Chapter 1

Introduction to Managerial Finance

1) Essay Questions
1. What is finance? Explain how this field affects the lives of everyone
and every organization.
Finance: Can be defined as the science and art of managing (Allocating) money / Funds /
Capital over time.
- It is the study of how individuals and businesses evaluate investments to raise and how
to raise funds to finance them.
- It is related to how individuals and businesses make choices between current spending
or receiving money now versus later.
 At the personal level, finance is concerned with individuals’ decisions about:
• how much of their earnings / income they spend now.
• how much they put aside (save)
• how they invest their savings (in the form of financial or/and real
investments)
 In a business level, finance is related to activities or decision-making process
involving:
• Planning and managing long term investments (Capital budgeting).
• Managing long term sources of funds (That is the mix between debt and
equity) a firm uses to finance its operations (Capital structure).
• Managing the firm working capital (WC = Current Assets – Current
liabilities) and ensuring that the firm in good liquidity position to maintain its day-
to-day operations.
Finance: is concerned with decision making process, financial institutions, financial
markets, and financial instruments involved in the transfer of savings from savers / surplus
sectors such as (individuals, businesses, and government) with excess cash to borrows /
deficit sectors such as (individuals, businesses, and government) who have less cash (that is
they have financial needs).

2- What is the financial services area of finance? Describe the field of

managerial finance.

 Financial Services: is the area of finance concerned with the design and delivery of
advice and financial products to individuals, businesses, and governments.

• Career opportunities include:

Career Opportunities

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 • banking
• personal financial planning
• Investments
• real estate
• insurance
 Managerial finance is concerned with the duties of the financial manager working in
a business. On the other hand, it also concerned with how to manage capital and how
to make financial decisions within a business
The organizational level of the managerial finance function.

depends mainly on the size of the firm in addition to other factors

In small firms/companies: the finance function may be performed by the company owner,
or its president or the accounting department
In large companies: finance typically evolves into a separate department linked to the
president.
 In such case there will be Vice President of Finance (CFO) or other title like
Chief Finance Sector (CFS) reporting to him or her the treasurer which is
responsible for the financial affairs/activities. And the controller which is
responsible for the accounting affairs/activities

3- Compare between (Treasurer and Controller)

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4- What are the two primary activities of the financial manager that
are related to the firm’s balance sheet?

1. The primary activities of the financial manager.

1- Investment Decisions can be classified in two groups:
 Short investment decisions (related to current assets)
 Long investment decisions (related to long term assets).
 Through making investment decisions, the financial managers:
 Determine both the mix and the type of assets found on the firm's balance sheet.
 Determine the best chances to invest their so as to a high level 0f expected return so wealth of
corporate owners can be maximized.
 Investment decision totally related to the left hand side of the balance sheet (T shape format)
2- Financing Decisions can be classified in two groups:
 Short-term financing decisions (related to current liabilities)
 Long-term financing decisions (related to long term liabilities and stockholders’equity).

 Through making financing decisions, the financial managers:

 Determine the appropriate mix of short-term and long-term financing.
 Determine the appropriate mix of long-term financing to maximize the value of the firm.
 Determine the additional financing needs.
 Deciding which individual short-term sources are best at a given point in time.
 Deciding which individual long-term sources are best at a given point in time.
 Financing decision totally related to the right hand side of the balance sheet (T shape format)

5- What are secondary activities of the financial manager that

are related to the firm’s balance sheet?

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This view can be represented in the following statement of financial position list format :

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 The Goal of the Firm
 Which Investment is Preferred?

 Profit maximization may not lead to the highest possible share price for at least three reasons:
1. Timing is important—the receipt of funds sooner rather than later is preferred
2. Profits do not necessarily result in cash flows available to stockholders
3. Profit maximization fails to account for risk

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 1. Profit Maximization

According to this goal,

 Management only looks for maximizing profits, but the question here is: what kind
of profits need to be maximized; earnings before interest and taxes (EPIT), or net
profits (NI).
 In brief, there is common agreement to maximize the earnings per Share (EPS)

CRITERION: select activities that increase EPS

this goal has many shortcomings(disadvantages) which are:
 Based on accounting numbers and principle, hence profits can vary significantly
depending on accounting method employed.
 ignoring risk - two firms may report identical profit figures but one firm's return
are more volatile.
 It does not take into consideration the time value many.
 It does not take into consideration the Future value prospects – two firms may
report identical profit, but one firm is more highly valued due its higher relative
future potential.

2. Shareholder Wealth Maximization

 Management only looks for maximizing shareholder wealth (stock price) and applying
the following criterion:
 CRITERION: select activities that increase shareholder wealth (stock price)
 stock price equal to the present value of all expected future cash flows shareholders
expect to receive.
 Risk is generally incorporated in the discount rate that converts future cash flows into
present day equivalent.
 since shareholders are residual claimants all other stakeholders (such as bondholders,
common stockholders) get their claims satisfied first. Thus they bear the highest level of
risk.

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 6- Compare between (Profit Maximization and Shareholders wealth maximization)

Profit Maximization Shareholders wealth Maximization

Profit is based upon Accrual Financial decision making based
accounting principles upon economic profit-cash flows
Profit measurement depends on
Measurement depends upon present
accounting policies and techniques
value of future cash flows
adopted by company
Realism (timing and risk of cash
Conservatism / Carefulness
flows are explicitly considered)

Stakeholders
7- Define the following term (Stakeholders)
Stakeholders are groups such as employees, customers, suppliers, creditors, owners, and
others who have a direct economic link to the firm.
 A firm with a stakeholder focus consciously avoids actions that would prove
detrimental to stakeholders. The goal is not to maximize stakeholder well-being but to
preserve it. Such a view is considered to be "socially responsible.“
 This thought can be viewed as an emphasis on the firm’s ” social responsibility”.
Really a preservation of stakeholder wealth than its maximization. Most firms
nowadays take stakeholder interests into consideration. but a difference in emphasis
remains.

8- For what three basic reasons is profit maximization inconsistent with wealth
maximization?

 Profit maximization may not lead to the highest possible share price for at least
three reasons:
1. Timing is important—the receipt of funds sooner rather than later is preferred
2. Profits do not necessarily result in cash flows available to stockholders
3. Profit maximization fails to account for risk

9. What is the goal of the firm and therefore of all managers and employees? Discuss how
one measures achievement of this goal.

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 To maximize shareholders wealth.
 the goal is measure by price; an increasing price per share of common stock relative to
the stock market as a whole indicates an achievement of this goal.in other words, measurement
depends upon present value of future cash flows (stock price) (think when apples shares went up,
when they were becoming popular because Steve jobs became CEO again.

10.What is risk? Why must risk as well as return be considered by the

financial manager who is evaluating a decision alternative or action?

 Risk: A measure of the uncertainty surrounding the return that an investment will earn or,
more formally, the variability of returns associated with a given asset.
 Financial managers must consider both risk and return because of their inverse effect on the share
price of firm. Increased risk may decrease the share price, while increased return is likely to
increase the share price. 

11. Describe the role of corporate ethics policies and guidelines, and discuss the relationship that is believed
to exist between ethics and share price.

Business ethics are the standards of conduct or moral judgment that apply to persons engaged in commerce.
 The goal of these ethical standards is to motivate business and market participants to adhere to both the letter
and the spirit of laws and regulations concerned with business and professional practice.
 Violations of these standards in finance involve a variety of actions: “creative accounting,” misleading financial
forecasts, insider trading, fraud, excessive executive compensation, and bribery.
 Ethics programs seek to:
• reduce litigation and judgment costs
• maintain a positive corporate image
• build shareholder confidence
• gain the loyalty and respect of all stakeholders
 The expected result of such programs is to positively affect the firm’s share price
 Negative publicity often leads to negative impacts on a firm.

The Agency Problem & Ways to ease it

The Principal-Agent Relationship: The

Agent is the “person that acts,” whereas the
Principal is the person that receives the benefits from the actions.
For Example: Shareholders of a company (principals) elect management (agents)
to act on their behalf.

