BSA-3

PRE-TEST FM1
77 items “Good luck”

1.Basic objective of Financial Management is ________________.

A.Maximization of profit.

B.Maximization of shareholder’s wealth

C.Ensuring Financial discipline in the firm.

D.All of these.

2.Financial structure refers to ________________.

A.Short-term resources.

B.All the financial resources.

C.Long-term resources.

D.All of these.

3.The market value of the firm is the result of__________.

A. Dividend decisions.

B. Working capital decisions.

C. Capital budgeting decisions.

D. Trade-off between risk and return

4.Cost of capital is __________________.

A.Lesser than the cost of debt capital.

B.Equal to the last dividend paid to the equity shareholders.

C.Equal to the dividend expectations of equity shareholders for the coming year.

D.None of the above.

5. Risk-return trade off implies_____________.

A. Increasing the portfolio of the firm through increased production.

B. Not taking any loans which increases the risk.

C. Not granting credit to risky customers.

D. Taking decision in such a way which optimizes the balance between risk and return.

6._____________ is a specific risk factor.

A.Market risk.

B.Inflation risk.

C.Interest rate risk.

D.Financial risk.

7._____________ is not a diversifiable or specific risk factor.

A.Company strike.

B.Bankruptcy of a major supplier.

C.Death of a key company officer.

D. Industrial Recession

8.The major benefit of diversification is to____________.

A. Increase the expected return.

B. Increase the size of the investment portfolio.

C. Reduce brokerage commissions.

D. Reduce the expected risk.

9.________ is concerned with the acquisition, financing, and management of assets with some overall
goal in mind.

A.Financial management.

B.Profit maximization.

C.Agency theory.

D.Social responsibility.

10.__________ is concerned with the maximization of a firm's earnings after taxes

A. Shareholder wealth maximization.

B. Profit maximization.

C. Stakeholder maximization.

D.EPS maximization.

11._______________ is the most appropriate goal of the firm.

A. Shareholder wealth maximization.

B. Profit maximization.

C. Stakeholder maximization.
D.EPS maximization

12.Which of the following statements is correct regarding profit maximization as the primary goal of the
firm?

A. Profit maximization considers the firm's risk level.

B. Profit maximization will not lead to increasing short-term profits at the expense of lowering expected
future profits.

C. Profit maximization does consider the impact on individual shareholder's EPS.

D. Profit maximization is concerned more with maximizing net income than the stock price.

13.Which of the following is not normally a responsibility of the treasurer of the modern corporation but
rather the controller?

A. Budgets and forecasts.

B. Asset management.

C. Investment management.

D. Financial management.

14.The __________ decision involves determining the appropriate make-up of the right-hand side of the
balance sheet.

A. Asset management.

B. Financing.

C. Investment.

D. Capital budgeting.

15.Treasurer should report to _______________.

A. Chief Financial Officer.

B. Vice President of Operations.

C. Chief Executive Officer.

D Board of Directors.

16.The __________ decision involves a determination of the total amount of assets needed, the
composition of the assets, and whether any assets need to be reduced, eliminated, or replaced.

A. Asset management.

B. Financing.

C. Investment.
D. Accounting.

17._____________ is not normally a responsibility of the controller of the modern corporation.

A. Budgets and forecasts.

B. Asset management.

C. Financial reporting to the IRS.

D. Cost accounting.

18.All constituencies with a stake in the fortunes of the company are known as __________.

A. Shareholders.

B. Stakeholders.

C. Creditors.

D. Customers.

19.Corporate governance success includes three key groups. _____________ represents these three
groups.

A. Suppliers, managers, and customers.

B. Board of directors, executive officers, and common shareholders.

C. Suppliers, employees, and customers.

D. Common shareholders, managers, and employees.

20.The long-run objective of financial management is to _____________.

A. Maximize earnings per share.

B. Maximize the value of the firm's common stock.

C. Maximize return on investment.

D. Maximize market share.

21. What is the primary goal of financial management?

A. Increase earnings

B. Maximizing cash flow

C. Maximizing shareholders' wealth

C. Minimizing risk of the firm

22. Proper-risk return management means that

a. the firm should take as few risks as possible.

b. consistent with the objectives of the firm, an appropriate trade-off between risk and return should be
determined.

C. the firm should earn highest return possible.

D. the firm should value future profits more highly than current profits.

23. Which of the following is not a major area of concern and emphasis in modern financial
management?

a. Inflation and its effect on profits

b. Stable short-term interest rates

C. Changing international environment

D. Increased reliance on debt

24. Which of the following is not a major area of concern and emphasis in modern financial
management?

a. Marginal analysis

b. Risk-return trade-off

C. Commodity trading

D. Changing financial institutions

25. A financial manager's goal of maximizing current or short term earnings may not be appropriate
because

a. it fails to consider the timing of the benefits.

b Increased earnings may be accompanied by unacceptably higher levels of risk.

c. Increased earnings are subjective; they can be defined in various ways such as accounting or economic
earnings.

