Question 1

Which of the following statements is correct?

Accepted Answer

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 which 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)  Because 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 the stockholders' best interest, 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. 
E)  Agency problems exist between stockholders and managers, and between stockholders and creditors. 
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 which 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)  Because 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 the stockholders' best interest, 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. 
E)  Agency problems exist between stockholders and managers, and between stockholders and creditors.

Question 2

Most executives believe that there is a positive correlation between ethics and long-run profitability because ethical behavior does all of the following except

Accepted Answer

A)  avoids fines and legal expenses. 
B)  reduces corporate taxes 
C)  attracts business from customers who appreciate and support ethical policies. 
D)  attracts and keeps employees of the highest caliber. 
A)  avoids fines and legal expenses. 
B)  reduces corporate taxes 
C)  attracts business from customers who appreciate and support ethical policies. 
D)  attracts and keeps employees of the highest caliber.

Question 3

Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

Accepted Answer

A) True 
 B)False

Question 4

____ decisions are decisions as to what types of assets should be purchased to help generate cash flows.

Accepted Answer

A)  Capital structure 
B)  Capital budgeting 
C)  Dividend policy 
D)  Repurchase 
A)  Capital structure 
B)  Capital budgeting 
C)  Dividend policy 
D)  Repurchase

Question 5

Voluntary socially responsible acts by businesses that raise costs are more likely in highly competitive industries.

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

The major advantage of a regular partnership or a corporation as a form of business is the fact that both offer their owners limited liability, whereas proprietorships do not.

Accepted Answer

A) True 
 B)False

Question 8

Allen Corporation can (1) build a new plant which should generate a before-tax return of 11 percent, or (2) invest the same funds in the preferred stock of FPL, which should provide Allen with a before-tax return of 9%, all in the form of dividends.Assume that Allen's marginal tax rate is 25 percent, and that 70 percent of dividends received are excluded from taxable income.If the plant project is divisible into small increments, and if the two investments are equally risky, what combination of these two possibilities will maximize Allen's effective return on the money invested?

Accepted Answer

A)  All in the plant project. 
B)  All in FPL preferred stock. 
C)  60% in the project; 40% in FPL. 
D)  60% in FPL; 40% in the project. 
E)  50% in each. 
A)  All in the plant project. 
B)  All in FPL preferred stock. 
C)  60% in the project; 40% in FPL. 
D)  60% in FPL; 40% in the project. 
E)  50% in each.

Question 9

Which of the following statements is correct?

Accepted Answer

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 which 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. 
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 which 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.

Question 10

Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S.Treasury bonds.Both have the same maturity, and they are equally risky and liquid.If Treasury bonds yield 6 percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?

Accepted Answer

A)  2.40% 
B)  3.60% 
C)  4.50% 
D)  5.25% 
E)  6.00% 
A)  2.40% 
B)  3.60% 
C)  4.50% 
D)  5.25% 
E)  6.00%

Question 11

Which of the following mechanisms is not used by shareholders to get managers to act in shareholders' best interests?

Accepted Answer

A)  Threat of firing. 
B)  Managerial compensation. 
C)  Performance shares. 
D)  Threat of takeover. 
E)  Answers b and c above. 
A)  Threat of firing. 
B)  Managerial compensation. 
C)  Performance shares. 
D)  Threat of takeover. 
E)  Answers b and c above.

Question 12

Actions that maximize the firm's current earnings per share will maximize the price of the firm's stock.

Accepted Answer

A) True 
 B)False

Question 13

Jane Doe, who has substantial personal wealth and income, is considering the possibility of opening a new business in the chemical waste management field.She will be the sole owner.The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years.However, the prospects for growth and positive future income look good, and Jane expects to realize substantial cash flows from dividends the firm will eventually pay out.Which of the legal forms of business organization would probably best suit her needs?

Accepted Answer

A)  Proprietorship, because of ease of entry. 
B)  Regular corporation, because of the limited liability. 
C)  Partnership, if she needs additional capital. 
D)  S corporation, to enjoy tax advantages and gain limited liability. 
E)  In this situation, the various forms of organization seem equally desirable. 
A)  Proprietorship, because of ease of entry. 
B)  Regular corporation, because of the limited liability. 
C)  Partnership, if she needs additional capital. 
D)  S corporation, to enjoy tax advantages and gain limited liability. 
E)  In this situation, the various forms of organization seem equally desirable.

Question 14

Taking poison pills and offering greenmail are

Accepted Answer

A)  Ways stockholders protect themselves and their interest from management's conflicting interests. 
B)  Tactics used by creditors to make their position more favorable when resolving agency problems between stockholders and creditors. 
C)  Two actions managers might take to ward off hostile takeovers. 
D)  Both commonly practiced methods used by firms' managers to increase stockholders' wealth. 
A)  Ways stockholders protect themselves and their interest from management's conflicting interests. 
B)  Tactics used by creditors to make their position more favorable when resolving agency problems between stockholders and creditors. 
C)  Two actions managers might take to ward off hostile takeovers. 
D)  Both commonly practiced methods used by firms' managers to increase stockholders' wealth.

Question 15

Multinational managerial finance requires that

Accepted Answer

A)  The effects of changing currency values be included in financial analyses. 
B)  Legal and economic differences be considered in financial decisions. 
C)  Political risk be excluded from multinational corporate financial analyses. 
D)  All of the above. 
E)  Only a and b above. 
A)  The effects of changing currency values be included in financial analyses. 
B)  Legal and economic differences be considered in financial decisions. 
C)  Political risk be excluded from multinational corporate financial analyses. 
D)  All of the above. 
E)  Only a and b above.

Question 16

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.

Accepted Answer

A) True 
 B)False

Which of the following statements is correct?

Most executives believe that there is a positive correlation between ethics and long-run profitability because ethical behavior does all of the following except

Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

____ decisions are decisions as to what types of assets should be purchased to help generate cash flows.

Voluntary socially responsible acts by businesses that raise costs are more likely in highly competitive industries.

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.

The major advantage of a regular partnership or a corporation as a form of business is the fact that both offer their owners limited liability, whereas proprietorships do not.

Which of the following statements is correct?

Which of the following mechanisms is not used by shareholders to get managers to act in shareholders' best interests?

Actions that maximize the firm's current earnings per share will maximize the price of the firm's stock.

Taking poison pills and offering greenmail are

Multinational managerial finance requires that

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.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters

Exam 6: Business Organizations and the Tax Environment

Which of the following statements is correct?

Most executives believe that there is a positive correlation between ethics and long-run profitability because ethical behavior does all of the following except

Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

____ decisions are decisions as to what types of assets should be purchased to help generate cash flows.

Voluntary socially responsible acts by businesses that raise costs are more likely in highly competitive industries.

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.

The major advantage of a regular partnership or a corporation as a form of business is the fact that both offer their owners limited liability, whereas proprietorships do not.

Which of the following statements is correct?

Which of the following mechanisms is not used by shareholders to get managers to act in shareholders' best interests?

Actions that maximize the firm's current earnings per share will maximize the price of the firm's stock.

Taking poison pills and offering greenmail are

Multinational managerial finance requires that

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.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters