Finance 301 Exam 1

Which of the following is NOT a balance sheet account associated with working capital?

Equipment

Out of the following, who believes the MOST in behavioral finance?

Equity Traders

The Hostile Takeovers in the 1980's were made possible by:

Easy Financing with Junk Bonds

True or False: Beta and expected return are not related at all.

False

True or False: Companies can maximize their value by maximizing customer satisfaction.

False

True or False: Due to the fact that managers are agent of stockholders, they are not allowed to act in their own self-interest and must only proceed as the stockholders direct them to.

False

True or False: Market Cap is equal to shareholder's equity

False

True or False: Stakeholders and Stockholders mean the same thing.

False

If SmallCo's stock currently trades at $100 per share and BigCo announces that they will acquire SmallCo for $120 per share, what will happen to SmallCo's stock price according to the efficient market hypothesis?

It will increase to $120 as soon as the announcement is made

Which of the following is NOT an external or internal control mechanism used to insure management acts in the interest of shareholders?

Management Perks

Given the following information, which stock has the highest return? Stock A: Current Price: $100 - Purchase Price: $85 - Dividends Paid: $3 Stock B: Current Price: $630 - Purchase Price: $545 - Dividends Paid: $20

Stock A

Corporate raiders showed that:

The best defense against a takeover is a high stock price

What is the current price per barrel of WTI crude oil?

$62

What is the agency problem of corporate governance?

A company's assets are owned by the stockholders, but controlled by management

What piece of legislation was the solution to the corporate governance issues in the 2000s?

Sarbanes Olexy

Which of the following best describes the solution to corporate governance issues in the 1990's?

Shared governance with institutional investors

The 5th principle of finance states that management has fiduciary responsibility to act in ___________ interests

Shareholders

Which of the following is NOT an element of the new corporate finance environment? Institutionalization of markets Shrinking equity markets Advances in IT and Telecommunication Technologies Greater risk None of the above

Shrinking Equity Markets

True or False: Under the Sarbanes-Oxley Act of 2002, management is directly accountable for the accuracy of the financial statements provided to investors.

True

Financial theory is based upon the assumption that investors are always

risk averse

Which of the following is NOT true in regards to behavioral finance - It involves studying the effects of various factors on economic decision-making - It examines the consequences of human decision making on market prices and returns - It asserts that prices reflect emotions and biases - Economic decision makers make rational decisions that maximize expected utility - Behavioral models integrate insights from psychology, neuroscience, and microeconomic theory

Economic decision makers make rational decisions that maximize expected utility

True or False: The CFO is typically involved in only accounting and short term management activities and is not involved in the long term strategy of the company.

False

True or false: In Gordan Gekko's "Greed is Good" speech, Gekko is arguing that management has made decisions that have been beneficial to shareholder value

False

True or false: Partnerships carry limited liability

False

The model in which capital flows to firms with the best prospects for creating shareholder value is

Fluid Capital Model

Which of the following is also known as a "Fear Index" in the markets?

Gold Price

Which of the following is not a corporate stakeholder?

Government

Over the past several decades to the 1960's, what is true regarding the financial environment?

Growth and volatility have both been high

Which of the following is an element of the new corporate finance environment?

Growth in Trade and Direct Investment

What was the primary reason Herbalife has been in the news recently?

Hedge fund managers Carl Icahn and Bill Ackman have been publicly fighting over their investment positions in the company

Which of the following is NOT an example of an internal control mechanism?

Human Resources

Which of the following is NOT a reason a company aims to grow their market cap?

It allows them to pay off owed liabilities to debt-holders

If the theory of efficient capital markets is correct, which of the following statements is true?

It is useless to attempt to beat the market

What is one of the challenges of the shareholder value standard?

It puts too much focus on markets and expectations

Why is the price of oil important?

It reflects economic demand

Why is the yield on 30-year Treasury bonds important?

It represents the base-level cost of capital in the US

Which of the following is NOT a management tenet according to Gordon Gekko? Management must be accountable to stock holders Management must grow the company Management must have a stake in the company Management must be efficient All of the above are true

Management must grow the company

What is NOT true about corporate governance?

Management teams are rarely shareholders in their own companies

What is NOT true about corporate governance? - It is the system of rules, practices, and processes by which a company is directed and controlled - Corporate governance battles often result from companies not being managed in the interest of the owners - Many corporate governance battles result in hostile takeovers and proxy battles - Management teams are rarely shareholders in their own companies - None of the above

Management teams are rarely shareholders in their own companies

Which of the following companies recently used the pac-man defense mechanism?

Men's Warehouse

Successful asset management means ______

Minimizing the amount of capital required to achieve company's objectives

Successful liability management means _______

Minimizing the cost of capital

Capital structure management is managing a company's

Mix between debt and equity financing

Which of the following is not a type of business organization?

Monopoly

If the principles of finance are true, which of the following are able to easily beat the returns of the capital markets?

None, capital markets are hard to beat.

Which of the following organizational forms has its profits taxed as income and is more difficult to form and transfer than a sole proprietorship?

Partnership

The dual challenges of management include:

Providing high-quality product/services and competitive returns to shareholders

The corporate governance contest Other People's Money is a

Proxy Fight

Which of the following did NOT happen during the 2000s financial period?

