Faculty of Management Technology Accounting & Financial Control Department Corporate Finance for BI FINC505 Chapter -1- The Role of Managerial Finance Problem Sheet -1P1 True/False 1. Financial managers actively manage the financial affairs of many types of business— financial and non-financial, private and public, for-profit and not-for-profit. 2. In partnerships, owners have unlimited liability and may have to cover debts of other less financially sound partners. 3. The board of directors is responsible for managing day-to-day operations and carrying out the policies established by the chief executive officer. . The capital expenditures analyst/manager is responsible for the evaluation and recommendation of proposed asset investments and may be involved in the financial aspects of implementation of approved investments. 5. The accountant evaluates financial statements, develops additional data, and makes decisions based on his or her assessment of the associated returns and risks. 6. The wealth of corporate owners is measured by the share price of the stock. 7. The agency problem is the acquisition of a firm by another firm that is not supported by management. . A primary market is a financial market in which pre-owned securities are traded. P2 Multiple Choice Questions 1. Finance can be defined as (a) the system of debits and credits. (b) the science of the production, distribution, and consumption of wealth. (c) the art and science of managing money. (d) the art of merchandising products and services. 2. Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000.
Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are (a) $3,000 and $10,000, respectively. (b) $3,000 and –$7,000, respectively. (c) $7,000 and –$3,000, respectively. (d) $3,000 and $7,000, respectively. 1 3. The conflict between the goals of a firm’s owners and the goals of its non-owner managers is (a) the agency problem. (b) incompatibility. (c) serious only when profits decline. (d) of little importance in most large U.
S. firms. 4. An ethics program is expected to have a _________ impact on the firm’s share price. (a) positive (b) negative (c) no impact (d) undetermined 5. A financial manager must choose between four alternative investments, 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide earnings over a three-year period as described below. Asset Year 1 Year 2 Year 3 1 $21,000 $15,000 $6,000 2 9,000 15,000 21,000 3 3,000 20,000 19,000 4 6,000 12,000 12,000 Based on the profit maximization goal, the financial manager would choose (a) Asset 1. b) Asset 2. (c) Asset 3. (d) Asset 4. 6. The true owner(s) of the corporation is (are) the _________. (a) board of directors (b) chief executive officer (c) stockholders (d) creditors 7. The two key financial markets are (a) primary market and secondary market. (b) primary market and money market. (c) money market and capital market. (d) capital market and secondary market. 8. The _________ stock exchange is a primary market where new public issues are sold. (a) regional (b) American (c) New York (d) over-the-counter 2