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FIN 370 Final Exam 4

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1. The goal of the firm should be the maximization of profit. (True/False) TRUE
It should be FALSE. The goal of the firm should be maximization of shareholder wealth.
2. For the risk-averse financial manager, the more risky a given course of action, the
higher the expected return must be. (True/False) TRUE
3. The corporation is the best form of organization in terms of raising capital?
True/False TRUE
4. The owners of a corporation enjoy unlimited liability.(True/False) FALSE
5. Financial management is concerned with the maintenance and creation of wealth.
(True/False) TRUE
6. Shareholder wealth is measured by the market value of the firm’s common stock.
(True/False) TRUE
7. Which of the following statements best represents what finance is about? C
a. How political, social, and economic forces affect corporations
b. Maximizing profits
c. Creation and maintenance of economic wealth
d. Reducing risk
8. The goal of the firm should be: A
a. Maximization of profits.
b. Maximization of shareholder wealth.
c. Maximization of consumer satisfaction.
d. Maximization of sales.
9. Consider the timing of the profits of the following certain investment
projects: B
Profit
L S
Year 1 $ 0 $ 3000
Year 2 $ 3000 $ 0
a. Project S is preferred to Project L.
b. Project L is preferred to Project S.
c. Projects S and L are equally desirable.
d. A goal of profit maximization would favor Project S only.

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10. Which of the following best describes the goal of the firm? B
a. The maximization of the total market value of the firm’s common stock
b. Profit maximization
c. Risk minimization
d. None of the above
11. Which of the following goals of the firm is equivalent to the maximization of
shareholder wealth? C
a. Profit maximization
b. Risk minimization
c. Maximization of the total market value of the firm’s common stock
d. None of the above
12. In finance, we assume that investors are generally: B
a. neutral to risk.
b. averse to risk.
c. fond of risk.
d. none of the above.
13. Which of the following is not an advantage of the sole
proprietorship? A
a. Limited liability
b. No time limit imposed on its existence
c. No legal requirements for starting the business
d. None of the above
14. The true owners of the corporation are the: D
a. holders of debt issues of the firm.
b. preferred stockholders.
c. board of directors of the firm.
d. common stockholders.
15. Assume that you are starting a business. Further assume that the business is
expected to grow very quickly and a great deal of capital will be needed soon. What type
of business organization would you choose?
A
a. Corporation
b. General Partnership
c. Sole proprietorship
d. Limited partnership

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16. If managers are making decisions to maximize shareholder wealth, then they are
primarily concerned with making decisions that should: D
a. positively affect profits.
b. increase the market value of the firm’s common stock.
c. either increase or have no effect on the value of the firm’s common stock.
d. accomplish all of the above.
17. Profit maximization is not an adequate goal of the firm when making financial
decisions because: B
a. it does not necessarily reflect shareholder wealth maximization.
b. it ignores the risk inherent in different projects that will generate the profits.
c. it ignores the timing of a project’s returns.
d. all of the above are correct.
18. Which of the following goals is in the best long-term interest of
stockholders? C
a. Profit maximization
b. Risk minimization
c. Maximizing of the market value of the existing shareholders’ common stock
d. Maximizing sales revenues
19. Which of the following factors enable a public corporation to grow to a greater
extent, and perhaps at a faster rate, than a partnership or a proprietorship? E
a. Unlimited liability of shareholders
b. Access to the capital markets
c. Limited life
d. Elimination of double taxation on corporate income
e. All of the above
20. Which of the following should be considered when assessing the financial impact
of business decisions? E
a. The amount of projected earnings
b. The risk-return tradeoff
c. The timing of projected earnings; i.e., when they are expected to occur
d. The amount of the investment in a given project
e. All of the above
21. Financial management is concerned with which of the following? E
a. Creating economic wealth
b. Making investment decisions that optimize economic value
c. Making business decisions that optimize economic wealth
d. Raising capital that is needed for growth
e. All of the above

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