Shrinking debt market

Which of the following organizational forms is easy to form but difficult to raise capital for?

Sole proprietorship

Which of the following best explains the difference between stakeholders and stockholders?

Stockholders have a residual claim to the firm's cash flows while the stakeholders are contractually protected

Which stakeholder is paid in 'Cost of Goods Sold?'

Suppliers

The NASDAQ reflects the performance of what stocks?

Technology

Which is the primary reason that corporations are the most prevalent organization form?

The ability to raise capital

Which of the following enhances shareholder value? - A company experiences strong revenue growth - A company increases their market share in their product industry - A company raises their return on equity - A company is able to expand their profit margins -All of the above

All of the above

Which of the following enhances shareholder value? - A company experiences strong revenue growth - A company increases their market share in their product industry - A company raises their return on equity - A company is able to expand their profit margins - All of the above

All of the above

Company XYZ currently has a stock price of $25.00, 500 million shares outstanding, and earnings per share of $1.50. What is its market cap?

$12.5 billion

Company XYZ pays a $6 per share dividend. One year ago the price of the stock was $83 and today the price is $70, what was the return on the stock?

-8.4%

Apple's stock traded at $260 a year ago. If Apple's stock currently trades at $320 and Apple paid a $10 per share dividend, what was the return on Apple's stock?

26.9%

Which of the following equations represents successful shareholder value creation?

Cost of Capital < Return on Investment

What is the world's largest market?

Currencies

Which of the following do governance battles NOT result from?

Debtholders wanting higher interest rate payments on their bonds

According to the principles of finance, diversification does what to the risk of an investment portfolio?

Decreases

The time value of money states that

A dollar today is worth more than a dollar tomorrow

Pac-Man defense against a hostile takeover occurs when

A target company making a counter-takeover bid for the acquirer

What was the solution to corporate governance issues in the 1980s?

Corporate takeovers

Which of the following is NOT one of the CFO's responsibilities as the company's treasurer?

Cost Accounting

Which of the following responsibilities fall under the CFO's role as the company's treasurer?

Capital Expenditures

Which of the following is an example of an external control mechanism?

Carl Icahn attempting a hostile takeover for 89% control of U.S. Steel for $7 Billion after finally being rebuffed by CEO David Roderick

Which of the following is an example of a Short-Term Asset?

Cash

Which of the following is an example of an agency cost?

Company issues $100 Billion of debt in order to acquire its largest competitor and become a market leader, despite potential bankruptcy risks

Which of the following was NOT a contributing factor to the financial crisis in 2008?

Conflicts of interest between the Board of Directors and management

Which of the following CFO roles pertain to the Accounting department?

Controller

The __________ is considered one of the CFO's traditional responsibilities as financial engineer.

Controller Functions

The random walk hypothesis states that

Day-to-day stock prices move randomly and independently of each other

Capital structure decisions are concerned with:

Debt & Equity

The term shareholder refers to which of the following stakeholders in a company?

The investors

What changed in the 1980s that allowed for hostile takeovers to take place?

The rise of corporate raiders

Orren Hari was an advocate of what approach to managing a company?

The stakeholder approach

What is true of stockholders?

They have a residual claim on the firm's cash flows

Which of the following is NOT a characteristic of a corporation

They're easily formed

Which is necessary for a Ponzi scheme to continue?

To attract new investors

According to Danny Devito talking in Other People's Money, why do people invest?

To make money

When Professor X started investing with a mutual fund, he had to pay a front-end load of 5% of the money he was investing. What is this front-end load of 5% an example of?

Transaction Costs

One of the ways management can improve shareholder value is by managing working and fixed capital to enhance a company's performance

True

The Anglo-American model of corporate governance is historically the best model to easily raise capital.

True

True or False: A corporation is considered a separate legal entity from its shareholders.

True

True or False: Capital budgeting is when companies manage their investments in long-term assets:

True

Which of the following was not a major volatility driver for bitcoin in the past two years?

US dollar weakening

What was the issue with Saturn's business that contributed to GM's bankruptcy?

Unprofitable operations

According to the efficient market hypothesis, using technical analysis to forecast future stock prices is

Useless

Making sales to a customer on credit is an example of a ________ decision, and would be the responsibility of the __________.

Working Capital; Treasurer

Which of the following is a major disadvantage of the corporate organizational form?

double taxation on the investment level

True or False: CEO Compensation is not a challenge to the shareholder value standard because they CEOs deserve to be compensated as much as they do for running the company and that does not affect the creating of shareholder value.

false

True or false: stockholders are NOT corporate stakeholders

false

The primary business of Warren Buffet's Berkshire Hathaway is:

insurance

Beta is used in the capital asset model primarily as a measure of

risk

Who is Danny Devito talking to in Other People's Money?

stockholders

True or False: Inflation decreases your return on investment by reducing the future value of the money you receive on your investment

true

If biotechnology stocks and utility stocks both provide the same expected return, then which would you invest in? (Hint: biotechnology companies are much riskier than utility companies because most of the time the entire company revolves around a single drug that has not yet been approved)

utility stock