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Test Bank For Contemporary Financial Management, 13th Edition

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    Test Bank For Contemporary Financial Management, 13th Edition, page 1@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.CHAPTER 1: THE ROLE AND OBJECTIVE OF FINANCIALMANAGEMENT1.Theprimaryobjectiveofthefirmis:a.Shareholderwealthmaximizationb.Socialresponsibilityc.Longrunsurvivald.ProfitmaximizationANSWER:a2.The shareholder wealthmaximization goal states that management should seek to maximize theof theexpected future returns to the owners of the firm.a.Futurevalueb.Compoundvaluec.Percentagevalued.PresentvalueANSWER:d3.Financialmanagerscantakeavarietyofactionstoinfluencethemarketvalueofacompany'sstock.AllofthefollowingareclassificationsofactionstakenEXCEPT:a.investingdecisionsb.financingdecisionsc.dividenddecisionsd.taximplicationdecisionsANSWER:d4.Shareholderwealthismeasuredbytheoftheshareholders'commonstockholdings.a.Bookvalueb.Marketvaluec.Historicvalued.CompoundvalueANSWER:b5.Thelimitationsoftheprofitmaximizationgoalinclude:a.Itlacksatimedimension(i.e.,itisstatic)b.Itfailstoconsiderriskc.Thedefinitionofprofitisambiguousd.AlltheabovearelimitationsANSWER:d

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    Test Bank For Contemporary Financial Management, 13th Edition, page 2

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    Test Bank For Contemporary Financial Management, 13th Edition, page 3Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.6.Theobjectiveofmaximizingshareholderwealth,asmeasuredbythemarketvalueofthefirm'sstocka.doesnotconsiderthetimingofthebenefitsreceivedb.providesawaytoconsidertheriskofthereturnsbeingofferedc.benefitsonlycertainstockholdersd.neitherconsidersthetimingofthebenefitsreceivednorbenefitsonlycertainstockholdersANSWER:b7.Thetwomostimportantdisciplinesonwhichfinancialmanagementreliesarea.accountingandproductionb.accountingandmarketingc.economicsandmarketingd.accountingandeconomicsANSWER:d8.Themostwidelyacceptedobjectiveofthefirmistoa.minimize riskb.maximizeprofitsc.maximizeshareholderwealthd.maximizeearningspershareANSWER:c9.Whenconsideringtheriskofreceivingcashflows,financialmanagersmustbeawarethat:a.investorswanthigherreturnsforperceivedgreaterrisk.b.investors want a lower valued firm to discourage futureinvestors which might dilute their existing control.c.investorsexpectdividendsandcapitalgainsregardlessoftherisksassociatedwithachievingthem.d.investorsalwayswantlowerreturnssothattheriskisminimized.ANSWER:a10.Amajoradvantageofusingthemaximizationofshareholderwealthastheprimarygoalofthefirmisthatthisgoalconsidersa.thetimingandtheriskoftheexpectedbenefitstobereceivedb.theinvestor'sconsumptionutilityc.thevalueofcloselyheldpartnershipsd.alltheaboveANSWER:a

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    Test Bank For Contemporary Financial Management, 13th Edition, page 4Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.11.Theprimaryreasonforthedivergencebetweentheshareholderwealthmaximizationgoalandtheactualgoalspursuedbymanagementhasbeenattributedtoa.separationofsocialresponsibilityandstakeholders'concernsb.separationofownershipandcontrolc.separationofpersonalwelfareandlong-runprofitgoalsd.thegrantingof"goldenparachute"contractsANSWER:b12.Givingtopmanagementisonemethodthatensuresmanagerswillactintheinterestofshareholdersinmergerdecisions.a."goldenparachute"contractsb.excellentpayc.executiveperksd.jobsecurityANSWER:a13.arisefromthedivergentobjectivesbetweenownersandmanagers.a.Shareholderrelationshipsb.Stakeholderproblemsc.Creditorproblemsd.AgencyproblemsANSWER:d14.Agencycostsincludeallofthefollowingexcept:a.expenditurestomonitormanagement'sactionsb.providingstockaspartofmanagement'scompensationc.flotationcostsd.bondingexpendituresANSWER:c15.Apotentialagencyconflictcanarisebetweenstockholdersandcreditorsbecauseownersmaya.increasetheriskofafirm'sinvestmentsb.decreasetheamountofdebtoutstandingc.decreasetheriskofafirm'sinvestmentsd.increasethefirm'snetworthANSWER:a

