Deck 1: Introduction

Question 1

The concept of arbitrage involves:

A)buying a share and selling it later when it increases in value
B)simultaneous transactions in different markets that result in an immediate risk-free profit.
C)agreeing on a price to buy or sell a security for in the future.
D)buying a higher quality good for a cheaper price than is offered for a similar lower quality item.

Answer 1

simultaneous transactions in different markets that result in an immediate risk-free profit.

Question 2

Interest rates can be expressed in real or nominal terms.Which of the following is most correct?

A)Market rates are always expressed in real terms,because it is important that inflation be included in financial assessment.
B)Real interest rates can be calculated as the difference between nominal rates and the inflation rate.
C)Because market rates are usually in nominal terms,cash flows will usually be in inflation-adjusted terms.
D)Market rates are only meaningful in nominal terms,because an accurate adjustment for inflation is not possible.

Answer 2

Because market rates are usually in nominal terms,cash flows will usually be in inflation-adjusted terms.

Question 3

Which of the following best reflects the financial objective of a company?

A)To minimise the operational risk facing the company.
B)To maximise the accounting profit of the company.
C)To provide the best possible dividend outcome for shareholders in any given year.
D)To maximise the market value of shareholders' equity.

Answer 3

To maximise the market value of shareholders' equity.

Question 4

In corporate finance,the financing and investment decisions are related to questions concerning:

A)how to generate profits and expand operations.
B)how to reduce costs and survive.
C)how to acquire and employ or invest funds.
D)all of the given options.

Question 5

Many small service businesses,retail stores and professional practices are operated as:

A)joint ventures.
B)partnerships.
C)sole proprietorships.
D)limited liability firms.

Question 6

The interest rate quoted in the financial markets for borrowing and lending transactions is the:

A)real interest rate.
B)prime lending rate.
C)nominal interest rate.
D)cash rate.

Question 7

The concept of market efficiency embodies the idea that:

A)investors want to be compensated with higher returns for all the unsystematic risk they bear,and expect prices to adjust in an instantaneous and unbiased way.
B)all investors are fully informed about the potential returns for a given firm,and therefore the share price is a fair representation.
C)share prices respond to new information in a way that is both unbiased and instantaneous.
D)because holders of debt do not share in the high returns in good economic periods,they require a higher rate of return relative to the risk they bear.

Question 8

Corporate decisions include:

A)investment decisions.
B)financing decisions.
C)dividend decisions.
D)all of the given options.

Question 9

An investment decision is distinct from a financing decision in that:

A)financing decisions consider which is the best investment to undertake,while investment decisions consider the list of possible investments that can be made.
B)investment decisions are about deciding on which new investments should be undertaken,and reviewing past investments,while financing decisions consider how to fund the capital needs of the investment program.
C)investment decisions relate to reviewing past investment programs,while financing decisions relate to funding new investments.
D)financing decisions relate to choices about the firm's financial asset base,while investment decisions relate to choices about physical assets.

Question 10

When formulating financial policy,managers also have to consider the appropriate balance between:

A)receivables and payables.
B)interim and final dividends.
C)short-term and medium-term finance.
D)short-term and long-term finance.

Question 11

The valuation of a firm is best described as depending on:

A)the market value of the assets employed by the firm.
B)the value of land and property held by the firm.
C)the value that the market places on the combined debt and equity of the firm.
D)the capitalised value of the dividends paid by the firm.

Question 12

In considering the operations of a mining company,diversifiable risk is best described as:

A)the combination of risk factors that relate to the operations of the mining company.
B)all of those factors that influence all companies in the economy,regardless of industry.
C)all risk factors that tend to influence the mining industry specifically.
D)variations in international commodity prices and the price of gold.

Question 13

The concept of market efficiency means that we should expect securities and other assets to be:

A)underpriced given their expected risks and returns.
B)overpriced given their expected risks and returns.
C)fairly priced given their expected risks and returns.
D)none of the given options is correct as prices cannot be predicted.

Question 14

Which of the following is not one of the three major types of business structures in Australia:

A)dealership.
B)sole proprietorship.
C)limited liability company.
D)partnership.

Question 15

The principle that a dollar is worth more the sooner it is to be received is the:

A)value principle.
B)value of money principle.
C)time value of money principle.
D)Fisher effect.

Question 16

Partnerships are a common form of business entity for small service businesses because:

A)they provide legal protection for the proprietor from the creditors of the firm.
B)they are ideal for where the business is owned by one person.
C)there are no legal requirements that need to be met to form a partnership.
D)they allow the company to buy,own and sell property.

Question 17

The principal role of a company's financial manager is:

A)to undertake the company's accounting and financial reporting activities.
B)to obtain the funds necessary for the capital budget and make sure they are used effectively.
C)to provide advice to the Board of Directors on the company's profitability.
D)none of the given options.

