Finance Exam 1

The three basic types of issues addressed by the study of finance are:

(1) What long-term investments should the firm undertake? This area of finance is generally referred to as capital budgeting. (2) How should the firm raise money to fund these investments? The firm's funding choices are generally referred to as capital structure decisions. (3) How can the firm best manage its cash flows as they arise in its day-to-day operations? This area of finance is generally referred to as working capital management.

Capital market vs money market

A capital market is a component of a financial market that allows long-term trading of debt and equity-backed securities. ... Capital markets offer higher-risk investments, while money markets offer safer assets; money market returns are often low but steady, while capital markets offer higher returns.

problems and conflicts resulting from the separation of the management and ownership of the firm.

Agency problem

According to Principle​ 3, how should investors decide where to invest their​ money? ​(Select the best choice​ below.) A. By determining the lowest return. B. By determining if the return is more than expected given the level of risk. C. By determining the highest return. D. By determining the expected EPS

B. By determining if the return is more than expected given the level of risk.

The​ long-run goal of the firm is to ​(Select the best choice​ below.) A. maximize earnings per share. B. hold large quantities of cash. C. maximize shareholder wealth. D. increase sales regularly.

C. maximize shareholder wealth.

What are the 5 principles of finance?

CASH FLOW IS WHAT MATTERS—Incremental cash received, not accounting profits, drives value. MONEY HAS A TIME VALUE—A dollar received today is more valuable to the recipient than a dollar received in the future. RISK REQUIRES A REWARD—The greater the risk of an investment, the higher will be the investor's required rate of return, and, other things remaining the same, the lower will be the investment's value. MARKET PRICES ARE GENERALLY RIGHT—For example, product market prices are often slower to react to important news than are prices in financial markets, which tend to be very efficient and quick to respond to news. CONFLICTS OF INTEREST CAUSE AGENCY PROBLEMS—Large firms are typically run by professional managers who own a small fraction of the firms' equity. The individual actions of these managers are often motivated by self-interest, which may result in managers not acting in the best interests of the firm's owners. When this happens, the firm's stock will lose value.

Why is it so hard to find extremely profitable​ projects? ​(Select the best choice​ below.) A. If an industry is generating large​ profits, then new entrants are​ attracted, driving down profits. B. To find high profit​ projects, the product or service must be differentiated​ and/or have a cost advantage over the competition. C. To find high profit​ projects, you must locate imperfections in the market that are not currently being taken advantage of. D. All of the above.

D. All of the above.

Advantages of the corporation include ​ (Select the best choice​ below.) A. transferability of ownership. B. unlimited liability. C. ability of the corporation to raise capital. D. double taxation of dividend income. E. A and C. F. A and B.

E. A and C.

a market in which the prices of securities at any instant in time fully reflect all publicly available information about the securities and their actual public values.

Efficient market

those institutions and procedures that facilitate transactions in all types of financial claims.

Financial markets

the difference between the cash flows a company will produce both with and without the investment it is thinking about making

Incremental cash flow

the cost of making a choice in terms of the next best alternative that must be foregone.

Opportunity cost

primary vs secondary money market

The primary market refers to the market where securities are created the secondary market is one in which they are traded among investors.

the management of the firm's current assets and short-term financing.

Working capital management

The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to: a.a series of corporate scandals involving Enron, WorldCom, Global Crossing, Tyco and numerous others. b.a dramatic rise in the US trade deficit. c.charges of excessive compensation to top corporate executives. d.rising complaints by investors and security analysts over the financial accounting for stock options.

a.a series of corporate scandals involving Enron, WorldCom, Global Crossing, Tyco and numerous others.

A(n) would be an example of a principal, while a(n) would be an example of an agent. a.shareholder; manager b.manager; owner c.accountant; bondholder d.shareholder; bondholder

a.shareholder; manager

primary vs secondary capital market

any part of the financial system that raises capital from bonds, shares, and other investments New stocks and bonds are created and sold to investors in the primary capital market securities are traded by investors on the secondary capital market.

___________ refers to meeting the needs of the present without compromising the ability of future generations to meet their own needs. a.Corporate Social Responsibility (CSR) b.Sustainability c.Convergence d.Green Economics

b.Sustainability

The decision function of financial management can be broken down into the decisions. a.financing and investment b.investment, financing, and asset management c.financing and dividend d.capital budgeting, cash management, and credit management

b.investment, financing, and asset management

What are the earnings per share (EPS) for a company that earned $100,000 last year in after-tax profits, has 200,000 common shares outstanding and $1.2 million in retained earning at the year end? a.$100,000 b.$6.00 c.$0.50 d.$6.50

c.$0.50

In the US, the has been given the power to adopt auditing, quality control, ethics, and disclosure standards for public companies and their auditors as well as investigate and discipline those involved. a.American Institute of Certified Public Accountants (AICPA) b.Financial Accounting Standards Board (FASB) c.Public Company Accounting Oversight Board (PCAOB) d.Securities and Exchange Commission (SEC)

c.Public Company Accounting Oversight Board (PCAOB)

Michael Cohn is a "member" (a type of owner) of a marine supply business. Michael's business is a.a sole proprietorship. b.a corporation. c.a limited liability company. d.a general partnership.

c.a limited liability company.

The controller's responsibilities are primarily in nature, while the treasurer's responsibilities are primarily related to . a.operational; financial management b.financial management; accounting c.accounting; financial management d.financial management; operations

c.accounting; financial management

The purpose of financial markets is to: a.increase the price of common stocks. b.lower the yield on bonds. c.allocate savings efficiently. d.control inflation.

c.allocate savings efficiently.

The focal point of financial management in a firm is: a.the number and types of products or services provided by the firm. b.the minimization of the amount of taxes paid by the firm. c.the creation of value for shareholders. d.the dollars profits earned by the firm.

c.the creation of value for shareholders.

The market price of a share of common stock is determined by: a.the board of directors of the firm. b.the stock exchange on which the stock is listed. c.the president of the company. d.individuals buying and selling the stock.

d.individuals buying and selling the stock.