Test Bank financial management principles and applications 12th edition Titman Sample

Financial accounting and reporting - Module 1

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Financial Management Principles and Applications 12th Edition Titman Solutions Manual

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Financial Management, 12e (Titman/Keown/Martin)

Chapter 1 Getting Started-Principles of Finance

1 Finance: An Overview

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

A) How political, social, and economic forces affect corporations

B) Maximizing profits

C) The study of how people and businesses make investment decisions and how to finance those

decisions

D) Reducing risk

Answer: C

Diff: 1 AACSB: 6. Reflective thinking Question Status: Revised Objective: 1 Understand the importance of finance and identify the three primary business decisions that financial managers make. Keywords: what is finance? Principles: Principle 3: Cash Flows Are the Source of Value

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

A) a financing decision.

B) an investment decision.

C) a capital structure decision.

D) a cash flow decision.

Answer: B

Diff: 1 AACSB: 6. Reflective thinking Question Status: New question Objective: 1 Understand the importance of finance and identify the three primary business decisions that financial managers make. Keywords: what is finance? Principles: Principle 3: Cash Flows Are the Source of Value

3) Working capital management refers to

A) long-term financing decisions.

B) the management of cash flows.

C) investing in product development.

D) capital structure.

Answer: B

Diff: 2 AACSB: 6. Reflective thinking Question Status: Previous edition

Objective: 1 Understand the importance of finance and identify the three primary business decisions that financial managers make. Keywords: capital structure Principles: Principle 3: Cash Flows Are the Source of Value

8) Business financial decisions are fundamentally different from personal financial decisions.

Answer: FALSE

9) What are the three basic questions addressed by the study of investments?

Answer: 1. What investments should the firm undertake?

2. How should the firm fund these investments?

3. How can the firm best manage cash flows in its day-to-day operations?

Diff: 2 AACSB: 6. Reflective thinking Question Status: New question Objective: 1 Understand the importance of finance and identify the three primary business decisions that financial managers make. Keywords: what is finance? Principles: Principle 3: Cash Flows Are the Source of Value

1 Three Types of Business

1) Which of the following is NOT an advantage of the sole proprietorship?

A) Limited liability

B) No time limit imposed on its existence

C) No legal requirements for starting the business

D) None of the above

Answer: A

Diff: 2 AACSB: 6. Reflective thinking Question Status: Previous edition Objective: 1 Identify the differences between the three major legal forms of business. Keywords: proprietorships Principles: Principle 2: There Is a Risk-Return Tradeoff

2) What is the chief disadvantage of the sole proprietorship as a form of business organization when

compared to the corporate form?

A) Sole proprietorships are subject to double taxation of profits.

B) The cost of formation.

C) Inadequate profit sharing.

D) Owners have unlimited liability.

Answer: D

3) Which of the following is NOT true for limited partnerships?

A) Limited partners can only manage the business.

B) One general partner must exist who has unlimited liability.

C) Only the name of general partners can appear in the name of the firm.

D) Limited partners may sell their interest in the company.

Answer: A

Diff: 2 AACSB: 6. Reflective thinking Question Status: Previous edition Objective: 1 Identify the differences between the three major legal forms of business. Keywords: partnerships Principles: Principle 2: There Is a Risk-Return Tradeoff

4) The true owners of the corporation are the

A) holders of debt issues of the firm.

B) preferred stockholders.

C) board of directors of the firm.

D) common stockholders.

Answer: D

Diff: 1 AACSB: 6. Reflective thinking Question Status: Previous edition Objective: 1 Identify the differences between the three major legal forms of business. Keywords: corporation Principles: Principle 2: There Is a Risk-Return Tradeoff

5) In terms of organizational costs, which of the following sequences is generally correct, moving from

lowest to highest cost?

A) General partnership, sole proprietorship, limited partnership, corporation

B) Sole proprietorship, general partnership, limited partnership, corporation

C) Corporation, limited partnership, general partnership, sole proprietorship

D) Sole proprietorship, general partnership, corporation, limited partnership

Answer: B

Diff: 2 AACSB: 6. Reflective thinking Question Status: Previous edition Objective: 1 Identify the differences between the three major legal forms of business. Keywords: corporation Principles: Principle 2: There Is a Risk-Return Tradeoff

9) Which of the following forms of organization blends elements of partnerships and corporations?

A) D.B.'s

B) Sole proprietorships

C) Limited liability companies (LLC's)

D) General partnership

Answer: C

Diff: 2 AACSB: 6. Reflective thinking Question Status: New question Objective: 1 Identify the differences between the three major legal forms of business. Keywords: corporation Principles: Principle 2: There Is a Risk-Return Tradeoff

10) Which of the following types of business forms is least risky to investors?

