction cost.
C. agency cost.
D. institutional cost.
7. The focal point of financial management in a firm is:
A. the number and types of products or services provided by the firm.
B. the minimization of the amount of taxes paid by the firm.
C. the creation of value for shareholders.
D. the dollars profits earned by the firm.
8. The decision function of financial management can be broken down into the
A. financing and investment
B. investment, financing, and asset management
C. financing and dividend
D. capital budgeting, cash management, and credit management
decisions.
C. inventory control
D. the receipt and disbursement of funds
9. A main benefit to the corporate form of organization is:
A. double taxation of corporate income
B. simplicity of decision making and low organizational complexity
C. limited liability for the corporate shareholders
D. a major management role exists for the firm's owners
10. In analyzing the firm, the investor should consider:
A. the risk inherent in the firm's operation
B. the time patterns over which the firm's earnings increase/decrease
C. the quality and reliability of the firm's reported earnings
D. all of the above should be considered
A.
B.
C.
D.
primary capital
capital composition
cost of capital
capital structure
7. The main focus of finance for the last 40 years has been:
A. mergers and acquisitions
B. conglomerate firms
C. inflation
D. risk-return relationships
8. To financial analysts, "working capital" means the same thing as __________.
A. total assets
B. fixed assets
C. current assets
D. current assets minus current liabilities.
9. Which of the following would be consistent with an aggressive approach to financing working
capital?
A. Financing short-term needs with short-term funds.
B. Financing permanent inventory buildup with long-term debt.
C. Financing seasonal needs with short-term funds.
D. Financing some long-term needs with short-term funds.
10. Which of the following would be consistent with a conservative approach to financing
working capital?
A. Financing short-term needs with short-term funds.
B. Financing short-term needs with long-term debt.
C. Financing seasonal needs with short-term funds.
D. Financing some long-term needs with short-term funds.
1. Which of the following would be consistent with a hedging (maturity matching) approach to
financing working capital?
A. Financing short-term needs with short-term funds.
B. Financing short-term needs with long-term debt.
C. Financing seasonal needs with long-term funds.
D. Financing some long-term needs with short-term funds.
2. Which of the following is a basic principle of finance as it relates to the management of
working capital?
A.
B.
C.
D.
3. Which of the following illustrates the use of a hedging approach to financing assets?
A. Temporary current assets financed with long-term liabilities.
B. Permanent working capital financed with long-term liabilities.
C. Short-term assets financed with equity
D. All assets financed with a mixture of 50% equity and 50% long-term debt.
4. In deciding the optimal level of current assets for the firm, management is confronted with
__________.
A. a trade-off between profitability and risk
B. a trade-off between liquidity and risk
C. a trade-off between equity and debt
D. a trade-off between short-term versus long-term borrowing
5. Which of the following statements is most correct?
A. For small companies, long-term debt is the principal source of external financing.
B. Current assets of the typical manufacturing firm account for over half of its total assets.
C. Strict adherence to the maturity matching approach to financing would call for all current
assets to be financed solely with current liabilities.
D. Similar to the capital structure management, working capital management requires the
financial manager to make a decision and not address the issue again for several months.
6. The amount of current assets required to meet a firm's long-term minimum needs is referred to
as __________ working capital.
A. permanent
B. temporary
C. net
D. gross
7. The amount of current assets that varies with seasonal requirements is referred to as
__________ working capital.
A. permanent
B. net
C. temporary
D. gross
8. Having defined working capital as current assets, it can be further classified according to
__________.
A. financing method and time
B. rate of return and financing method
C. time and rate of return
D. components and time
9. Your firm has a philosophy that is analogous to the hedging (maturity matching) approach.
Which of the following is the most appropriate form for financing a new capital investment in
plant and equipment?
A. Trade credit.
B. 6-month bank notes.
C. Accounts payable.
D. Common stock equity.
10. Your firm has a philosophy that is analogous to the hedging (maturity matching) approach.
Which of the following is the most appropriate non-spontaneous form for financing the excess
seasonal current asset needs?
A. Trade credit.
B. 6-month bank notes.
C. Accounts payable.
D. Common stock equity.
1. Under a conservative financing policy a firm would use long-term financing to finance some
of the temporary current assets. What should the firm do when a "dip" in temporary current
assets causes total assets to fall below the total long-term financing?
