Managerial Finance Exam #1

Financial management deals with the maintenance and creation of economic value or wealth
The fundamental goal of a business is to maximize the retained earnings available to the corporations shareholders
Shareholder wealth maximization means maximizing the price of the existing common stock
Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money
One problem with maximizing shareholder wealth as a goal is that it ignores risk taken by the firms financial decisions
The goal of profit maximization ignores the risk of financial decisions
Shareholders react to poor investment or dividend decisions by causing the total value of the firms stock to fall, and they react to good decisions by bidding the price of the stock up
The primary goal of a publicly owned corporation is to?
maximize shareholder wealth
Maximization of shareholder wealth
provides benefits to society as scarce resources are directed to their most productive use
A financial manager is considering two projects, A and B. A is expected to add $2 million in profits this year, while B is expected to add $1 million to profits this year. Which of the following statements is most correct
The manager should select the project that causes stock price to increase the most, which could be A or B
When making financial decisions, managers should always look at marginal, or incremental cash flows
Profits represent money that can be spent, and as such form the basis for determining the value of financial decisions
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 but because market prices already reflect all publicly available information
managers should not be concerned with business ethics because ethical behavior is inconsistent with the primary goal of maximizing shareholder value
The risk-return tradeoff is seen in many areas of finance
The sole proprietorship has no legal business structure separate from its owner
An efficient market is one where the prices of the assets traded in that market fully reflect all available information at any instant in time.
The five basic principles of finance include all of the following except:
Incremental profits determine value
(included in basic principles: risk requires a reward, cash flow is what matters, money has a time value)
To measure vale, the concept of time value of money is used
To bring the future benefits and cost of a project, measure by its cash flows, back to the present
All of the following contributed to recent financial crises except:
relying on the efficiency of financial markets
Executive compensation in the U.S
is dominated by performance-based compensation designed to reduce agency problems
The recent financial crises was exacerbated by
managers who underestimated the real risks of their decisions and borrowed excessively
Ethical behavior
is essential in business because unethical behavior destroys trust and business relationships
Investors generally don't like risk, Therefore, a typical investor
will only take an additional risk if he expects to be compensated in the form of additional returen
A corporate treasurer is typically responsible for cash management, credit management, and raising capital
Determining how a firm should raise money to fund its long-term investments is referred to as capital structure decisions
The Chief Financial Officer (CFO) is responsible for overseeing financial planning, corporate strategic planning, and controlling the firms cash flow
The financial manager most directly responsible for producing the company's financial statements and directing its cost accounting functions is the:
The three basic types of issues addressed by the study of finances are
capital budgeting, capital structure decisions, and working capital management
Working capital management is concerned with
how a firm can best manage its cash flows as they arise in its day-to-day operations
Capital budgeting is concerned with
what long-term investments a firm should undertake
Determining the best way to raise money to fund a firms long-term investment is called
the capital structure decisions
The best form of business entity to attract new capital is the sole proprietorship because investors only need to deal with one owner
S-type corporations and limited liability companies are taxed like partnerships, but have the advantage of limited liability for their owners
A limited liability company (LLC) is taxed like a partnership but provides limited liability for its owners similar to a corporation
Owners of a corporation enjoy limited liabaility
Limited partnership provides limited liability to:
only to limited partners who do not participate in the management of the business
All of the following business organizations provide limited liability to their owners except:
general partnership
Which of the following statements about the corporate form of business organizations is true?
The corporate form has the disadvantage of double taxation relative to a sole proprietorship
Limited partnerships are not prevalent as corporations because
it is easier to transfer ownership by selling common stock than it is to sell partnership
Which of the following is an advantage of the sole proprietorship?
no significant legal requirements for starting the business
The true owners of the corporation are the...
common stockholders
Which of the following forms of business organization has the greatest ability to attract new capital?
Which of the following is NOT considered to be a disadvantage of the sole proprietorship form of business organization?
