Test Bank , 10e - Tenth Edition Arthur J. Keown John D. Martin J....

Foundations of Finance Tenth Edition Arthur J. Keown John D. Martin

• William Petty

Foundations of Finance Test Bank , 10e By Rodrigo Hernandez

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1 Copyright © 2020 Pearson Education, Inc.Foundations of Finance, 10e (Keown/Martin/Petty) Chapter 1 An Introduction to the Foundations of Financial Management

Learning Objective 1.1

1) Financial management deals with the maintenance and creation of economic value or wealth.

Answer: TRUE

Diff: 1 Page Ref: 3

Keywords: Financial Management

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

2) Each financial decision made by a corporate manager can be evaluated by its direct impact on the corporation's stock price.

Answer: FALSE

Diff: 1 Page Ref: 4

Keywords: Goal of the Firm

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

3) The fundamental goal of a business is to maximize the retained earnings available to the corporation's shareholders.

Answer: FALSE

Diff: 1 Page Ref: 3

Keywords: Goal of the Firm

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

4) Shareholder wealth maximization means maximizing the price of the existing common stock.

Answer: TRUE

Diff: 1 Page Ref: 3

Keywords: Shareholder Wealth, Goal of the Firm

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

5) It is important to evaluate a corporate manager's financial decision by measuring the effect the decision should have on the corporation's stock price if everything else were held constant.

Answer: TRUE

Diff: 2 Page Ref: 4

Keywords: Goal of the Firm, Maximize Shareholder Wealth

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

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2 Copyright © 2020 Pearson Education, Inc.6) Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money.

Answer: FALSE

Diff: 2 Page Ref: 4

Keywords: Goal of the Firm, Profits, Time Value of Money

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

7) The goal of the firm's financial managers should be the maximization of the total value of the firm's stock.

Answer: TRUE

Diff: 1 Page Ref: 3

Keywords: Goal of the Firm

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

8) The payment of a dividend to current shareholders will have no impact on a corporation's share price because the cash paid is not available to future potential shareholders who may want to buy the corporation's stock.

Answer: FALSE

Diff: 1 Page Ref: 4

Keywords: Goal of the Firm

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

9) One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the firm's financial decisions.

Answer: FALSE

Diff: 1 Page Ref: 4

Keywords: Goal of the Firm

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

10) The goal of profit maximization ignores the risk of financial decisions.

Answer: FALSE

Diff: 1 Page Ref: 4

Keywords: Goal of the Firm

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

11) Only a firm's financial decisions affect its stock prices.

Answer: FALSE

Diff: 1 Page Ref: 4

Keywords: Determinants of Stock Price

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

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3 Copyright © 2020 Pearson Education, Inc.12) Shareholders react to poor investment or dividend decisions by causing the total value of the firm's stock to fall, and they react to good decisions by bidding the price of the stock up.

Answer: TRUE

Diff: 2 Page Ref: 4

Keywords: Determinants of Stock Price

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

13) The primary goal of a publicly owned corporation is to

• maximize dividends per share
• maximize shareholder wealth
• maximize earnings per share after taxes
• minimize shareholder risk

Answer: B

Diff: 1 Page Ref: 3

Keywords: Goal of the Firm, Corporation

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

14) Maximization of shareholder wealth

• represents a zero sum game in which one corporation gains 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: 1 Page Ref: 3

Keywords: Goal of the Firm, Maximize Shareholder Wealth

Learning Obj.: L.O. 1.1

AACSB: Reflective Thinking

15) A financial manager is considering two projects, A and B. A is expected to add $2 million to profits this year while B is expected to add $1 million to profits this year. 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 or he is irrational.
• The manager should select the project that causes the stock price to increase the most, which

could be A or B.

Answer: D

Diff: 2 Page Ref: 4

Keywords: Goal of the Firm

Learning Obj.: L.O. 1.1

AACSB: Analytical Thinking

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