Test Bank_Fundamentals of Financial Management 12E | Complete Solution

Chapter 1: Overview True/False Page 1

(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject
lines.

Multiple Choice: True/False
Please note that some of the T/F questions overlap with some of the multiple choice items. We don't
think this creates a problem, but please take this into account when making your assignments.
(1-1) Role of finance F M Answer:
1. In most corporations, the CFO ranks under the CEO.
a. True
b. False
(1-1) Role of finance F M Answer:

2. The Chairman of the Board must also be the CEO.
a. True
b. False
(1-1) Role of finance F M Answer:

3. The board of directors is the highest ranking body in a corporation, and
the chairman of the board is the highest ranking individual. The CEO
generally works under the board and its chairman, and the board generally
has the authority to remove the CEO under certain conditions. The CEO,
however, cannot remove the board, but he or she can endeavor to have the
board voted out and a new board voted in should a conflict arise. It is
possible for a person to simultaneously serve as CEO and chairman of the
board, though many corporate control experts believe it is bad to vest
both offices in the same person.
a. True
b. False
(1-3) Forms of organization F M Answer:

4. Partnerships and proprietorships generally have a tax advantage over
corporations.
a. True
b. False

CHAPTER 1
AN OVERVIEW OF FINANCIAL MANAGEMENT
Page 2 True/False Chapter 1: Overview
(1-3) Forms of organization F M Answer:
5. A disadvantage of the corporate form of organization is that corporate
stockholders are more exposed to personal liabilities in the event of
bankruptcy than are investors in a typical partnership.
a. True
b. False

(1-3) Forms of organization F M Answer:
6. An advantage of the corporate form of organization is that corporations
are generally less highly regulated than proprietorships and partnerships.
a. True
b. False

(1-3) Forms of organization F M Answer:
7. Some partners in a partnership may have different rights, privileges, and
responsibilities than other partners.
a. True
b. False

