Copyright 2015 Pearson Education, Inc.

1 Copyright © 2015 Pearson Education, Inc.

Financial Management: Concepts and Applications (Foerster)

Chapter 1 Overview of Financial Management

1.1 Financial Management and the Cash Flow Cycle

1) Which of the following statements best represents what finance is about?

• How political, social, and economic factors affect corporations
• How corporations can maximize profits
• How to create and maintain economic wealth
• How to reduce shareholder risk

Answer: C

Diff: 1

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Reflective Thinking

2) The primary goal of a publicly owned firm is:

• maximize profits.
• minimize shareholder risk.
• value creation.
• maximize revenues.

Answer: C

Explanation: C) to maximize shareholder's wealth

Diff: 1

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Reflective Thinking

3) The creation of value is driven by what factors?

• Cash flow and growth
• Growth and risk
• Profitability and growth
• Reducing risk

Answer: B

Explanation: B) The primary goal of a firm is value creation, and that the creation of value is

driven by two key factors: growth and risk.

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Reflective Thinking

4) The creation of value:

• implies that one firm will gain at the expense of others.
• provides benefits to society as scarce resources are directed to their most productive use.
• is not a practical goal since it cannot be measured effectively.
• is achieved only if cash flows exceed accounting profits.

Answer: B

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Ethical Understanding and Reasoning

(Financial Management Concepts and Applications 1e Stephen Foerster ) (Test Bank all Chapters) 1 / 4

2 Copyright © 2015 Pearson Education, Inc.5) If managers are making decisions to maximize shareholder wealth, then they are primarily

concerned with making decisions that should:

• positively affect profits.
• increase the market value of the firm's common stock.
• either increase or have no effect on the value of the firm's common stock.
• Accomplish all of the above.

Answer: B

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Reflective Thinking

6) Profit maximization does not adequately describe the goal of the firm because:

• profit maximization does not require the consideration of risk.
• profit maximization often has a short-term focus.
• maximization of dividend payout ratio is a better description of the goal of the firm.
• Both A and B

Answer: D

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Reflective Thinking

7) Which of the following goals of the firm are synonymous with the maximization of shareholder wealth?

• Profit maximization
• Risk minimization
• Maximization of the total market value of the firm's common stock
• None of the above

Answer: C

Diff: 1

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Reflective Thinking

8) In measuring value, the firm's focus should be on:

• cash flow.
• accounting profits.
• time value of money.
• earnings per share.

Answer: A

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Reflective Thinking

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3 Copyright © 2015 Pearson Education, Inc.9) Profit maximization is NOT an adequate goal of the firm when making financial decisions

because:

• it does not necessarily reflect shareholder wealth maximization.
• it ignores the risk inherent in different projects that will generate the profits.
• it can over-emphasize a project's short-term returns.
• All of the above.

Answer: D

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Reflective Thinking

10) Which of the following goals are in the best long-term interest of shareholders?

• Profit maximization
• Risk minimization
• Maximizing the market value of the existing shareholders' common stock
• Maximizing sales revenue

Answer: C

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Reflective Thinking

11) A financial manager is considering two projects, A and B; both are expected to add $5 million to profits. Project A is expected to add $5 million to profits this year, while Project B is expected to add $1 million to profits each year over the next five years. Which of the following statements is MOST correct?

• The manager should select Project A because it maximizes profits.
• The manager should select the project that maximizes long-term profits, not just one year of

profits.

• The manager should select Project A, of course.
• The manager should select the project that causes shareholder wealth to increase the most,

which could be A or B.

Answer: D

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Analytic Skills

12) Do corporate decisions that increase the value of the firm's equity benefit society as a whole?

• Yes, as long as the value of the firm's equity increases, society is better off.
• Yes. as long as the increase in the value of the firm's equity does not come at the expense of

others.

• No, any gain in the value of the firm's equity is always less than the cost to society.
• No, any gains in the value of the firm's equity are perfectly offset by societal costs.

Answer: B

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Ethical Understanding and Reasoning

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4 Copyright © 2015 Pearson Education, Inc.13) The financial manager is involved in these cash-related activities in the firm:

• investing, working capital management, and financing.
• real assets, financing, and investing
• operations, profitability, and financing
• investing, operating, and financing.

Answer: D

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Communication

14) The three basic types of cash-related activities that every business faces are:

• investing, working capital management, and financing.
• financing, operations, and investing.
• working capital management, financing, and budgeting.
• capital budgeting, investing, and cash management.

Answer: B

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Reflective Thinking

15) The cash flow cycle:

• describes the flow of cash through a company.
• illustrates that profits and cash flows are the same.
• reminds a financial manager that profits are important.
• focuses on financing activities only.

Answer: A

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Analytic Skills

16) Cash management is typically the responsibility of the:

• chief executive officer.
• vice president of production and operations.
• financial manager.
• company internal auditor.

Answer: C

Diff: 2

Topic: 1.1 Financial Management and Cash Flow Cycles

AACSB: Reflective Thinking

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