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eu/test-bank-principles-of-managerial-finance-14th-edition-gitman
1) A financial analyst is responsible for maintaining and controlling a firm's daily cash
balances.
Answer: FALSE
2) Finance is concerned with the process institutions, markets, and instruments involved in
the transfer of money among and between individuals, businesses, and government.
Answer: TRUE
3) Financial managers administer the financial affairs of all types of businesses such as
private and public, large and small, and profit seeking and not for profit.
Answer: TRUE
7) In large companies, CEOs are legally responsible for coordinating the assets and
liabilities of the employees' pension fund.
Answer: FALSE
8) A controller typically handles the accounting activities, such as tax management, data
processing, financial accounting, and cost accounting.
Answer: TRUE
9) Managerial finance is concerned with design and delivery of advice and financial
products to individuals, businesses, and governments.
Answer: FALSE
10) ________ is concerned with design and delivery of advice and financial products to
individuals, businesses, and governments.
A) Managerial finance
B) Auditing services
C) Financial services
D) Cost accounting
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Answer: C
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1) In partnerships, owners have unlimited liability and may have to cover debts of other less
financially sound partners.
Answer: TRUE
3) A sole proprietor has unlimited liability; his or her total investment in the business, but
not his or her personal assets, can be taken to satisfy creditors.
Answer: FALSE
4) In a limited partnership, all partners' liabilities are limited to their investment in the
partnership.
Answer: TRUE
7) Which of the following legal forms of organization has the ease of dissolution?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
Answer: A
D) S-corporations
Answer: A
13) Which of the following is the purest and most basic form of corporate ownership?
A) bond
B) notes
C) common stock
D) preferred stock
Answer: C
government bodies.
D) In sole proprietorships, owners have unlimited liability; whereas, in corporations, owners
have limited liability.
Answer: D
1.3 Describe the goal of the firm and explain why maximizing the value of the firm is an
appropriate goal for a business.
1) High net cash flow with fixed risk is generally associated with a higher share price.
Answer: TRUE
3) To achieve the goal of profit maximization for each alternative being considered, a
financial manager would select the one that is expected to result in the highest return.
Answer: TRUE
5) The wealth of corporate owners is measured by the share price of the stock.
Answer: TRUE
6) Risk, the magnitude and timing of cash flows are the key determinants of share price,
which represent the wealth of the owners in the firm.
Answer: TRUE
7) A higher earnings per share (EPS) does not necessarily translate into a higher stock price.
Answer: TRUE
8) The profit maximization goal ignores the timing of returns, does not directly consider
cash flows, and ignores risk.
Answer: TRUE
10) An increase in a firm's risk will always result in a higher share price since the stockholder
must be compensated for the greater risk.
Answer: FALSE
11) Stockholders expect to earn higher rates of return on investments with lower risk and
lower rates of return on investments with higher risk.
Answer: FALSE
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12)The goal of business ethics is to motivate business and market participants to adhere to
both the letter and the spirit of laws and regulations in all aspects of business and
professional practice.
Answer: TRUE
16) Wealth maximization as the goal of a firm implies enhancing the wealth of ________.
A) the auditors
B) the creditors
C) the federal reserve
D) the firm's stockholders
Answer: D
17) The amount earned during the accounting period on each outstanding share of common
stock is called ________.
A) dividend per share
B) earnings per share
C) net profits after taxes
D) book value per share
Answer: B
18) Which of the following is the best measure of profit maximization goal?
A) retained earnings
B) risk of the investment
C) earnings per share
D) timing of the returns
Answer: C
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20) Profit maximization as the goal of the firm is not ideal because ________.
A) profits are only accounting measures
B) cash flows are more representative of financial strength
C) profit maximization does not consider risk
D) profits today are less desirable than profits earned in future years
Answer: C
22) The key variables in the owner wealth maximization process are ________.
A) market risk premium and risk
B) cash flows and risk
C) risk-free rate and share price
D) total assets and risk
Answer: B
23) Cash flows and risk are the key determinants in share price. Increased cash flow results
in ________, other things remaining the same.
A) a lower share price
B) a higher share price
C) an unchanged share price
D) an undetermined share price
Answer: B
24) Cash flows and risk are the key determinants in share price. Increased risk, other things
remaining the same, results in ________.
A) a lower share price
B) a higher share price
C) an unchanged share price
D) an undetermined share price
Answer: A
25) Financial managers evaluating decision alternatives or potential actions must consider
________.
A) only risk
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B) only return
C) either risk or return
D) risk, return, and the impact on share price
Answer: D
26) An ethics program is expected to have ________ impact on a firm's share price.
A) a positive
B) a negative
C) no impact
D) an unpredictable
Answer: A
29) If the CEO of a company were to pass away, what do you think would happen to price of
the stock?
A) It would decrease because of the perceived increased risk due of lack of near-term
leadership.
B) It would increase because of the perceived increased risk due of lack of near-term
leadership.
C) It would decrease because of the perceived decreased risk due of lack of near-term
leadership.
D) It would increase because of the perceived decreased risk due of lack of near-term
leadership.
Answer: A
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31) A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each
asset costs $35,000 and is expected to provide earnings over a three-year period as described
below. Based on the wealth maximization goal, the financial manager would choose
________.
A) Asset 1
B) Asset 2
C) Asset 3
D) Asset 4
Answer: A
32) A financial manager must choose between three alternative investments. Each asset is
expected to provide earnings over a three-year period as described below. Based on the
wealth maximization goal, the financial manager would ________.
