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 …show more content…
Due to unstable world markets, most large U.S. corporations do almost all of their business in the United States.

Answer: False; Difficulty: 1; Keywords: Multinational Firm

27. The goal of the firm's financial managers should be the maximization of the total value of the firm's stock.

Answer: True; Difficulty: 1; Keywords: Goal of the Firm

28. One of the problems associated with maximization of total current stock value is that it ignores the timing of a project's return.

Answer: False; Difficulty: 1; Keywords: Maximizing Shareholder Value, Timing of Returns

29. Although maximization of the market value of a firm's common stock is a valid objective of the firm, it is not without its drawbacks since the effects of financial structure decisions are not reflected in this term.

Answer: False; Difficulty: 1; Keywords: Goal of the Firm, Financial Structure

30. One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the firm's financial managers.

Answer: False; Difficulty: 1; Keywords: Goal of the Firm, Risk

31. Only a firm's financial decisions affect its stock prices.

Answer: False; Difficulty: 1; Keywords: Determinants of Stock Price

32. The goal of profit maximization ignores the risk of financial decisions.

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

33. Shareholders react to poor investment or dividend