Exam 1: An Introduction to the Foundations of Financial Management

Short-term United States Treasury Bills are widely used as proxies for risk-free assets,yet the returns on these T-bills are consistently greater than zero.Is this consistent with the concept of a risk-return tradeoff?

The board of directors of Wireless,Inc.is considering two compensation plans for the CEO of the company.The first would pay the CEO a salary of $250,000 for the upcoming year.The second would pay the CEO a salary of $100,000 and provide the CEO with a stock option to buy 100,000 shares of stock for $11 per share.The current price per share of Wireless,Inc.stock is $10 per share.The stock option expires at the end of the year.Why might shareholders prefer the second payment plan? As part of your answer,calculate the breakeven point for the CEO to obtain the same compensation under option two as he or she would under option one.

Your friend,John,believes that since capital markets are efficient,he doesn't need to read the financial press or be involved in stock research before purchasing stocks for his portfolio.He simply throws darts at the stock pages and buys the stocks the darts hit.Is stock research and analysis important when buying and selling stocks in an efficient market?

All of the following statements about agency problems are true except:

Ethical behavior

Shareholders react to poor investment or dividend decisions by causing the total value of the firm's stock to fall,and they react to good decisions by bidding the price of the stock up.

The goal of the firm's financial managers should be the maximization of the total value of the firm's stock.

The goal of profit maximization ignores the risk of financial decisions

Each financial decision made by a corporate manager can be evaluated by its direct impact on the corporation's stock price.

Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it.If Joe invests and the business loses the lawsuits,the most Joe can lose is

In a limited partnership at least one general partner must exist; that general partner has unlimited liability.

Which of the statements below are true?

Giving the company's CEO stock options as part of his or her compensation package is an example of an agency cost.

One of the problems associated with maximization of total current stock value is that it ignores the timing of a project's return.

Which of the following statements best represents the "Agency Problem? "

Assume that you won the Lotta Dough Lotto jackpot for $20 million.Further assume that you were offered a choice to receive the $20 million today,or receive it in equal installments of $1 million per year for 20 years.According to one of the principles of finance,which would you take?

A corporate financial manager trying to maximize shareholder value

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 ________.

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

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.