Agency Problem: arise when managers place personal goals ahead of the goals
of shareholders.

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For Example:

Agency Cost: arise from agency problems that are borne by shareholders and represent
a loss of shareholder wealth. In other words, These are costs borne by shareholders to
prevent agency problem.

Resolving the Agency Problem:

Corporate Governance
 Good corporate governance by the Board of Directors is the heart of any resolution.

Corporate governance refers to the rules, processes, and laws by which companies are operated,
controlled, and regulated.
 It defines the rights and responsibilities of the corporate participants such as the shareholders,
board of directors, officers and managers, and other stakeholders, as well as the rules and
procedures for making corporate decisions.
 A system by which business corporations are directed and controlled (OECD).
 It is, narrowly as the relationship of a company to its shareholders or broadly as its relationship
to society (FT).

 To better understand the role that shareholders play in shaping a firm’s corporate governance, it’s better to
differentiate between to broad classes of owners:
1. Individual investors are investors who own relatively small quantities of shares so as to meet personal investment
goals.

2. Institutional investors are investment professionals, such as banks, insurance companies, mutual funds, and pension
funds, that are paid to manage and hold large quantities of securities on behalf of others.

 Unlike individual investors, institutional investors often monitor and directly influence a firm’s corporate governance by
exerting pressure on management to perform or communicating their concerns to the firm’s board.
 Many financial scandals arise from bad/poor governance in those firms, e.g.
Enron, World.com, and Lehman Brothers etc.
 Corporate governance is concerned with the following issues:
• Transparency.
• Honest reporting of activities.
• Composition and functions of the board of directors.
• Remuneration structure and incentives.
• Ethical behavior.

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 The Role of Business Ethics
Business ethics are the standards of conduct or moral judgment that apply to persons engaged in
commerce.
 The goal of these ethical standards is to motivate business and market participants to adhere to
both the letter and the spirit of laws and regulations concerned with business and professional
practice.
 Violations of these standards in finance involve a variety of actions: “creative accounting,”
misleading financial forecasts, insider trading, fraud, excessive executive compensation, and
bribery.

 Ethics programs seek to:

• reduce litigation and judgment costs
• maintain a positive corporate image
• build shareholder confidence
• gain the loyalty and respect of all stakeholders
 The expected result of such programs is to positively affect the firm’s share price
 Negative publicity often leads to negative impacts on a firm.

12- Define Agency Problem

Agency Problem: is referring to the conflict of interest between shareholders and managers
of the firm. Such conflict appears as a result of the separation between management and
ownership of the firm. The managers act as the agents of the owner(s) of the firm. When
the managers have less than 100% of the ownership in the firm, they may act active on
their own benefits rather than the owner` interest

13- What are the main principles of finance discussed in this chapter ?
 The main principles behind the financial topics being dealt in this chapter and the following ones are:
Money has a time value
Principal
An Egyptian pound received today worth more than an Egyptian pound received in the future. On the
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other hand, an Egyptian pound received in the future is worth less than an Egyptian pound received today.
There is a risk-return tradeoff
Principal - Individuals would not take on additional risk unless they expect to be compensated with additional
2 return.
- This principal is based on the concept that individuals are risk averse
Cash flows are the source of value
Principal
- Profit is an accounting concept designed to measure a firm’s performance over a period of time.
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- Cash flow is the amount of cash that actually be taking out of the firm over the same period.
Market prices reflect information
Principal
Investors act to new information through buying and selling investments. The efficiency of the market
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determines by the speed with which investors reply and the way that prices respond to the information

14-What is Risk-Return Tradeoff? OR Return is the Price of Risk. Discuss

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 The risk-return tradeoff states that the potential return rises with an increase in risk. Using this
principle, individuals associate low levels of uncertainty (risk) with low potential returns,
and high levels of uncertainty or risk with high potential returns.

15- What is the primary economic principle used in managerial finance?