fewer regulations and reporting requirements
Capital markets are all financial institutions that help a business raise long-term capital
Organized stock exchanges provide the benefits of a continuous market, fair security pricing, and helping businesses raise new capital
On the basis of number of shares traded, more stocks are traded over the counter than an organized exchanges
One advantage of being listed on the NYSE is that all trades are made in an auction setting with face-to-face trading between individuals on the floor of the stock exchnage
One advantage of organized stock exchanges is increased stock price volatility resulting from the efficient exchange of information
Three ways that savings can be transferred through financial markets to those in need of funds include direct transfers, indirect transfers using the investment banker, and indirect transfers using the financial intermediary
Each purchase occurring in the secondary markets increases the total stock of financial assets that exist in the economy
The money market includes transactions in short-term financial instruments
Over-the-counter markets include all security markets, with the exception of organized exchanges
For a firm to have its securities listed on an exchange, it must meet certain requirements. These usually include measures of profitability, size, market value, and a public ownership
A seasoned equity offering is the sale of additional shares by a company whose shares are already publicly traded
Financial intermediaries issue their own indirect securities and use the proceeds to purchase the direct securities of other economic units
general Electric (GE) has been a public company for many years with its common stock traded on the NYSE. If GE decides to sell 500,000 shares of new common stock, the transaction will be described as:
a seasoned equity offering because GE has sold common stock before
A wealthy private investor providing a direct transfer of funds is called?
an angel investor
common examples of financial intermediaries include all of the following except
Venture Capital Firms
John calls his stockbroker and instructs him to purchase 100 shares of Microsoft Corporation common stock. This transaction occurs in the
secondary market
General Motors raises money by selling a new issue of common stock. This transaction occur in
the capital market
All of the following securities are sold in money markets EXCEPT:
common stock
(Are sold in money markets: commercial paper, 6 month certificates of deposit, 3 month U.S Treasury bills)
Which of the fol.lowing is an advantage of organized stock exchanges?
providing a continuous market
The telecommunications system that provides a national information linkup among brokers and dealers operating in the over-the-counter market is called:
In August 2004, Google first sold its common stock to the public at $85 per share and raised $1.76 billion. This is an example of
primary market transaction
The Securities and Exchange Commission (SEC)
regulates both primary and secondary markets
The investment banker performs three basic functions:
(1) underwriting (2) distributing (3) advising
The negotiated purchased is the most prevalent method of securities distribution in the private sector
Investment banking firms are prohibited from selling securities due to conflicts of interest
It is common practice among the largest corporations to sell their securities directly to investors
The competitive bid purchase is largely confined to railroad, public utility, and municipal bond issues
Because they occur in private, stricter regulations are placed on the private placements of securities
Investment firms, such as Goldman Sachs, assist the transfer of capital by
facilitating indirect transfers from savers (investing public) to borrowers (corporations needing capital)
The investment banker does NOT underwrite the securities to be issued in which of the following?
best efforts
A "Dutch auction" was used by Google to raise money in 2004. A Dutch auction involves
Allowing investors to submit bids saying how many shares they'd like to buy and at what price
In private placement, the securities are offered and sold to a limited number of investors
Over time, there has been a high correlation between actual rates of return on securities and the securities' standard deviations of return
Investors expect to receive the highest returns from government-issued securities because the government will not default on securities that it has issued
The real rate of return is the return earned above the
Inflation risk premium
Which of the following represents the correct ordering of returns over the period 1926 to 2008 (from lowest to highest return)?
Treasury bills, Long-term corporate bonds, Common stocks, Small firm common stocks
In response to the banking crisis and economic collapse of 2007 and 2008, the U.S government moved to increase interest rates in order to attract foreign capital seeking high returns in U.S banks
The time value of money is the opportunity cost of passing up the earning potential of a dollar today
A rational investor would receive $1,200 today rather than $100 per month for 12 months
When using a financial calculator, cash outflows generally have to be entered as negative numbers, because a financial calculator sees money "leaving your hands."
John has to pay $1,000 per month for his mortgage for another 5 years, but he is considering paying the mortgage off in one lump sum. John cannot calculate the present value of the payments using the annuity formulas because his payments are monthly and not once per year
To evaluate or compare investment proposals, we must adjust the value of cash flows to a common date
An example of an annuity is the interest received from binds
Bill saves $3,000 per year in his IRA starting at age 25 and continuing to age 65, when he retires. The amount Bill has in his IRA at age 65 can be characterized as the future value of annuity
When repaying an amortized loan, the interest payments increase over time due to compounding process
The future value of annuity due is greater than the future value of an otherwise identical ordinary annuity
A return of 12% compounded annually is the same as a return of 1% per month
If we invest money for 10 years at 8% interest, compounded semi-annually, we are really investing money for 20 six-month periods, and receiving 4% interest each period
For a given stated interest rate, an investor would receive a greater future value with daily compounding as opposed monthly compunding
It is never appropriate to compare nominal rates unless they include the same number of compounding periods per year
A share of preferred stock that pays the same annual dividend forever is an example of perpetuity