Exam 1: An Introduction to the Foundations of Financial Management

Your friend Ricky took a finance class and learned about the risk-return trade-off.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 trade-off.

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

Which of the following is an advantage of the sole proprietorship?

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 trade-off?

As of year-end 2012,the great economic recession in the United States that began in 2007 has NOT officially ended.

Fortunately,Europe was largely shielded from the economic recession that afflicted the world economy in 2007.The European economies contracted less and have recovered much more rapidly than their counterparts in the United States and China.

Profits represent money that can be spent,and as such,form the basis for determining the value of financial decisions.

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?

Cash flows and profits are synonymous; in other words,higher cash flows equal higher profits.

The principle of risk-return trade-off means that

Which of the following goals of the firm are synonymous (equivalent)to the maximization of shareholder wealth?

Cash and credit management are typically the responsibility of the

The best form of business entity to attract new capital is the sole proprietorship because investors only need to deal with one owner.

Its ability to raise capital by selling stock makes the corporation the best form of organization in terms of raising capital.

Determining how a firm should raise money to fund its long-term investments is referred to as capital structure decisions.

Ethical behavior

Managers should not be concerned with business ethics because ethical behavior is inconsistent with the primary goal of maximizing shareholder value.

Which of the following forms of business organization has the greatest ability to attract new capital?

A limited partnership provides limited liability to

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