 Marginal cost–benefit analysis is the economic principle that states that financial
decisions should be made and actions taken only when the added benefits exceed the
added costs
 Marginal cost-benefit analysis can be illustrated using the following simple example.
 Nord Department Stores is applying marginal-cost benefit analysis to decide whether to
replace a computer:

16- What are the major differences between accounting and finance
with respect to emphasis on cash flows and decision making?

 One major difference in perspective and emphasis between finance and accounting is
that accountants generally use the accrual method while in finance, the focus is on cash
flows.
 Accrual Basis: recognizes sales revenue and expenses incurred to make sale at time of sale.
 Cash Basis: recognizes revenues and expenses only with respect to actual inflows and
outflows of cash
Decision Making
 Finance and accounting also differ with respect to decision-making:
 Accountants devote most of their attention to the collection and presentation of financial data.
 Financial managers evaluate the accounting statements, develop additional data, and make
decisions on the basis of their assessment of the associated returns and risks

2) MCQs
1) ________ 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
Answer: C

2) Managerial finance ________.

A) involves tasks such as budgeting, financial forecasting, cash management, and funds procurement

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 B) involves the design and delivery of advice and financial products
C) recognizes funds on an accrual basis
D) devotes the majority of its attention to the collection and presentation of financial data
Answer: A
3) Finance is ________.
A) the system of verifying, analyzing, and recording business transactions
B) the science of the production, distribution, and consumption of goods and services
C) the art and science of managing money
D) the art of merchandising products and services
Answer: C
4) Which of the following is an area of career opportunities in financial services?
A) supply chain management
B) personal financial planning
C) auditing of financial statements
D) production planning
Answer: B
5) Which of the following is an area of career opportunities in managerial finance?
A) investment
B) real estate and insurance
C) capital expenditures management
D) personal financial planning
Answer: C
6) Which of the following is a duty of a financial manager in a business firm?
A) developing marketing plans
B) controlling the stock price
C) raising financial resources
D) auditing financial records
Answer: C
7) A ________ is responsible for evaluating and recommending proposed long-term investments.
A) financial analyst
B) credit manager
C) pension fund manager
D) capital expenditures manager
Answer: D
8) The primary goal of a financial manager is ________.
A) minimizing risk
B) maximizing profit
C) maximizing wealth
D) minimizing return
Answer: C
9) Corporate owners receive return ________.
A) by realizing gains through increases in share price and interest earnings
B) by realizing gains through increases in share price and cash dividends
C) through capital appreciation and retained earnings
D) through interest earnings and earnings per share
Answer: B
10) The wealth of the owners of a corporation is represented by ________.
A) profits
B) earnings per share
C) share value
D) cash flow

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 Answer: C
11) 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
12) 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
13) 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
14) Profit maximization as a goal is ideal because it directly considers ________.
A) risk and book value of assets
B) timing and cash flow
C) timing and risk
D) EPS and stock price.
Answer: D
15) 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
16) Which of the following is a measure of profit maximization to shareholders?
A) the timing of returns
B) earnings per share
C) current assets
D) market risk premium
Answer: B
17) 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
18) 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

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19) 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
20) Financial managers evaluating decision alternatives or potential actions must consider ________.
A) only risk
B) only return
C) either risk or return
D) risk, return, and the impact on share price
Answer: D26) 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
21) Which of the following is true of cash flows and risk?
A) Low cash flow and low risk result in an increase in share price.
B) High cash flow and low risk result in an increase in share price.
C) High cash flow and high risk result in an increase in share price.
D) Lo cash flow and high risk result in an increase in share price.
Answer: B
22) As the risk of a stock investment increases, investors' ________.
A) return will increase
B) return will decrease
C) required rate of return will decrease
D) required rate of return will increase
Answer: D
23) 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
24) Which of the following is true of a cash flow?
A) Profits do not necessarily result in cash flows available to the stockholders.
B) It is guaranteed that the board of directors will increase dividends when net cash flows increase.
C) A firm's income statement will never show a positive profit when its cash outflows exceed its cash inflows.
D) An increase in revenue will always result in an increase in cash flow.
Answer: A
25) 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 ________.