D. All of the given choices.

26. All of the following are functions of the financial manager except

a. Analyzing and planning the company's performance.

b. Anticipating the company's financial needs.

C. 2Assigning the market price of the company's stock.

d. Allocating the funds to the most profitable asset.

27. Which of the following statements is false?

a. The financing decision involves the process of allocating funds for investment in competing assets.

b. The treasurer would be responsible for activities such as managing cash balances, granting credit to
customers and managing the process of issuing new securities.

c. The optimal capital structure is the best combination of long-term debt equity.

d. It is necessary to determine the appropriate risk-return trade-off to maximize the market value of the
firm for its shareholders.

28. Which of the following statements is true?

A. The higher the profit of a firm, the higher the value of the firm is assured of receiving in the market.

b. Social responsibility and profit maximization are synonymous.

C. Maximizing the earnings of the firm is the primary goal of financial management.

d. There are some serious problems with the financial goal of maximizing the earnings of the firm.

29. Corporate social responsibility is

A. Effectively enforced through the controls envisioned by classical economics.

B. The obligation to shareholders to earn profit.

C. The duty to embrace service to the public interest.

D. The obligation to serve long term organizational interests.

30.A common argument against corporate involvement in socially responsible behavior is that

a. It encourages government intrusion in decision making.

b. as a legal person, a corporation is accountable for its conduct.

C. It creates goodwill.

d. competitive market, such behavior incurs costs that place the company at a disadvantage.

31. Which of the following statements is false?

a. Because socially desirable goals can impede profitability in many instances, managers should not try to
operate under the assumption of wealth maximization.

b. As finance emerged as a new field, much emphasis was placed on mergers and acquisitions.

C. Timing is a particularly important consideration in financial decisions.

d. During the 1930s, the government assumed a much greater role in regulating the securities industry.

32. Which of the following statements is false?

a. In the mid 1950s, finance began to change to a more analytical, decision-oriented approach.

b. Recently, the emphasis of financial management has been on the relationships between risk and
returns.

c. Inflation has led to phantom profits and undervalued assets.

d. For as long as satisfactory level of profit is earned, the financial manager need not be concerned with
unethical behavior.

33. Integrity is an ethical requirement for all Financial managers. One aspect of integrity requires

A. Performance of professional duties in accordance with applicable

b. Avoidable of conflict of interest.

c. Refraining from improper use of inside information.

D. Maintenance of an appropriate level of professional

34. All of the following are function of the manager eхсерt.

a. Analyzing and planning the company's performance.

b. Anticipating the company's financial needs.

C. Assigning the market price of the company's stock

d. Allocating funds to the most profitable asset.

35. Which of the following statements is false?

a. The financing decision involves the process of allocating funds for investment in competing assets.

b. The treasurer would be responsible for activities such as managing cash balances, granting credit to
customers and managing the process of issuing new securities.
C. The optimal capital structure is the best combination of long-term debt and equity.

d. It is necessary to determine the appropriate risk-return trade-off to maximize the market value of the
firm for its shareholders.

36. Regine is a financial manager who has discovered that her company is violating environmental
regulations. If her immediate superior is involved, her appropriate action is to

a. does nothing since she has a duty of loyalty to the organization.

b. consults the audit committee.

C. present the matter to the next higher managerial level.

d. confronts her immediate superior.

37. If a financial manager discovers unethical conduct in his/her organization and fails to act, he/she will
be in violation of which ethical standard(s)?

a. "Actively or passively subvert the attainment of the organization's legitimate and ethical objectives."

b. "Communicate unfavorable as well as favorable information."

c. "Condone the commission of such acts by others within their organizations."

d. All of the answers are correct.

38. Integrity is an ethical requirement for all financial managers. One aspect of integrity requires

a. performance of professional duties in accordance with applicable laws.

b. avoidance of conflict of interest.

c. refraining from improper use of inside information.

d. maintenance of an appropriate level of professional competence.

39. A financial manager discovers a problem that could mislead users of the firm's financial data and has
informed his/her immediate superior.He/she should report the circumstances to the audit committee
and/or the board of directors only if

a. he immediate superior, who reports to the chief executive officer, knows about the situation but refuses
to correct it.

b. the immediate superior assures the financial manager that the problem will be resolved.

C. the immediate superior reports the situation to his/her superior.

d. the immediate superior, the firm's chief executive officer, knows about the situation but refuses to
correct it.