A) Sole proprietorship

B) Limited partnership

C) General partnership

D) A public corporation

Answer: D

Diff: 1 AACSB: 6. Reflective thinking Question Status: Revised Objective: 1 Identify the differences between the three major legal forms of business. Keywords: corporation Principles: Principle 2: There Is a Risk-Return Tradeoff

11) Which forms of organization are free of initial legal requirements?

A) Sole proprietorship

B) General partnership

C) Corporation

D) Both A and B

Answer: D

Diff: 1 AACSB: 6. Reflective thinking Question Status: Previous edition Objective: 1 Identify the differences between the three major legal forms of business. Keywords: partnerships Principles: Principle 2: There Is a Risk-Return Tradeoff

12) For these types of organization, no distinction is made between business and personal assets.

A) Sole proprietorship

B) General partnership

C) Limited partnership

D) Both A and B

Answer: D

Diff: 2 AACSB: 6. Reflective thinking Question Status: Revised Objective: 1 Identify the differences between the three major legal forms of business. Keywords: partnerships Principles: Principle 2: There Is a Risk-Return Tradeoff

13) Which of the following is a significant disadvantage of a general partnership?

A) The cost of forming it is high.

B) Each partner is fully responsible for the liabilities incurred by the partnership.

C) There is a risk associated with the industry in which it operates.

D) Forming the business is very complex.

Answer: B

14) Which of the following forms of business organization is the dominant economic force in the United

States?

A) The sole proprietorship

B) The general partnership

C) The limited partnership

D) The joint venture

E) The corporation

Answer: E

15) A limited partner is liable

A) for only his or her own share of the partnership's debts.

B) for his or her own share of the partnership's debts and contingently liable for the other partners shares.

C) only up to the amount invested by that partner.

D) for none of the partnership's debts.

Answer: C

20) In a general partnership, all partners have unlimited liability for the actions of any one partner when

that partner is conducting business for the firm.

Answer: TRUE

21) There is no legal distinction made between the assets of the business and the personal assets of the

owners in the limited partnership.

Answer: FALSE

22) The owners of a corporation are liable for the corporation's obligations up to the amount of their

investment.

Answer: TRUE

23) General partners have unrestricted transferability of ownership, while limited partners must have the

consent of all partners to transfer their ownership.

Answer: FALSE

24) Ultimate control in a corporation is vested in the board of directors.

Answer: FALSE

25) Owners must register and pay yearly fees to their State of residence when establishing a sole

proprietorship.

Answer: FALSE

Diff: 1 AACSB: 6. Reflective thinking Question Status: Previous edition Objective: 1 Identify the differences between the three major legal forms of business. Keywords: proprietorships Principles: Principle 2: There Is a Risk-Return Tradeoff

26) Limited partners may actively manage the business.

Answer: FALSE

27) The life of a corporation is not dependent upon the status of the investors.

Answer: TRUE

28) A sole proprietorship is the most desirable business form in all circumstances.

Answer: FALSE

29) In a sole proprietorship, the owner is personally responsible without limitation for the liabilities

incurred.

Answer: TRUE

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

A) profit maximization does not require the consideration of risk.

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

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

D) A and B.

Answer: D

Diff: 2 AACSB: 6. Reflective thinking Question Status: Previous edition Objective: 1 Understand the role of the financial manager within the firm and the goal for making financial choices. Keywords: goal of the firm Principles: Principle 3: Cash Flows Are the Source of Value

4) Which of the following goals of the firm is equivalent to the maximization of shareholder wealth?

A) Profit maximization

B) Risk minimization

C) Maximization of the total market value of the firm's common stock

D) None of the above

Answer: C

Diff: 1 AACSB: 6. Reflective thinking Question Status: Previous edition Objective: 1 Understand the role of the financial manager within the firm and the goal for making financial choices. Keywords: goal of the firm Principles: Principle 3: Cash Flows Are the Source of Value

5) If managers are making decisions to maximize shareholder wealth, then they are primarily concerned

with making decisions that should

A) positively affect profits.

B) increase the market value of the firm's common stock.

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

D) accomplish all of the above.

Answer: B

6) Profit maximization is not an adequate goal of the firm when making financial decisions because

A) it does not necessarily reflect shareholder wealth maximization.

B) it ignores the risk inherent in different projects that will generate the profits.

C) it ignores the timing of a project's returns.

D) all of the above are correct.

Answer: D

7) Which of the following goals is in the best long-term interest of stockholders?

