INTRODUCTION TO FINANCIAL MANAGEMENT

1.)
Which of the following statements is true?
a. One of the benefits of incorporating your business is that you become
entitled to receive unlimited liability.
b. Sole proprietorships are subject to more regulations than corporations.
c. Sole proprietorships do not have to pay corporate tax.
d. All of the statements above are correct.

2.)
Which of the following statements is most correct?
a. One advantage of forming a corporation is that you have limited liability.
b. Corporations face fewer regulations than sole proprietorships.
c. One disadvantage of being a sole proprietor is that you have to pay
corporate taxes, even though you don’t realize the benefits of being a
corporation.
d. Statements b and c are correct.

3.)
Which of the following statements is most correct?
a. Corporations generally face fewer regulations than sole proprietorships do.
b. Corporate shareholders have unlimited liability.
c. It is usually easier to transfer ownership in a corporation than it is to
transfer ownership in a sole proprietorship.
d. All of the above statements are correct.

4.)
Which of the following statements is most correct?
a. One drawback of forming a corporation is that it subjects the firm to
additional regulations.
b. One drawback of forming a corporation is that it subjects the firm to
limited liability.
c. One drawback of forming a corporation is that it makes it more difficult
for the firm to raise capital.
d. All of the statements above are correct.

5.)
The primary goal of a publicly-owned firm interested in serving its
stockholders should be to
a. Maximize expected total corporate profit.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.

6.)
Which of the following statements is most correct?
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.

7.)
Which of the following work to reduce agency conflicts between stockholders
and bondholders?
a. Including restrictive covenants in the company’s bond contract.
b. Providing managers with a large number of stock options.
c. The passage of laws that make it easier for companies to resist hostile
takeovers.
d. Statements b and c are correct.

8.)
Which of the following is likely to encourage a firm’s managers to make
decisions that are in the best interest of shareholders?
a. Executive compensation comes primarily in the form of stock options.
b. The state legislature recently passed a law that makes it more difficult to
successfully complete a hostile takeover.
c. Institutional investors such as mutual funds and pension funds hold large
amounts of the firm’s stock.
d. Statements a and b are correct.

9.)
Which of the following statements is most correct?
a. A good goal for a corporate manager is maximization of expected EPS.
b. Most business in the U.S. is conducted by corporations; corporations’
popularity results primarily from their favorable tax treatment.
c. 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.
d. Firms in highly competitive industries find it easier to exercise “social
responsibility” than do firms in oligopolistic industries.

10.)
Which of the following statements is most correct?
a. The ability of firms to engage in socially beneficial projects that involve
voluntary costs is constrained by competition and the need of firms to attract
capital at low cost.
b. The actions that maximize a firm’s stock price are inconsistent with
maximizing social welfare.
c. The concepts of social responsibility and ethical responsibility on the
part of corporations are completely different and neither is relevant in
maximizing stock price.
d. In a competitive market, if a group of firms do not spend resources making
social welfare improvements, but another group does, in general, this will not
affect the second group’s ability to attract capital.

11.)
Which of the following statements is most correct?
a. The proper goal of the financial manager should be to maximize the firm’s
expected cash flow, because this will add the most wealth to each of the
individual shareholders (owners) of the firm.
b. One way to state the decision framework most useful for carrying out the
firm’s objective is as follows: “The financial manager should seek that
combination of assets, liabilities, and capital that will generate the largest
expected projected after-tax income over the relevant time horizon.”
c. The riskiness inherent in a firm’s earnings per share (EPS) depends on the
characteristics of the projects the firm selects, which means it depends upon
the firm’s assets, but EPS does not depend on the manner in which those assets
are financed.
d. Since large, publicly-owned firms are controlled by their management teams,
and typically, ownership is widely dispersed, managers have great freedom in
managing the firm. Managers may operate in stockholders’ best interests, but
they may also operate in their own personal best interests. As long as
managers stay within the law, there simply aren’t any effective controls over
managerial decisions in such situations.

12.)
Which of the following statements is most correct?
a. Agency conflicts between stockholders and managers are not really a problem
when outsiders (that is, non-managers) own shares in a corporation.
b. Managers may operate in stockholders’ best interests, or managers may
operate in their own personal best interests. As long as managers stay within
the law, there are no effective controls that stockholders can implement to
control managerial decision making.
c. The agency conflicts between bondholders and stockholders can be reduced
with the use of restrictive bond covenants.
d. An agency relationship exists when one or more persons hire another person
to perform some service but withhold decision-making authority from that
person.

13.)
The chief management accountant called “controller” traditionally performs
these functions except:
a. The establishment and implementation of the financial planning process.
b. Financial and management reporting and interpretation.
c. Protection of company resources and economic evaluation.
d. Preparation of proposals for product promotions.

