Finance Exam 1
________ is the name given to the processes surrounding recognition of the principal-agent problem and ways to align agents with the interests of the principals.
Agency theory
Which of the following can lead to increased expected cash flow over time to the firm?
All of the above
Financial markets can be classified by which of the following?
All of the above can be classifications of financial markets.
________ is the area of finance concerned with the activities of buying and selling financial assets such as stocks and bonds.
investments
Which of the following actions will INCREASE the present value of an investment?
Decrease the interest rate
Which of the following is the CORRECT formula for calculating the future value?
FV = PV × (1 + r)^n
Sale of new common stock in the primary market is regulated by the ________, and a sale of used common on the secondary market is regulated by the ________.
SEC; SEC
________ is simply the interest earned in subsequent periods on the interest earned in prior periods.
compound interest
Bonds are bought and sold in ________ markets.
debt
To determine the present value of a future amount, one should ________ the future cash flows.
discount
Stocks are bought and sold in ________ markets. Correct!
equity
The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes. Next, interest expense is subtracted to find the taxable income for the period. Then the appropriate taxes are calculated and subtracted. We finally arrive at the ________, the so-called bottom line of the income statement.
net income
Net income is ________.
not cash flow
A never-ending stream of equal periodic, end-of-the-period cash flows is called a/an ________.
perpetuity
The sale of "new" securities, where the financial asset is being traded for the very first time, is said to take place in the ________ market.
primary
The problem of motivating one party to act in the best interest of another party is known as the ________.
principal-agent problem
In agency theory, the owners of the business are referred to as ________, and the managers are referred to as ________.
principals, agents
The sale of "used" securities, where the financial asset is being traded from one individual to another and the proceeds do not go to the original issuer of the security, is said to take place in the ________ market.
secondary
Which of the following compensation packages is likely to work best for executive managers?
stock options
The movement of money from lender to borrower and back again is known as ________.
the cycle of money
Cash flow is ________.
the increase or decrease in cash for the period
Which of the statements below is TRUE?
Accounting Identity is: Assets ≡ Liabilities + Owners' Equity
Capital budgeting is best defined by which of the following questions?
What business are we in?
The means by which a company is financed refers to the firm's ________.
capital structure
________ is the typical title of the corporate executive charged with determining the best repayment structure for borrowed funds to ensure timely repayment and sufficient cash for daily operations.
Chief Financial Officer (CFO)
Which of the following is NOT an example of an equity market transaction?
Grant contacts his broker and requests a purchase of IBM bonds.
Maximizing the market value of firm equity and which of the following are mutually exclusive?
None of the above is mutually exclusive with maximizing the value of market equity.
Which of the following identities is TRUE?
Operating Cash Flow = EBIT + Depreciation - Taxes
The fundamental starting point of all the accounting statements is the ________.
accounting identity
A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________.
annuity due
One of the key components to making financial decisions is to ________.
understand the timing and amount of cash flow
Managing the firm's short-term financing activities is known as ________.
working capital management