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A) Asset 1
B) Asset 2
C) Asset 3
D) Asset 4
Answer: A
26) 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
27) Which of the following is true of stakeholders?
A) They are the owners of a firm.
B) They are groups to whom a firm has financial obligations.
C) They are groups having a direct economic link to a firm.
D) They include only the bondholders, common stockholders, and preferred stockholders.
Answer: C
28) Which of the following is an example of a firm's stakeholder?
A) suppliers
B) Federal reserve
C) media
D) competitors
Answer: A

29) Which of the following is considered as a violation of business ethics?

A) earnings management
B) repurchase of shares
C) using the call option on a callable bond when the interest rate is low
D) paying a high amount of dividends every year
Answer: A
30) 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
31) The implementation of a pro-active ethics program is expected to result in ________.
A) a positive corporate image and increased respect, but is not expected to affect cash flows
B) an increased share price resulting from a decrease in risk, but is not expected to affect cash flows
C) a positive corporate image and increased respect, but is not expected to affect share price
D) a positive corporate image and increased respect, a reduction in risk, and enhanced cash flow resulting in an
increase in share price
Answer: D

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32) An effective ethics program ________.
A) can weaken corporate value
B) has no effect on a corporation's value
C) can enhance a corporation's value
D) will result in high employee attrition rate
Answer: C
33) 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
34) An accountant's primary function is ________.
A) the evaluation of the financial statements
B) making decisions based on financial data
C) the collection and presentation of financial data
D) the planning of cash flows
Answer: C
35) A treasurer is commonly responsible for handling ________.
A) tax management
B) corporate accounting
C) investing surplus funds
D) cost accounting
Answer: C
36) A controller is commonly responsible for ________.
A) managing cash
B) financial accounting
C) managing credit activities
D) financial planning
Answer: B
37) A ________ is responsible for a firm's financial activities such as financial planning and fund raising,
making capital expenditure decisions, and managing cash, credit, the pension fund, and foreign exchange.
A) treasurer
B) controller
C) foreign exchange manager
D) pension fund manager
Answer: A
38) A ________ is responsible for the firm's accounting activities, such as corporate accounting, tax
management, financial accounting, and cost accounting.
A) treasurer
B) controller
C) foreign exchange manager
D) pension fund manager
Answer: B
39) Which of the following is true of accrual basis accounting?
A) Expenses are recognized either when they are incurred or cash is paid.
B) Revenue is recognized when a customer pays cash.
C) Expenses are recognized when they are incurred.
D) Revenue is recognized when a customer pays cash or shows interest to purchase the product or service.
Answer: C
40) Which of the e following is true of cash basis accounting?

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 A) All credit sales will be recorded as revenue.
B) Revenue is recognized when a customer pays cash.
C) Expenses are recognized when they are incurred.
D) Accounts receivable and accounts payable can never be zero.
Answer: B
41) A financial manager is interested in the cash inflows and outflows of a firm, rather than the accounting data,
in order to ________.
A) ensure profitability
B) maintain healthy public relations
C) ensure timely payment of taxes
D) maintain an optimum solvency level
Answer: D
42) Which of the following is the responsibility of a finance manager?
A) processing purchase orders and invoices
B) ensuring accounts payable are paid on time
C) preparing the monthly income statement
D) analyzing the capital needs of the firm
Answer: D
43) Economic theories that a financial manager must ensure for efficient business operations, include ________.
A) supply-and-demand analysis
B) asset pricing theory
C) Porter's theory of five forces
D) Monte Carlo simulation
Answer: A
44) The primary economic principle used in managerial finance is ________.
A) purchase power parity
B) asset pricing theory
C) Porter's theory of five forces
D) marginal cost-benefit analysis
Answer: D
45) ________ is one of the primary responsibilities of a financial manager.
A) Monitoring quarterly tax payments
B) Analyzing budget and performance reports
C) Determining the audit policy
D) Preparing income statements
Answer: B
46) By concentrating on cash flows within a firm, the financial manager should be able to
A) prepare tax returns
B) control the share price
C) avoid insolvency
D) maintain public relations
Answer: C
47) Marginal analysis states that financial decisions should be made and actions should be taken only when
A) marginal revenue equals marginal cost
B) benefits equal costs
C) added benefits exceed added costs
D) added benefits are greater than zero
Answer: C
48) A firm has just ended its calendar year making a sale in the amount of $200,000 of merchandise purchased
during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it
is yet to collect at year end from the customer. The possible problem this firm may face is ________.

