EOL1

True/False
Indicate whether the statement is true or false.

____ 1. The proper goal of the financial manager should be to maximize the firm's expected profit, since this will add the most wealth to each of the individual shareholders (owners) of the firm.

____ 2. The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society.

____ 3. If a firm's managers want to maximize stock price it is in their best interests to operate efficient, low-cost plants, develop new and safe products that consumers want, and maintain good relationships with customers, suppliers, creditors, and the communities in which they operate.

____ 4. If a firm's stock price falls during the year, this indicates that the firm's managers are not acting in shareholders' best interests.

____ 5. An agency problem exists between stockholders and managers. A second agency problem arises between stockholders and creditors.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 6. The primary goal of a publicly-owned firm interested in serving its stockholders should be to
a.|Maximize expected total corporate profit.|
b.|Maximize expected EPS.|
c.|Minimize the chances of losses.|
d.|Maximize the stock price per share.|
e.|Maximize expected net income.|

____ 7. Which of the following statements is most correct?
a.|Compensating managers with stock can reduce the agency problem between stockholders and managers.|
b.|Restrictions are included in credit agreements to protect bondholders from the agency problem that exists between bondholders and stockholders.|
c.|The threat of a takeover can reduce the agency problem between bondholders and stockholders.|
d.|Statements a and b are correct.|
e.|All of the statements above are correct.|