Principles of Finance - Chapter 1: An Overview of Financial Management

B corporations a. still focus on making a profit. b. are committed to putting other stakeholders on an equal footing with shareholders. c. undergo an annual audit to review practices regarding social responsibility, corporate governance, and transparency. d. are a fairly small but rapidly growing number of companies. e. All of these answer choices are correct.

e. All of these answer choices are correct.

If the CEO is accused of questionable behavior, the Board of Directors should a. investigate the situation. b. take proactive steps to ensure the situation is dealt with. c. ensure that the company's reputation is not damaged. d. avoid damage to the company's culture and long-term performance. e. All of these answer choices are correct.

e. All of these answer choices are correct.

Finance does NOT affect decisions in which of the following areas? a. Marketing b. Human Resources c. Accounting d. Management e. None of these answers is correct.

e. None of these answers is correct.

Which of the following statements about managers' compensation is true? a. High salaries motivate managers to increase stockholders' wealth. b. Awarding managers stock options on a monthly basis instead of yearly keeps stock prices high. c. Basing managers' compensation on intrinsic value, not market price, will lead to constant increases in stock price. d. Yearly changes in compensation policies keep managers alert to differences in stock prices. e. Rewarding managers for stock performance over the long run gives them an incentive to keep the stock price high over time.

e. Rewarding managers for stock performance over the long run gives them an incentive to keep the stock price high over time.

Kayla is concerned that her division manager may be pushing the development of a new product by ordering her to omit recent negative test results from internal reports. Kayla should a. not say anything because she's not in charge of development. b. obey the order but talk to other members of her team about the issue. c. disobey and include the test results anyhow. d. anonymously tip off the local news team. e. There is no clear answer but staying quiet may be the worst choice.

e. There is no clear answer but staying quiet may be the worst choice.

Which of the following statements is true? a. Finance developed from economics and accounting. b. Economics developed from accounting and finance. c. Accounting developed from finance and economics. d. Finance, economics, and accounting are not related. e. The COO is in charge of accounting and finance in most businesses.

a. Finance developed from economics and accounting.

Which of the following is NOT a part of effective corporate governance? a. Focus on short-run profits that add up in the long run b. Use of stock-based compensation for key employees c. Holding managers accountable for poor performance d. Rules and practices to ensure that managers balance the needs of customers, employees, and affected citizens with shareholder interests e. Having a strong, independent board of directors

a. Focus on short-run profits that add up in the long run

Double taxation is a major drawback to which form of business organization? a. Partnerships b. C corporations c. LLCs and LLPs d. Proprietorships e. S corporations

b. C corporations

To maximize shareholder wealth, decisions are evaluated a. based on how they affect the stock price. b. in terms of financial consequences and how they affect society at large. c. consistent with management goals. d. to prioritize the broader needs of society . e. for transparency and corporate governance.

b. in terms of financial consequences and how they affect society at large.

Stocks are overvalued when a. there is an R&D breakthrough. b. the actual stock price exceeds the intrinsic value of the stock. c. the intrinsic value of the stock exceeds the market price. d. the firm's intrinsic value is maximized. e. investors are pessimistic about a stock.

b. the actual stock price exceeds the intrinsic value of the stock.

Bondholders may demand a higher rate of return when a. covenants are included in the bond agreements. b. they believe that a company will pursue risky projects. c. there are more than two bondholders. d. the amount of common stock in a firm exceeds the amount of bonds. e. All of these answer choices are correct.

b. they believe that a company will pursue risky projects.

Which of the following is NOT a main area of finance as taught in universities? a. Financial management b. Accounting c. Capital markets d. Investments e. All of these are considered areas of a finance discipline

b. Accounting

Effective communication with stockholders by managers a. allows managers to persuade stockholders that the firm is socially responsible. b. makes it less likely that corporate raiders will undervalue a firm's stock. c. causes the stock price to remain close to the intrinsic value over time. d. avoids shareholder activism. e. ensures that underperforming firms will be able to change course and recover.

c. causes the stock price to remain close to the intrinsic value over time.

Finance is important to individuals because a. all jobs require some level of financial knowledge . b. employers make investment decisions in "defined contribution" pension plans. c. most employees are not willing to take financial risks. d. employees decide how individual retirement funds are invested and how much risk they are willing to assume. e. decision-making skills improve over time .

d. employees decide how individual retirement funds are invested and how much risk they are willing to assume.