A. Use the excess funds to pay down long-term debt.
B. Invest the excess long-term financing in marketable securities.
C. Use the excess funds to repurchase common stock.
D. Purchase additional plant and equipment.
2. Which of the following statements is correct for a conservative financing policy for a firm
relative to a former aggressive policy?
A. The firm uses long-term financing to finance all fixed and current assets.
B. The firm will see an increase in its expected profits.
C. The firm will see an increase in its risk profile.
D. The firm will increase its dividends per share (DPS) this period.
3. Which of the following statements is correct for an aggressive financing policy for a firm
relative to a former conservative policy?
A. The firm will use long-term financing to finance all fixed and current assets.
B. The firm will see an increase in its expected profits.
C. The firm will see a decline in its risk profile.
D. The firm will need to issue additional common stock this period to finance the assets.
4. How can a firm provide a margin of safety if it cannot borrow on short notice to meet its
needs?
A.
B.
C.
D.
Maintain a low level of current assets (especially cash and marketable securities).
Shorten the maturity schedule of financing.
Increasing the level of fixed assets (especially plant and equipment).
Lengthening the maturity schedule of financing.
5. Risk, as it relates to working capital, means that there is jeopardy to the firm for not
maintaining sufficient current assets to __________.
A. meet its cash obligations as they occur and take advantage of prompt payment discounts
B. support the proper level of sales and take prompt payment discounts
C. maintain current and acid-test ratios at or above industry norms
D. meet its cash obligations as they occur and support the proper level of sales
6. If a company moves from a "conservative" working capital policy to an "aggressive" policy, it
should expect __________.
A. liquidity to decrease, whereas expected profitability would increase
B. expected profitability to increase, whereas risk would decrease
C. liquidity would increase, whereas risk would also increase
D. risk and profitability to decrease
7. To financial analysts, "net working capital" means the same thing as __________.
A. total assets
B. fixed assets
C. current assets
D. current assets minus current liabilities.
8. Which one of the following most accurately describes capital gearing?
A. The ratio of interest charges to profits
B. The ratio of current borrowing to this year's capital repayments
C. The ratio of capital employed to sales
D. The ratio of debt to shareholders' funds or total assets
9. Which of the following defines financial risk?
A. The risk that the financial system may collapse because of a loss of confidence
B. The additional variability in returns to stock market investors because of systematic risk
C. The additional variability in returns to shareholders that arises because the financial
structure contains debt
D. The risk to which an investor is exposed when purchasing a financial security
10. Agency costs in finance theory are most accurately described by which of the following
definitions?
A. The costs of buying an asset through an agent such as a stock broker or estate agent
B. The initial cost of purchasing an asset through an agent, e.g. a travel agent's fee
C. The direct and indirect costs of ensuring that agents (e.g. managers of firms) act in the
best interests of principals (e.g. shareholders of firms)
D. The costs of allowing financial intermediaries to take decisions on your behalf which
may not be optimal for you
1. Which of the following is not a motive explaining the manifestation of the pecking order for
financing?
A. Because the firm does not have any more assets unpledged to use as collateral for loans
B. The issue of equity is perceived as an act of desperation
C. Ordinary shares are more expensive to issue than issuing debt capital and using retained
earnings
D. Managers follow the line of least resistance with respect to communications and approval
of finance promoters
2. Agency cost is defined as:
A. The salaries of managers acting as agents for the company's owners
B. The direct and indirect costs of ensuring that agents act in the best interest of principals
C. The cost of providing information to decrease information asymmetry
D. The payments made to a broker when transacting business
3. The term "capital structure" refers to:
A. long-term debt, preferred stock, and common stock equity.
B. current assets and current liabilities.
C. total assets minus liabilities.
D. shareholders' equity.
4. A critical assumption of the net operating income (NOI) approach to valuation is:
A. that debt and equity levels remain unchanged.
B. that dividends increase at a constant rate.
C. that ko remains constant regardless of changes in leverage.
D. that interest expense and taxes are included in the calculation.
5. The traditional approach towards the valuation of a company assumes:
A. that the overall capitalization rate holds constant with changes in financial leverage.
B. that there is an optimum capital structure.
C. that total risk is not altered by changes in the capital structure.
D. that markets are perfect.
6. Two firms that are virtually identical except for their capital structure are selling in the market
at different values. According to M&M
A. one will be at greater risk of bankruptcy.
B. the firm with greater financial leverage will have the higher value.
C. this proves that markets cannot be efficient.
D. this will not continue because arbitrage will eventually cause the firms to sell at the same
value