Financial Management Quiz: Objectives And Functions!

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Financial Management Quiz: Objectives And Functions! - Quiz

Managing your finances is extremely important. Take this financial management quiz right now if you want to learn more about how to go about efficiently managing your finances precisely! Financial management is not all about trying to save money. It is about how to get better at spending it. We sometimes make purchases that are not that useful to us, and we regret them almost as soon as we buy them. Learn more points like this with our quiz! All the best!


Questions and Answers
  • 1. 

    What is the best criterion in evaluating the performance of a financial manager:

    • A.

      Maximization of Corporate Profits.

    • B.

      Maximizing a company's market share.

    • C.

      Maximizing shareholder wealth

    • D.

      Beating the competition.

    • E.

      Maximizing the company's share market price.

    Correct Answer(s)
    C. Maximizing shareholder wealth
    E. Maximizing the company's share market price.
    Explanation
    The market value of shares takes into consideration both the risks of the investments and the rewards paid to shareholders.

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  • 2. 

    Which of the following is NOT a function of financial management:

    • A.

      Deciding the best sources of finance.

    • B.

      Spending money on capital expansion

    • C.

      Preparation of Tax Returns

    • D.

      Evaluating how much dividends to pay shareholders.

    • E.

      The management of working capital.

    Correct Answer
    C. Preparation of Tax Returns
    Explanation
    The preparation of tax returns does not fit into the Financial Managers' traditional functions of making finance, investment, and dividend (or operating) decisions.

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  • 3. 

    Numerous research has consistently shown that there is a strong positive correlation between the size of the executive bonuses paid to a financial manager and that financial manager's performance in maximizing shareholder wealth.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    Satisfy yourself by investigating authoritative research.

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  • 4. 

    What is the main criticism in using shareholder wealth as the best criterion in evaluating the performance of a financial manager:

    • A.

      It does not take into account the shareholder's exposure to financial risk.

    • B.

      It is not sustainable.

    • C.

      It does not take into account the size of the shareholders investment.

    • D.

      Maximizing profits is a more suitable criterion.

    • E.

      Share market prices can be manipulated in the short term.

    Correct Answer
    E. Share market prices can be manipulated in the short term.
    Explanation
    One does not even have to be a shareholder to use the internet and its plethora of investor cafes to spread unsubstantiated but credible rumors that may have short term impact on the stock market.

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  • 5. 

    When making investment decisions, professional investors mainly consider the size of their expected returns on investment.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    A sophisticated investor would balance exposure to financial risk against the size of expected ROI.

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  • 6. 

    Which of the following goals would NOT serve as good criteria for evaluation of financial performance:

    • A.

      Minimizing Corporate Tax

    • B.

      Slashing costs

    • C.

      Beating the Competition

    • D.

      Maximizing Profits

    • E.

      Maximizing market share.

    Correct Answer(s)
    A. Minimizing Corporate Tax
    B. Slashing costs
    C. Beating the Competition
    D. Maximizing Profits
    E. Maximizing market share.
    Explanation
    None take into account investor's exposure to financial risk or size of the investment. Many businesses have been ruined by the indiscriminate slashing of costs. Maximizing market share at any cost may prove unprofitable. There is a fine line between legal tax minimization and fraudulent tax avoidance and an unhealthy focus of tax might be to the detriment of higher profits. Likewise, a determined attitude to beat the competition may transgress Trade Practices laws. There is no exact measure of profit.

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  • 7. 

    A company's market capitalization = Number of issued shares * market price per share.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because a company's market capitalization is calculated by multiplying the number of issued shares by the market price per share. This represents the total value of a company's outstanding shares in the market.

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  • 8. 

    Which of the following would NOT be classified as a finance decision:

    • A.

      Spending money on Capital Expenditure.

    • B.

      Raising money using equity finance.

    • C.

      Spending money on revenue expenditure.

    • D.

      Borrowing Funds.

    • E.

      Paying dividends to shareholders

    Correct Answer(s)
    A. Spending money on Capital Expenditure.
    C. Spending money on revenue expenditure.
    E. Paying dividends to shareholders
    Explanation
    The finance decision related to getting funds from various sources.

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  • 9. 

    Which of the following would be part of a financial manager's dividend (or operating) decisions:

    • A.

      Spending money on Capital Expenditure.