14.)
Controllership has attained special recognition in corporate management as
business expands in complexity and reach, and as the controller exerts
influence for management to take organization’s goals. Controllership and
treasurership constitute corporate finance. These are among the controller’s
traditional functions:
1. Tax management.
2. Financial reporting and interpretation.
3. Credit management.
4. Sourcing and investing of funds.
5. Reporting to government regulatory agencies.
6. Risk management.
7. Economic appraisal.
8. Planning for control.
a. All eight items.
b. Items 1, 2, 3, 4, 5, 7, and 8 only.
c. Items 1, 2, 5, 7, and 8 only.
d. 2, 3, 5, and 7, and 8 only.

15.)
Which of the following is not usually a controller’s function?
a. Planning for control.
b. Tax administration.
c. Protection of assets.
d. Credit and collection.

16.)
Which of the following is not a Controller’s function?
a. In charge of planning and control
b. Protection of assets such as adequate insurance coverage. Etc.
c. Interpreting and reporting on effects of external factors on the
business
d. Arranging short-term financing

17.)
Which of the following is a Controller’s responsibility?
a. Tax planning and accounting
b. In charge of credit and collection
c. Custodian of funds
d. Arranging short-term financing

18.)
Which of the following is not a controllership function, as distinguished from
a treasury function?
a. Reporting and interpreting
b. Protection of assets
c. Credit and collection
d. Government reporting

19.)
You were newly appointed as controller of CZX Corporation. Among the jobs
your department would do include the following:
a. Cash receipts, cash disbursements, general accounting, taxation,
financial accounting analysis, and internal auditing.
b. Financial reporting, strategic planning, managerial accounting,
taxation, financial statement analysis, and internal accounting.
c. Financial accounting, managerial accounting, cost accounting, inventory
accounting, payroll accounting, tax accounting and sales forecasting.
d. Tax accounting, managerial accounting, internal auditing, general
accounting.

20.)
It is concerned with allocating, raising, and controlling the funds of the
firm.
a. finance
b. management accounting
c. financial management
d. budgeting

21.)
It is the efficient allocation of funds to specific assets
a. investment
b. financing
c. division of assets
d. dividend policy

22.)
The finance manager is responsible in maximizing the value of the utility
owned by these people.
a. creditors
b. board of directors
c. stockholders/investors
d. suupliers

23.)
It is a kind of security issued by the firm to raise funds with the
expectation of receiving dividends in the future.
a. capital stock
b. stock dividends
c. bonds
d. short-term debt

24.)
It is one of the goals of the finance manager.
a.) maximize profit
b.) maximize market share
c.) maximize stock price
d.) maximize asset investment

25.)
Which of the following statements does not support the argument that
“maximizing profit is not the primary objective of the firm.”
a.) accounting profits cannot be measured accurately.
b.) accounting fails to determine the timing of benefits
c.) accounting does not increase the profits
d.) a change in profit is also a change in risk

26.)
Which theory best describes the management of the corporation by people who
will act on behalf of the stockholders?
a.) management theory
b.) stockholder’s theory
c.) accounting theory
d.) agency theory

27.)
Which of the following is a valid criticism concerning the goal of the firm to
maximize profits?
a.) profit maximization ignores expenses.
b.) profit maximization is completely unrelated to shareholders’ wealth
c.) profit maximization may ignore the timing of profits
d.) there are no valid criticisms of profit-maximizing firms.

28.)
Which of the following forms does the actual return to the stockholders take?
a.) dividend payments
b.) proceeds from sale of stock
c.) interest income
d.) principal repayment
29.)
Which of the following does not affect the stock price of the firm?
a.) legal constraints
b.) capital structure
c.) taxation system
d.) economic activity of the country.

30.)
All of the following mechanisms are used by shareholders to get managers to
act in the shareholders’ best interest except:
a.) threat of takeover
b.) threat of firing
c.) golden parachute
d.) giving stock options

31.)
It chooses a financing mix that maximizes the value of the projects
a.) dividend decision
b.) financing decision
c.) investment decision
d.) none of the above.

32.)
It is the process of determining how much money should be declared as
dividends to be given to the stockholders
a.) dividend decision
b.) financing decision
c.) investment decision
d.) none of the above.

33.)
It is a decision to be made whether to issue bonds or equity to purchase
equipment
a.) investment decision
b.) dividend decision
c.) financing decision
d.) none of the above.

34.)
The issuance of commercial paper is in the area of _________
a.) investment decision
b.) financing decision
c.) dividend decision
d.) none of the above

35.)
Ensures that the management of a company considers the best interests of all
the stakeholders and not just the stockholders
a.) management of interests
b.) all-stakeholders policy
c.) good corporate governance
d.) social management

36.)
These persons have a vested interest in a company and can either affect or be
affected by a business' operations and performance
a.) community
b.) stockholders
c.) stakeholders
d.) shareholders

37.)
It is a type of business where the owner is also the manager.
a.) partnership
b.) sole proprietorship
c.) joint venture
d.) agency

38.)
In case of liquidation, who has priority over assets?
a.) debtors
b.) creditors
c.) partners
d.) agents

39.)
The following are types of business organizations except:
a.) sole proprietorship
b.) sole partnership
c.) partnership
d.) corporation

40.)
It is the function of the treasurer.
a.) auditing
b.) government reporting
c.) financial accounting
d.) financial planning

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