Foundations of Finance, Keown - Complete test bank - exam questions - quizzes (updated 2022)

Foundations of Finance, 8e (Keown/Martin/Petty)

Chapter 1 An Introduction to the Foundations of Financial
Management



Learning Objective 1



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

Answer: TRUE

Diff: 1

Keywords: Financial Management

AACSB: Reflective thinking skills




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

Keywords: Goal of the Firm

AACSB: Reflective thinking skills



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

Answer: FALSE

Diff: 1

Keywords: Goal of the Firm

AACSB: Reflective thinking skills




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

Answer: TRUE

,Diff: 1

Keywords: Shareholder Wealth, Goal of the Firm

AACSB: Reflective thinking skills




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

Keywords: Goal of the firm, Shareholder Wealth Maximization

AACSB: Reflective thinking skills




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

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

AACSB: Reflective thinking skills

,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

Keywords: Goal of the Firm

AACSB: Reflective thinking skills

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

Keywords: Goal of the Firm

AACSB: Reflective thinking skills




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

Keywords: Goal of the Firm

AACSB: Reflective thinking skills




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

Answer: TRUE

Diff: 1

Keywords: Goal of the Firm

AACSB: Reflective thinking skills




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

Answer: FALSE

Diff: 1

, Keywords: Determinants of Stock Price

AACSB: Reflective thinking skills




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

Keywords: Determinants of Stock Price

AACSB: Reflective thinking skills




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

Keywords: Goal of the Firm, Corporation

AACSB: Reflective thinking skills




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