Exam 1: An Introduction to the Foundations of Financial Management

Assume that an investor is offered a choice of a risk-free government bond that is expected to return 3.5% or a high-risk corporate stock.According to one of the principles of finance,what would induce the investor to purchase the corporate stock?

The risk/return tradeoff implies that the return on a riskless asset must be zero.

Cash and credit management are typically the responsibility of the

An efficient market is one where the prices of the assets traded in that market fully reflect all available information at any instant in time.

Which of the following forms of business organizations provide limited liability to all its owners?

It is important to evaluate a corporate manager's financial decision by measuring the effect the decision should have on the corporation's stock price if everything else were held constant.

If two companies have the same net income and the same level of risk,they must also have the same stock price or the market is not in equilibrium.

Company A reports sales of $100,000 and net income of $15,000.Company B reports sales of $100,000 and net income of $10,000.Therefore

The corporation is a legal entity separate from its owners; thus it is possible for the corporation to continue even upon the death of one or more shareholders.

In finance,we assume that investors are generally

Which of the following is the most important goal that a corporation should strive for?

Executive compensation in the United States

Shareholder wealth maximization means maximizing the price of the existing common stock.

An investor is considering two equally risky investments.Investment A is expected to return $1,000 per year for the next 5 years.Investment B is expected to return $6,000 at the end of 5 years.Which of the following statements is MOST correct if both investments A and B have the same cost?

Bill,a local inventor,developed a diet pill that he believes will solve the obesity problem in the United States.Bill wants to create a new company,50% owned by Bill and 50% owned by a major drug company.Although he believes the pills are safe,Bill is concerned about liability if someone becomes sick or dies.The best form of business organization for the new company is ________.

John invested $1,000 in a risky investment and Bill invested $1,000 in a less risky investment.One year later,Bill's investment is worth $1,030.Which of the following statements is MOST correct?

The root cause of agency problems is conflicts of interest.

Which of the following is NOT true for a limited partnership?

The payment of a dividend to current shareholders will have no impact on a corporation's share price because the cash paid is not available to future potential shareholders who may want to buy the corporation's stock.

Only a firm's financial decisions affect its stock prices.