FM L-Ch1-Questions

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Multiple choice questions

1. Which of the following is the primary goal of financial management?

a) Maximizing revenues

b) Maximizing shareholder wealth

c) Minimizing costs

d) Increasing market share

Answer: b) Maximizing shareholder wealth

Explanation: The primary goal of financial management is to maximize shareholder wealth, which is
typically reflected by increasing the value of the firm's stock.

2. Which of the following is a characteristic of capital markets?

a) Short-term instruments

b) Long-term securities like stocks and bonds

c) Trade in cash and equivalents

d) Instruments maturing in less than one year

Answer: b) Long-term securities like stocks and bonds

Explanation: Capital markets deal with long-term securities such as stocks and bonds, whereas money
markets focus on short-term instruments.

3. What is the key difference between primary and secondary markets?

a) In the primary market, new securities are issued, while in the secondary market, existing securities are
traded.

b) Both markets deal only with short-term securities.

c) Primary markets are more liquid than secondary markets.

d) Secondary markets involve only corporate bonds.

Answer: a) In the primary market, new securities are issued, while in the secondary market, existing
securities are traded.

Explanation: Primary markets are for issuing new securities, while secondary markets involve trading
existing securities between investors.
4. Which of the following is an example of a financial institution?

a) Stock exchange

b) Commercial bank

c) Supermarket

d) Tax office

Answer: b) Commercial bank

Explanation: Financial institutions include banks, insurance companies, and investment firms that
facilitate financial transactions.

5. In which market would you find Treasury bills and commercial paper being traded?

a) Capital market

b) Primary market

c) Money market

d) Secondary market

Answer: c) Money market

Explanation: The money market deals with short-term instruments like Treasury bills and commercial
paper.

6. Which of the following best describes a corporation?

a) A business owned and run by one individual

b) A legal entity separate from its owners

c) A business where owners have unlimited liability

d) A business primarily funded by debt

Answer: b) A legal entity separate from its owners

Explanation: A corporation is a separate legal entity, meaning its owners (shareholders) have limited
liability and are not personally responsible for the corporation’s debts.

7. Which of the following is an example of an investment decision?

a) Deciding to issue new shares

b) Deciding to buy new machinery for production


c) Paying dividends to shareholders

d) Borrowing money from a bank

Answer: b) Deciding to buy new machinery for production

Explanation: Investment decisions involve choosing projects or assets the company should invest in,
such as new equipment or facilities.

8. What is a key feature of the money market?

a) It is used for long-term financing.

b) It involves highly liquid, short-term debt instruments.

c) It trades in equities.

d) It is the place where companies raise long-term capital.

Answer: b) It involves highly liquid, short-term debt instruments.

Explanation: The money market deals with short-term, highly liquid instruments like Treasury bills and
certificates of deposit.

9. Which of the following financial management decisions is concerned with how to raise funds?

a) Investment decisions

b) Dividend decisions

c) Financing decisions

d) Budgeting decisions

Answer: c) Financing decisions

Explanation: Financing decisions involve determining how the firm will raise funds, whether through
debt, equity, or other means.

10. Which business organization type provides limited liability to its owners?

a) Sole proprietorship

b) Partnership

c) Corporation

d) General partnership

Answer: c) Corporation
Explanation: In a corporation, shareholders have limited liability, meaning they are not personally
responsible for the company's debts.

11. In which market do companies typically raise capital by selling new securities?

a) Secondary market

b) Primary market

c) Derivatives market

d) Foreign exchange market

Answer: b) Primary market

Explanation: The primary market is where companies issue new securities, such as stocks or bonds, to
raise capital.

12. Which of the following is a possible goal of a firm other than profit maximization?

a) Wealth maximization

b) Loss minimization

c) Revenue shrinking

d) Dividend reduction

Answer: a) Wealth maximization

Explanation: Wealth maximization focuses on increasing shareholder wealth and is often considered a
more sustainable long-term goal than profit maximization alone.

13. Which of the following financial institutions primarily deals with risk management and protection
against losses?

a) Commercial banks

b) Insurance companies

c) Investment banks

d) Credit unions

Answer: b) Insurance companies

Explanation: Insurance companies provide protection against risks, offering policies that help businesses
and individuals manage financial risks.
14. Cash flows to a firm come from which of the following sources?

a) Payments for expenses

b) Salaries paid to employees

c) Sales revenue and investments

d) Debt repayment

Answer: c) Sales revenue and investments

Explanation: Cash inflows to a firm typically come from revenue generated by sales and any investments
made into the business.

15. Which financial market provides a platform for trading existing securities between investors?

a) Primary market

b) Secondary market

c) Money market

d) Capital market

Answer: b) Secondary market

Explanation: The secondary market is where existing securities are traded between investors, such as on
stock exchanges.

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