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    Test Bank For Contemporary Financial Management, 13th Edition, page 5Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.16.Creditorshaveafixedfinancialclaimonacompany'sresourcesthroughallofthefollowingEXCEPT:a.longtermdebtb.bankloansc.preferredstockd.commercialpaperANSWER:c17.Agencyproblemsmaygiverisetocoststhatthemarketvalueoffirms.a.increaseb.decreasec.donotaffectd.arenotimportanttoANSWER:b18.Allofthefollowingareproblemswiththemicroeconomicprofitmaximizationmodelexcept:a.theabsenceofatimedimensionb.offersfinancialmanagersinsightstoawiderangeofproblemsc.doesnotconsidertheriskofalternativedecisionsd.theproblemofdefiningprofitsANSWER:b19.arelargelyoutsideofthedirectcontrolofmanagers.a.investmentstrategiesb.economicenvironmentfactorsc.majorpolicydecisionsd.dividendpoliciesANSWER:b20.Thesuccessofafirmislinkedtoitsstakeholders.Thisgroupincludes:a.communityneighborsb.suppliersc.employeesd.alloftheseANSWER:d

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    Test Bank For Contemporary Financial Management, 13th Edition, page 6Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.21.TechniquesidentifiedbyJohnCaseythatmanagerscouldkeepinmindwhenaddressingtheethicaldimensionsofabusinessproblemincludeallofthefollowingexcept:a.collectallthefactsbearingontheproblemb.clarifytheparametersoftheproblemc.involveallpartieswithafinancialinterestintheoutcomed.seekequityforthosewhomaybeaffectedANSWER:c22.Manysmallbusinessownersarediversifiedwithrespecttotheirpersonalwealth.a.poorlyb.highlyc.welld.90%ANSWER:a23.dealswitheconomicdecisionsofindividuals,households,andfirms.a.Economicaccountingb.Microeconomicsc.BlueChipeconometricsd.MacroeconomicsANSWER:b24.Financialmanagementdrawsheavilyonthefollowingrelateddisciplines:a.accountingb.macroeconomicsc.microeconomicsd.alloftheseANSWER:d25.Thechieffinancialofficer(CFO)normallyhasresponsibilityforallthefollowingexcept:a.advertisingstrategyb.managinginterestrateriskc.tradingforeigncurrenciesd.accountingfunctionsANSWER:a

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    Test Bank For Contemporary Financial Management, 13th Edition, page 7Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.26.Thecontrollernormallyhasresponsibilityforallrelatedactivities,whilethetreasurerisnormallyconcernedwith.a.acquisition,dataprocessingb.tax,costaccountingc.tax,financialaccountingd.accounting,expenditureoffundsANSWER:d27.Accordingtotheshareholderwealthmaximizationgoal,managementshouldseektomaximizetheoftheto_______owners.a.presentvalue;expectedpretaxcashflowsb.futurevalue;expectedpretaxcashflowsc.presentvalue;expectedfuturereturnsd.futurevalue;expectedfuturereturnsANSWER:c28.Shareholderwealthismeasuredbythe.a.bookvalueoftheshareholders'commonstockholdingsb.marketvalueoftheshareholders'commonstockholdingsc.bookvalueofthecompany'sassetsd.marketvalueofthecompany'sassetsANSWER:b29.Amongthemostimportantagencyrelationshipsinthecontextoffinanceis(are)therelationship(s)between.a.stockholdersandcreditorsb.managementandworkersc.stockholdersandcreditors,andmanagementandworkersd.managementandcreditorsANSWER:a30.Protectivecovenantsinacompany'sbondindenturesareusedinagencyrelationshipsinvolving.a.stockholdersandmanagersb.stockholdersandcreditorsc.managementandworkersd.managementandcreditorsANSWER:b

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    Test Bank For Contemporary Financial Management, 13th Edition, page 8Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.31.Thechieffinancialofficer(CFO)ofacorporationnormallyreportstotheofthecompany.a.chairmanoftheboardofdirectorsb.chiefoperatingofficerc.controllerd.chiefexecutiveofficerANSWER:d32.Thehasagoalofservingasabridgebetweenacademicstudyoffinanceandtheapplicationoffinancialprinciplesbyfinancialmanagers.a.FinancialExecutivesInstituteb.FinancialManagementAssociationc.AmericanFinanceAssociationd.InstitutionofFinancialAnalystsANSWER:b33.Allofthefollowingeconomicenvironmentfactorsaffectstockpricesexcept:a.investmentstrategiesb.competitionc.taxratesd.currencyexchangeratesANSWER:a34.Themajorfactorsthatdeterminethemarketvalueofacompany'ssharesofstockincludethe.a.riskofitscashflowsb.timingofitscashflowsc.bookvalueofitsassetsd.riskofitscashflowsandthetimingofitscashflowsANSWER:d35.Thereisoftenadivergencebetweentheshareholderwealthmaximizationgoalandtheactualgoalspursuedbymanagement.Theprimaryreasonforthisis.a.geographicaldispersionofshareholdersb.separationofownershipandcontrolc.agedifferencesbetweenmanagersandshareholdersd.thatbothhavetheirownagendasANSWER:b

