Exam 1: An Introduction to the Foundations of Financial Management

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,

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

Underemployment is a term used to describe hiring employees who work for a designated foreman or team leader.In this sense they are employed under a specific individual.

Your friend,John,believes that since capital markets are efficient,he doesn't need to read the financial press or be involved in stock research before purchasing stocks for his portfolio.He simply throws darts at the stock pages and buys the stocks the darts hit.Is stock research and analysis important when buying and selling stocks in an efficient market?

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.

High Tech Corp.cut its research and development budget in 2010 by $4,000,000 in order to improve its cash flow for the year.Which of the following statements is MOST correct?

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.

Each financial decision made by a corporate manager can be evaluated by its direct impact on the corporation's stock price.

In the search for profits,U.S.corporations have been forced to look beyond our country's borders.All of the following contributed to the movement EXCEPT

Which of the statements below are true?

When evaluating an investment project,which of the following best describes the financial information needed by the decision maker?

Giving the company's CEO stock options as part of his or her compensation package is an example of an agency cost.

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

An investment project is acceptable if the total cash received over the life of the project exceeds the total cash spent over the life of the project.

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.

The goal of the firm's financial managers should be the maximization of the total value of the firm's stock.

Limited partnerships are not as prevalent as corporations because

The risk-return trade-off is seen in many areas of finance.

What are the primary differences among a sole proprietorship,a partnership,and a corporation?

Explain why large and growing firms tend to choose the corporate form.