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1-1ChapterOneFinancialEconomicsThischaptercontains48multiplechoicequestions,20shortproblemsand5longerproblems.MultipleChoice1.Theprimarygoalofcorporatemanagementisto________shareholderwealth.(a)minimize(b)maximize(c)leverage(d)mitigateAnswer:(b)2.A________stockmarketimposes________disciplineonmanagerstotakeactionstomaximizethemarketvalueofthefirm’sshares.(a)competitive,strong(b)dispersed,weak(c)mature,no(d)dispersed,strongAnswer:(a)3.The________formisespeciallywellsuitedtotheseparationofownershipandmanagementoffirmsbecauseitallowsrelativelyfrequentchangesinownersbysharetransferwithoutaffectingtheoperationsofthefirm.(a)corporate(b)soleproprietorship(c)partnership(d)householdAnswer:(a)4.________isanythingthathaseconomicvalue.(a)Apartnership(b)Anasset(c)Abalancesheet(d)AnincomestatementAnswer:(b)1-25.Ahousehold’swealthornetworthismeasuredbythevalueofits________minusits________.(a)liabilities;assets(b)assets;liabilities(c)stocks;bonds(d)bonds;liabilitiesAnswer:(b)6.Thebranchoffinancedealingwithfinancialdecisionsoffirmsiscalled________or________.(a)investments;internationalfinance(b)markets;institutions(c)businessfinance;institutions(d)businessfinance;corporatefinanceAnswer:(d)7.Bondspromise________cashpayments,whilestockspaythe________valueleftoverafterallotherclaimantshavebeenpaid.(a)variable;residual(b)residual;fixed(c)fixed;residual(d)fixed;variableAnswer:(c)8.Theday-to-dayfinancialaffairsofthefirmareusuallyreferredtoas________.(a)workingcapitalmanagement(b)capitalstructure(c)capitalbudgeting(d)strategicplanningAnswer:(a)9.Adisadvantageofthesoleproprietorshipisthefactthatthesoleproprietorhas________.(a)limitedliabilityforthedebtsofthefirm(b)unlimitedliabilityforthedebtsofthefirm(c)expensivecoststoestablishthefirm(d)limitedauthorityovertheday-to-daybusinessdecisionsofthefirmAnswer:(b)1-310.IntheU.S.corporationswithconcentratedownershiparecalled________andcorporationswithbroadlydispersedownershiparecalled________.(a)privatecorporations;publiccorporations(b)publiccorporations;privatecorporations(c)publiccorporations;monopolies(d)privatecorporations;stateownedcorporationsAnswer:(a)11.Billyownsahouseworth$350,000andhasa$55,000bankaccount.Billyowes$270,000tothebankonahomemortgageloanandhasa$12,000creditcarddebtoutstanding.CalculateBilly’snetworth.(a)$135,000(b)$123,000(c)$497,000(d)$37,000Answer:(b)12.Marloweownsahouseworth$150,000,acarworth$25,000andhasan$18,000bankaccount.Marloweowes$135,000tothebankonahomemortgageloan,$18,000onthecarloanandhasan$18,000creditcarddebtoutstanding.CalculateMarlowe’snetworth.(a)$58,000(b)$123,000(c)$22,000(d)$37,000Answer:(c)13.Anadvantageofthecorporateformofownershipis________.(a)noliability(b)unlimitedliability(c)limitedliability(d)CEOliabilityAnswer:(c)1-414.Inthecorporateform,theseparatedstructurecreatesthepotentialfor________betweenownersandmanagers.(a)aconflictofinterest(b)increasedtransactionalcosts(c)stabilityinrelations(d)noneoftheaboveAnswer:(a)15.Allofthefollowingarereasonsforhavingaseparationofmanagementandownershipofthefirmexcept:(a)the“goingconcern”effectfavorstheseparatedstructure(b)professionalmanagersmaybefoundwhopossessasuperiorabilitytorunthebusiness(c)itpreventsthepossibilityofaconflictofinterestbetweentheownersandmanagement(d)itallowsforsavingsinthecostofinformationgatheringAnswer:(c)16.________involvestheevaluationofcostsandbenefitsspreadoutovertime,anditislargelyafinancialdecision-makingprocess.(a)Stockvaluation(b)Bondvaluation(c)Inventorycosting(d)StrategicplanningAnswer:(d)17.Shareholderwealthmaximizationdependsonallofthefollowingexcept:(a)productiontechnology(b)marketinterestrates(c)riskaversion(d)marketriskpremiumsAnswer:(c)18.Aproblemwithusingtheprofitmaximizationcriterionis________.(a)decidingwhichperiod’sprofitistobemaximized(b)thedefinitionof“maximizeprofits”isambiguous(c)thefailuretoconsiderrisk(d)alloftheaboveAnswer:(d)1-519.Theexistenceofawellfunctioningstockmarketfacilitatestheefficientseparationoftheownershipandmanagementoffirms,sincestockpricescanbesubstitutedforexternalinformationabout________.(a)thefirm’sproductiontechnology(b)thewealth,preferences,andotherinvestmentopportunitiesoftheowners(c)thehistoriccostsofthefirm’sinfrastructure(d)thefirm’sabilitytomeetitsprojectedgoalsAnswer:(b)20.Oneplacetolookforastatementofthegoalsofacorporation’stopmanagersisthe________.(a)balancesheet(b)incomestatement(c)annualreport(d)bankruptcyfilingAnswer:(c)21.Intheabsenceofastockmarket,managerswouldrequireinformationthatis________toobtain.(a)costlyifnotimpossible(b)costless(c)readilyavailable(d)time-consumingbutinexpensiveAnswer:(a)22.Management’staskismademucheasierwhenitcanobservethe________ofitsownandotherfirms’shares.(a)bookprices(b)marketprices(c)historicalprices(d)securitypricesAnswer:(b)1-623.________areentitledtoashareofanyofthedistributionsfromthecorporationsuchascashdividends.(a)Soleproprietors(b)Generalpartners(c)Professionalmanagers(d)ShareholdersAnswer:(d)24.________isthefounderofmodernportfoliotheory.(a)HarryMarkowitz(b)MertonMiller(c)WilliamSharpe