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 A) high taxes
B) lack of cash flow
C) inability to receive credit
D) high leverage
Answer: B
49) Which of the following line items in a balance sheet is considered the most for making a financing
decision?
A) current assets
B) long-term liabilities
C) revenue
D) cost of goods sold
Answer: B
50) Investment decisions generally refer to the items that appear on the ________.
A) left-hand side of the balance sheet, and financing decisions relate to the items on the right-hand side
B) right-hand side of the balance sheet, and financing decisions relate to the items on the left-hand side
C) right-hand side of the balance sheet, and financing decisions relate to the items on the income statement
D) left-hand side of the balance sheet, and financing decisions relate to the items on the income statement
Answer: A
51) Which of the following is one of the key activities of a financial manager?
A) making financing decisions
B) managing cost accounting
C) managing financial accounting
D) making legal policy decisions
Answer: A
52) The primary activity of a financial manager is ________.
A) analyzing accrued earnings
B) making an investment decision
C) preparing organization charts
D) auditing financial statements
Answer: B
53) Which of the following activities of a finance manager determines the types of assets the firm holds?
A) budget allocation
B) investment decisions
C) financing decisions
D) analyzing and planning cash flows
Answer: B
54) Making financing decisions includes ________.
A) determining the appropriate mix of short-term and long-term financing
B) deciding on which individual securities to select for investment
C) analyzing quarterly budget and performance reports
D) improving the productivity of manufacturing products
Answer: A
55) Making investment decisions includes ________.
A) inventory
B) fixed assets
C) accounts receivable
D) notes payable
Answer: D
56) Managing a firm's assets includes ________.
A) accruals
B) notes payable

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 C) cash
D) accounts payable
Answer: C
57) Which of the following activities of a finance manager determines how the firm raises money to pay for the
assets in which it invests?
A) financial analysis and planning
B) investment decisions
C) financing decisions
D) analyzing and planning cash flows
Answer: C

58) A financial manager's investment decisions determine ________.

A) both the mix and the type of assets found on the firm's balance sheet
B) both the mix and the type of liabilities found on the firm's balance sheet
C) both the mix and the type of assets and liabilities found on the firm's balance sheet
D) both the mix and the type of short-term and long-term financing
Answer: A
59) In planning and managing the requirements of a firm, the financial manager is concerned with ________.
A) the mix and type of assets, but not the type of financing utilized
B) the type of financing utilized, but not the mix and type of assets
C) the acquisition of fixed assets, allowing someone else to plan the level of current assets required, and the
market value of the share
D) the mix and type of assets, the type of financing utilized, and analysis in order to monitor the financial
condition
Answer: D
60) A financial manager's financing decisions determine ________.
A) both the mix and the type of assets found on the firm's balance sheet
B) the most appropriate mix of short-term and long-term financing
C) both the mix and the type of assets and liabilities found on the firm's balance sheet
D) the proportion of the firm's earnings to be paid as dividend
Answer: B
61) The ________ has/have the ultimate responsibility in guiding corporate affairs and carrying out policies.
A) board of directors
B) chief financial officer
C) stockholders
D) creditors
Answer: A
62) The responsibility for managing day-to-day operations and carrying out corporate policies belongs to the
________.
A) board of directors
B) chief executive officer
C) stockholders
D) creditors
Answer: B
63) In a corporation, the board of directors are elected by the ________.
A) chief executive officer
B) creditors
C) stockholders
D) employees
Answer: C

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64) Which of the following is an example of agency cost?
A) costs incurred for setting up an agency
B) failure of making the best investment decision
C) payment of income tax
D) payment of interest
Answer: B