40. One of the major disadvantages of a sole proprietorship is

a. that there is unlimited liability to the owner.

b. the simplicity of decision making.

C. low organizational costs.

D. low operating costs.

41. The partnership form of organization

a. avoids the double taxation of earnings and dividends found in the corporate form of organization.

b. usually provides limited liability to the partners.

c. has unlimited life.

d. simplifies decision making.

42. A corporation is a.

A. owned by stockholders who enjoy the privilege of limited liability.

b. easily divisible between owners.

c. a separate legal entity with perpetual life.

d. all of the above.

43. When the local grocery store puts peanut butter on sale, reducing its price from 4.20 per item to
3.70 per item, the quantity sold increases from 180 per week to 260 per week. This response illustrates
which of the following concepts?

A. Cross-price elasticity of demand

B. Price elasticity of supply

C. Price elasticity of supply

D. Income elasticity of demand

44. Let’s look at the first part of the formula. How do we find the percentage change in quantity using
the midpoint formula?

A. The change in quantity multiplied by the average quantity

B. the change in quantity divided by the average quantity, multiplied by 100

C. The average quantity divided by the change in quantity multiplied by 2

45. How do we express the percentage change in quantity using the variables Q1 (original quantity and
Q2 (new quantity)

A. Q1−Q22×100Q1-Q22×100

b. Q2−Q1(Q2+Q1)×100Q2-Q1(Q2+Q1)×100
c. Q2−Q1(Q2+Q1)÷2×100
d. Q2-Q1(Q2+Q1)÷2×100

46. Now let’s look at the second part of the formula. How do we find the percentage change in price
using the midpoint formula?

A. the change in price multiplied by the average price

B. The change in price divided by the average price, multiplied by 100

C. the average price divided by the change in price, multiplied by 2

47. How do we express this using the variables P1 (original price), P2 (new price)?

A. P2−P1(P2+P1)×100P2-P1(P2+P1)×100

B. P2−P1(P2+P1)÷2×100P2-P1(P2+P1)÷2×100
C. P1−P22×100

48-50. Solve the elasticity for demand of peanut butter.

5 points each.
1. An increase in the price of a product will reduce the amount of it purchased because:

supply curves are upsloping.

A.

the higher price means that real incomes have risen.

B.

consumers will substitute other products for the one whose price has risen.
C.

consumers substitute relatively high-priced for relatively low-priced products.

D.

2. Which of the following will not cause the demand for product K to change?

a change in the price of close-substitute product J

A.

an increase in consumer incomes

B.

a change in the price of K

C.
 a change in consumer tastes
D.

3. Which of the following would not shift the demand curve for beef?

a widely publicized study which indicates beef increases one's cholesterol

A.

a reduction in the price of cattle feed

B.

an effective advertising campaign by pork producers

C.

a change in the incomes of beef consumers

D.

4. If the price of K declines, the demand curve for the complementary product J will:

shift to the left.

A.

decrease.
B.

shift to the right.

C.

remain unchanged.
D.

5. A firm's supply curve is up sloping because:

the expansion of production necessitates the use of qualitatively inferior inputs.

A.

mass production economies are associated with larger levels of output.

B.

consumers envision a positive relationship between price and quality.

C.
 beyond some point the production costs of additional units of output will rise.
D.
6. Strategic Management does not involve ________.
A. Setting Objectives
B.Analyzing the competitive environment
C.Analyzing the external organization
D. Analyzing the internal organization
7. Strategic Management is the management of an organization’s resources to achieve its ________.
a. Financial needs
b. Goals and Objectives
c. Competitive Advantage
d. Market Share
8. Stability strategy is a ________ level strategy.
a. Functional
b. Corporate
c. Business
d. Strategic

9. Which of the following statements about factors of production is false?

a) The term 'factors of production' is another term for resources.

b) The factor of production termed labor means human resources.

c) The factor or production termed land means natural resources.

d) The factor of production termed capital means the money which the owners of firms need
in order to set their firms up
10. Which of the following statements about the use of resources is not one of the key questions in
economics?

a) How are resources used?

b) Where are resources used?

c) For what are resources used?

d) For whom are resources used?

11. Which of the following statements about producers is false?

a) Households produce many goods and services for themselves

b) People set up some producers who do not aim to make profits.

 c) All the goods and services consumed in any country are produced by its own producers.

d) Governments arrange the production of some goods and services.

12. Which of the following statements is true?

a) Despite the problem of scarcity, people do not always want producers to use the most
efficient production methods.

b) The problem of scarcity would disappear if the world's population grew to ensure more
labor was available.

c) A producer who uses no more resources than it needs must display productive efficiency.

d) The world's economies were as integrated 50 years ago as they are today