Exam 1: An Overview of Financial Management

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True

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A) 23.56%
B) 22.44%
C) 19.52%
D) 24.68%
E) 17.05%

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B

A) Maximize managers' own interests,which are by definition consistent with maximizing shareholders' wealth.
B) Maximize the firm's expected EPS,which must also maximize the firm's price per share.
C) Minimize the firm's risks because most stockholders dislike risk.In turn,this will maximize the firm's stock price.
D) Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.
E) Since it is impossible to measure a stock's intrinsic value,the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.

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A) The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced.
B) The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover.
C) The percentage of the firm's stock that is held by institutional investors such as mutual funds,pension funds,and hedge funds rather than by small individual investors rises from 10% to 80%.
D) The firm's founder,who is also president and chairman of the board,sells 90% of her shares.
E) The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval.

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A) Pay managers large cash salaries and give them no stock options.
B) Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.
C) Beef up the restrictive covenants in the firm's debt agreements.
D) Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock.
E) For a firm that compensates managers with stock options,reduce the time before options are vested,i.e. ,the time before options can be exercised and the shares that are received can be sold.

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A) Due to limited liability,unlimited lives,and ease of ownership transfer,the vast majority of U.S.businesses (in terms of number of businesses) are organized as corporations.
B) Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation.However,if the business gets very large,it becomes advantageous to convert to a corporation,primarily because corporations have important tax advantages over proprietorships and partnerships.
C) Due to legal considerations related to ownership transfers and limited liability,which affect the ability to attract capital,most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment.
D) Large corporations are taxed more favorably than proprietorships.
E) Corporate stockholders are exposed to unlimited liability.

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A) Well-designed bond covenants are useful for reducing potential conflicts between stockholders and managers.
B) The bid price in a hostile takeover is generally above the price before the takeover attempt is announced,because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail.
C) Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.
D) Takeovers are most likely to be attempted if the target firm's stock price is above its intrinsic value.
E) The efficiency of the U.S.economy would probably be increased if hostile takeovers were absolutely forbidden.

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A) If a corporation elects to be taxed as an S corporation,then both it and its stockholders can avoid all Federal taxes.This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.
B) The more capital a firm is likely to require,the smaller the probability that it will be organized as a corporation.
C) It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
D) One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt.This problem would be avoided if you formed a corporation to operate the business.
E) Corporate shareholders are exposed to unlimited liability,but this factor is offset by the tax advantages of incorporation.

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A) In most corporations,the CFO ranks above the CEO.
B) By law in most states,the chairman of the board must also be the CEO.
C) The board of directors is the highest ranking body in a corporation,and the chairman of the board is the highest ranking individual.The CEO generally works under the board and its chairman,and the board generally has the authority to remove the CEO under certain conditions.The CEO,however,cannot remove the board,but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise.It is possible for a person to simultaneously serve as CEO and chairman of the board,though many corporate control experts believe it is bad to vest both offices in the same person.
D) The CFO generally reports to the firm's chief accounting officer,who is normally the controller.
E) The CFO is responsible for raising capital and for making sure that capital expenditures are desirable,but he or she is not responsible for the validity of the financial statements,as the controller and the auditors have that responsibility.

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A) A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation.
B) Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.
C) "Whistle blowers," because of the courage it takes to blow the whistle,are generally promoted more rapidly than other employees.
D) It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior.
E) Although people's moral characters are probably developed before they are admitted to a business school,it is still useful for business schools to cover ethics,if only to give students an idea about the adverse consequences of unethical behavior to themselves,their firms,and the nation.

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A) One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than are partners.
B) Relative to proprietorships,corporations generally face fewer regulations,and they also find it easier to raise capital.
C) There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of assets in which it invests.
D) Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.
E) Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.

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