FINANCIAL MANAGEMENT (C214) PRACTICE
QUESTIONS WITH ACCURATE SOLUTIONS
RATED A WESTERN GOVERNORS’ UNIVERSITY
,1
Prehard Tech has an innovative app-based trading platform and expects its growth
to boom in the next few years. Before the company goes public, it wants to show a
strong history of profit and is focusing its efforts on improving its bottom line (on the
income statement).
What is a potential negative consequence if the firm focuses solely on profit
maximization?
Creation of fewer goods and services
Correct
Unethical behavior and potential scandals
Correct. Focusing solely on profit maximization can lead to unethical behavior, as
exemplified by the Enron scandal, where the pursuit of profit led to misreported
financial statements and significant loss of shareholder value.
Reduced efficiency in operations as the company expands
Decreased shareholder value and lower dividend payments
2
How might a privately held company define shareholder value differently from a
publicly held company?
Publicly held companies do not focus on maximizing shareholder value.
Privately held companies prioritize global expansion over shareholder value.
Correct
Privately held companies may value keeping the business within the family.
Correct. Privately held family businesses likely place more value on keeping the
business in the family and make decisions with that in mind, which may differ from
the perspective of publicly held companies.
Publicly held companies primarily focus on employee benefits.
3
What effect does a currency devaluation have on a country’s international trade?
It directly increases the value of the country’s currency, making imports cheaper.
It eliminates the need to hedge currency risk.
It discourages international trade by increasing transaction costs.
Correct
It makes a country’s exports cheaper internationally.
, Correct. Devaluation reduces the price of a country’s goods and services abroad,
making exports more competitive while potentially increasing the volume of
exports.
4
How does global financing integration benefit corporations?
It simplifies currency risk to the point of near irrelevance.
It ensures that companies invest primarily in international operations.
It restricts companies to only using financial instruments available in their home
countries.
Correct
It provides access to a wider range of funding sources and investment opportunities.
Correct. Global financing integration enables companies to tap into international
markets for debt and equity, offering them more favorable conditions and
diversification benefits than might be available domestically.
5
What is an auction market in secondary financial markets?
A market that involves trading securities based on future predictions of performance
A market that operates without a physical location and through a network of dealers
Correct
A market that operates where prices are determined by the highest bidder
Correct. An auction financial market, like the New York Stock Exchange (NYSE),
operates similarly to a traditional auction where assets are sold to the highest
bidder.
A market that only allows trading of commodities and not stocks
6
Why are efficient, well-developed financial markets important for stock pricing?
They enable stocks to always trade at book value.
They guarantee profits for all investors.
Correct
They produce more reliable stock prices.
Correct. Efficient and well-developed financial markets enable frequent trading of
stocks, leading to more reliable and up-to-date pricing that better reflects available
information about the stock.
QUESTIONS WITH ACCURATE SOLUTIONS
RATED A WESTERN GOVERNORS’ UNIVERSITY
,1
Prehard Tech has an innovative app-based trading platform and expects its growth
to boom in the next few years. Before the company goes public, it wants to show a
strong history of profit and is focusing its efforts on improving its bottom line (on the
income statement).
What is a potential negative consequence if the firm focuses solely on profit
maximization?
Creation of fewer goods and services
Correct
Unethical behavior and potential scandals
Correct. Focusing solely on profit maximization can lead to unethical behavior, as
exemplified by the Enron scandal, where the pursuit of profit led to misreported
financial statements and significant loss of shareholder value.
Reduced efficiency in operations as the company expands
Decreased shareholder value and lower dividend payments
2
How might a privately held company define shareholder value differently from a
publicly held company?
Publicly held companies do not focus on maximizing shareholder value.
Privately held companies prioritize global expansion over shareholder value.
Correct
Privately held companies may value keeping the business within the family.
Correct. Privately held family businesses likely place more value on keeping the
business in the family and make decisions with that in mind, which may differ from
the perspective of publicly held companies.
Publicly held companies primarily focus on employee benefits.
3
What effect does a currency devaluation have on a country’s international trade?
It directly increases the value of the country’s currency, making imports cheaper.
It eliminates the need to hedge currency risk.
It discourages international trade by increasing transaction costs.
Correct
It makes a country’s exports cheaper internationally.
, Correct. Devaluation reduces the price of a country’s goods and services abroad,
making exports more competitive while potentially increasing the volume of
exports.
4
How does global financing integration benefit corporations?
It simplifies currency risk to the point of near irrelevance.
It ensures that companies invest primarily in international operations.
It restricts companies to only using financial instruments available in their home
countries.
Correct
It provides access to a wider range of funding sources and investment opportunities.
Correct. Global financing integration enables companies to tap into international
markets for debt and equity, offering them more favorable conditions and
diversification benefits than might be available domestically.
5
What is an auction market in secondary financial markets?
A market that involves trading securities based on future predictions of performance
A market that operates without a physical location and through a network of dealers
Correct
A market that operates where prices are determined by the highest bidder
Correct. An auction financial market, like the New York Stock Exchange (NYSE),
operates similarly to a traditional auction where assets are sold to the highest
bidder.
A market that only allows trading of commodities and not stocks
6
Why are efficient, well-developed financial markets important for stock pricing?
They enable stocks to always trade at book value.
They guarantee profits for all investors.
Correct
They produce more reliable stock prices.
Correct. Efficient and well-developed financial markets enable frequent trading of
stocks, leading to more reliable and up-to-date pricing that better reflects available
information about the stock.
