Finance True

Financial management deals with the maintenance and creation of economic value True
Shareholder wealth maximization means maximizing the price of the existing common stock True
It is important to evaluate a corporate manager’s financial decision by measuring the effect the decision should have on the corporations stock price if everything else were held constant True
The goal of the firm’s financial managers should be the maximization of the total value of the firms stock True
The goal of profit maximization ignores the risk of financial decisions True
Shareholders react to poor investment or dividend decisions by causing the total value of the firms stock to fall, and they react to good 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 True
When making financial decisions, managers should always look at marginal or incremental cash flows True
The root cause of agency problems is conflicts of interests True
Giving the company’s CEO stock options as a part of his or her compensation package is an example of an agency cost. True
The sole proprietorship has no legal business structure separate from its owner True
An efficient market is one where the prices of the assets traded in that market fully reflect all available information at any instant in time True
A corporate treasurer is typically responsible for cash management, credit management, and raising capital True
Determining how a firm should raise money to fund its long-term investments is referred to as capital structure decisions True
The chief financial officer(CFO) is responsible for overseeing financial planning, corporate strategic planning, and controlling the firms cash flow. True
The sole proprietorship for all practical purposes the absence of any formal legal business structure True
S-type corporations and limited liability companies are taxed like partnerships, but have the advantage of limited liability for their owners True
A limited liability company is taxed like a partnership but provides limited liability for its owners similar to a corporation True
Its ability to raise capital by selling stock makes the corporation the best form of organization in term True
The owners of a corporation enjoy limited liability true
In a sole proprietorship the owner is personally responsible without limitations for the liabilities incurred True
In a limited partnership at least one general partner must exist; that general unlimited liability True
Individuals, corporations, and governments can be either savings deficit unit or savings surplus units True
Part of the US Government huge deficit is financed by foreign countries, such as china, which is a savings surplus unit True
Capital markets are all the financial institutions that help a business raise long term capital True
Organized stock exchanges provide the benefits of a continuous market, fair security principles and helping business raise new capital True
On the basis of the number of shares traded, more stocks are traded over the counter than on the organized exchanges True
Three ways that savings can be transferred through the financial markets to those in need of funds include direct transfers, indirect transfers using the investment banker, and indirect transfers using the financial intermediary True
The money market includes transactions in short-term financial instuments True
Over the counter markets include all security markets, with the exception of organized exchanges True
For a firm to have its securities listed on exchange, it must meet certain requirements. These usually include measures of profitability, size, market value, and public ownership True
The vast majority of corporate bond business takes place over the counter True
Financial markets exist in order to allocate savings in the economy to the demanders of those savings True
A seasoned equity offering is the sale of additional by a company whose shares are already publicly traded True
Financial intermediaries issue their own indirect securities and use the proceeds to purchase the direct securities of other economic units True
Cash markets are often referred to as spot markets True
The investment banker performs three basic functions (1)underwriting (2) distributing (3) advising True
The negotiated purchase is the most prevalent method of securities distribution in the private sector True
The syndicate can be thought of as a wholesaler of securities and the dealer organization as a retailer of securities True
A group of investment bankers organized to distribute large securities issues is known as a syndicate True
The competitive bid purchase is largely confined to railroad, public utility, and municipal bond issues True
The bid price is the price that a dealer will pay for a security; the asked price is the price at which she will sell a security True
In a private placement, the securities are offered and sold to a limited number of investors True
The process of shelf registration is beneficial to the issuing firm because it will reduce the time needed for the firm to take an issue to market True
Over time there has been a high correlation between actual rates of return on securities and the securities standard deviations of returns True
The rate of return available on the next best investment alternative for the saver refers to the opportunity cost of funds true
The term structure of interest rates usually indicates that longer terms to maturity have higher expected returns true
If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity True
Common sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm’ s financial performance across time and with competitors True
Earnings before taxes, or taxable income is equal to operating income minus financing costs true
Profit to sales relationships are defined as profit margins True
The accounting book value of an asset represents the historical cost of the asset rather than its current market value or replacement cost True
A firms income statement reports the results from operating the business for a period of time, while the firms balance sheet provides a snapshot of the firms financial position at a specific point in time True
An income statement reports the firms revenues and expenses for a specific period of time True
A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities and equity True
Under current accounting rules, the plant and equipment account shows the historical cost of plus any subsequent improvements to the plant and equipment True
The balance sheet reflects the accounting equation: Assets= Liabilites + Owners equity True
According to accrual accounting, revenues are recognized when earned and expenses are recognized when incurred True
The statement of cash flow explains the changes that took place in the firms cash balance over the period of interest True
