BBA 5th Semester: True or False (Chapter 1)

1. Public finance is the study of money management of the individual.

False. Public finance is the study of the management of money by the government. On the other hand, money management by an individual is called personal finance.

2. Business finance is the study of money management of all forms of business organizations.

True. Money management by all forms of business organization (sole, partnership, and corporation) is called business finance.

3. The primary goal of financial management decisions is to maximize the price of the firm’s stock.

True. The primary goal of financial management is to maximize the stock price because this objective considers all stakeholders. If the price of a stock is maximized, all parties related to companies will be benefited.

4. Finance is related to the acquisition, allocation, management and efficient utilization of the firm’s financial resources.

True. Financial management is related to the acquisition and utilization of money by the firm which includes the allocation and management of money.

5. Firms always are short of funds. Therefore, raising funds is the most important function of the financial manager.

False. Firms may have short of funds, in this case, a firm must raise the funds. On the other hand, if a firm has surplus funds, the firm should invest these surplus funds. Therefore, the raising of funds is not only the functions of the financial manager i.e. utilization of funds is also another main function of the financial manager. 

6. The primary emphasis of the financial manager is on profit maximization.

False. A primary emphasis of the financial manager is to maximize stock price because this goal considers all parties related to the firm.

7. Executive finance functions are handled by persons with a basic knowledge of accounting.

False. Executive finance functions are carried out by Financial manager (chief financial officer, treasurer, controller, and respective department heads). On the other hand, accounting activities are carried out by controller and day to day functions of accounting are carried out by the lower level staff of respective departments.

8. The board of directors is responsible for managing the day to day operation of the business and carrying out the policies established by the CEO.

False. Financial manager (chief financial officer, treasurer, controller, and respective department heads) are responsible for the policy-making functions. On the other hand, day to day functions is carried out by the lower level staff of respective departments.

9. Risk management in the most crucial responsibility of the financial manager.

True. The financial manager should manage risk for his/her firm by purchasing an insurance policy and by hedging tools.

10. The objective of profit maximization considers the time value of money.

False. Profit maximization does not consider the time value of money and two equal profit projects provides equal weight.

11. High earnings per share represent the higher stock price of the corporation.

True. The stock price is the product of price earnings ratio and earnings per share. Stock price depends on the earning per share, thus higher the earnings per share higher will be the stock price and vice versa

12. The investment decision is also known as capital structure decision. 

False. The investment decision is the decision related to the purchase of a fixed asset. On the other hand, capital structure decision is the selection of the optimal mix of long term sources of financing.

13. Investing in long term assets and projects is related to the firm’s financing decision.

False. Investment in long term assets (i.e. fixed assets) and projects are investment decision. To make an investment decision, the financial manager must analyze the risk and return of possible long term assets and projects. To the selection of long term assets and projects, the financial manager uses various capital budgeting techniques. The popular method is the net present value method. If the NPV of the project is positive, the project should be accepted and vice versa. On the other hand, financing decision is the selection of a mix of all long term sources of financing. This mix must be optimum and that should maximize the value of the firm. 

14. The treasurer oversees the accounting activities of the firm.

False. Treasurer oversees the financing activities and controller oversees the accounting activities.

15. For a firm wealth maximization goal is preferable to profit maximization goal.

True. Wealth maximization goal is preferable than profit maximization because wealth maximization goal is clear, consider risk element and the time value of money.

16. Financial manager places primary emphasis on cash flows.

True. Value of the firm is derived from the cash flows so the financial manager must emphasis on cash flows. Bigger the cash flows bigger the value of the firm and vice versa.

17. Financial management is concerned with the maintenance and creation of wealth.

True. The goal of the financial management or financial manager is to maximize the wealth of the firm and maintain a consistent level.

18. Shareholder wealth is measured by the market value of the firm’s common stock.

True. Shareholder wealth is measured by the market value of the firm’s common stock. If the market value of the firm’s share is increased, then the value of the firm is increased.

19. Financial manager has a close relationship with the financial market.

True. Performance of the financial manager shown in the market by increasing in the stock price. So, there is a close relationship with the financial market.

20. Day to day functions of the finance department is carried out by the financial manager.

False. Financial manager (chief financial officer, treasurer, controller, and respective department heads) are responsible for the policy-making functions or managerial functions or executive functions. On the other hand, day to day functions is carried out by the lower level staff of respective departments.