Question 1

Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money.

Accepted Answer

A) True 
 B)False

Question 2

All of the following statements about agency problems are true EXCEPT

Accepted Answer

A)  Agency problems interfere with the goal of maximizing shareholder value. 
B)  Agency costs are paid by the managers who do not act in the shareholders' best interest. 
C)  Agency problems result from the separation of management and the ownership of a firm. 
D)  The root cause of agency problems is conflicts of interest. 
A)  Agency problems interfere with the goal of maximizing shareholder value. 
B)  Agency costs are paid by the managers who do not act in the shareholders' best interest. 
C)  Agency problems result from the separation of management and the ownership of a firm. 
D)  The root cause of agency problems is conflicts of interest.

Question 3

Which of the following is an advantage of the general partnership form of business organization?

Accepted Answer

A)  limited liability of business owners 
B)  low cost of formation 
C)  easy ability to raise capital 
D)  double taxation 
A)  limited liability of business owners 
B)  low cost of formation 
C)  easy ability to raise capital 
D)  double taxation

Question 4

The chief financial officer (CFO)is responsible for overseeing financial planning,corporate strategic planning,and controlling the firm's cash flow.

Accepted Answer

A) True 
 B)False

Question 5

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 6

A financial manager is evaluating a project which is expected to generate profits of $100,000 per year for the next 10 years.The project should be accepted if

Accepted Answer

A)  the cost of the project is less than $1,000,000. 
B)  the cost of the project is less than the present value of $100,000 per year for 10 years. 
C)  this project's expected profits are higher than any other projects the corporation has available. 
D)  the present value of the project's cash inflows exceeds the present value of the project's cash outflows. 
A)  the cost of the project is less than $1,000,000. 
B)  the cost of the project is less than the present value of $100,000 per year for 10 years. 
C)  this project's expected profits are higher than any other projects the corporation has available. 
D)  the present value of the project's cash inflows exceeds the present value of the project's cash outflows.

Question 7

Which of the following statements about the corporate form of business organization is true?

Accepted Answer

A)  The corporate form has the disadvantage of double taxation relative to a sole proprietorship. 
B)  The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation. 
C)  Sole proprietorships are the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor. 
D)  The corporate form has the advantage of unlimited liability. 
A)  The corporate form has the disadvantage of double taxation relative to a sole proprietorship. 
B)  The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation. 
C)  Sole proprietorships are the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor. 
D)  The corporate form has the advantage of unlimited liability.

Question 8

A general partnership,unlike a limited partnership,is an entity that legally functions separate and apart from its owners.

Accepted Answer

A) True 
 B)False

Question 9

Investors will be indifferent between two investments if both investments have the same expected return.

Accepted Answer

A) True 
 B)False

Question 10

Limited liability companies are more flexible than S-type Corporations because limited liability companies operate under state laws.

Accepted Answer

A) True 
 B)False

Question 11

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. 
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 12

Profits are down so the controller decides to change the corporation's accounting policy relating to inventory costing.The change will allow the corporation to report higher income and higher assets,although the physical inventory has not changed.Which of the following statements is MOST correct?

Accepted Answer

A)  The stock price is likely to increase because income is higher. 
B)  The stock price is likely to be unaffected because the stock market is efficient. 
C)  The stock price is likely to decrease because reported inventory is higher. 
D)  If the stock price increases, the stock market is efficient. 
A)  The stock price is likely to increase because income is higher. 
B)  The stock price is likely to be unaffected because the stock market is efficient. 
C)  The stock price is likely to decrease because reported inventory is higher. 
D)  If the stock price increases, the stock market is efficient.

Question 13

John won the lottery on Monday and can take either $50,000 per year for 20 years,or $500,000 today.Bill won the same lottery on Tuesday and has the same options for receiving the cash.A well respected financial advisor is hired by both John and Bill.The advisor recommends that John take the $50,000 per year for 20 years but advises Bill to take the $500,000 up front payment.How is it possible to give different advice to two clients regarding the exact same cash flows?

Accepted Answer

The time value of money is based on oppo

Question 14

One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the firm's financial decisions.

Accepted Answer

A) True 
 B)False

Question 15

The procedure by which significant changes may be made to a partnership,such as admission of a new partner or termination of the partnership,are governed by each state so no partnership agreement is needed.

Accepted Answer

A) True 
 B)False

Question 16

The "perfect storm" of factors that contributed to the economic crisis of 2007 include

Accepted Answer

A)  increases in the minimum wage rate, unchecked illegal immigration, and state government deficits. 
B)  financial deregulation, unchecked commodity prices, floating currency exchange rates. 
C)  poorly chosen mortgage loans, falling housing prices, and a contracting economy. 
D)  agency costs, inefficient markets, and perfect capital markets. 
A)  increases in the minimum wage rate, unchecked illegal immigration, and state government deficits. 
B)  financial deregulation, unchecked commodity prices, floating currency exchange rates. 
C)  poorly chosen mortgage loans, falling housing prices, and a contracting economy. 
D)  agency costs, inefficient markets, and perfect capital markets.

Question 17

Even though many U.S.companies,including General Electric,IBM,Walt Disney,and American Express,have successfully restructured their operations to expand internationally,not many foreign firms have made their mark in the United States.