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    Test Bank For Contemporary Financial Management, 13th Edition, page 9Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.36.Theexistenceofdivergentobjectivesbetweenownersandmanagersisoneexampleofaclassofproblemsarisingfrom____.a.socialresponsibilityconcernsb.agedifferencesbetweenmanagersandownersc.agencyrelationshipsd.union-managementrelationsANSWER:c37.Theactivitiesofthetreasurerincludeallofthefollowingexcept:a.financialplanningb.taxpreparationc.creditanalysisd.pensionfundmanagementANSWER:b38.Themostimportantmanagerialobjectiveisto:a.makeMC=MRb.maximizeprofitsc.minimizeagencycostsd.noneoftheseANSWER:d39.areimportantbecausethefinancialhealthofafirmdependsonthefirmbeingabletogeneratesufficientcashtopayitscreditors,employees,suppliers,andowners.a.cashsalesb.cashflowsc.cashprofitsd.netprofitsANSWER:b40.Onemethodofdecreasingthecashoutflowsofafirmistoa.decreasedepreciationb.increasecapitalexpendituresc.decreasedividendsd.increasedebtrepaymentANSWER:c

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    Test Bank For Contemporary Financial Management, 13th Edition, page 10Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.41.Accountingisconcernedprimarilywithmatching:a.cost-basedrevenueandexpensesb.taxliabilityandfuturecashflowsc.revenueandlongtermdebtd.inventoryandcostofsalesANSWER:a42.Generallyacceptedaccountingprinciplesareambiguousinthedeterminationofafirm'snetincomebecause:a.itdoesnotreflectactualcashinflowsandoutflowsofthefirmb.stockdividendsaredifficulttoforecastc.depreciationisacashoutlaybutisnotreflectedassuchd.taxlawschangeregularlywhichcausethefirmtomisjudgeitstruetaxobligationANSWER:a43.Theaccountant'sroleinthefirmistodoallofthefollowingexcept:a.preparefinancialstatementsb.determinethefeasibilityofcertaininvestmentdecisionsc.determinethetaxliabilityofthefirmd.keeprecordsofthefirm'sperformanceANSWER:b44.Thefinancialmanageruseswhendeterminingthefirm'smostappropriatecapitalstructure.a.accountingdatab.employmentbenefitdatac.federalregulationsd.computersoftwaredesignANSWER:a45.The net present value rule provides appropriate guidance for financial decision makers when costs are incurredimmediately buta.futurecashflowsarenotknownwithcertaintyb.marginalcostsareequaltomarginalrevenuec.resultinastreamofbenefitsoverseveralfuturetimeperiodsd.marginalcostsaregreaterthanmarginalrevenueANSWER:c46.Corporateofficersnormallyincludeallthefollowingexcept:a.Secretaryb.Chiefoperatingofficerc.Treasurerd.FinancialanalystANSWER:d

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    Test Bank For Contemporary Financial Management, 13th Edition, page 11Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.47.Thedifferencebetweenafirm'sannualafter-taxoperatingprofitanditstotalannualcostofcapitalisknownas:a.earnedincomeb.EconomicValueAddedc.ManagerialValueAddedd.operatingincomeANSWER:b48.equalsthenumberofsharesoutstandingtimesthemarketpricepershare.a.Bookvalueb.Stakeholderswealthc.Totalshareholderwealthd.EconomicvalueANSWER:c49.Concernfortheinterestsoftheshareholdercanbeviewedasthemeanstotheendof:a.maximizinglong-termshareholderwealthb.diminishingmarginalreturnc.maximizing riskd.continuing legal litigationANSWER:a50.Thenetpresentvalueofaninvestmentmadebyafirmrepresentsthecontributionofthatinvestmenttotheofthefirm.a.bookvalueb.profitc.valued.cashflowANSWER:c51.A major advantage of the corporate form of business over both sole proprietorships and partnerships is thea.limited liabilityb.reduction in taxesc.ease offormationd.ability to maintain ownershipANSWER:a52.Anadvantagethatthecorporateformofbusinesshasovereitherthesoleproprietorshiporpartnershipisthe:a.abilitytoraisecapitalb.easeofchangingownershipc.limitedliabilityd.eliminationofdoubletaxesANSWER:d

