IFM10 Ch 01 solution

IFM10 Ch 01 solution - CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT(Difficulty E = Easy M = Medium and T = Tough True-False Easy(1.2 Goal of firm

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(Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: (1.2) 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 (1.2) 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 (1.2) Managerial incentives Answer: b Diff: E 3 . Executive stock options are shares of stock awarded to managers on the basis of corporate performance. a. True b. False (1.2) Social welfare and finance Answer: b Diff: E 4 . 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 (1.2) Social welfare and finance Answer: a Diff: E 5 . 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 Chapter 1: An Overview of Financial Management Page 1 CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT
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(1.3) 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 (1.3) Agency Answer: b Diff: E 7 . 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 (1.3) Agency Answer: a Diff: E 8 . An agency problem exists between stockholders and managers. A second agency problem arises between stockholders and creditors. a. True b. False Medium: (1.2) 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 (1.3) 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 Page 2 Chapter 1: An Overview of Financial Management
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Multiple Choice: Conceptual Easy: (1.2) 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 03/05/2011 for the course FINANCE 6141 taught by Professor Jones during the Fall '10 term at GCSU.

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IFM10 Ch 01 solution - CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT(Difficulty E = Easy M = Medium and T = Tough True-False Easy(1.2 Goal of firm

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