65) Which of the following is the best measure to ensure that management decisions are in the best interest of
the stockholders?
A) fire managers who are inefficient
B) remove management's perquisites
C) tie management compensation to the performance of the company's common stock price
D) tie management compensation to the level of dividend per share
Answer: C
66) If managers are not owners of their company, then they are ________.
A) dealers
B) agents
C) bondholders
D) brokers
Answer: B
67) The conflict between the goals of a firm's owners and the goals of its non-owner managers is ________.
A) the agency problem
B) incompatibility
C) serious only when profits decline
D) the window-dressing
Answer: A
68) Which of the following is an example of agency costs?
A) cost of labor
B) raw material cost
C) monitoring expenditures cost
D) factory rent
Answer: C

3) True and false

1) 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
2) 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
3) Financial managers perform different tasks developing a financial plan or budget, extending credit to
customers, evaluating proposed large expenditures, and raising money to fund a firm's operations.
Answer: TRUE
4) A capital expenditures analyst/manager is responsible for the evaluation and recommendation of proposed
asset investments.
Answer: TRUE
5) A controller administers a firm's credit policy by analyzing or managing the evaluation of credit applications,
extending credit, and monitoring and collecting accounts receivable.
Answer: FALSE

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6) In large companies, CEOs are legally responsible for coordinating the assets and liabilities of the employees'
pension fund.
Answer: FALSE
7) A controller typically handles the accounting activities, such as tax management, data processing, financial
accounting, and cost accounting.
Answer: TRUE
8) A treasurer is responsible for the firm's accounting activities, such as corporate accounting, tax management,
financial accounting, and cost accounting.
Answer: FALSE
9) High net cash flow with fixed risk is generally associated with a higher share price.
Answer: TRUE
10) When considering a firm's financial decision alternative, financial managers should accept only those
actions that are expected to increase the firm's profitability.
Answer: FALSE
11) 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
12) Dividend payments change directly with changes in earnings per share.
Answer: FALSE
13) The wealth of corporate owners is measured by the share price of the stock.
Answer: TRUE
14) 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
15) A higher earnings per share (EPS) does not necessarily translate into a higher stock price.
Answer: TRUE
16) The profit maximization goal ignores the timing of returns, does not directly consider cash flows, and
ignores risk.
Answer: TRUE
17) When considering a firm's financial decision alternative, financial managers should accept only those
actions that are expected to maximize shareholder value.
Answer: TRUE
18) 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
19) 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
20) 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
21) Managerial finance is concerned with design and delivery of advice and financial products to individuals,
businesses, and governments.
Answer: FALSE
22) Marginal cost-benefit analysis states that financial decisions should be made and actions should be taken
only when the added benefits exceed the added costs.
Answer: TRUE
23) The treasurer typically manages a firm's cash, investing surplus funds when available and securing outside
financing when needed.
Answer: TRUE

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24) A corporate treasurer's focus tends to be more external, while the controller's focus is more internal.
Answer: TRUE
25) A corporate controller is an officer responsible for a firm's financial activities such as financial planning and
fund raising, making capital expenditure decisions, and managing cash, credit, the pension fund, and foreign
exchange.
Answer: FALSE
26) A corporate treasurer typically handles both the cost accounting and financial accounting.
Answer: FALSE
27) The financial manager must look beyond financial statements to obtain insight into developing or existing
problems since the accrual accounting data do not fully describe the circumstances of a firm.
Answer: TRUE
28) A financial manager's primary activities include making investment and financing decisions.
Answer: TRUE
29) Financing decisions deal with the left-hand side of the firm's balance sheet.
Answer: FALSE
30) The board of directors is responsible for managing day-to-day operations and carrying out the policies
established by the chief executive officer.
Answer: FALSE
31) Agency problem arises when managers deviate from the goal of maximization of shareholder wealth by
placing their personal goals ahead of the goals of shareholders.
Answer: TRUE
32) Agents of corporate owners are themselves owners of the firm and have been elected by all the corporate
owners to represent them in decision-making and management of the firm.
Answer: FALSE
33) An agency problem occurs when a firm selects an ineffective marketing, advertising, and PR firm to
represent them.
Answer: FALSE

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