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CHAPTER 1

(Nature, Purpose and Scope of Financial Management)


Multiple Choice Questions
1. Financial management is also referred to the following except:
A)
B)
C)
D)

Managerial finance
Corporate finance
Business finance
Public finance

2. The field of finance is closely related to the fields of:


A)
B)
C)
D)

statistics and economics


statistics and risk analysis
economics and accounting
accounting and comparative return analysis

3. The ultimate measure of performance is:


A)
B)
C)
D)

the amount of the firm's earnings


how the earnings are valued by the investor
the firm's profit margin
return on the firm's total assets

4. Which of the following are not among the daily activities of financial management?
A)
B)
C)
D)

sale of shares and bonds


credit management
inventory control
the receipt and disbursement of funds

5. In analyzing the firm, the investor should consider


A)
B)
C)
D)
6.

the risk inherent in the firm's operation


the time patterns over which the firm's earnings increase/decrease
the quality and reliability of the firm's reported earnings This is the correct answer.
all of the above should be considered.

The long-run objective of financial management is to:


A)
B)
C)
D)

maximize earnings per share.


maximize the value of the firm's common stock.
maximize return on investment.
maximize market share.

7. The primary goal of financial management in a firm is:


A) the number and types of products or services provided by the firm.
B) the minimization of the amount of taxes paid by the firm.
C) the creation of value for shareholders.

D) the dollar profits earned by the firm.


8. "Shareholders wealth" in a firm is represented by:
A)
B)
C)
D)

the number of people employed in the firm.


the book value of the firm's assets less the book value of its liabilities.
the amount of salary paid to its employees.
the market price per share of the firm's common stock.

9. The decision function of financial management can be broken down into the ____ decisions.
A)
B)
C)
D)

financing and investment


investment, financing, and dividend decisions
financing and dividend
capital budgeting, cash management, and credit management

10. Financing decisions include


A)
B)
C)
D)

Cost of finance and the risks attached to it


Scarcity of the firms resources
Determination of quantum profits to be distributed
Optimal dividend distribution policy

11. Agency theory examines the:


A)
B)
C)
D)

relationship between the owners and managers of the firm


insurability of the firm's assets
relationship between dividend policy and firm value
value of the firm relative to other firms in the industry

12. Capital is allocated by financial markets by:


A)
B)
C)
D)

a lottery system between investment dealers


pricing securities based on their risk and expected future cash flows
by pricing risky securities higher than low-risk securities
by a government risk-rating system

13. The allocation of capital is determined by:


A)
B)
C)
D)

expected rates of return


Central bank of the Philippines
the initial sale of securities in the primary market
the size of the firms debt

14. The main focus and concern of modern financial management is:
A)
B)
C)
D)

mergers and acquisitions


conglomerate firms
inflation
risk-return relationships

15. Financial management is applicable to:


A) Non-profit organizations

B) Sole proprietorship
C) Partnership
D) All of the following
ANSWERS:
1. Answer: D
All of the listed above refers to financial management except public finance. Public
finance is the study of the role of the government in the economy.
2. Answer: C
Financial manager will make use of accounting information in the analysis of the firms
business position in decision making and the success of the business firm is influenced by the
overall performance of the economy.
3. Answer: B
In the valuation approach profits are important but the ultimate measure of performance
is how investors value the earnings of the firm.
4. Answer: A
Credit management, inventory control, receipt and disbursement of funds are all part of
the daily activities of a firm but the sale of shares and bonds are less frequent routine
responsibilities of the financial manager.
5. Answer: D
The financial manager should be sensitive to all these considerations
6. Answer: B
The financial manager in a business enterprise must make decisions for the owners of the
firm. He must act in the shareholders best interest by making decisions that increase the value of
stock.
7. Answer: C
All the things listed are important for the firm but the primary goal of financial
management is to maximize the current value of existing stock.
8. Answer: D
Companies can determine shareholder wealth by looking at overall company value in
terms of the market price or current value per share.
9. Answer: B
The three major types of decisions that the Financial manager of a modern business firm
will be involved in are investment, financing, and dividend decisions.
10. Answer: A
Scarcity of resources forms part of investment decision while profit distribution and
optimal dividend distribution are included in dividend decisions. Only the cost of finance and
risks are included in financing decisions.
11. Answer: A
The relationship that exists between shareholders and financial managers is that of a
principal and an agent.
12. Answer: B
Capital markets allocate capital by pricing those securities high that have low risk, high
returns relative to other companies, and good expectations for the future. By pricing these
securities high, the market allows "good" firms to raise money less expensively than low priced
"poor" firms.

13. Answer: A
Capital flows to where it can receive the best return for given risk
14. Answer: D
It is a major concern for financial managers to minimize risk and maximize return.
15. Answer: D
Financial management is applicable to all kinds of business and non-profit organizations.

