Financial Management Principles and Applications 8th Edition By Sheridan Titman test bank

Answer: B
Only a few financial decisions involve some sort of risk–return trade-off.
True
False
Difficulty: Basic
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: B
In efficient markets, prices rapidly adjust to new information.
True
False
Difficulty: Moderate
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: A
Rewarding executives for increasing quarterly earnings will motivate them to act in the long-term best interests of shareholders.
True
False
Difficulty: Basic
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: B
Essay: Write your answer in the space provided or on a separate sheet of paper
Briefly discuss why financial decision makers must focus on incremental cash flows when evaluating new projects.
Difficulty: Complex
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: Incremental cash flows describe the total cash effect on the company, looking at the difference between total cash flow to the company, with the cash flow and without the cash flow. The company can then value these cash flows and see if the company is worth more with the project or without the project.
 Discuss the risk–return trade-off and how it relates to finance.
Difficulty: Moderate
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: As people are risk averse, they need a higher return as the risk gets higher. This means that investors will need a higher return on bonds that they do not consider to be as safe as other bonds, and they will need a higher return on stock when the company in question’s stock seems to be riskier than the stock of other companies.
Why do you think many companies compensate executives with options based on long-term increases in the value of the company’s stock?
Difficulty: Moderate
AACSB: 3. Analytical thinking
Learning Objective: 1.4 Explain the five principles of finance that form the basis of financial management for both businesses and individuals
Answer: Tying executive compensation to long-term increases in the stock price makes sense because they are supposed to be working to maximise shareholder wealth. Stock-based compensation plans imply that decisions made to benefit shareholders will also benefit themselves.