TESTBANK FOR Foundations of Finance, 9e (Keown/Martin/Petty) A GRADE

TESTBANK
FOR
Foundations
of Finance, 9e
(Keown/Marti
n/Petty) A
GRADE

, )
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: 3
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: 3
Keywords: Goal of the Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
AACSB: Reflective Thinking

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: 3
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: TRUE
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

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: 3, 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 .
A) maximize dividends per share
B) maximize shareholder wealth
C) maximize earnings per share after taxes
D) 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
A) represents a zero sum game in which one corporation gains at the expense of others.
B) provides benefits to society as scarce resources are directed to their most productive use.
C) is not a practical goal since it cannot be measured effectively.
D) is achieved only if cash flows exceed accounting profits.
Answer: A
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?
A) The manager should select project A because it maximizes profits.
B) The manager should select the project that maximizes long-term profits, not just one year of
profits.
C) The manager should select project A or he is irrational.
D) 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

16) Shareholder wealth maximization means
A) maximizing earnings per share.
B) maximizing dividends per share.
C) maximizing the price of existing common stock.
D) maximizing stockholders equity.
Answer: C
Diff: 1 Page Ref: 3
Keywords: Goal of the Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
AACSB: Reflective Thinking

17) The goal of the firm should be
A) maximization of profits (net income per share).
B) maximization of shareholder wealth.
C) maximization of market share.
D) maximization of sales.
Answer: B
Diff: 1 Page Ref: 3
Keywords: Goal of the Firm, Maximize Shareholder Wealth
Learning Obj.: L.O. 1.1
AACSB: Reflective Thinking

18) Which of the following goals of the firm are synonymous (equivalent) to the maximization of
shareholder wealth?
A) profit maximization
B) risk minimization
C) maximization of the total market value of the firm's common stock