Question 1

Joe,a risk-averse investor,is trying to choose between investment A and investment B.If investment A is riskier than investment B and Joe selects investment A anyway,then

Accepted Answer

A)  the actual return for investment A will be higher than the actual return for investment B.
B)  the actual return for investment A will be higher than the expected return for investment B.
C)  the expected return for investment A will be higher than the actual return for investment B.
D)  the expected return for investment A will be higher than the expected return for investment B.

Question 2

Investors will be indifferent between two investments if both investments have the same expected return.

Accepted Answer

A) True 
 B)False

Question 3

The purchase of a pool of mortgages is often financed through the sale of securities called mortgage-backed securities,or MBS.This is a key part of the securitization process.

Accepted Answer

A) True 
 B)False

Question 4

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 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

One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the firm's financial decisions.

Accepted Answer

A) True 
 B)False

Question 7

Which form of organization is free of initial legal requirements?

Accepted Answer

A)  sole proprietorship
B)  general partnership
C)  corporation
D)  both A and B

Question 8

High Tech Corp.cut its research and development budget in 2010 by $4,000,000 in order to improve its cash flow for the year.Which of the following statements is MOST correct?

Accepted Answer

A)  The stock price will likely increase because the value of stock is based on reported cash flow.
B)  The stock price may decrease because investors may predict that future cash flows will decrease due to the lack of innovation and new products.
C)  The change will have no impact on stock price because the company's profits will not change in 2010.
D)  The stock price will increase only if reported profits in 2010 are also higher than profits reported in 2009.

Question 9

Profits represent money that can be spent,and as such,form the basis for determining the value of financial decisions.

Accepted Answer

A) True 
 B)False

Question 10

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 11

When making financial decisions,managers should always look at marginal,or incremental cash flows.

Accepted Answer

A) True 
 B)False

Question 12

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 13

The expected return on a riskless asset is greater than zero due to

Accepted Answer

A)  an expected return for delaying consumption.
B)  an expected return for opportunity costs.
C)  an expected return for taxes.
D)  irrational investors who believe risk is always present.

Question 14

Investors want a return that satisfies the following expectations:

Accepted Answer

A)  A return for delaying consumption
B)  An additional return for taking on risk
C)  An additional return for accepting dividends rather than capital gains
D)  Both A and B.

Question 15

The goal of profit maximization ignores the risk of financial decisions

Accepted Answer

A) True 
 B)False

Question 16

Which of the following categories of owners have limited liability?

Accepted Answer

A)  general partners
B)  sole proprietors
C)  shareholders of a corporation
D)  both A and B

Question 17

Project A is expected to generate positive cash flow of $1 million in 10 years while Project B is expected to generate $500,000 in 5 years.Therefore

Accepted Answer

A)  Project A is preferred because shareholder value is based on cash flow.
B)  Project B is preferred because its cash flow is expected to be received sooner than the cash flow from Project A.
C)  Both projects have equal value because they average $100,000 per year.
D)  Project B may be preferred to Project A if the opportunity cost of money is high enough.

Question 18

A limited partnership provides limited liability to

Accepted Answer

A)  all general partners.
B)  only limited partners responsible for day to day management of the firm.
C)  only to limited partners who do not participate in the management of the business.
D)  all partners.

Question 19

In terms of the costs to organize each,which of the following sequences is correct,moving from highest to lowest cost?

Accepted Answer

A)  general partnership,sole proprietorship,limited partnership,corporation
B)  sole proprietorship,general partnership,limited partnership,corporation
C)  corporation,limited partnership,general partnership,sole proprietorship
D)  sole proprietorship,general partnership,corporation,limited partnership

Question 20

Which of the following statements about the corporate form of business organization is true?

Accepted Answer

A)  The corporate form has the disadvantage of double taxation relative to a sole proprietorship.
B)  The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation.
C)  Sole proprietorships are the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor.
D)  The corporate form has the advantage of unlimited liability.

Exam 1: An Introduction to the Foundations of Financial Management

High Tech Corp.cut its research and development budget in 2010 by $4,000,000 in order to improve its cash flow for the year.Which of the following statements is MOST correct?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

When making financial decisions,managers should always look at marginal,or incremental cash flows.

Correct AnswerverifiedShow Answer

The expected return on a riskless asset is greater than zero due to

Correct AnswerverifiedShow Answer

Profits represent money that can be spent,and as such,form the basis for determining the value of financial decisions.

Correct AnswerverifiedShow Answer

Investors will be indifferent between two investments if both investments have the same expected return.

Correct AnswerverifiedShow Answer

The goal of profit maximization ignores the risk of financial decisions

Correct AnswerverifiedShow Answer

Which of the following categories of owners have limited liability?

Correct AnswerverifiedShow Answer

One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the firm's financial decisions.

Correct AnswerverifiedShow Answer

Investors want a return that satisfies the following expectations:

Correct AnswerverifiedShow Answer

In terms of the costs to organize each,which of the following sequences is correct,moving from highest to lowest cost?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Joe,a risk-averse investor,is trying to choose between investment A and investment B.If investment A is riskier than investment B and Joe selects investment A anyway,then

Correct AnswerverifiedShow Answer

Project A is expected to generate positive cash flow of $1 million in 10 years while Project B is expected to generate $500,000 in 5 years.Therefore

Correct AnswerverifiedShow Answer

Which form of organization is free of initial legal requirements?

Correct AnswerverifiedShow Answer

The five basic principles of finance include all of the following EXCEPT

Correct AnswerverifiedShow Answer

Which of the following statements about the corporate form of business organization is true?

Correct AnswerverifiedShow Answer

A limited partnership provides limited liability to

Correct AnswerverifiedShow Answer

The purchase of a pool of mortgages is often financed through the sale of securities called mortgage-backed securities,or MBS.This is a key part of the securitization process.

Correct AnswerverifiedShow Answer

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