Accepted Answer

A) True 
 B)False

Question 18

Assume that you won the Lotta Dough Lotto jackpot for $20 million.Further assume that you were offered a choice to receive the $20 million today,or receive it in equal installments of $1 million per year for 20 years.According to one of the principles of finance,which would you take?

Accepted Answer

A)  the $20 million in equal installments of $1 million per year for 20 years because you would be afraid of spending it all right away 
B)  the $20 million today because it would be worth more than if you would receive it in equal installments of $1 million per year for 20 years 
C)  You would be indifferent as to when you would receive the $20 million since the total number of dollars received is the same either way. 
D)  the $20 million in equal installments of $1 million per year for 20 years because it would be worth more than if you would receive it today 
A)  the $20 million in equal installments of $1 million per year for 20 years because you would be afraid of spending it all right away 
B)  the $20 million today because it would be worth more than if you would receive it in equal installments of $1 million per year for 20 years 
C)  You would be indifferent as to when you would receive the $20 million since the total number of dollars received is the same either way. 
D)  the $20 million in equal installments of $1 million per year for 20 years because it would be worth more than if you would receive it today

Question 19

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. 
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 20

Project A is expected to generate positive cash flow of $1 million in 10 years while Project B is expected to generate $500,000 in 5 years.Therefore

Accepted Answer

A)  Project A is preferred because shareholder value is based on cash flow. 
B)  Project B is preferred because its cash flow is expected to be received sooner than the cash flow from Project A. 
C)  Both projects have equal value because they average $100,000 per year. 
D)  Project B may be preferred to Project A if the opportunity cost of money is high enough. 
A)  Project A is preferred because shareholder value is based on cash flow. 
B)  Project B is preferred because its cash flow is expected to be received sooner than the cash flow from Project A. 
C)  Both projects have equal value because they average $100,000 per year. 
D)  Project B may be preferred to Project A if the opportunity cost of money is high enough.

Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money.

All of the following statements about agency problems are true EXCEPT

Which of the following is an advantage of the general partnership form of business organization?

The chief financial officer (CFO)is responsible for overseeing financial planning,corporate strategic planning,and controlling the firm's cash flow.

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.

A financial manager is evaluating a project which is expected to generate profits of $100,000 per year for the next 10 years.The project should be accepted if

Which of the following statements about the corporate form of business organization is true?

A general partnership,unlike a limited partnership,is an entity that legally functions separate and apart from its owners.

Investors will be indifferent between two investments if both investments have the same expected return.

Limited liability companies are more flexible than S-type Corporations because limited liability companies operate under state laws.

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

Profits are down so the controller decides to change the corporation's accounting policy relating to inventory costing.The change will allow the corporation to report higher income and higher assets,although the physical inventory has not changed.Which of the following statements is MOST correct?

One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the firm's financial decisions.

The procedure by which significant changes may be made to a partnership,such as admission of a new partner or termination of the partnership,are governed by each state so no partnership agreement is needed.

The "perfect storm" of factors that contributed to the economic crisis of 2007 include

Even though many U.S.companies,including General Electric,IBM,Walt Disney,and American Express,have successfully restructured their operations to expand internationally,not many foreign firms have made their mark in the United States.

Assume that you won the Lotta Dough Lotto jackpot for $20 million.Further assume that you were offered a choice to receive the $20 million today,or receive it in equal installments of $1 million per year for 20 years.According to one of the principles of finance,which would you take?

Project A is expected to generate positive cash flow of $1 million in 10 years while Project B is expected to generate $500,000 in 5 years.Therefore

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 1: An Introduction to the Foundations of Financial Management

Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money.

All of the following statements about agency problems are true EXCEPT

Which of the following is an advantage of the general partnership form of business organization?

The chief financial officer (CFO)is responsible for overseeing financial planning,corporate strategic planning,and controlling the firm's cash flow.

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.

A financial manager is evaluating a project which is expected to generate profits of $100,000 per year for the next 10 years.The project should be accepted if

Which of the following statements about the corporate form of business organization is true?

A general partnership,unlike a limited partnership,is an entity that legally functions separate and apart from its owners.

Investors will be indifferent between two investments if both investments have the same expected return.

Limited liability companies are more flexible than S-type Corporations because limited liability companies operate under state laws.

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

Profits are down so the controller decides to change the corporation's accounting policy relating to inventory costing.The change will allow the corporation to report higher income and higher assets,although the physical inventory has not changed.Which of the following statements is MOST correct?

One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the firm's financial decisions.

The procedure by which significant changes may be made to a partnership,such as admission of a new partner or termination of the partnership,are governed by each state so no partnership agreement is needed.

The "perfect storm" of factors that contributed to the economic crisis of 2007 include

Even though many U.S.companies,including General Electric,IBM,Walt Disney,and American Express,have successfully restructured their operations to expand internationally,not many foreign firms have made their mark in the United States.

Assume that you won the Lotta Dough Lotto jackpot for $20 million.Further assume that you were offered a choice to receive the $20 million today,or receive it in equal installments of $1 million per year for 20 years.According to one of the principles of finance,which would you take?

Project A is expected to generate positive cash flow of $1 million in 10 years while Project B is expected to generate $500,000 in 5 years.Therefore

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters