16 Questions
Principle 2: A dollar received today is worth more than a dollar received in the future.
True
Principle 4: The incremental cash flow is the difference between the projected cash flows if the project is selected, versus what they will be if the project is not selected.
True
Principle 3: Cash flow, not accounting profit, is used as the measurement tool.
True
Principle 5: It is hard to find exceptionally profitable projects in competitive markets.
True
Principle 6: Efficient capital markets means the values of all assets and securities at any instant in time fully reflect all available information.
True
Principle 7: The agency problem results from conflicts of interest between the manager/agent and the stockholder/owners.
True
Principle 8: The cash flows considered are the after-tax incremental cash flows to the firm as a whole.
True
Principle 9: The process of diversification can reduce risk, and as a result, measuring a project’s or an asset’s risk is very difficult.
True
Principle 10: Each person has his or her own set of values, which forms the basis for personal judgments about what is the right thing.
True
Ethical Behavior is doing the right thing, and ethical dilemmas are everywhere in finance.
True
Financial Management refers to the efficient and effective management of money (funds) in such a manner as to achieve the goals of the organization.
True
The more risk an investment has, the lower its expected return will be.
False
Understanding the ten principles of financial management is not necessary to understand finance.
False
Present value and future value cannot be calculated in financial management.
False
Financial management includes planning, organizing, directing, and controlling the financial activities of the organization.
True
The concept of time value of money is not relevant to financial management.
False
Study Notes
Financial Management Principles
- A dollar received today is worth more than a dollar received in the future, due to the time value of money.
- The incremental cash flow is the difference between the projected cash flows if a project is selected, versus what they will be if the project is not selected.
- Cash flow, not accounting profit, is used as the measurement tool in financial management.
- In competitive markets, it is hard to find exceptionally profitable projects.
- Efficient capital markets imply that the values of all assets and securities at any instant in time fully reflect all available information.
Cash Flows and Risk
- The cash flows considered in financial management are the after-tax incremental cash flows to the firm as a whole.
- Diversification can reduce risk, making it difficult to measure a project's or an asset's risk.
- The expected return of an investment decreases as the level of risk increases.
Ethical Behavior and Financial Management
- Ethical Behavior involves doing the right thing, and ethical dilemmas are prevalent in finance.
- Each person has their own set of values, which form the basis for personal judgments about what is right.
Financial Management Functions
- Financial management includes planning, organizing, directing, and controlling the financial activities of the organization.
- The primary goal of financial management is to achieve the organization's goals efficiently and effectively.
Test your knowledge on financial management principles, including concepts of finance, corporate world, time value of money, financial statements, risk and return, and financial ratios.
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