Question 1

Assume that you went to Las Vegas and hit the jackpot for $5 million.Further assume that you were offered a choice to receive the $5 million today,or receive it in two years.According to one of the principles of finance,which would you take?

Accepted Answer

A)  The $5 million in two years because you would be afraid of spending it all right away. 
B)  The $5 million in two years because it would be worth more than if you would receive it today. 
C)  You would be indifferent as to when you would receive the $5 million. 
D)  The $5 million today because it would be worth more than if you would receive it in two years.

Question 2

Suppose XYZ Corporation is traded on the New York Stock Exchange.XYZ's closing price on Monday is $20 per share.After the market closes on Monday,XYZ makes a surprise announcement that it has obtained a major new customer.XYZ's stock will likely

Accepted Answer

A)  open at $20 per share on Tuesday and then increase as more investors read the announcement in the Wall Street Journal. 
B)  remain at $20 per share because in efficient markets the price already reflects all information. 
C)  open above $20 because the positive news will result in a higher valuation even though the stock has not yet traded. 
D)  open below $20 because the surprise announcement creates more uncertainty.

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

The five basic principles of finance include all of the following except:

Accepted Answer

A)  Cash flow is what matters. 
B)  Money has a time value. 
C)  Risk requires a reward. 
D)  Incremental profits determine value.

Question 6

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,

Accepted Answer

A)  the cost of the lot is zero since the corporation already owns it. 
B)  the opportunity cost of the lot is $250,000 and should be included in calculating the value of the project. 
C)  the cost of the lot for valuation purposes is $50,000 because land does not depreciate. 
D)  the incremental cash flow should be the $50,000 original cost less accumulated amortization.

Question 7

The owners of a corporation enjoy limited liability.

Accepted Answer

A) True 
 B)False

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

Determining the best way to raise money to fund a firm's long-term investments is called

Accepted Answer

A)  the capital budgeting decision. 
B)  the portfolio decision. 
C)  the money flow processing decision. 
D)  the capital structure decision.

Question 10

The fundamental goal of a business is to maximize the retained earnings available to the corporation's shareholders.

Accepted Answer

A) True 
 B)False

Question 11

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 12

The CEO of High Tech International decides to change an accounting method at the end of the current year.The change results in reported profits increasing by 5%,but the company's cash flows are not changed.If capital markets are efficient,then

Accepted Answer

A)  the stock price will not be affected by the accounting change. 
B)  the stock price will increase due to higher profits. 
C)  the stock price will increase only if the accounting change will also result in higher profits in the next year. 
D)  the stock price will decrease because accounting method changes are not permitted under generally accepted accounting principles.

Question 13

The sole proprietorship has no legal business structure separate from its owner.

Accepted Answer

A) True 
 B)False

Question 14

Maximization of shareholder wealth

Accepted Answer

A)  represents a zero sum game in which one corporation gains at the expense of others. 
B)  provides benefits to society as scarce resources are directed to their most productive use. 
C)  is not a practical goal since it cannot be measured effectively. 
D)  is achieved only if cash flows exceed accounting profits.

Question 15

Which of the following forms of business organization limits the liability of owners?

Accepted Answer

A)  sole proprietorship 
B)  general partnership 
C)  corporation 
D)  two person partnership

Question 16

Your friend Ricky took a finance class and learned about the risk/return tradeoff.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 tradeoff.

Accepted Answer

The answer of Your friend Ricky took a finance class...

Question 17

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.

Accepted Answer

The answer of The manager of Golden Ray Corporation receives...

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 1: An Introduction to the Foundations of Financial Management

Assume that you went to Las Vegas and hit the jackpot for $5 million.Further assume that you were offered a choice to receive the $5 million today,or receive it in two years.According to one of the principles of finance,which would you take?

Suppose XYZ Corporation is traded on the New York Stock Exchange.XYZ's closing price on Monday is $20 per share.After the market closes on Monday,XYZ makes a surprise announcement that it has obtained a major new customer.XYZ's stock will likely

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

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 five basic principles of finance include all of the following except:

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,

The owners of a corporation enjoy limited liability.

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.

Determining the best way to raise money to fund a firm's long-term investments is called

The fundamental goal of a business is to maximize the retained earnings available to the corporation's shareholders.

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

The CEO of High Tech International decides to change an accounting method at the end of the current year.The change results in reported profits increasing by 5%,but the company's cash flows are not changed.If capital markets are efficient,then

The sole proprietorship has no legal business structure separate from its owner.

Maximization of shareholder wealth

Which of the following forms of business organization limits the liability of owners?

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

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

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?