A) choose Asset 1
B) choose Asset 2
C) choose Asset 3
D) be indifferent between Asset 1 and Asset 2
Answer: A
36) Which of the following is one of the positive benefits of an effective ethics program?
A) reduce potential litigation and judgment costs
B) maintain and build competitor confidence
C) gain the loyalty, commitment, and respect of the firm's competitors
D) making sure violations are penalized, while at the same time not subjecting the employee
to publicity
Answer: A
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39) Corporate ethics policies typically apply to ________ in dealing with ________.
A) employee actions; customers and creditors
B) employee actions; customers, vendors, and regulators
C) management actions; all corporate constituents
D) employee actions; all corporate constituents
Answer: D
2.1 Understand the role that financial institutions play in managerial finance.
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6) Firms that require funds from external sources can obtain them ________.
A) through financial institutions
B) from central bank directly
C) through forex market
D) by issuing T-bills
Answer: A
9) The shadow banking system describes a group of institutions that engage in lending activities,
much like traditional banks.
Answer: TRUE
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10) Which of the following provides savers with a secure place to invest funds and offer both
individuals and companies loans to finance investments?
A) investment banks
B) securities exchanges
C) mutual funds
D) commercial banks
Answer: D
11) Which of the following assists companies in raising capital, advise firms on major
transactions such as mergers or financial restructuring, and engage in trading and market making
activities?
A) investment banks
B) securities exchanges
C) mutual funds
D) commercial banks
Answer: A
1) Primary and secondary markets are markets for short-term and long-term securities,
respectively.
Answer: FALSE
2) Financial markets are intermediaries that channel the savings of individuals, businesses, and
government into loans or investments.
Answer: FALSE
3) A public offering is the sale of a new security issue—typically debt or preferred stock—
directly to an investor or group of investors.
Answer: FALSE
5) The Glass-Steagall Act was imposed to allow commercial and investment banks to combine
and work together.
Answer: FALSE
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8) Which of the following is a forum in which suppliers and demanders of funds can transact
business directly?
A) shadow banking system
B) financial markets
C) commercial banks
D) financial institutions
Answer: B
9) The sale of a new security directly to an investor or a group of investors is called ________.
A) arbitraging
B) short selling
C) a capital market transaction
D) a private placement
Answer: D
10) The ________ market is where securities are initially issued and the ________ market is
where pre-owned securities (not new issues) are traded.
A) primary; secondary
B) money; capital
C) secondary; primary
D) primary; money
Answer: A
2.3 Describe the differences between the capital markets and the money markets.
1) The over-the-counter (OTC) market is a market for trading smaller and unlisted securities.
Answer: TRUE
2) NASDAQ is considered an OTC market since it is not recognized by the SEC as a "listed
exchange."
Answer: FALSE
3) In the OTC market, the ask price is the highest price offered by a dealer to purchase a given
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security.
Answer: FALSE
4) In the Eurobond market, corporations and governments typically issue bonds denominated in
dollars and sell them to investors located outside the United States.
Answer: TRUE
5) Capital markets are for investors who want a safe temporary place to deposit funds where they
can earn interest and for borrowers who have a short-term need for funds.
Answer: FALSE
6) Money markets are markets for long-term funds such as bonds and equity.
Answer: FALSE
7) An efficient market is a market that establishes correct prices for the securities that firms sell
and allocates funds to their most productive use as a result of the intense competition among
investors.
Answer: TRUE
8) Money markets involve the trading of securities with maturities of one year or less.
Answer: TRUE
10) The Eurocurrency market is a market for short-term bank deposits denominated in U.S.
dollars or other easily convertible currencies.
Answer: TRUE
11) The money market is a financial relationship created by a number of institutions and
arrangements that allows suppliers and demanders of long-term funds to make transactions.
Answer: FALSE
16) The key securities traded in the capital markets are ________.
A) commercial papers and Treasury bills
B) Treasury bills and certificates of deposit
C) stocks and bonds
D) bills of exchange and commercial papers
Answer: C
20) A market that establishes correct prices for the securities that firms sell and allocates funds to
their most productive uses is called a(n) ________.
A) future market
B) forex market
C) efficient market
D) weak-form market
Answer: C
21) The ________ is created by a financial relationship between suppliers and demanders of
short-term funds.
A) stock market
B) capital market
C) forex market
D) money market
Answer: D
22) By definition, the money market involves the buying and selling of ________.
A) stocks and bonds
B) short-term securities
C) all financial instruments except derivatives
D) secured premium notes
Answer: B
24) The ________ is created by a number of institutions and arrangements that allow the
suppliers and demanders of long-term funds to make transactions.
A) forex market
B) capital market
C) money market
D) commodities market
Answer: B
25) Long-term debt instruments used by both government and business are known as ________.
A) preferred stocks
B) T-bills
C) bonds
D) equities
Answer: C
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27) In a ________ market, the buyer and seller are brought together to trade securities in an
organization called ________.
A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market
Answer: C
28) In a ________ market, the buyer and seller are not brought together to trade securities
directly but instead have their orders executed on the ________.
A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market
Answer: D
31) Apex Inc. issues a bond of $1,000 which pays interest semiannually at a coupon interest rate
of 8%. The maturity of the bond is 15 years. Where should this bond be traded?
A) forex market
B) money market
C) capital market
D) commodities market
Answer: C
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