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Problems in Financial Management

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Problems in Financial Management
CHAPTER 1

AN INTRODUCTION TO THE FOUNDATIONS OF FINANCIAL MANAGEMENT – THE TIES THAT BIND

TRUE/FALSE

1. The difference between the market value of the firm and the amount of money invested in the firm is known as market value added.

Answer: True; Difficulty: 1; Keywords: Market Value Added, Goal of the Firm

2. A company that wants to maximize earnings per share may either over invest or use too much debt.

Answer: True; Difficulty: 2; Keywords: Earnings Per Share, Goal of the Firm

3. Shareholder wealth maximization means maximizing the price of the existing common stock.

Answer: True; Difficulty: 1; Keywords: Shareholder Wealth, Goal of the Firm

4. It is important to evaluate all financial decisions by measuring how they affect a firm’s stock price, hence ensuring maximization of shareholder wealth.

Answer: False; Difficulty: 2; Keywords: Goal of the Firm, Shareholder Wealth Maximization

5. Business owners who want to operate as sole proprietors must request sole proprietor status and get approval from taxing authorities to pass business income to the owner’s individual tax return.

Answer: False; Difficulty: 1; Keywords: Sole Proprietorship, Legal Forms of Business

6. A general partnership, unlike a limited partnership, is an entity that legally functions separate and apart from its owners.

Answer: False; Difficulty: 2; Keywords: General Partnership, Limited Partnership, Legal Forms of Business

7. The best form of business entity to attract new capital is the sole proprietorship because investors only need to deal with one owner.

Answer: False; Difficulty: 1; Keywords: Legal Forms of Business, Sole Proprietorship

8. S-type corporations and limited liability companies are taxed like partnerships, but have the advantage of limited liability for their owners.

Answer: True; Difficulty: 1; Keywords: Legal Forms of Business, S-Corporation, Limited Liability Company

9. Limited liability
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