CHAPTER 1
AN OVERVIEW OF FINANCIAL MANAGEMENT
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F
statements are used in multiple-choice questions. See the preface for information on the AACSB
letter indicators (F, M, etc.) on the subject lines.
Multiple Choice: True/False
(1-1) Role of finance F M Answer: a EASY
1. In most corporations, the CFO ranks under the CEO.
a. True
b. False
(1-1) Role of finance F M Answer: b EASY
2. The Chairman of the Board must also be the CEO.
a. True
b. False
(1-1) Role of finance F M Answer: a EASY
3. 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.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
4. Partnerships and proprietorships generally have a tax advantage over
corporations.
a. True
b. False
(1-3) Forms of organization F M Answer: b EASY
5. A disadvantage of the corporate form of organization is that corporate
stockholders are more exposed to personal liabilities in the event of
bankruptcy than are investors in a typical partnership.
a. True
b. False
Chapter 1: Overview True/False Page 1
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
,(1-3) Forms of organization F M Answer: b EASY
6. An advantage of the corporate form of organization is that corporations
are generally less highly regulated than proprietorships and
partnerships.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
7. Some partners in a partnership may have different rights, privileges, and
responsibilities than other partners.
a. True
b. False
(1-3) Forms of organization F M Answer: b EASY
8. One advantage of the corporate form of organization is that it avoids
double taxation.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
9. It is generally harder to transfer one’s ownership interest in a
partnership than in a corporation.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
10. 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.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
11. If a corporation elects to be taxed as an S corporation, then it can
avoid the corporate tax. However, its stockholders will have to pay
personal taxes on the firm's net income.
a. True
b. False
(1-3) Forms of organization F M Answer: b EASY
12. 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.
a. True
b. False
Page 2 True/False Chapter 1: Overview
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, (1-3) Forms of organization F M Answer: b EASY
13. It is generally less expensive to form a corporation than a
proprietorship because, with a proprietorship, extensive legal documents
are required.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
14. The more capital a firm is likely to require, the greater the probability
that it will be organized as a corporation.
a. True
b. False
(1-3) Forms of organization F M Answer: b EASY
15. One disadvantage of forming a corporation rather than a partnership is
that this makes it more difficult for the firm’s investors to transfer
their ownership interests.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
16. Organizing as a corporation makes it easier for the firm to raise
capital. This is because corporations' stockholders are not subject to
personal liabilities if the firm goes bankrupt and also because it is
easier to transfer shares of stock than partnership interests.
a. True
b. False
(1-4) Shareholder value F M Answer: b EASY
17. In order to maximize its shareholders' value, a firm's management must
attempt to maximize the expected EPS.
a. True
b. False
(1-4) Shareholder value F M Answer: b EASY
18. In order to maximize its shareholders' value, a firm's management must
attempt to maximize the stock price on a specific target date.
a. True
b. False
(1-5) Intrinsic values F G M Answer: a EASY
19. In order to maximize its shareholders' value, a firm's management must
attempt to maximize the stock price in the long run, or the stock's
"intrinsic value."
a. True
b. False
Chapter 1: Overview True/False Page 3
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
AN OVERVIEW OF FINANCIAL MANAGEMENT
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F
statements are used in multiple-choice questions. See the preface for information on the AACSB
letter indicators (F, M, etc.) on the subject lines.
Multiple Choice: True/False
(1-1) Role of finance F M Answer: a EASY
1. In most corporations, the CFO ranks under the CEO.
a. True
b. False
(1-1) Role of finance F M Answer: b EASY
2. The Chairman of the Board must also be the CEO.
a. True
b. False
(1-1) Role of finance F M Answer: a EASY
3. 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.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
4. Partnerships and proprietorships generally have a tax advantage over
corporations.
a. True
b. False
(1-3) Forms of organization F M Answer: b EASY
5. A disadvantage of the corporate form of organization is that corporate
stockholders are more exposed to personal liabilities in the event of
bankruptcy than are investors in a typical partnership.
a. True
b. False
Chapter 1: Overview True/False Page 1
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
,(1-3) Forms of organization F M Answer: b EASY
6. An advantage of the corporate form of organization is that corporations
are generally less highly regulated than proprietorships and
partnerships.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
7. Some partners in a partnership may have different rights, privileges, and
responsibilities than other partners.
a. True
b. False
(1-3) Forms of organization F M Answer: b EASY
8. One advantage of the corporate form of organization is that it avoids
double taxation.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
9. It is generally harder to transfer one’s ownership interest in a
partnership than in a corporation.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
10. 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.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
11. If a corporation elects to be taxed as an S corporation, then it can
avoid the corporate tax. However, its stockholders will have to pay
personal taxes on the firm's net income.
a. True
b. False
(1-3) Forms of organization F M Answer: b EASY
12. 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.
a. True
b. False
Page 2 True/False Chapter 1: Overview
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, (1-3) Forms of organization F M Answer: b EASY
13. It is generally less expensive to form a corporation than a
proprietorship because, with a proprietorship, extensive legal documents
are required.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
14. The more capital a firm is likely to require, the greater the probability
that it will be organized as a corporation.
a. True
b. False
(1-3) Forms of organization F M Answer: b EASY
15. One disadvantage of forming a corporation rather than a partnership is
that this makes it more difficult for the firm’s investors to transfer
their ownership interests.
a. True
b. False
(1-3) Forms of organization F M Answer: a EASY
16. Organizing as a corporation makes it easier for the firm to raise
capital. This is because corporations' stockholders are not subject to
personal liabilities if the firm goes bankrupt and also because it is
easier to transfer shares of stock than partnership interests.
a. True
b. False
(1-4) Shareholder value F M Answer: b EASY
17. In order to maximize its shareholders' value, a firm's management must
attempt to maximize the expected EPS.
a. True
b. False
(1-4) Shareholder value F M Answer: b EASY
18. In order to maximize its shareholders' value, a firm's management must
attempt to maximize the stock price on a specific target date.
a. True
b. False
(1-5) Intrinsic values F G M Answer: a EASY
19. In order to maximize its shareholders' value, a firm's management must
attempt to maximize the stock price in the long run, or the stock's
"intrinsic value."
a. True
b. False
Chapter 1: Overview True/False Page 3
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