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    Test Bank For Contemporary Financial Management, 13th Edition, page 12Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.53.Amajordisadvantageofasoleproprietorshipisthefactthata.itisexpensivetoestablishb.theownerhasunlimitedpersonalliabilityc.itiseasytofinancegrowthd.theownerpaystaxesonalltheincomeANSWER:b54.In a limited partnership, the limited partners may limit their:a.tax liabilityb.liabilityc.tax write-offd.ability to attract new productsANSWER:b55.Corporatesecuritiesrepresentclaimsagainstthea.corporateofficersofthefirmb.agentsofthecorporationc.liabilitiesandnetworthofthefirmd.assetsandfutureearningsofthefirmANSWER:d56.is(are)referredtoasaresidualformofownershipinacorporation.a.Commonstockb.Preferredstockc.Bondsd.DividendsANSWER:a57.The advantages of thecorporate form of organization over both sole proprietorships and partnerships include.a.limited liabilityb.permanencyc.limited liability and permanencyd.lower tax ratesANSWER:c58.Althoughthistypeofbusinessgenerateslessthan6%ofthetotalU.S.businessrevenue,makeupapproximately75%ofallbusinesses.a.generalpartnershipsb.corporationsc.limitedpartnershipsd.sole-proprietorshipsANSWER:d

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    Test Bank For Contemporary Financial Management, 13th Edition, page 13Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.59.All of the following are advantages of the corporate form of business organization EXCEPT:a.unlimited lifeb.unlimited liabilityc.flexibility in ownership changed.ability to raise capitalANSWER:b60.Thereareproblemswithusingthe“profitmaximization”criterion.Whichofthefollowingis/arecorrect?I.Profitmaximizationhasanambiguousdefinitionof“maximizingprofits”.II.Profitmaximizationfailstoconsiderrisk.a.OnlystatementIiscorrectb.OnlystatementIIiscorrectc.BothstatementsIandIIarecorrectd.NeitherstatementInorIIiscorrectANSWER:c61.Whichofthefollowingstatementsis/arecorrect?I.ShareholderselecttheChairmanoftheBoardII.Theboardofdirectorshasnocontroloverwhetherornotdividendswillbepaid.a.OnlystatementIiscorrectb.OnlystatementIIiscorrectc.BothstatementsIandIIarecorrectd.NeitherstatementInorIIiscorrectANSWER:d62.Therearethreemajorfactorsthatdeterminethemarketvalueofacompany’sshareofstock.AllofthefollowingarefactorsEXCEPT:a.Cashflowsb.Salesgeneratedc.Timingofcashflowsd.RisktakentogeneratecashflowsANSWER:b63.Aneconomicprincipleusedinfinanceis:a.Fullutilizationofdataprocessingb.Marginalanalysiswheremarginalcostsaresetequaltomarginalrevenues.c.Accrualbasisofrecognizingrevenuesandexpensesd.TargetcapitalstructureANSWER:b

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    Test Bank For Contemporary Financial Management, 13th Edition, page 14Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.64.Thedefinitionofthemarginalanalysisprincipleisthatfinancialdecisionsaremadeandactionsaretakena.withintheglobaleconomicviewpoint.b.withregardtogovernmentallawsandculturaleffectiveness.c.whentheaddedbenefitsexceedtheaddedcosts.d.basedontheimpactofpublicopinion.ANSWER:c65.Therearethreeformsofbusinessorganization.Whichofthefollowinghasunlimitedliability?I.CorporationII.Generalpartnershipa.OnlystatementIiscorrectb.OnlystatementIIiscorrectc.BothstatementsIandIIarecorrectd.NeitherstatementInorIIiscorrectANSWER:b66.Themanagerialdecisionthatemergesfromthemicroeconomicprofitmaximizationmodelis:a.MarginalCosts<MarginalRevenuesb.MarginalCosts=Profitsc.MarginalRevenues>MarginalCostsd.MarginalCosts=MarginalRevenueANSWER:d67.Soleproprietorships,partnershipsandcorporationsarethethreemainformsofbusinessorganization.Thereareothertypeswhicharereferredtoashybrids.Examplesofhybridbusinessformsare:a.10K&14BCorporationsb.Section8andSubchapterSCorporationsc.SubchapterSandLLCsd.10KCorporationsandLLCsANSWER:c68.Thetypeofcorporatesecuritythatpaysperiodicinterestaswellastheeventualreturnofprincipalis:a.Preferredstockb.DebtSecuritiesc.EquitySecuritiesd.FixedassetloansANSWER:b

