FM L-Ch1-Questions
FM L-Ch1-Questions
FM L-Ch1-Questions
a) Maximizing revenues
c) Minimizing costs
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.
a) Short-term instruments
Explanation: Capital markets deal with long-term securities such as stocks and bonds, whereas money
markets focus on short-term instruments.
a) In the primary market, new securities are issued, while in the secondary market, existing securities are
traded.
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
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
Explanation: The money market deals with short-term instruments like Treasury bills and commercial
paper.
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.
Explanation: Investment decisions involve choosing projects or assets the company should invest in,
such as new equipment or facilities.
c) It trades in equities.
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
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
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
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
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?
d) Debt repayment
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
Explanation: The secondary market is where existing securities are traded between investors, such as on
stock exchanges.