    • B.

      Raising money using equity finance.

    • C.

      Spending money on revenue expenditure.

    • D.

      Borrowing Funds.

    • E.

      Paying dividends to shareholders

    Correct Answer(s)
    C. Spending money on revenue expenditure.
    E. Paying dividends to shareholders
    Explanation
    Financial managers are responsible for making decisions regarding the allocation of funds within a company. This includes decisions related to dividends and operating activities. Revenue expenditure refers to expenses incurred in the day-to-day operations of the business, such as salaries, rent, and utilities. Therefore, spending money on revenue expenditure is a part of a financial manager's operating decisions. Paying dividends to shareholders is also a key decision made by financial managers, as it involves distributing profits to the owners of the company.

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  • 10. 

    Which of the following would be part of a financial manager's investment decision:

    • A.

      Spending money on Capital Expenditure.

    • B.

      Raising money using equity finance.

    • C.

      Spending money on revenue expenditure.

    • D.

      Borrowing Funds.

    • E.

      Paying dividends to shareholders

    Correct Answer
    A. Spending money on Capital Expenditure.
    Explanation
    A financial manager's investment decision involves allocating funds towards long-term assets that will generate future income and contribute to the growth of the company. Capital expenditure refers to spending money on acquiring or improving these long-term assets, such as purchasing new equipment or expanding production facilities. This decision is crucial as it directly impacts the company's profitability and competitive position. By investing in capital expenditure, the financial manager aims to enhance productivity, efficiency, and overall business performance.

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  • 11. 

    The market value of a firm can be affected by:

    • A.

      Investors' perceptions of the firm.

    • B.

      General economic conditions

    • C.

      The investments a firm's managers may make

    • D.

      The dividend payments made by the firm

    • E.

      Rumor, innuendo and gossip.

    Correct Answer(s)
    A. Investors' perceptions of the firm.
    B. General economic conditions
    C. The investments a firm's managers may make
    D. The dividend payments made by the firm
    E. Rumor, innuendo and gossip.
    Explanation
    The market value of a firm can be affected by investors' perceptions of the firm because investors' opinions and beliefs about the company's future prospects can influence their buying and selling decisions, thereby impacting the demand and price of the firm's shares. General economic conditions can also affect the market value of a firm as changes in the overall economy, such as inflation, interest rates, and unemployment, can impact consumer spending and investor confidence. The investments made by a firm's managers can also affect its market value as successful investments can increase profitability and attract investors, while poor investments can lead to losses and a decrease in market value. Additionally, the dividend payments made by the firm can impact its market value as higher dividend payments may attract income-seeking investors, while lower or no dividend payments may discourage investors. Finally, rumor, innuendo, and gossip can affect the market value of a firm as negative rumors or negative media coverage can create doubts and uncertainties about the company's performance, leading to a decrease in investor confidence and a decrease in market value.

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  • 12. 

    An advantage of a Limited Liability Company form of business organization is that the liability of the company to pay its debts is limited by corporate law.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The company's liability for its debt is NOT limited: a company incurs FULL liability for its debts. Rather, it is the liability of the SHAREHOLDERS to contribute towards the debts of the company that is limited to the amount unpaid by the shareholders on shares in the company owned by them.

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  • 13. 

    A partnership must be dissolved when there is a change of ownership.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In a partnership, ownership is divided among multiple partners. Therefore, when there is a change in ownership, such as when a partner leaves or a new partner is added, it can disrupt the balance and dynamics of the partnership. Dissolving the partnership allows for a reevaluation of the terms and conditions, redistribution of assets, and potentially the formation of a new partnership agreement to accommodate the change in ownership. Hence, the statement that a partnership must be dissolved when there is a change of ownership is true.

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  • 14. 

    The characteristics of a company limited by shares are:

    • A.

      A company is managed by its owners.

    • B.

      There exists an agency relationship between corporate management and shareholders.

    • C.

      Shareholders can vote at the company's Annual General Meeting.

    • D.

      A shareholder can vote to change the amount of dividend recommended by the Board of Directors.

    • E.

      A company is a separate legal entity apart from its owners.