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    Test Bank For Contemporary Financial Management, 13th Edition, page 15Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.69.WhatisthefunctionoftheCFO?a.Controloftheaccountingfunctionsofthefirm.b.Effectivecommunicationwiththeinvestmentcommunityaboutthefirm’sperformance.c.Oversightofthefinancialstatements.d.Determinationofeffectivetaxreductionstrategies.ANSWER:b70.AccordingtotheSmallBusinessAdministration,whatpercentofallbusinessesareconsideredsmallbusinesses?a.>20%b.>75%c.>95%d.>50%ANSWER:c71.Financialdecisionsshouldbeconsistentwiththegoalofshareholderwealthmaximization.However,theremaybeadivergencebetweenshareholderwealthmaximizationandtheactualgoalsofmanagement.Theprimaryreasonforthisis:a.Managementwantstoensuregoodpublicrelations.b.TheBoardofDirectorsisbecomingincreasinglyuninvolvedwithinthecorporation.c.Shareholdersdonotfeelthatwealthmaximizationisrelevant.d.Thereisaseparationofownershipandcontrolincorporations.ANSWER:d72.Asaresultofaccountingscandals,severalmethodshavebeendevelopedtodealwiththeissuesofcorporategovernance.TheyareallofthefollowingEXCEPT:a.TheBoardmustselectonlySECapprovedconsultants.b.ChairmanoftheBoardpositionshouldbesplitfromtheCEOposition.c.BoardofDirectorsshouldhaveamajorityofindependentdirectors.d.TheBoardofDirectorsmustexplainitsapproachforadoptingacodeofethicsfortheCEOandseniorfinancialofficers.ANSWER:a73.Maximization of shareholder wealth is not an accounting concept. A corporation’s value should be based ona.liquidation valueb.book valuec.market valued.stock valueANSWER:c

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    Test Bank For Contemporary Financial Management, 13th Edition, page 16Chapter 1:The Role and Objective of Financial Management@ 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.74.Acorporationthatoperatesethicallywillnoticecertainbenefitsasitappliestoshareholderwealthmaximization.With shareholder wealth maximization in mind, all of the following could be experienced by anethical corporationEXCEPT:a.The corporation can expect to have reduced litigation expense.b.The cooperation can expect to have greater agency costs.c.The corporation can expect to have reduced damages expenses.d.The corporation can expect to have a more favorable impression by customers and investors.ANSWER:b75.Examplesofagencycostsincurredbyshareholderstominimizeagencyproblemsare:a.Expendituresassociatedwithindependentauditing.b.ExpendituresassociatedwithSECapproval.c.Expendituresassociatedwithmonitoringmanagement’sactionsd.Expendituresassociatedwithinventorycontrol.ANSWER:c76.Explainthechainofcommandinacorporation.ANSWER:Thestockholders,whoownapro-ratashareofthecompany,electtheboardofdirectors.Theboardmakesbroaddecisionsaffectingthedirectionofthecompany,leavingtheday-to-daydecisionstothecorporateofficers,whoareelectedbytheboard.Corporateofficersare:thechairmanoftheboard,thechiefexecutiveofficer,thechiefoperatingofficer,chieffinancialofficer,president,vice-president(s),treasurerandsecretary.77.Therearefivecompetitiveforcesthatinfluenceanindustry’sstructure.ANSWER:1.Thethreatofnewentrants.2.Thethreatofsubstituteproducts3.Thebargainingpowerofbuyers4.Thebargainingpowerofsuppliers5.Therivalryamongcurrentcompetitors78.Whataretheshortcomingsintheprofitmaximizationobjectiveasamanagerialstrategy?ANSWER:1.Profitmaximizationlacksatimedimension.2.Therearemanydefinitionsofprofitforafirm.Thereismuchlatitudepermittedinrecognizingandaccountingforcostsandrevenues.3.Thereisaquestionastowhichprofitistobemaximized:totalprofit,rateofprofitorEPS.4.Thereisnodirectwaytoconsidertheriskassociatedwithalternativedecisions.79.Preferredstockisconsideredprioritystock.Explainthispriority.ANSWER:Commonstockisaresidualformofownership.Preferredstockhaspriorityovercommonstockholderswithregardtothefirm’searningsandassets.Preferredstockholdersarepaidcashdividendsbeforecommonstockholders.Intheeventofbankruptcyorliquidation,preferredstockholdersareaheadofcommonstockholdersinthedistributionofthecorporation’sassets.

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