Professional Documents
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1-Overview of Financial Management
1-Overview of Financial Management
Easy:
1 . Firm organization
Answer: c Diff: E
2 . Firm organization
Answer: c Diff: E
Chapter 1 - Page 1
Firm organization Answer: a Diff: E
.
3
Which of the following statements is most correct?
3 . Firm organization
Answer: a Diff: E
Chapter 1 - Page 2
Firm organization Answer: a Diff: E
.
4
Until this year, Cheers Inc. was organized as a partnership. This year,
the partners have decided to organize the business as a corporation. As
a result of this change in organizational form, which of the following
statements is most correct?
4 . Firm organization
Answer: a Diff: E
Except for statement a, all the other statements are exactly opposite
for corporations.
5 . Firm organization
Answer: c Diff: E N
Chapter 1 - Page 3
Corporate form Answer: a Diff: E
.
7
Which of the following statements is most correct?
Chapter 1 - Page 4
Goal of firm Answer: d Diff: E
8
. The primary goal of a publicly-owned firm interested in serving its
stockholders should be to
a. Compensating managers with stock can reduce the agency problem between
stockholders and managers.
b. Restrictions are included in credit agreements to protect bondholders
from the agency problem that exists between bondholders and
stockholders.
c. The threat of a takeover can reduce the agency problem between
bondholders and stockholders.
d. Statements a and b are correct.
e. All of the statements above are correct.
Chapter 1 - Page 5
Agency Answer: d Diff: E
.
12
Which of the following actions are likely to reduce the agency problem
between stockholders and managers?
a. Bond covenants.
b. The threat of a takeover.
c. Pressure from the board of directors.
d. Statements a and b are correct.
e. Statements b and c are correct.
(2021 FM2 POST TEST)
Chapter 1 - Page 6
d. Corporations and partnerships have an advantage over proprietorships
because a sole proprietor is subject to unlimited liability, but
investors in the other types of businesses are not.
e. Firms in highly competitive industries find it easier to exercise
“social responsibility” than do firms in oligopolistic industries.
Chapter 1 - Page 7
Miscellaneous concepts Answer: e Diff: E
.
16
Which of the following statements is most correct?
Chapter 1 - Page 8
Miscellaneous concepts Answer: e Diff: E N
.
20
Which of the following statements is most correct?
Medium:
Business ethics Answer: e Diff: M
.
21
Which of the following is an example of an area of business in which the
use of “questionable” ethics is considered a necessity?
Chapter 1 - Page 9
Corporate charter and bylaws Answer: b Diff: M
.
23
Which of the following statements is most correct?
a. The corporate bylaws are the set of rules drawn up by the state to
enable managers to run the firm in accordance with state laws.
b. Procedures for electing corporate directors are contained in bylaws,
while the declaration of the activities that the firm will pursue and
the number of directors are included in the corporate charter.
c. Procedures that govern changes in the bylaws of the corporation are
contained in the corporate charter.
d. Although most companies design a charter, only the bylaws are legally
required to be filed with the secretary of state in order for a
corporation to be in official existence.
e. None of the statements above is correct.
Chapter 1 - Page 10
Firm organization Answer: c Diff: M
.
26
Which of the following statements is most correct?
a. The optimal dividend policy is the one that satisfies the shareholders
because they supply the firm’s capital.
b. The use of debt financing has no effect on cash flow or stock price.
c. The riskiness of projected cash flows depends upon how the firm is
financed.
d. Stock price is dependent on the projected cash flows and the use of
debt, but not on the timing of the cash flow stream.
e. Dividend policy is one aspect of the firm’s financial policy that is
determined directly by the shareholders.
Chapter 1 - Page 11
Corporate goals and control Answer: e Diff: M
.
29
Which of the following statements is most correct?
Chapter 1 - Page 12
Agency Answer: d Diff: M
31
. Which of the following statements is most correct?
a. One of the ways in which firms can mitigate or reduce agency problems
between bondholders and stockholders is by increasing the amount of
debt in the capital structure.
b. The threat of takeover is one way in which the agency problem between
stockholders and managers can be alleviated.
c. Managerial compensation can be structured to reduce agency problems
between stockholders and managers.
d. Statements b and c are correct.
31 . Agency
Answer: d Diff: M
6 . Corporate form
Answer: c Diff: E
7 . Corporate form
Answer: a Diff: E
8 . Goal of firm
Answer: d Diff: E
9 . Agency
Answer: d Diff: E
10 . Agency
Answer: a Diff: E
Chapter 1 - Page 13
e. All of the statements above are correct.
(2021 FM2 POST TEST)
11 . Agency
Answer: b Diff: E
12 . Agency
Answer: d Diff: E
13 . Managerial incentives
Answer: e Diff: E
14 . Managerial incentives
Answer: e Diff: E N
Chapter 1 - Page 14
who do not face the threat of hostile takeovers.
c. Bond covenants are an effective way to resolve agency conflicts
between shareholders and managers.
d. Because of their size, it is easier for sole proprietors and
partnerships to raise outside capital than it is for a corporation.
e. One advantage to forming a corporation is that the owners of the
corporations have limited liability.
board seats.) Since they are shareholders and have more influence, they
will ensure that managers act in the best interests of shareholders, so
statement c is true.
15 . Miscellaneous concepts
Answer: c Diff: E
16 . Miscellaneous concepts
Answer: e Diff: E
17 . Miscellaneous concepts
Answer: c Diff: E
18 . Miscellaneous concepts
Answer: a Diff: E
Chapter 1 - Page 15
CHAPTER 1
ANSWERS AND SOLUTIONS
default. Therefore, they would like the firm to stay less risky so they
get their interest payments. If they owned a bond that promised to pay
them 5 percent, and then the firm became risky, the default risk premium
would be higher. However, the bondholders would still be getting the 5
percent return that compensated them for the old level of default risk.
Therefore, statement c is false. Since statements b and c are false,
Statements d and e must also be false.
19 . Miscellaneous concepts
Answer: b Diff: E
20 . Miscellaneous concepts
Answer: e Diff: E N
21 . Business ethics
Answer: e Diff: M
22 . Social welfare
Answer: a Diff: M
Chapter 1 - Page 16
23 . Corporate charter and bylaws
Answer: b Diff: M
24 . Corporate form
Answer: d Diff: M
25 . Partnership form
Answer: d Diff: M
26 . Firm organization
Answer: c Diff: M
27 . Firm organization
Answer: e Diff: M
Answer: c Diff: M
Answer: e Diff: M
30 . Agency
Answer: c Diff: M
32 . Miscellaneous concepts
Answer: e Diff: M
Chapter 1 - Page 17
Statement e is correct. The other statements are false. Corporations
face more regulations and double taxation as compared to proprietorships
and partnerships. The threat of a takeover will encourage managers to
maximize shareholders’ wealth. Failing to do so will result in the
takeover--and in the managers losing their jobs. Bond covenants are a
way to resolve conflicts between management and bondholders. In general,
there is more uncertainty about the quality of small firms, compared to
large firms. This makes it harder for small companies to raise outside
capital.
Chapter 1 - Page 18