Problems in Financial Management

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CHAPTER 1

AN INTRODUCTION TO THE FOUNDATIONS OF FINANCIAL MANAGEMENT – THE TIES THAT BIND

TRUE/FALSE

1. The difference between the market value of the firm and the amount of money invested in the firm is known as market value added.

Answer: True; Difficulty: 1; Keywords: Market Value Added, Goal of the Firm

2. A company that wants to maximize earnings per share may either over invest or use too much debt.

Answer: True; Difficulty: 2; Keywords: Earnings Per Share, Goal of the Firm

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

Answer: True; Difficulty: 1; Keywords: Shareholder Wealth, Goal of the Firm

4. It is important to evaluate all financial decisions by measuring how they affect a firm’s stock price, hence ensuring maximization of shareholder wealth.

Answer: False; Difficulty: 2; Keywords: Goal of the Firm, Shareholder Wealth Maximization

5. Business owners who want to operate as sole proprietors must request sole proprietor status and get approval from taxing authorities to pass business income to the owner’s individual tax return.

Answer: False; Difficulty: 1; Keywords: Sole Proprietorship, Legal Forms of Business

6. A general partnership, unlike a limited partnership, is an entity that legally functions separate and apart from its owners.

Answer: False; Difficulty: 2; Keywords: General Partnership, Limited Partnership, Legal Forms of Business

7. The best form of business entity to attract new capital is the sole proprietorship because investors only need to deal with one owner.

Answer: False; Difficulty: 1; Keywords: Legal Forms of Business, Sole Proprietorship

8. S-type corporations and limited liability companies are taxed like partnerships, but have the advantage of limited liability for their owners.

Answer: True; Difficulty: 1; Keywords: Legal Forms of Business, S-Corporation, Limited Liability Company

9. Limited liability companies are more flexible than S-type Corporations because limited liability companies operate under state laws.

Answer: False; Difficulty: 2; Keywords: Legal Forms of Business, S-Corporation, Limited Liability Company

10. A corporate treasurer is typically responsible for cash management, credit management, and raising capital.

Answer: True; Difficulty: 1; Keywords: Treasurer, Financial Managers

11. A financial manager must evaluate each investment project ignoring taxes because the manager has no control over the tax system.

Answer: False; Difficulty: 1; Keywords: Taxes, Relevant Cash Flows

12. Dividends received by a corporation are taxable income while dividends paid by a corporation are a tax deductible expense.

Answer: False; Difficulty: 1; Keywords: Dividends, Taxable Income

13. In order to simplify the tax code, current regulations require that a dollar of income earned by a U.S. Corporation in the United States is taxed in the same way as a dollar of income earned by a U.S. Corporation in a foreign country.

Answer: False; Difficulty: 1; Keywords: Taxes, Foreign Income

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

Answer: False; Difficulty: 2; Keywords: Goal of the Firm, Profits, Time Value of Money

15. 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: False; Difficulty: 2; Keywords: Net Income, Risk, Timing of Cash Flow

16. Profit maximization is not the goal of the firm because accounting profits do not accurately measure the timing and uncertainty of a company's cash flows.

Answer: True; Difficulty: 1; Keywords: Goal of the Firm, Profits, Cash Flow

17. A limited liability company (LLC) is taxed like a partnership but provides limited liability for its owners similar to a corporation.

Answer:...
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