Question 1

Executive compensation in the United States

Accepted Answer

A)  is dominated by performance-based compensation that ensures fair and just pay for corporate executives. 
B)  is dominated by performance-based compensation designed to reduce agency problems. 
C)  cannot be linked to stock prices as this would create a conflict of interest with existing shareholders. 
D)  is well below levels in Europe and Asia.

Question 2

In terms of the costs to organize each,which of the following sequences is correct,moving from highest to lowest cost?

Accepted Answer

A)  general partnership, sole proprietorship, limited partnership, corporation 
B)  sole proprietorship, general partnership, limited partnership, corporation 
C)  corporation, limited partnership, general partnership, sole proprietorship 
D)  sole proprietorship, general partnership, corporation, limited partnership

Question 3

Investors want a return that satisfies the following expectation(s):

Accepted Answer

A)  A return for delaying consumption 
B)  An additional return for taking on risk 
C)  An additional return for accepting dividends rather than capital gains 
D)  Both A and B.

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Advantages of the corporate form of business organization include

Accepted Answer

A)  easier transfer of ownership. 
B)  double taxation. 
C)  minimal legal requirements. 
D)  none of the above

Question 7

The primary goal of a publicly owned corporation is to ________.

Accepted Answer

A)  maximize dividends per share 
B)  maximize shareholder wealth 
C)  maximize earnings per share after taxes 
D)  minimize shareholder risk

Question 8

Which of the following are characteristics of a limited partnership?

Accepted Answer

A)  Limited partners may not participate in the management of the limited partnership. 
B)  There must be one or more general partners. 
C)  General partners have unlimited liability. 
D)  all of the above

Question 9

When making financial decisions,managers should always look at marginal,or incremental cash flows.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following forms of organizations have earnings that are taxed twice,once as business income and once as personal income as the earnings are distributed to the owners in the form of dividends?

Accepted Answer

A)  corporations 
B)  general partnerships 
C)  limited partnerships 
D)  both A and C

Question 11

All of the following contributed to recent financial crises EXCEPT

Accepted Answer

A)  Focusing on earnings instead of cash flow. 
B)  Focusing on the short run. 
C)  Relying on the efficiency of financial markets. 
D)  Excessive risk taking due to underestimation of risk.

Question 12

There is no legal distinction made between the assets of the business and the personal assets of any of the owners in the limited partnership.

Accepted Answer

A) True 
 B)False

Question 13

The expected return on a riskless asset is greater than zero due to

Accepted Answer

A)  an expected return for delaying consumption. 
B)  an expected return for opportunity costs. 
C)  an expected return for taxes. 
D)  irrational investors who believe risk is always present.

Question 14

Shareholder wealth maximization means

Accepted Answer

A)  maximizing earnings per share. 
B)  maximizing dividends per share. 
C)  maximizing the price of existing common stock. 
D)  maximizing stockholders equity.

Question 15

Documents uncovered after the Exxon Valdez oil spill in Alaska revealed that Exxon could have used double-hulled oil tankers that would have prevented the spill,but the cost of refitting their fleet of single-hulled tankers was considered too high.Exxon determined that the cost of cleaning up an oil spill would be less than the cost of refitting the ships,thus increasing shareholder value.Several years after the oil spill,however,Exxon was fined billions of dollars for the spill.How do the costs of the cleanup and the fines pertain to a discussion of maximizing shareholder value and ethical responsibility?

Accepted Answer

The answer of Documents uncovered after the Exxon Valdez oil...

Question 16

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?

Accepted Answer

A)  If John's investment is worth less than $1,030, then John was irrational to invest in the risky project. 
B)  John's investment must be worth more than $1,030 because of the risk-return trade-off, given that John's investment was more risky. 
C)  If John's investment is worth more than $1,030, then Bill was irrational to invest in the less risky investment. 
D)  The worth of John's investment cannot be determined with the information given.

Question 17

Investors generally don't like risk.Therefore,a typical investor

Accepted Answer

A)  will not be induced to take on any risk. 
B)  will only take on the least risk possible. 
C)  will only take on additional risk if he expects to be compensated in the form of additional return. 
D)  will only accept a zero return if the risk is zero.

Question 18

Which of the following is NOT true regarding mortgaged-backed securities (MBS)?

Accepted Answer

A)  MBS are sold to investors who can hold them as an investment or resell them to other investors. 
B)  The MBS process allows the mortgage bank or other financial institution that made the original mortgage loan to get its money back out of the loan and lend it to someone else. 
C)  Securitization provides liquidity to the mortgage market and makes it possible for banks to loan more money to home buyers. 
D)  All of the above statements are true.

Question 19

The opportunity cost of any choice you make is the highest-valued alternative that you had to give up when you made the choice.

Accepted Answer

A) True 
 B)False

Question 20

S-type corporations have all of the following advantages EXCEPT

Accepted Answer

A)  they are taxed as partnerships. 
B)  the owners have limited liability. 
C)  distributions are taxed twice, similar to corporate dividend payments. 
D)  all owners must be people, no corporations.

Exam 1: An Introduction to the Foundations of Financial Management

Executive compensation in the United States

In terms of the costs to organize each,which of the following sequences is correct,moving from highest to lowest cost?

Investors want a return that satisfies the following expectation(s) :

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.

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

Advantages of the corporate form of business organization include

The primary goal of a publicly owned corporation is to ________.

Which of the following are characteristics of a limited partnership?

When making financial decisions,managers should always look at marginal,or incremental cash flows.

Which of the following forms of organizations have earnings that are taxed twice,once as business income and once as personal income as the earnings are distributed to the owners in the form of dividends?

All of the following contributed to recent financial crises EXCEPT

There is no legal distinction made between the assets of the business and the personal assets of any of the owners in the limited partnership.

The expected return on a riskless asset is greater than zero due to

Shareholder wealth maximization means

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?

Investors generally don't like risk.Therefore,a typical investor

Which of the following is NOT true regarding mortgaged-backed securities (MBS) ?

The opportunity cost of any choice you make is the highest-valued alternative that you had to give up when you made the choice.

S-type corporations have all of the following advantages EXCEPT