Exam 1: An Introduction to the Foundations of Financial Management

Assume that you went to Las Vegas and hit the jackpot for $5 million.Further assume that you were offered a choice to receive the $5 million today,or receive it in two years.According to one of the principles of finance,which would you take?

Suppose XYZ Corporation is traded on the New York Stock Exchange.XYZ's closing price on Monday is $20 per share.After the market closes on Monday,XYZ makes a surprise announcement that it has obtained a major new customer.XYZ's stock will likely

S-type corporations and limited liability companies are taxed like partnerships,but have the advantage of limited liability for their owners.

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 five basic principles of finance include all of the following except:

A corporate manager decides to build a new store on a lot owned by the corporation that could be sold to a local developer for $250,000.The lot was purchased for $50,000 twenty years ago.When determining the value of the new store project,

The owners of a corporation enjoy limited liability.

If the stock market is efficient,then investors do not need to read the Wall Street Journal or research companies before they select which stocks to buy because market prices already reflect all publicly available information.

Determining the best way to raise money to fund a firm's long-term investments is called

The fundamental goal of a business is to maximize the retained earnings available to the corporation's shareholders.

A general partnership,unlike a limited partnership,is an entity that legally functions separate and apart from its owners.

The CEO of High Tech International decides to change an accounting method at the end of the current year.The change results in reported profits increasing by 5%,but the company's cash flows are not changed.If capital markets are efficient,then

The sole proprietorship has no legal business structure separate from its owner.

Maximization of shareholder wealth

Which of the following forms of business organization limits the liability of owners?

Your friend Ricky took a finance class and learned about the risk/return tradeoff.Wanting a high return,Ricky invested in a risky,start-up technology company.A year later the company went bankrupt and Ricky lost his entire investment.Ricky is furious with his finance professor for misleading him,claiming he was taught that higher return goes with higher risk.Explain how Ricky misinterpreted the risk/return tradeoff.

The manager of Golden Ray Corporation receives a bonus if company profits exceed $1,000,000 this year.During the final week of the year,the manager changes an accounting policy that will increase reported profits from $950,000 to $1,025,000,triggering his bonus.The change in profits of $75,000 will reverse itself in the next year,and the accounting change has no impact on Golden Ray's cash flow.Discuss the above situation as it relates to both an agency problem and efficient markets.

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

Financial management deals with the maintenance and creation of economic value or wealth.

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?