Question 18

Corporate finance can be described as decisions made by:

A)equity market investors.
B)potential debt holders.
C)company directors and management.
D)financial analysts.

Question 19

Shareholders in a company have limited liability,which means that:

A)shareholders can be called upon to contribute only the amount unpaid on shares held in the company.
B)the maximum the shareholders can be called upon to contribute is the current market price of the shares.
C)shareholders can never be called upon to make an additional contribution to the company's assets.
D)shareholders have little or limited interest in the activities of management of the company,because the management and ownership of the firm are separated.

Question 20

The ultimate objective of investment and financing decisions is to maximise:

A)the number of projects the company is invested in.
B)the amount added to the value of the owner's wealth.
C)the salaries of all employees of the firm.
D)the repayments that are made of debt.

Question 21

The value of derivative securities depends on the value of:

A)the company value derived from analysts expectations.
B)some underlying security.
C)market interest rates.
D)the structure of the business.

Question 22

The purchasing power of money increases over time as a result of ____________.

Question 23

The key feature of an agency relationship is that:

A)the principal will always make decisions that are in the best interests of the agent.
B)a company will allow another firm to take on its name,and act as an agent in doing business.
C)the decisions by the agent will always improve the position of the owners of a firm.
D)one party passes the responsibility for making decisions to another party.

Question 24

An investor who is ______________ will choose a risky investment only if the expected return on the investment is high enough to compensate the investor for bearing the risk.

Question 25

The shareholders of most companies have _______________,meaning that if the company is unable to pay its debts,the owners of fully paid shares are not obliged to contribute further to repay the debt.

Question 26

Agency costs are an integral part of agency relationships.They are a key concern in the shareholder-management relationship in that:

A)agency costs result in a reduction in the value of the company,because management pursues its own interests.
B)agency costs result in a reduction in the value of the company,because of the administration costs in establishing agencies.
C)establishment of agency relationships requires extensive legal and contractual arrangements,which can be very costly.
D)shareholders view a company that operates as an agent to other companies as being more risky,and therefore they are willing to pay less for shares in the company.

Question 27

A company has an indefinite life.

Question 28

In Australia,most large businesses are partnerships:

Question 29

Owners of a sole proprietorship are protected by limited liability.

Question 30

Which of the following statements is an advantage of a partnership?

A)It can combine the wealth and talents of several individuals.
B)The partners are personally liable for the debts of the partnership.
C)The partnership has an indefinite life.
D)Additional capital can be raised relatively by issuing additional shares on the stock market.

Question 31

The possibility that managers may pursue their own objectives rather than shareholder interests is known as the _________ problem.

Question 32

A company is a separate legal entity formed under the _______________.

Question 33

The issuance of ordinary shares is normally:

A)a financing decision made by managers.
B)an investment decision made by managers.
C)a dividend decision made by managers.
D)both a financing decision made by managers and an investment decision made by managers.

Question 34

The company's financial objective is to maximise the market value of shareholders' wealth.

Question 35

Which of the following does not represent a financing activity of a company?

A)Organising the project funding for specific investments.
B)Managing the cash flows and short-term investments of the company.
C)Organising the funding of the general operations of the company.
D)Undertaking the accounting and annual reporting activities of the company.

Question 36

Which of the following does not represent an agency cost resulting from the separation of ownership from control of the firm?

A)The expense of providing management with bonuses based on profitability.
B)The cost of a company director taking a business trip to Hawaii with no potential benefit to the company.
C)The cost of a staff Christmas party designed to enhance staff morale.
D)The cost of monitoring the activities of management to keep track of its expenditures and decisions.

Question 37

Compared with other forms of business structure,a ___________ is subject to the most onerous regulation.

Question 38

Which of the following statements is a disadvantage of a sole proprietorship?

A)The taxation treatment of partnerships can be a disadvantage.
B)It is more expensive to establish than a company.
C)It can be difficult to raise funds for expansion.
D)There are more regulatory requirements than a company.

Question 39

The concept of investors being risk averse means that:

A)investors will always prefer an investment that carries less risk.
B)investors require higher returns to compensate for carrying more risk.
C)the investment's risk is the predominant feature considered by the investor.
D)investors will make all possible attempts to avoid systematic risk.

Question 40

Maximising the value of the firm can also be described as:

A)maximising the value of the company's ordinary shares.
B)maximising the accounting profit of the firm.
C)minimising the interest rate charged by creditors of the firm.
D)maximising sales revenue or turnover of the firm.

Question 41

An efficient capital market is one in which securities and other assets are fairly priced:

Question 42

It is better to receive a sum of money next year than to receive the same amount today:

Question 43

The market value of a company is calculated as the sum of the net assets and owners equity on the company's balance sheet:

Question 44

If the interest rate is 10% per annum,most people would rather receive $1 now than $1.06 in one year's time: