Chapter 1 An Overview of Managerial Finance 1
CHAPTER 1—AN OVERVIEW OF MANAGERIAL FINANCE
TRUE/FALSE
1. In general, the role of the financial manager is to plan for the acquisition and use of funds so as to
maximize the value of the firm.
ANS: T DIF: Easy TOP: Financial manager
2. The financial manager must execute his or her duties independent of the other activities of the
firm in order to properly maximize the value of the firm.
ANS: F DIF: Easy TOP: Financial manager
3. Two key limitations of the proprietorship form of business involve potential difficulty in raising
needed capital and the presence of unlimited personal liability for business debts.
ANS: T DIF: Easy TOP: Proprietorship
4. A hostile takeover involves an attempt by one group of stockholders to solicit votes from other
stockholders in order to put a new management team into place and is usually motivated by low
stock price.
ANS: F DIF: Easy TOP: Hostile takeover
5. No firm can take cost-increasing, socially responsible actions in a competitive marketplace and
expect to continue to compete, even if those cost-increasing actions yield significant benefits to
the firm.
ANS: F DIF: Easy TOP: Social responsibility
6. The proper goal of the financial manager should be to maximize the firm's expected profit,
because this will add the most wealth to each of the individual shareholders (owners) of the firm.
ANS: F DIF: Easy TOP: Goal of firm
7. One way to state the decision framework most useful for carrying out the firm's objective is that
the financial managers should seek that combination of assets, liabilities, and capital which will
generate the largest expected projected income over the relevant time horizon.
ANS: F DIF: Easy TOP: Objectives of firm
8. The riskiness inherent in a firm's earnings per share (EPS) depends on both the types of projects
the firm takes on and the manner in which the projects are financed.
ANS: T DIF: Easy TOP: Risk and earnings
9. Cultural differences in do not impact the multinational corporations as they expand into different
geographic regions.
ANS: F DIF: Easy TOP: Multinational Corporations
10. Normal profits are those that result in rates of return that are just sufficient to attract new capital
in financial markets.
ANS: T DIF: Easy TOP: Normal profits
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
, Chapter 1 An Overview of Managerial Finance 2
11. If a firm's managers want to maximize stock price it is in their best interests to operate efficient,
low-cost plants, develop new and safe products that consumers want, and maintain good
relationships with customers, suppliers, creditors, and the communities in which they operate.
ANS: T DIF: Easy TOP: Social welfare and finance
12. In a competitive marketplace "good ethics" is a wonderful idea but an impractical standard. There
are simply too few benefits to be gained from maintaining high business ethics.
ANS: F DIF: Easy TOP: Business ethics
13. Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than
those same cash flows denominated in the parent company's home currency.
ANS: T DIF: Easy TOP: Exchange rate risk
14. A financial manager's task is to make decisions concerning the acquisition and use of funds for
the greatest benefit of the firm.
ANS: T DIF: Easy TOP: Financial management
15. Incentive compensation plans are used to attract and retain top managerial talent as well as to
align the interests of management with shareholders.
ANS: T DIF: Easy TOP: Managerial incentives
16. The finance function is relatively independent of most other corporate functions. Marketing
decisions, for example, might affect the firm's need for funds but are not affected by conditions in
financial markets or other financing issues.
ANS: F DIF: Medium TOP: Financial management
17. In a competitive marketplace, if managers deviate too far from making decisions that are
consistent with stockholder wealth maximization, they risk being disciplined by the market. Part
of this discipline involves the threat of being taken over by groups who are more aligned with
stockholder interests.
ANS: T DIF: Medium TOP: Managerial incentives
18. The disadvantages associated with a proprietorship are similar to those under a partnership. One
exception to this is due to the formal nature of the partnership agreement and the commitment of
the partners' personal assets. As a result, partnerships do not have difficulty raising large amounts
of capital.
ANS: F DIF: Medium TOP: Partnership
19. The term multinational corporation is used to describe a firm that operates in two more countries.
ANS: T DIF: Medium TOP: Multinational corporations
20. Nations do not have the sovereignty to expropriate the assets of a firm without compensation.
ANS: F DIF: Medium TOP: Political risk
21. Having the manager's compensation tied to the company's performance increases the agency
problem that corporations face.
ANS: F DIF: Medium TOP: Agency problem
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
CHAPTER 1—AN OVERVIEW OF MANAGERIAL FINANCE
TRUE/FALSE
1. In general, the role of the financial manager is to plan for the acquisition and use of funds so as to
maximize the value of the firm.
ANS: T DIF: Easy TOP: Financial manager
2. The financial manager must execute his or her duties independent of the other activities of the
firm in order to properly maximize the value of the firm.
ANS: F DIF: Easy TOP: Financial manager
3. Two key limitations of the proprietorship form of business involve potential difficulty in raising
needed capital and the presence of unlimited personal liability for business debts.
ANS: T DIF: Easy TOP: Proprietorship
4. A hostile takeover involves an attempt by one group of stockholders to solicit votes from other
stockholders in order to put a new management team into place and is usually motivated by low
stock price.
ANS: F DIF: Easy TOP: Hostile takeover
5. No firm can take cost-increasing, socially responsible actions in a competitive marketplace and
expect to continue to compete, even if those cost-increasing actions yield significant benefits to
the firm.
ANS: F DIF: Easy TOP: Social responsibility
6. The proper goal of the financial manager should be to maximize the firm's expected profit,
because this will add the most wealth to each of the individual shareholders (owners) of the firm.
ANS: F DIF: Easy TOP: Goal of firm
7. One way to state the decision framework most useful for carrying out the firm's objective is that
the financial managers should seek that combination of assets, liabilities, and capital which will
generate the largest expected projected income over the relevant time horizon.
ANS: F DIF: Easy TOP: Objectives of firm
8. The riskiness inherent in a firm's earnings per share (EPS) depends on both the types of projects
the firm takes on and the manner in which the projects are financed.
ANS: T DIF: Easy TOP: Risk and earnings
9. Cultural differences in do not impact the multinational corporations as they expand into different
geographic regions.
ANS: F DIF: Easy TOP: Multinational Corporations
10. Normal profits are those that result in rates of return that are just sufficient to attract new capital
in financial markets.
ANS: T DIF: Easy TOP: Normal profits
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
, Chapter 1 An Overview of Managerial Finance 2
11. If a firm's managers want to maximize stock price it is in their best interests to operate efficient,
low-cost plants, develop new and safe products that consumers want, and maintain good
relationships with customers, suppliers, creditors, and the communities in which they operate.
ANS: T DIF: Easy TOP: Social welfare and finance
12. In a competitive marketplace "good ethics" is a wonderful idea but an impractical standard. There
are simply too few benefits to be gained from maintaining high business ethics.
ANS: F DIF: Easy TOP: Business ethics
13. Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than
those same cash flows denominated in the parent company's home currency.
ANS: T DIF: Easy TOP: Exchange rate risk
14. A financial manager's task is to make decisions concerning the acquisition and use of funds for
the greatest benefit of the firm.
ANS: T DIF: Easy TOP: Financial management
15. Incentive compensation plans are used to attract and retain top managerial talent as well as to
align the interests of management with shareholders.
ANS: T DIF: Easy TOP: Managerial incentives
16. The finance function is relatively independent of most other corporate functions. Marketing
decisions, for example, might affect the firm's need for funds but are not affected by conditions in
financial markets or other financing issues.
ANS: F DIF: Medium TOP: Financial management
17. In a competitive marketplace, if managers deviate too far from making decisions that are
consistent with stockholder wealth maximization, they risk being disciplined by the market. Part
of this discipline involves the threat of being taken over by groups who are more aligned with
stockholder interests.
ANS: T DIF: Medium TOP: Managerial incentives
18. The disadvantages associated with a proprietorship are similar to those under a partnership. One
exception to this is due to the formal nature of the partnership agreement and the commitment of
the partners' personal assets. As a result, partnerships do not have difficulty raising large amounts
of capital.
ANS: F DIF: Medium TOP: Partnership
19. The term multinational corporation is used to describe a firm that operates in two more countries.
ANS: T DIF: Medium TOP: Multinational corporations
20. Nations do not have the sovereignty to expropriate the assets of a firm without compensation.
ANS: F DIF: Medium TOP: Political risk
21. Having the manager's compensation tied to the company's performance increases the agency
problem that corporations face.
ANS: F DIF: Medium TOP: Agency problem
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
