Chapter 1: Nature, Purpose, and Scope of Financial Management Flashcards
What is the primary goal of financial management?
a. Increase earnings
b. Maximizing cash flow
c. Maximizing shareholders’ wealth
d. Minimizing risk of the firm
ANSWER: c. Maximizing shareholders’ wealth
Proper risk-return management means that
a. The firm should take as few risks as possible
b. Consistent with the objectives of the firm, an appropriate trade-off between risk and return should be determined
c. The firm should earn the highest return possible
d. The firm should value future profits more highly than current profits
ANSWER: b. Consistent with the objectives of the firm, an appropriate trade-off between risk and return should be determined
Which of the following is not a major area of concern and emphasis in modern financial management?
a. Inflation and its effect on profits
b. Stable short-term interest rates
c. Changing international environment
d. Increased reliance on debt
ANSWER: b. Stable short-term interest rates
Which of the following is not a major area of concern and emphasis in modern financial management?
a. Marginal analysis
b. Risk-return trade-off
c. Commodity trading
d. Changing financial institutions
ANSWER: c. Commodity trading
A financial manager’s goal of maximizing current or short-term earnings may not be appropriate because
a. It fails to consider the timing of the benefits
b. Increased earnings may be accompanied by unacceptably higher levels of risk
c. Earnings are subjective; they can be defined in various ways such as accounting or economic earnings
d. All of the given choices
ANSWER: d. All of the given choices
All of the following are functions of the financial manager except
a. Analyzing and planning the company’s performance
b. Anticipating the company’s financial needs
c. Assigning the market price of the company’s stock
d. Allocating the funds to the most profitable asset
ANSWER: c. Assigning the market price of the company’s stock
Which of the following statements is false?
a. The financing decision involves the process of allocating funds for investment in competing assets
b. The treasurer would be responsible for activities such as managing cash balances, granting credit to customers, and managing the process of issuing new securities
c. The optimal capital structure is the best combination of long-term debt and equity
d. It is necessary to determine the appropriate risk-return trade-off to maximize the market value of the firm for its shareholders
b. The treasurer would be responsible for activities such as managing cash balances, granting credit to customers, and managing the process of issuing new securities