A) Profit maximization

B) Risk minimization

C) Maximizing of the market value of the existing shareholders' common stock

D) Maximizing sales revenues

Answer: C

8) If managers do not pursue the goal of maximizing shareholder wealth

A) they concentrate on more important matters like growing market share.

B) they can focus more on social responsibilities.

C) they are likely to lose their jobs.

D) they can focus more on long-term profitability.

Answer: C

Diff: 2 AACSB: 6. Reflective thinking Question Status: New question Objective: 1 Understand the role of the financial manager within the firm and the goal for making financial choices. Keywords: goal of the firm Principles: Principle 5: Individuals respond to incentives.

12) Serious ethical violations by corporations such as Enron led to the passage of

A) the Dodd-Frank Act.

B) the Insider Trading Act of 1988.

C) the Sarbanes-Oxley Act.

D) All of the above.

Answer: C

13) The goal of the firm should be the maximization of profit.

Answer: FALSE

14) One of the problems associated with profit maximization is that it ignores the timing of a project's

return.

Answer: TRUE

15) The goal of profit maximization is equivalent to the goal of maximization of share value.

Answer: FALSE

16) The goal of profit maximization ignores the timing of profit.

Answer: TRUE

17) The goal of maximize shareholder wealth inevitably conflicts with socially responsible behavior on

the part of corporation.

Answer: FALSE

Diff: 2 AACSB: 6. Reflective thinking Question Status: New question Objective: 1 Understand the role of the financial manager within the firm and the goal for making financial choices. Keywords: ethics Principles: Principle 4: Market Prices Reflect Information

18) The Sarbane-Oxley Act addresses insider trading by members of Congress.

Answer: FALSE

Diff: 2 AACSB: 6. Reflective thinking Question Status: Previous edition Objective: 1 Understand the role of the financial manager within the firm and the goal for making financial choices. Keywords: ethics Principles: Principle 5: Individuals respond to incentives.

19) A reputation for unethical behavior can negatively affect the value of a company's stock.

Answer: TRUE

Diff: 1 AACSB: 6. Reflective thinking Question Status: Previous edition Objective: 1 Understand the role of the financial manager within the firm and the goal for making financial choices. Keywords: ethics Principles: Principle 5: Individuals respond to incentives.

20) The agency problem arises due to the separation of ownership and control in a corporation.

Answer: TRUE

1 The Four Basic Principles of Finance

1) Consider the following equally likely project outcomes:

Profit

X Y

Pessimistic prediction $ 0 $

Expected outcome $ 500 $

Optimistic prediction $1000 $

A) Investors will prefer project X because it potentially offers a higher profit.

B) Investors will reject both projects because the profit is too low.

C) Investors will prefer project Y because the expected return is the same as for project X but the outcome

is certain.

D) Since Projects X and Y have the same expected outcomes of $500, investors will view them as identical

in value.

Answer: C

Diff: 2 AACSB: 3. Analytic thinking Question Status: Revised Objective: 1 Explain the five principles of finance that form the basis of financial management for both businesses and individuals. Keywords: risk, return Principles: Principle 2: There Is a Risk-Return Tradeoff

2) Consider the timing of the profits of the following certain investment projects:

Profit

L S

Year 1 $ 0 $ 3000

Year 2 $ 3000 $ 0

A) Project S is preferred to Project L.

B) Project L is preferred to Project S.

C) Projects S and L are equally desirable.

D) A goal of profit maximization would favor Project S only.

Answer: A

Diff: 2 AACSB: 3. Analytic thinking Question Status: Previous edition Objective: 1 Explain the five principles of finance that form the basis of financial management for both businesses and individuals. Keywords: time value of money Principles: Principle 1: Money Has a Time Value

3) In finance, we assume that investors are generally

A) neutral to risk.

B) averse to risk.

C) fond of risk.

D) none of the above.

Answer: B

Diff: 1 AACSB: 3. Analytic thinking Question Status: Previous edition Objective: 1 Explain the five principles of finance that form the basis of financial management for both businesses and individuals. Keywords: risk, return Principles: Principle 2: There Is a Risk-Return Tradeoff

4) Consider cash flows for Projects X and Y such as:

Project X Project Y

Year 1 $300 0 $ 0

Year 2 $ 0 $

A rational person would prefer receiving cash flows sooner because

A) the money can be reinvested.

B) the money is nice to have around.

C) the investor may be tired of a particular investment.

D) the investor is indifferent to either proposal.

Answer: A

5) Which of the following should be considered when assessing the financial impact of business

decisions?

A) The amount of projected earnings

B) The risk-return tradeoff

C) The timing of projected earnings; i., when they are expected to occur

D) All of the above

Answer: D