Financial Management Function and Environment

Which of the following statements best represents what finance is about?

• How political, social, and economic forces affect corporations

• Maximizing profits

• The study of how people and businesses make investment decisions and how to finance those decisions.

• Reducing risk

From a financial point of view, a company that decides to develop new product is making

• a financing decision.

• an investment decision.

• a capital structure decision.

• a cash flow decision.

Finance managers need to interact constantly with

• marketing managers.

• accounting staff.

• management information systems staff.

• all of the above.

The true owners of the corporation are the

• holders of debt issues of the firm.

• preferred stockholders.

• board of directors of the firm.

• common stockholders.

Maximization of shareholder wealth as a goal is superior to accounting profit maximization because

• it considers the time value of the money.

• following the shareholder wealth maximization goal will ensure high stock prices

• accounting profits are not the same as cash flows.

• A and C

Which of the following best describes the goal of the firm?

• The maximization of the total market value of the firm's common stock

• Profit maximization

• Risk minimization

• None of the above

Profit maximization does not adequately describe the goal of the firm because

• profit maximization does not require the consideration of risk.

• profit maximization ignores the timing of a project's return.

• maximization of dividend payout ratio is a better description of the goal of the firm.

• A and B.

If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should

• positively affect profits.

• increase the market value of the firm's common stock.

• either increase or have no effect on the value of the firm's common stock.

• accomplish all of the above.

What does the agency problem refer to?

• The conflict that exists between the board of directors and the employees of the firm

• The problem associated with financial managers and Internal Revenue agents.

• The conflict that exists between stockbrokers and investors.

• The problem that results from potential conflicts of interest between the manager of a business and the stockholders.

Managers of corporations need to act in an ethical manner

• because ethics violations will be punished by the law.

• because a business must be trusted by investors, customer and the public if it is to succeed.

• because business managers must answer to a higher authority.

• because ethical behavior is its own justification.