Table of Contents
CHAPTER 1—AN OVERVIEW OF MANAGERIAL FINANCE ................................................... 1
CHAPTER 2—THE FINANCIAL ENVIRONMENT ................................................................... 10
CHAPTER 3—THE TIME VALUE OF MONEY ........................................................................ 25
Appendix 3A................................................................................................................ 69
CHAPTER 4—RISK AND RATES OF RETURN ...................................................................... 75
Appendix 4A................................................................................................................ 96
CHAPTER 5—VALUATION CONCEPTS ................................................................................ 98
CHAPTER 6—CAPITAL BUDGETING TECHNIQUES .......................................................... 149
Appendix 6A.............................................................................................................. 174
CHAPTER 7—PROJECT CASH FLOWS AND RISK ............................................................ 188
Appendix 7A.............................................................................................................. 227
Appendix 7B.............................................................................................................. 228
CHAPTER 8—THE COST OF CAPITAL ............................................................................... 236
CHAPTER 9—CAPITAL STRUCTURE ................................................................................. 259
CHAPTER 10—DIVIDEND POLICY ...................................................................................... 277
CHAPTER 11—ANALYSIS OF FINANCIAL STATEMENTS................................................. 286
CHAPTER 12—FINANCIAL PLANNING AND CONTROL .................................................... 307
CHAPTER 13—WORKING CAPITAL POLICY ..................................................................... 327
CHAPTER 14—MANAGING SHORT-TERM ASSETS .......................................................... 334
CHAPTER 15—MANAGING SHORT-TERM LIABILITIES (FINANCING) ............................. 356
CHAPTER 16—COMMON STOCK AND THE INVESTMENT BANKING PROCESS ........... 381
CHAPTER 17—LONG-TERM DEBT ..................................................................................... 390
CHAPTER 18—ALTERNATIVE FINANCING ARRANGEMENTS & CORPORATE
RESTRUCTURING ................................................................................................................ 410
,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. Performance shares are dollar bonuses awarded to managers on the basis of corporate
performance.
ANS: F DIF: Easy TOP: Managerial incentives
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
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. The most important trends in finance from the 1990s that have continued into the new
millennium include (1) the continued globalization of business, (2) a further increase in
the use of technology, and (3) the regulatory attitude of government.
ANS: T DIF: Easy TOP: Financial evolution
16. Restricted stock grants are a type of incentive plan in which the managers are awarded
shares of stock on the basis of the firm's performance over given intervals with respect
to earnings per share or other measures.
ANS: F DIF: Easy TOP: Managerial incentives
17. 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
, 18. 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
19. 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
20. The term multinational corporation is used to describe a firm that operates in two more
countries.
ANS: T DIF: Medium TOP: Multinational corporations
21. Nations do not have the sovereignty to expropriate the assets of a firm without
compensation.
ANS: F DIF: Medium TOP: Political risk
22. 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
23. Since 1985, for the most part, the government has discouraged mergers and
acquisitions, which resulted in fewer mergers at historically low values taking place.
ANS: F DIF: Medium TOP: Government regulation
24. A proprietorship is an unincorporated business owned by one individual and the owner
benefits from the limited liability for business which limits his losses to what he has
invested in the company.
ANS: F DIF: Medium TOP: Proprietorship
25. The corporate charter is a document filed with the secretary of the state in which the
firm is incorporated that provides information about the company, including its name,
address, directors, and amount of capital stock.
ANS: T DIF: Medium TOP: Corporate charter and bylaws
26. Industrial groups are organizations comprised of companies in different industries with
common ownership interests, which include firms necessary to sell and manufacture
products.
ANS: T DIF: Medium TOP: Foreign forms of business
CHAPTER 1—AN OVERVIEW OF MANAGERIAL FINANCE ................................................... 1
CHAPTER 2—THE FINANCIAL ENVIRONMENT ................................................................... 10
CHAPTER 3—THE TIME VALUE OF MONEY ........................................................................ 25
Appendix 3A................................................................................................................ 69
CHAPTER 4—RISK AND RATES OF RETURN ...................................................................... 75
Appendix 4A................................................................................................................ 96
CHAPTER 5—VALUATION CONCEPTS ................................................................................ 98
CHAPTER 6—CAPITAL BUDGETING TECHNIQUES .......................................................... 149
Appendix 6A.............................................................................................................. 174
CHAPTER 7—PROJECT CASH FLOWS AND RISK ............................................................ 188
Appendix 7A.............................................................................................................. 227
Appendix 7B.............................................................................................................. 228
CHAPTER 8—THE COST OF CAPITAL ............................................................................... 236
CHAPTER 9—CAPITAL STRUCTURE ................................................................................. 259
CHAPTER 10—DIVIDEND POLICY ...................................................................................... 277
CHAPTER 11—ANALYSIS OF FINANCIAL STATEMENTS................................................. 286
CHAPTER 12—FINANCIAL PLANNING AND CONTROL .................................................... 307
CHAPTER 13—WORKING CAPITAL POLICY ..................................................................... 327
CHAPTER 14—MANAGING SHORT-TERM ASSETS .......................................................... 334
CHAPTER 15—MANAGING SHORT-TERM LIABILITIES (FINANCING) ............................. 356
CHAPTER 16—COMMON STOCK AND THE INVESTMENT BANKING PROCESS ........... 381
CHAPTER 17—LONG-TERM DEBT ..................................................................................... 390
CHAPTER 18—ALTERNATIVE FINANCING ARRANGEMENTS & CORPORATE
RESTRUCTURING ................................................................................................................ 410
,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. Performance shares are dollar bonuses awarded to managers on the basis of corporate
performance.
ANS: F DIF: Easy TOP: Managerial incentives
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
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. The most important trends in finance from the 1990s that have continued into the new
millennium include (1) the continued globalization of business, (2) a further increase in
the use of technology, and (3) the regulatory attitude of government.
ANS: T DIF: Easy TOP: Financial evolution
16. Restricted stock grants are a type of incentive plan in which the managers are awarded
shares of stock on the basis of the firm's performance over given intervals with respect
to earnings per share or other measures.
ANS: F DIF: Easy TOP: Managerial incentives
17. 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
, 18. 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
19. 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
20. The term multinational corporation is used to describe a firm that operates in two more
countries.
ANS: T DIF: Medium TOP: Multinational corporations
21. Nations do not have the sovereignty to expropriate the assets of a firm without
compensation.
ANS: F DIF: Medium TOP: Political risk
22. 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
23. Since 1985, for the most part, the government has discouraged mergers and
acquisitions, which resulted in fewer mergers at historically low values taking place.
ANS: F DIF: Medium TOP: Government regulation
24. A proprietorship is an unincorporated business owned by one individual and the owner
benefits from the limited liability for business which limits his losses to what he has
invested in the company.
ANS: F DIF: Medium TOP: Proprietorship
25. The corporate charter is a document filed with the secretary of the state in which the
firm is incorporated that provides information about the company, including its name,
address, directors, and amount of capital stock.
ANS: T DIF: Medium TOP: Corporate charter and bylaws
26. Industrial groups are organizations comprised of companies in different industries with
common ownership interests, which include firms necessary to sell and manufacture
products.
ANS: T DIF: Medium TOP: Foreign forms of business
