Question

 1) Which one of the following is a capital budgeting decision?

 A) Deciding whether or not a new production facility should be built

 B) Determining how much inventory to keep on hand

 C) Deciding when to repay a long-term debt

 D) Deciding how much credit to grant to a particular customer

 E) Determining how much debt should be borrowed from a particular lender

 2) A firm's capital structure refers to the firm's:

 A) combination of accounts appearing on the left side of its balance sheet.

 B) proportions of financing from current and long-term debt and equity.

 C) combination of cash and cash equivalents.

 D) investment selections for its excess cash reserves.

 E) mixture of various types of production equipment.

 3) The primary goal of financial management is to:

 A) maximize current dividends per share of the existing stock.

 B) maintain steady growth in both sales and net earnings.

 C) avoid financial distress.

 D) minimize operational costs and maximize firm efficiency.

 E) maximize the current value per share of the existing stock.

 4) A conflict of interest between the stockholders and managers of a firm is referred to as

 the:

 A) corporate breakdown.

 B) stockholders' liability.

 C) agency problem.

 D) legal liability.

 E) corporate activism.

Answer 1

1A

A capital budgeting decision is the one in which the long-term decision needs to be made as regards a capital expenditure. From the given options only the first option is the capital budgeting decision because building a new production facility is both a long-term decision and a capital expenditure. Other options are not capital budgeting decisions.

2 B

The capital structure of a firm refers to the segregation of capital into debt and equity. It determines what proportion of funds raised are through borrowings and what proportion comes by way of owners capital. The other options do not specify the sources of capital.

3E

The primary goal of financial management is to maximize the wealth of the shareholders. This wealth is maximized by maximizing the share price in the market. Hence all other options are ancillary goals but not primary.

4C

The management is considered the agents of the shareholders who are the owners of the company. At times there is a conflict of interest between the management and the shareholders. This is known as the agency problem. The other options to not relate to conflict of interest between stockholders and managers of a company.