Question 1

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.

Accepted Answer

A

Question 2

Only a firm's financial decisions affect its stock prices.

Accepted Answer

Stock prices are affected by a variety of factors such as economic conditions, industry trends, changes in management, and even geopolitical events. While financial decisions certainly play a role in a firm's stock price, they are not the only factor that affects it.

Question 3

Which of the following goals of the firm are synonymous (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

Accepted Answer

Maximization of the total market value of the firm's common stock is equivalent to the maximization of shareholder wealth as it takes into account the expectations and preferences of shareholders. Profit maximization and risk minimization may not necessarily result in an increase in shareholder wealth.

Question 4

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.

Accepted Answer

The payment of a dividend can actually have an impact on a corporation's share price. When a dividend is announced, it often attracts more investors, which can increase demand for the stock and drive up the share price. Additionally, some investors may choose to reinvest their dividends back into the company, which can lead to further growth and appreciation in the share price.

Question 5

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.

Accepted Answer

Shareholder wealth maximization means maximizing the price of existing common stock, which benefits the shareholders as they can sell their shares at a higher price and earn a higher return on their investment. Maximizing earnings per share or dividends per share may not necessarily result in an increase in the stock price, while maximizing stockholders equity focuses on the company's financial position rather than the shareholders' wealth.

Question 6

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

Accepted Answer

Corporate managers should not only focus on short-term profits but also consider the long-term impact of their investment decisions on the company's sustainability and growth. The time value of money should not be the sole determinant of investment decisions.

Question 7

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

Accepted Answer

The primary objective of financial management is to increase shareholder value or maximize the total value of the firm's stock.

Question 8

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

Accepted Answer

The fundamental goal of a business is to maximize shareholder value, which is broader than just maximizing retained earnings. It involves increasing the overall value of the company through various means, including profitability, growth, and strategic decisions that may not always result in increased retained earnings.

Question 9

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 $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.

Accepted Answer

The answer of A financial manager is considering two projects,A...

Question 10

Which of the following is the most important goal that a corporation should strive for?
A) Maximize current profits.
B) Maximize market share.
C) Maximize revenue.
D) Maximize shareholder wealth.

Accepted Answer

Maximizing shareholder wealth is the most important goal as it creates long-term value for the company's owners and investors. This includes increasing the value of the company's stock, paying out dividends, and ensuring the company's financial stability and growth. By prioritizing shareholder wealth, the corporation also typically focuses on making smart business decisions that benefit its employees, customers, and other stakeholders. Maximizing current profits, market share, or revenue may be important in the short term, but they do not necessarily lead to sustained success and growth for the company.

Question 11

The goal of profit maximization ignores the risk of financial decisions

Accepted Answer

The goal of profit maximization focuses solely on maximizing profits without considering the risk associated with financial decisions. This approach may lead companies to pursue risky ventures in the quest for higher profits, which could end up being disadvantageous in the long run.

Question 12

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.

Accepted Answer

Evaluating a manager's financial decision by measuring its effect on the corporation's stock price is a common practice among investors. The underlying assumption is that the stock price reflects the present value of the corporation's future cash flows, and any decision that affects these cash flows will ultimately impact the stock price. Of course, there may be other factors that affect the stock price, such as changes in market conditions or investor sentiments, which cannot be controlled by the manager. Nonetheless, using stock price as a performance metric can provide valuable insights into how well a manager is allocating resources and creating shareholder value.

Question 13

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

Accepted Answer

The primary goal of a publicly owned corporation is to maximize shareholder wealth. This is usually achieved by maximizing stock price and paying dividends to shareholders. While maximizing earnings per share and minimizing shareholder risk may be important considerations, they are not the primary goal of a corporation.

Question 14

One of the causes of the recent financial crisis in the United States has been excessive risk taking due to underestimation of risk.How does this relate to financial leverage?
 Can overestimation of risk also be detrimental?

Accepted Answer

The answer of One of the causes of the recent...

Question 15

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

Accepted Answer

Shareholder wealth maximization refers to the goal of maximizing the value of shares or equity in a company, which ultimately means maximizing the price of the existing common stock. This is achieved by increasing profits, improving efficiency, and implementing strategies that increase the share price over time.

Question 16

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

Accepted Answer

Maximization of shareholder wealth as a goal does consider risk, as the value of a firm's stock reflects both the expected returns and the risk associated with achieving those returns. Financial decisions that increase risk without adequate expected returns can decrease stock value, contrary to the goal of maximizing shareholder wealth.

Question 17

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.

Accepted Answer

Maximization of shareholder wealth considers not only short-term profits but also long-term sustainability and growth of the firm, which benefits the shareholders in the form of higher stock prices and dividends. Maximizing profits or market share does not necessarily lead to long-term success and may even harm the firm's reputation or sustainability in the market. Maximizing sales alone also does not guarantee profitability or shareholder wealth.

Question 18

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

Accepted Answer

While a financial decision can certainly influence a corporation's stock price, there are many other factors (such as market conditions, investor sentiment, and macroeconomic trends) that also play a role in determining the stock price. Therefore, it would be inaccurate to judge the success of a financial decision solely on its impact on the stock price.

Question 19

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

Accepted Answer

Financial management involves making decisions that increase the value of a company or individual's assets and wealth. It involves managing financial resources, creating and implementing financial strategies, and evaluating financial performance.

Question 20

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.

Accepted Answer

Shareholders' reactions to poor or good investment and dividend decisions are reflected in the price of the stock, which can either fall or rise.

Quiz 1: An Introduction to the Foundations of Financial Management

Maximization of shareholder wealth

Only a firm's financial decisions affect its stock prices.

Which of the following goals of the firm are synonymous (equivalent) to the maximization of shareholder wealth?

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.

Shareholder wealth maximization means

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

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

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

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 $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?

Which of the following is the most important goal that a corporation should strive for?