(1-3) Forms of organization F M Answer:
8. One advantage of the corporate form of organization is that it avoids
double taxation.
a. True
b. False
(1-3) Forms of organization F M Answer:
9. It is generally harder to transfer one’s ownership interest in a
partnership than in a corporation.
a. True
b. False
(1-3) Forms of organization F M Answer:
10. One danger of starting a proprietorship is that you may be exposed to
personal liability if the business goes bankrupt. This problem would be
avoided if you formed a corporation to operate the business.
a. True
b. False
(1-3) Forms of organization F M Answer:
11. If a corporation elects to be taxed as an S corporation, then it can
avoid the corporate tax. However, its stockholders will have to pay
personal taxes on the firm's net income.
a. True
b. False
Chapter 1: Overview True/False Page 3
(1-3) Forms of organization F M Answer:  
12. If a corporation elects to be taxed as an S corporation, then both it and
its stockholders can avoid all Federal taxes. This provision was put
into the Federal Tax Code in order to encourage the formation of small
businesses.
a. True
b. False
(1-3) Forms of organization F M Answer:  
13. It is generally less expensive to form a corporation than a
proprietorship because, with a proprietorship, extensive legal documents
are required.
a. True
b. False
(1-3) Forms of organization F M Answer:
14. The more capital a firm is likely to require, the greater the probability
that it will be organized as a corporation.
a. True
b. False
(1-3) Forms of organization F M Answer:  
15. One disadvantage of forming a corporation rather than a partnership is
that this makes it more difficult for the firm’s investors to transfer
their ownership interests.
a. True
b. False
(1-3) Forms of organization F M Answer:
16. Organizing as a corporation makes it easier for the firm to raise capital.
This is because corporations' stockholders are not subject to personal
liabilities if the firm goes bankrupt and also because it is easier to
transfer shares of stock than partnership interests.
a. True
b. False
(1-4) Goals of the firm F M Answer:  
17. In order to maximize its shareholders' value, a firm's management must
attempt to maximize the expected EPS.
a. True
b. False
(1-4) Goals of the firm F M Answer:  
18. In order to maximize its shareholders' value, a firm's management must
attempt to maximize the stock price on a specific target date.
a. True
Page 4 True/False Chapter 1: Overview
b. False
(1-5) Intrinsic values F G M Answer:
19. In order to maximize its shareholders' value, a firm's management must
attempt to maximize the stock price in the long run, or the stock's
"intrinsic value."
a. True
b. False
(1-5) Intrinsic values F M Answer:  
20. If management operates in a manner designed to maximize the firm's
expected profits for the current year, this will also maximize the
stockholders' wealth as of the current year.
a. True
b. False
(1-6) Important trends E F M Answer:
21. Globalization of business has been facilitated by improvements in
telecommunications.
a. True
b. False
(1-7) Business ethics B F M Answer:
22. The bankruptcy of Enron Corporation, and the fraud committed by some of
its officers, has led to some important changes in business practices.
a. True
b. False
(1-7) Business ethics B F M Answer:  
23. There are many types of unethical business behavior. One example is
where executives provide information that they know is incorrect to banks
and to stockholders. It is illegal to provide such information to banks,
but it is not illegal to provide it to stockholders because they are the
owners of the firm, not outsiders.
a. True
b. False
(1-5) Intrinsic values F G Answer:  
24. A stock's market price would equal its intrinsic value if all investors
had all the information that is available about the stock. In this case
the stock's market price would equal its intrinsic value.
a. True
b. False
(1-5) Intrinsic values F G Answer:  
25. If a stock's market price is above its intrinsic value, then the stock
can be thought of as being undervalued, and it would be a good buy.
Chapter 1: Overview True/False Page 5
a. True
b. False
(1-5) Intrinsic values F G Answer:  
26. If a stock's intrinsic value is greater than its market price, then the
stock is overvalued and should be sold.
a. True
b. False
(1-5) Intrinsic values F G Answer:  
27. For a stock to be in equilibrium as the book defines it, its market price
should exceed its intrinsic value.
a. True
b. False
(1-5) Intrinsic values F G Answer:  
28. The term "marginal investor" means an investor who is active in the
market and would tend to buy a stock if its price fell and sell it if it
rose, barring any new information coming out about the stock.
a. True
b. False
(1-7) Business ethics B F M Answer:  
29. If a lower level person in a firm does something illegal, like "cooking
the books" to understate costs and thereby increase profits above the
correct profits because he or she was told to do so by a superior, the
lower level person cannot be prosecuted but the superior can be
prosecuted.
a. True
b. False
(1-7) Business ethics B F G Answer:  
30. If someone deliberately understates costs and thereby increases profits,
then this can cause the price of the stock to rise above its intrinsic
value. The stock price will probably fall in the future. Also, those
who participated in the fraud can be prosecuted, and the firm itself can
be penalized.
a. True
b. False
(1-8) Conflicts B F M Answer:  
31. Managers always attempt to maximize the long-run value of their firms'
stocks, or the stocks' intrinsic values. This is exactly what
stockholders desire. Thus, conflicts between stockholders and managers
are not possible. However, there can be conflicts between stockholders
and bondholders.
a. True
Page 6 True/False Chapter 1: Overview
b. False
Chapter 1: Overview Conceptual M/C Page 7
(1-8) Conflicts F M Answer:  
32. A hostile takeover is said to occur when another corporation or group of
investors gains voting control over a firm and replaces the old managers.
If the old managers were managing the firm inefficiently, then hostile
takeovers can improve the economy. However, hostile takeovers are
controversial, and legislative actions have been taken to make them more
difficult to undertake.
a. True
b. False
(1-5) Intrinsic values F M Answer: a HARD
33. If a firm's board of directors wants to maximize value for its
stockholders in general (as opposed to some specific stockholders), it
should design an executive compensation system whose goal is to maximize
the stock's intrinsic value rather than the stock's current market price.
a. True
b. False
Multiple Choice: Conceptual
Please note that some of the answer choices, or answers that are very close, are used in different
questions. This has caused us no difficulties, but please take this into account when you make up
exams.
(1-3) Forms of organization F M Answer: e EASY
34. Which of the following statements is CORRECT?
a. One of the disadvantages of incorporating your business is that you
could become subject to the firm's liabilities in the event of
bankruptcy.
b. Sole proprietorships are subject to more regulations than corporations.
c. In any partnership, every partner has the same rights, privileges, and
liability exposure as every other partner.
d. Corporations of all types are subject to the corporate income tax.
e. Sole proprietorships and partnerships generally have a tax advantage
over corporations.
(1-3) Forms of organization F M Answer: c EASY
35. Which of the following statements is CORRECT?
a. One of the advantages of the corporate form of organization is that it
avoids double taxation.
b. It is easier to transfer one’s ownership interest in a partnership
than in a corporation.
c. One of the disadvantages of a sole proprietorship is that the
proprietor is exposed to unlimited liability.
d. One of the advantages of a corporation from a social standpoint is
that every stockholder has equal voting rights, i.e., “one person, one
vote.”
e. Corporations of all types are subject to the corporate income tax.
Page 8 Conceptual M/C Chapter 1: Overview
(1-3) Forms of organization F M Answer:
36. Which of the following statements is CORRECT?
a. One advantage of forming a corporation is that equity investors are
usually exposed to less liability than they would be in a partnership.
b. Corporations face fewer regulations than sole proprietorships.
c. One disadvantage of operating a business as a sole proprietor is that
the firm is subject to double taxation, because taxes are levied at
both the firm level and the owner level.
d. It is generally less expensive to form a corporation than a
proprietorship because, with a proprietorship, extensive legal
documents are required.
e. If a partnership goes bankrupt, each partner is exposed to liabilities
only up to the amount of his or her investment in the business.
(1-3) Forms of organization F M Answer:
37. Relaxant Inc. operates as a partnership. Now the partners have decided
to convert the business into a corporation. Which of the following
statements is CORRECT?
a. Relaxant’s shareholders (the ex-partners) will now be exposed to less
liability.
b. The company will probably be subject to fewer regulations and required
disclosures.
c. Assuming the firm is profitable, none of its income will be subject to
federal income taxes.
d. The firm's investors will be exposed to less liability, but they will
find it more difficult to transfer their ownership.
e. The firm will find it more difficult to raise additional capital to
support its growth.
(1-3) Forms of organization F M Answer: c EASY
38. Which of the following statements is CORRECT?
a. Corporations generally face fewer regulations than sole
proprietorships.
b. Corporate shareholders are exposed to unlimited liability.
c. It is usually easier to transfer ownership in a corporation than in a
partnership.
d. Corporate shareholders are exposed to unlimited liability, but this
factor is offset by the tax advantages of incorporation.
e. There is a tax disadvantage to incorporation, and there is no way any
corporation can escape this disadvantage, even if it is very small.
(1-3) Forms of organization F M Answer: e EASY
39. Which of the following could explain why a business might choose to
operate as a corporation rather than as a sole proprietorship or a
partnership?
a. Corporations generally face fewer regulations.
b. Less of a corporation’s income is generally subject to federal taxes.
c. Corporate shareholders are exposed to unlimited liability, but this
factor is offset by the tax advantages of incorporation.
d. Corporate investors are exposed to unlimited liability.
Chapter 1: Overview Conceptual M/C Page 9
e. Corporations generally find it easier to raise large amounts of
capital.
(1-4) Goals of the firm F M Answer: d EASY
40. The primary operating goal of a publicly-owned firm interested in serving
its stockholders should be to
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share over the long run, which is the
stock’s intrinsic value.