Quiz 1 Building Wealth

1. "Shareholder wealth" in a firm is represented by:

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.

The correct answer is "the market price per share of the firm's common stock." This is because the market price per share reflects the value that investors place on the company and its future cash flows. It is an indicator of the company's performance and potential for growth, which ultimately affects the wealth of its shareholders. The number of people employed, the book value of assets, and the amount of salary paid to employees do not directly represent shareholder wealth.

Explanation

The correct answer is "the market price per share of the firm's common stock." This is because the market price per share reflects the value that investors place on the company and its future cash flows. It is an indicator of the company's performance and potential for growth, which ultimately affects the wealth of its shareholders. The number of people employed, the book value of assets, and the amount of salary paid to employees do not directly represent shareholder wealth.

2. The controller's responsibilities are primarily in nature, while the treasurer's responsibilities are primarily related to .

Operational; financial management

Financial management; accounting

Accounting; financial management

Financial management; operations

The controller's responsibilities are primarily related to accounting, which involves tasks such as financial reporting, budgeting, and ensuring compliance with financial regulations. On the other hand, the treasurer's responsibilities are primarily related to financial management, which includes tasks such as managing cash flow, investments, and financial risk. Therefore, the correct answer is accounting; financial management.

Explanation

The controller's responsibilities are primarily related to accounting, which involves tasks such as financial reporting, budgeting, and ensuring compliance with financial regulations. On the other hand, the treasurer's responsibilities are primarily related to financial management, which includes tasks such as managing cash flow, investments, and financial risk. Therefore, the correct answer is accounting; financial management.

3. The decision function of financial management can be broken down into the decisions.

Financing and investment

Investment, financing, and asset management

Financing and dividend

Capital budgeting, cash management, and credit management

The decision function of financial management involves making decisions related to investment, financing, and asset management. Investment decisions involve determining where to allocate funds to generate the highest return. Financing decisions involve determining how to obtain the necessary funds to finance investments. Asset management decisions involve managing and optimizing the use of assets to generate maximum value. Therefore, the correct answer is investment, financing, and asset management.

Explanation

The decision function of financial management involves making decisions related to investment, financing, and asset management. Investment decisions involve determining where to allocate funds to generate the highest return. Financing decisions involve determining how to obtain the necessary funds to finance investments. Asset management decisions involve managing and optimizing the use of assets to generate maximum value. Therefore, the correct answer is investment, financing, and asset management.

4. A(n) would be an example of a principal, while a(n) would be an example of an agent.

Shareholder; manager

Manager; owner

Accountant; bondholder

Shareholder; bondholder

In this scenario, a shareholder can be considered a principal because they are the owners of the company and have a financial stake in its success. On the other hand, a manager can be considered an agent because they are hired by the shareholders to run the company on their behalf and make decisions in their best interest.

Explanation

In this scenario, a shareholder can be considered a principal because they are the owners of the company and have a financial stake in its success. On the other hand, a manager can be considered an agent because they are hired by the shareholders to run the company on their behalf and make decisions in their best interest.

5. The focal point of financial management in a firm is:

The number and types of products or services provided by the firm.

The minimization of the amount of taxes paid by the firm.

The creation of value for shareholders.

The dollars profits earned by the firm.

The focal point of financial management in a firm is the creation of value for shareholders. This means that the primary goal of financial management is to maximize the wealth and returns for the owners or shareholders of the company. This involves making decisions and implementing strategies that will increase the value of the company's stock and generate profits for shareholders. It encompasses various aspects such as financial planning, investment decisions, capital structure, and dividend policies, all aimed at maximizing shareholder value.

Explanation

The focal point of financial management in a firm is the creation of value for shareholders. This means that the primary goal of financial management is to maximize the wealth and returns for the owners or shareholders of the company. This involves making decisions and implementing strategies that will increase the value of the company's stock and generate profits for shareholders. It encompasses various aspects such as financial planning, investment decisions, capital structure, and dividend policies, all aimed at maximizing shareholder value.

6. The long-run objective of financial management is to:

Maximize earnings per share.

Maximize the value of the firm's common stock.

Maximize return on investment.

Maximize market share.

The long-run objective of financial management is to maximize the value of the firm's common stock. This means that the financial manager's goal is to increase the overall value and worth of the company's stock, which benefits the shareholders and investors. By maximizing the value of the firm's common stock, the financial manager aims to generate higher returns and attract more investors, leading to the growth and success of the company in the long term.

Explanation

The long-run objective of financial management is to maximize the value of the firm's common stock. This means that the financial manager's goal is to increase the overall value and worth of the company's stock, which benefits the shareholders and investors. By maximizing the value of the firm's common stock, the financial manager aims to generate higher returns and attract more investors, leading to the growth and success of the company in the long term.