Chapter 2
(Relationship of Financial Objectives to Organizational Strategy and Other Organizational Objectives)
Multiple Choice Questions
1. Corporate social responsibility is
a. Effectively enforced through the controls envisioned by classical economics.
b. The obligation to shareholders to earn a profit.
c. The duty to embrace service to the public interest.
d. The obligation to serve long-term organizational interest.
2. Which of the following statements is false?
a. Timing is a particularly important consideration in financial decisions.
b. During the 1930s, the government assumed a much greater role in regulating the
securities industry.
c. Because socially desirable goals can impede profitability in many instances,
managers should not try to operate under the assumption of wealth maximization.
d. As finance emerged as a new field, much emphasis was placed on mergers and
acquisitions.
3. Which of the following statements is true?
a. Social responsibility and profit maximization are synonymous.
b. There are more serious problems with financial goal of maximizing the earnings of a
firm.
c. Maximizing the earnings of the firm is the primary goal of financial management.
d. The higher the profit of the firm, the higher the value of the firm is assured of
receiving in the market.
4. Which of the following statements is false?
a. For as long as satisfactory level of profit is earned, the financial manager need not be
concerned with unethical behavior.
b. In the mid 1950s, finance began to change to more analytical, decision-oriented
approach.
c. Inflation has led to phantom profits and undervalued assets.
d. Recently, the emphasis of financial management has been on the relationships
between risk and return.

5. A common argument against corporate involvement and socially responsible behavior is that
a. As a legal person, a corporation is accountable for its conduct.
b. It encourages government intrusion in decision making.
c. In a competitive market, such behavior incurs costs that place the company at a
disadvantage.
d. It creates goodwill.
6. The wealth maximization goal is advocated on the following grounds, except,
a. It considers the risk and time value of money.
b. It considers future cash flow, dividends and earnings per share.
c. It suggests the regular and consistent dividend payments to the shareholders.
d. The financial decisions are taken with a view to improve the profit of the firm.
7. Which of the following is not an example of investing decisions of a financial manager?
a. Funds allocation and its rationing
b. Asset replacement decision
c. Determination of fixed assets to be acquired.
d. Determination of the best capital structure or mixture of debt and equity financing.
8. An 18th century economist who was of the first and well-known proponent of shareholders
wealth maximization viewpoint.
a. Luca Pacioli
b. Adam Smith
c. Karl Marx
d. John Maynard Keynes
9. Which of the following is an example of operating decisions made by a financial manager?
a. The level of cash, securities and inventory that should be kept on hand.
b. Securities analysis and portfolio management.
c. Determination of the total amount of fund that a firm can commit for investment.
d. Evaluation and selection of capital investment proposal.
10. _________ is concerned about the acquisition, financing, and management of assets with
some overall goal in mind.
a. Financial Management
b. Profit Maximization
c. Agency theory
d. Social responsibility
11. What is the most appropriate goal of the firm?
a. Shareholder wealth maximization
b. Profit maximization
c. Stakeholder maximization
d. EPS maximization
12. The ________ decision involves determining the appropriate make-up of the right-hand side
of the balance sheet.
a. Asset Management
b. Financing
c. Investment
d. Capital Budgeting
13. The _______ decision involves efficiently managing the assets on the balance sheet on a dayto-day basis, especially current assets.
a. Asset Management
b. Financing
c. Investment
d. Capital Budgeting

14. A concept that implies that the firm should consider issues such as protecting the consumer,
paying fair wages, maintaining fair hiring practices, supporting education, and considering
environmental issues.
a. Financial Management
b. Profit Maximization
c. Agency theory
d. Social responsibility
15. Which of the following statements is correct regarding profit maximization as the primary
goal of the firm?
a. Profit maximization considers the firms risk level.
b. Profit maximization will not lead to increasing short-term profits at the expense of
lowering expected future profits.
c. Profit maximization does consider the impact on individual shareholder EPS.
d. Profit maximization is concerned more with maximizing the net income than the
stock price.
Prepared by:
Tiu, Jonathan Michael T.
3rd Year BS Accountancy
ANSWERS:
1. C.
Corporate social responsibility, often abbreviated "CSR," is a corporation's initiatives to assess
and take responsibility for the company's effects on environmental and social wellbeing.
Investopedia, LLC (2016)
2. C.
Every corporations primary goal is to maximize the current value per share of existing stock or
ownership. Hence, it should try to keep in balance its socially desirable goals and at the same
time, the goal of wealth maximization.
3. B.
Maximizing earnings is only of a short-term financial goal. It cannot produce spontaneous ideas
to generate useful decisions for high risk problems that the company may encounter.
4. A.
A company is not created solely for earning profits. It should also be responsible for its actions
which fall outside of what is considered morally right for a person, a profession, or an industry.
5. C.
Imagine a situation of a very tight competition in a certain industry, it may really be very costly
for a firm to consider corporate social actions when its economical condition is at risk.
6. D.
The financial decisions are taken with a view to improve the capital appreciation of the share
price and not for profit.
7. D.
Determination of the best capital structure or mixture of debt and equity financing is an example
of financing decision.
8. B.
Adam Smith argued that, an individual pursuing its own interest tends also to promote the good
of his community.

9. A.
All the other choices are an example of investing decisions.
10. A.
Financial management is a decision making process concerned with planning, acquiring and
utilizing funds in a manner that achieves the firms desired goals.
11. A.
The goal of financial management is to maximize the current value per share of the existing
stock or ownership in a firm.
12. B.
The right side of the balance sheet is composed of the equity section to which is affected by
financing decisions.
13. A.
Asset management may be referred to as the operating decisions made by finance managers,
which influences the day-to-day activities.
14. D.
Refer to the meaning of CSR in answer #1.
15. D.
Wealth maximization focuses on the appreciation of the current value per share, while the profit
maximization on the other hand, is concerned on the profit itself.