1) Financial management deals with the maintenance and creation of economic value or wealth. Answer: True 2) Each financial decision made by a corporate manager can be evaluated by its direct impact on the corporation's stock price. Answer: False 3) 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. Answer: True 4) Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money. Answer: 5) The goal of the firm's financial managers should be the maximization of the total value of the firm's stock. Answer: 6) Only a firm's financial decisions affect its stock prices. Answer: 7) 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. Answer: 8) When making financial decisions, managers should always look at marginal or incremental cash flows. Answer: 9) 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. Answer: 10) 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. Answer: 11) Profits represent money that can be spent, and as such, form the basis for determining the value of financial decisions. Answer: 12) Giving the company's CEO stock options as part of his or her compensation package is an example of an agency cost. Answer: 13) Cash flows and profits are synonymous; in other words, higher cash flows equal higher profits. Answer: 14) Managers should not be concerned with business ethics because ethical behavior is inconsistent with the primary goal of maximizing shareholder value. Answer: 15) The risk/return trade-off implies that the return on a riskless asset must be zero. Answer: 16) An efficient market is one in which the prices of the assets traded in that market fully reflect all available information at any instant in time. Answer: 17) The opportunity cost of any choice you make is the highest-valued alternative that you had to give up when you made the choice. Answer: 18) Determining how a firm should raise money to fund its long-term investments is referred to as capital structure decisions. Answer: For question, 19 through 30 you select one choice only. 19) 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. Answer: 20) 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. Answer: 21) Suppose XYZ Corporation is traded on the New York Stock Exchange. XYZ's closing price on Monday is $20 per share. After the market closes on Monday, XYZ makes a surprise announcement that it has obtained a major new customer. XYZ's stock will likely A) Open at $20 per share on Tuesday and then increase as more investors read the announcement in The Wall Street Journal. B) Remain at $20 per share because in efficient markets the price already reflects all information. C) Open above $20 because the positive news will result in a higher valuation even though the stock has not yet traded. D) Open below $20 because the surprise announcement creates more uncertainty. Answer: 22) 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. Twenty years ago, the lot was purchased for $50,000. When determining the value of the new store project, A) The cost of the lot is zero since the corporation already owns it. B) The opportunity cost of the lot is $250,000 and should be included in calculating the value of the project. C) The cost of the lot for valuation purposes is $50,000 because land does not depreciate. D) The incremental cash flow should be the $50,000 original cost less accumulated amortization. Answer: 23) In order to reduce agency problems, managers may be provided compensation that includes: A) A fixed salary so managers' pay is not at risk, allowing managers to focus on the company's business. B) A bonus based on the level of profit achieved during the year. C) An option to buy the company's stock. D) Incentive pay for achieving higher sales than last year. Answer: 24) An investor is considering two equally risky investments. Investment A is expected to return $1,000 per year for the next 5 years. Investment B is expected to return $6,000 at the end of 5 years. Which of the following statements is most correct if both investments A and B have the same cost? A) A risk averse investor will select investment B because it is expected to provide the most cash ($6,000 > $5,000). B) A risk averse investor will select investment A because it provides cash earlier than investment B. C) The investor will select investment A only if the cost is less than $1,000. D) The investor may select investment A or investment B depending on the opportunity cost of money. Answer: 25) Ethical behavior A) Is the fifth basic principles of finance. B) Cannot be a concern to managers who are expected to maximize shareholder value. C) In the corporate world means not breaking any laws. D) Is essential in business because unethical behavior destroys trust and business relationships. Answer: 26) Assume that you won the Lotta Dough Lotto jackpot for $20 million. Further assume that you were offered a choice to receive the $20 million today or to receive it in equal installments of $1 million per year for 20 years. According to one of the principles of finance, which would you take? A) The $20 million in equal installments of $1 million per year for 20 years because you would be afraid of spending it all right away. B) The $20 million today because it would be worth more than if you would receive it in equal installments of $1 million per year for 20 years. C) You would be indifferent as to when you would receive the $20 million since the total number of dollars received is the same either way. D) The $20 million in equal installments of $1 million per year for 20 years because it would be worth more than if you would receive it today. Answer: 27) The three basic types of issues addressed by the study of finance are A) Capital budgeting, capital structure decisions, and working capital management. B) Capital budgeting, working capital management, and investment analysis. C) Capital structure decisions, working capital management, and sustained profitability. D) Capital budgeting, investment analysis, and cash management. Answer: 28) Working capital management is concerned with A) How a firm can best manage its cash flows as they arise in its day-to-day operations. B) How a firm should raise money to fund its investments. C) What long-term investments a firm should undertake. D) Managing a firm