Question 1

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?

Accepted Answer

A) a return that is substantially lower than 3.5% 
B) cash dividends 
C) a return that is substantially higher than 3.5% 
D) none of the above

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Cash and credit management are typically the responsibility of the

Accepted Answer

A) controller. 
B) vice president of production and operations. 
C) chief executive officer,or CEO. 
D) treasurer.

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) general partnership 
B) limited partnership 
C) corporation 
D) both B and C

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) Company A's cash flow may be higher or lower than Company B's cash flow even though A's net income is higher. 
B) Company A's cash flow is $5,000 more than Company B's cash flow. 
C) Company B is creating less value for its shareholders than Company A. 
D) Company B's accounts receivable must be higher than Company A's accounts receivable.

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

In finance,we assume that investors are generally

Accepted Answer

A) neutral to risk. 
B) averse to risk. 
C) fond of risk. 
D) none of the above

Question 11

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

Accepted Answer

A) maximize current profits 
B) maximize market share 
C) maximize revenue 
D) maximize shareholder wealth

Question 12

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

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?

Accepted Answer

A) A risk averse investor will select investment B because it is expected to provide the most cash ($6,000 > $5,000). 
B) A risk averse investor will select investment A because it provides cash earlier than investment B. 
C) The investor will select investment A only if the cost is less than $1,000. 
D) The investor may select investment A or investment B depending on the opportunity cost of money.

Question 15

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 ________.

Accepted Answer

A) sole proprietorship with Bill as owner and the drug company as creditor 
B) general partnership with Bill and the drug company as equal partners 
C) S-type corporation with Bill and the drug company owning equal shares 
D) limited liability company with Bill and the drug company owning equal shares

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 tradeoff,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

The root cause of agency problems is conflicts of interest.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) limited liability for its owners 
B) One general partner must exist who has unlimited liability. 
C) Only the name of general partners can appear in the name of the firm. 
D) Limited partners may sell their interest in the company.

Question 19

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 20

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

Accepted Answer

A) True 
 B)False

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?

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.