BAF 201 - Chapter 1 Quiz

Which of the following goals of the firm are synonymous (equivalent) to the maximization of shareholder wealth? (a) maximization of the total market value of the firm's common stock (b) maximizing earnings per share (c) maximizing shareholder equity

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

A corporate manager decides to build a new store on a lot owned by the corporation that could be sold to a local developer for $250,000. The lot was purchased for $50,000 twenty years ago. When determining the value of the new store project the opportunity cost of the land is ________. Should this be included when calculating the value of the project?

the opportunity cost of the lot is $250,000 and should be included in calculating the value of the project.

A financial manager is evaluating a project which is expected to generate profits of $100,000 per year for the next 10 years. The project should be accepted if

the present value of the project's cash inflows exceeds the present value of the project's cash outflows.

Maximization of shareholder wealth A) represents a zero sum game in which one corporation gains at the expense of others. B) provides benefits to society as scarce resources are directed to their most productive use. C) is not a practical goal since it cannot be measured effectively. D) is achieved only if cash flows exceed accounting profits.

A) represents a zero sum game in which one corporation gains at the expense of others.

Investors want a return that satisfies the following expectations:

An additional return for taking on risk and A return for delaying consumption

The goal of the firm should be A) maximization of profits (net income per share). B) maximization of shareholder wealth. C) maximization of market share. D) maximization of sales.

B) maximization of shareholder wealth.

The primary goal of a publicly owned corporation is to ________. A) maximize dividends per share B) maximize shareholder wealth C) maximize earnings per share after taxes D) minimize shareholder risk

B) maximize shareholder wealth

Shareholder wealth maximization means A) maximizing earnings per share. B) maximizing dividends per share. C) maximizing the price of existing common stock. D) maximizing stockholders equity.

C) maximizing the price of existing common stock.

A financial manager is considering two projects, A and B. A is expected to add $2 million to profits this year while B is expected to add $1 million to profits this year. Which of the following statements is MOST correct? A) The manager should select project A because it maximizes profits. B) The manager should select the project that maximizes long-term profits, not just one year of profits. C) The manager should select project A or he is irrational. D) The manager should select the project that causes the stock price to increase the most, which could be A or B.

D) The manager should select the project that causes the stock price to increase the most, which could be A or B.

If two companies have the same net income and the same level of risk, they must also have the same stock price or the market is not in equilibrium.

False

Shareholder selection committees select potential board of director nominees ensuring that board members will monitor management sufficiently to protect shareholder interests.

False

Investors will be indifferent between two investments if both investments have the same expected return.

False *Investors will be interested in RISK and will EXPECT a REWARD for taking on more RISK!

Profits represent money that can be spent, and as such, form the basis for determining the value of financial decisions.

False *Remember that cash is king! Cash flows not profits are what is important.

When making financial decisions, managers should always look at marginal, or incremental cash flows.

True

Giving the company's CEO stock options as part of his or her compensation package is an example of an agency cost.

True *The stock Options help tie the CEO's actions directly to the Stock Price and hopefully align the CEO's personal oals and the company's goals.

The expected return on a riskless asset is greater than zero due to

an expected return for delaying consumption.

Financial management deals with the maintenance and creation of economic value or wealth

TRUE

It is important to evaluate a corporate manager's financial decision by measuring the effect the decision should have on the corporation's stock price if everything else were held constant.

TRUE

Shareholder wealth maximization means maximizing the price of the existing common stock.

TRUE

Shareholders react to poor investment or dividend decisions by causing the total value of the firm's stock to fall, and they react to good decisions by bidding the price of the stock up.

TRUE

The goal of profit maximization ignores the risk of financial decisions

TRUE

The goal of the firm's financial managers should be the maximization of the total value of the firm's stock.

TRUE

The five basic principles of finance include all of the following EXCEPT: (a) cash flow is what matters (b) money has a time value (c) risk requires reward (d) market prices are generally right (e) conflicts of interest cause agency problems (f) incremental profits determine value

(f) incremental profits determine value

Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money.

FALSE

Each financial decision made by a corporate manager can be evaluated by its direct impact on the corporation's stock price.

FALSE

One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the firm's financial decisions.

FALSE

The fundamental goal of a business is to maximize the retained earnings available to the corporation's shareholders.

FALSE

The payment of a dividend to current shareholders will have no impact on a corporation's share price because the cash paid is not available to future potential shareholders who may want to buy the corporation's stock.

FALSE

An investment project is acceptable if the total cash received over the life of the project exceeds the total cash spent over the life of the project.

False

Joe, a risk-averse investor, is trying to choose between investment A and investment B. If investment A is riskier than investment B and Joe selects investment A anyway, then

the expected return for investment A will be higher than the expected return for investment B.