Which of the Following Statements Is Correct

question 32

Multiple Choice

Which of the following statements is correct?

• A) The proper goal of the financial manager should be to maximize the firm's expected cash flow,because this will add the most wealth to each of the individual shareholders (owners)of the firm.
• B) One way to state the decision framework most useful for carrying out the firm's objective is as follows: "The financial manager should seek that combination of assets,liabilities,and capital which will generate the largest expected projected after-tax income over the relevant time horizon."
• C) The riskiness inherent in a firm's earnings per share (EPS)depends on the characteristics of the projects the firm selects,which means it depends upon the firm's assets,but EPS does not depend on the manner in which those assets are financed.
• D) Because large,publicly-owned firms are controlled by their management teams,and typically,ownership is widely dispersed,managers have great freedom in managing the firm.Managers may operate in the stockholders' best interest,but they may also operate in their own personal best interests.As long as managers stay within the law,there simply aren't any effective controls over managerial decisions in such situations.
• E) Agency problems exist between stockholders and managers,and between stockholders and creditors.

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Definitions:

Effective EAR

The Effective Annual Rate is the actual return on an investment, taking into account the effect of compounding interest.

Par Value

The nominal or face value of a bond, stock, or coupon as stated by the issuer, which is often used to calculate interest payments.

Annual Coupon Payments

The fixed interest payments made by a bond issuer to the bondholders at regular intervals over the life of the bond.

Positive Slope

In graph terms, a positive slope indicates that as one variable increases, the other variable also increases, demonstrating a direct relationship.