Ratio analysis enhances our understanding of three basic attributes of performance: liquidity, profitability, and the ability to create shareholder value True
Financial ratios are used by managers inside the company and by lenders, credit-rating agents and investors outside of the company True
Common stockholders may use financial rations to monitor manger actions to help lessen agency problems True
Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firms as ratios that are too low True
Ratios are used to standardize financial information, thereby making it easier to interpret True
How managers choose to finance the business affects the company’s risk, and as a result the rate of return stockholders receive on their investments True
Return on equity is driven by (1) the spread between the operating return on assets and the interest rate, and (2) changes in the debt ration True
Operating return on assets is equal to the operating profit margin times total asset turnoner True
If company A has a lower average collection period than company B, then company A will have a higher accounts receivable turnover True
Operating profits or EBIT is used to measure a firm’s profits on assets because it does not include the firms cost of debt financing True
Operating return on assets is equal to operation profit margin times total asset turnover true
a high debt ratio can be favorable because higher leverage may result in a higher return on equity true
A common method of evaluation a firm’s financial ratios is to compare the current values the firm’s ratios to its own ratios from prior periods. This is referred to as trend analysis true
Ratios that examine profit relative to investment are useful in evaluation the overall effectiveness of the firms mangament true
One weakness of the times interest earned ratio is that it includes only the annual interest expense as a finance expense and ignores other financing items such as lease payments that must be paid true
DuPont analysis indicates that the return on equity may be boosted above the return on assets by using leverage true
economic value added attempts to measure a firm;s economic profit rather than its accounting profit true
Economic value added includes a charge for the cost of equity that is not included on financial statemtents prepared according to GAAP true
Financial ratios are used by personnel in marketing, human resources, and other groups within a firm, not just by the finance and accounting personnel true
Seasonality causes comparability problems into ratio analysis. A common solution is to use an average account balance as opposed to an ending account balance true
Ratio analysis enhances our understanding of three basic attributes of performance: liquidty, profitability, and the ability to create shareholder value True
Theoretically, market values of assets are better for evaluating the creation of the shareholders wealth than accounting numbers, but accounting numbers are used because they are more avaliable true
Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or evenmisleading true
Financial ratios are used by managers inside the company and by lenders, credit-rating agencies, and investors outside of the company true
Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too low true
ratios are used to standardized financial information, thereby making it easier to interpret true
How managers choose to finance the business affects the companys risk and as a result the rate of return stockholders recieve on their investments true
Operating return on assets is equal to the operating profit margin times total asset turnover true
Operating profits or EBIT is used to measure a firms profits on assets because it does include the firms cost of debt financing true
Operating return on assets is equal to operating profit margin times total assets turnover true
A common method of evaluating a firms financial ratio is to compare the current value of the firms ratio to its own ratios from prior period, this referred as to trend analysis true
Ratios that examine profit relative to investment are useful in evaluation the overall effectivness of the firms management true
Economic value added attempts to measure a firm’s profit rather than its accounting profit true
Financial ratios are used by personnel in marketing, human resources and other groups within a firm , not just by the finance and accounting personnel true
Seasonality causes comparability problems in ratio analysis true
The time value of money is the opportunity cost of passing up the earning potential of a dollar today true
A rational investor would prefer to recieve $1200 today rather than $100 per month for 12 months true
A timeline identifies the timing and amount of a stream of cash flows, along with the interest rate it earns true
If only you earned interest on your initial investment, and not on previously earned interest it would be called simple interest true
when using a financial calculation cash outflows generally have to be entered as negative numbers, because a financial calculator sees money leaving your hands true
When solving a problem involving an annuity due, you must select the beinning mode on your financial calculator true
At an annual interest rate of 9% an initital sum of money will double approximately every 8 years true
The present value of a single future of money is inversely related to both the number of years until payment is received and the discount rate true
The same underlying formula is used for computing both the future value and present value true
The future value of annuity will increase if the interest rate goes up, but the present value of the same annuity will decrease as the interest rate goes up True
The interest rate is positive, then the future value of an annuity due will be greater than the future value of an ordinary annuity true
To evaluate or compare investment proposals, we must adjust the value of all cash flows to a common date true
an example of an annuity is the interest received from bonds true
The value of a bond investment, which provides fixed interest payments will increase when discounted at 8% rate rather than a 11% rate true
The future value of an annuity is greater than the future value of an otherwise identical ordinary annuity true
If we invest money for 10 years at 8 percent interest, compounded semi-annually, we are really investing money for 20 six month periods, and receiving 4 percent interest each period true
For a given stated interest rate, an investor would recieve a greater future value with daily compounding as opposed to monthly compounding true
A certificate of deposit that pays 9.8% compounded montly is better than a similar certificate of deposit that pays 10% compounded only once per year true

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