    Correct Answer(s)
    B. There exists an agency relationship between corporate management and shareholders.
    C. Shareholders can vote at the company's Annual General Meeting.
    E. A company is a separate legal entity apart from its owners.
    Explanation
    The characteristics of a company limited by shares are that there exists an agency relationship between corporate management and shareholders, shareholders can vote at the company's Annual General Meeting, and a company is a separate legal entity apart from its owners. This means that the management of the company acts on behalf of the shareholders and is accountable to them. Shareholders have the right to vote on important matters at the Annual General Meeting, including the amount of dividend recommended by the Board of Directors. Additionally, the company is considered a separate legal entity, meaning it has its own legal rights and obligations independent of its owners.

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  • 15. 

    Preference shareholders are entitled to be refunded their investment before unsecured creditors in the event of an insolvent company's liquidation.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    Preference shareholders are not entitled to be refunded their investment before unsecured creditors in the event of an insolvent company's liquidation. In the liquidation process, secured creditors are given priority over unsecured creditors, and preference shareholders fall under the category of equity shareholders. Therefore, they have a lower priority in the distribution of assets compared to both secured and unsecured creditors.

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  • 16. 

    Preferential creditors (as defined by corporations law) have the same priority to their claims as preference shareholders do for return of their capital, in the event of an insolvent company's liquidation.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement is false because preferential creditors and preference shareholders do not have the same priority to their claims in the event of an insolvent company's liquidation. Preferential creditors, such as employees and tax authorities, have a higher priority and are paid before preference shareholders. Preference shareholders are considered equity holders and are paid after all other creditors have been satisfied.

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  • 17. 

    Rank the following claims in order from least risk to most risk, from an investor's viewpoint: 1 - Mortgage, 2 - ordinary shares, 3 - Debentures, 4 - Unsecured Notes, 5 - Preference Shares:

    • A.

      1-3-2-4-5

    • B.

      1-3-4-5-2

    • C.

      1-3-5-4-2

    • D.

      1-3-4-2-5

    • E.

      1-3-2-5-4

    Correct Answer
    B. 1-3-4-5-2
    Explanation
    From an investor's viewpoint, the least risky option would be mortgage (1) as it is backed by collateral. Debentures (3) would be the next least risky option as they are secured by the assets of the company. Unsecured Notes (4) would be more risky as they are not backed by collateral. Preference Shares (5) would be even riskier as they have a higher risk of not receiving dividends or getting their investment back. Ordinary Shares (2) would be the most risky option as they have the highest potential for loss and are the last to receive any remaining value in case of liquidation.

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  • 18. 

    Wealth maximization is superior to profit maximization as the goal of financial management, because:

    • A.

      Profits include estimates, in addition to cash flows.

    • B.

      Profits ignore time value of money.

    • C.

      Profits take into account costs.

    • D.

      Profit maximization disregards financial risk.

    • E.

      Profit includes sales amounts.

    Correct Answer(s)
    A. Profits include estimates, in addition to cash flows.
    B. Profits ignore time value of money.
    D. Profit maximization disregards financial risk.
    Explanation
    Wealth maximization is considered superior to profit maximization as the goal of financial management because profits include estimates, in addition to cash flows. This means that profits are not always accurate and can be influenced by various factors such as accounting practices and assumptions. Additionally, profits ignore the time value of money, which means that they do not consider the fact that money received in the future is worth less than money received in the present. Lastly, profit maximization disregards financial risk, meaning that it does not take into account the potential risks and uncertainties associated with investment decisions.

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  • 19. 

    Under the Partnership Act, every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while a partner and after the partner's death, the partner's estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Under the Partnership Act, every partner in a firm is jointly liable with the other partners for all debts and obligations of the firm. This means that if the firm incurs any debts or obligations, each partner is responsible for them. Additionally, even after a partner's death, their estate is still liable for any remaining debts and obligations of the firm. Therefore, the statement is true.

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  • 20. 

    Whatever the individual investor's attitudes to risk, the market returns in relation to various measures of risk establish that investors, on average, are risk-averse.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement suggests that regardless of an individual investor's risk preferences, the market returns in relation to different risk measures show that investors, on average, tend to be risk-averse. This implies that most investors prefer lower-risk investments and are not willing to take on excessive risk in order to achieve higher returns.

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Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Apr 19, 2024
    Quiz Edited by
    ProProfs Editorial Team
  • Oct 24, 2010
    Quiz Created by
    Hdtchr
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