Chapter_1 - CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT...

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Chapter 1 - Page 1 (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: Goal of firm Answer: b Diff: E 1. The proper goal of the financial manager should be to maximize the firm's expected profit, since this will add the most wealth to each of the individual shareholders (owners) of the firm. a. True b. False Goal of firm Answer: b Diff: E 2. If a firm has a single owner, we may say that the proper goal of a financial manager would be to maximize the firm's earnings per share. a. True b. False Managerial incentives Answer: b Diff: E 3. Performance shares are dollar bonuses awarded to managers on the basis of corporate performance. a. True b. False Agency Answer: b Diff: E 4. If a firm's stock price falls during the year, this indicates that the firm's managers are not acting in shareholders' best interests. a. True b. False Agency Answer: a Diff: E 5. An agency problem exists between stockholders and managers. A second agency problem arises between stockholders and creditors. a. True b. False Agency Answer: b Diff: E 6. An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person. a. True b. False CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT
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Social welfare and finance Answer: b Diff: E 7. The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society. a. True b. False Social welfare and finance Answer: a Diff: E 8. 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. a. True b. False Medium: Managerial incentives Answer: a Diff: M 9. In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken over by groups who are more aligned with stockholder interests. a. True b. False Hostile takeovers Answer: b Diff: M 10. A hostile takeover is a method of seizing control of a company and involves an action taken against the opposition of incumbent management. However, this action is typically motivated by a desire to control the firm's assets and is rarely motivated by a low share price. a. True b. False Multiple Choice: Conceptual Easy: Goal of firm Answer: d Diff: E 11. 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.
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This note was uploaded on 05/12/2010 for the course BUSINESS BS525 taught by Professor Matthews during the Spring '10 term at Drexel.

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Chapter_1 - CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT...

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